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Legal issues surrounding the PNB housing preferential allotment case

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This article is written by Shubadha Khandekar a Junior advocate at A&A Law pursuing a Diploma in General Corporate Practice. This article has been edited by Ojuswi (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

In a very interesting case, the bench comprising Justice Tarun Agarwal (Presiding Officer) and Justice M.T. Joshi (Judicial Member) of the Securities Appellate Tribunal (SAT) on 9th August 2021 gave a split verdict in an Appeal preferred by PNB Housing Finance Private Limited (the Company) against an order of Securities and Exchange Board of India (SEBI) with regards to preferential allotment of shares by the Company to certain institutional investors. The present article lays out a brief analysis of the judgement.

Facts

The Punjab National Bank, the largest shareholder in PNB Housing Finance Private Limited with a holding of 33% in the Company, was not able to provide funding to the Company as necessary regulatory approvals from the Reserve Bank of India (RBI) were not obtained. The Company in order to raise its Capital agreed to issue preferential shares of proposed Rs. 4,000 Crores in favour of four institutional investors namely Pluto Investments Société à Responsabilité Limitée (Limited Liability Company) an affiliated entity of Carlyle Asia Partners IV, Limited Partnership and Carlyle Asia Partners V, Limited Partnership, Salisbury Investments Private Limited, Alpha Investments Private Limited, and General Atlantic Singapore Fund Foreign Institutional Investors Private Limited, and accordingly a resolution dated 31st May 2021 came to be passed by the Board of Directors approving the raising of capital through preferential allotment of shares to the proposed allottees at a price of Rs.390/ per share. 

The resolution also resolved to convene an Extraordinary General Meeting (EGM) for approval of the resolution by the shareholders. Notice for EGM was issued to the shareholders and thereafter the Stock Exchange was informed about the resolution passed by the Board of Directors and the issuance of Notice to shareholders of the Company. Pending the EGM, the Company received an order from SEBI whereby the Company was restrained to act upon the resolution to hold the EGM for purposes of allotment of preferential shares until it obtained a report from the registered valuer as to the proper valuation of preferential shares, as is provided for in its Articles of Association (AOA). The said order came to be challenged before SAT by the Company. 

During the proceedings, on 21st June 2021 SAT allowed the Company to hold EGM to enable the shareholders to vote on the agenda of preferential allotment of shares, but placed a condition that the results not be declared and instead kept in a sealed cover until disposal of the Appeal.

Issues involved

  1. Is it imperative for the Company to obtain a valuation report from a registered valuer as per Article 19(2) of its AOA or whether the Company is required to get the pricing calculated under Regulation 164 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018?
  2. Whether rules of natural justice were followed?
  3. Whether SEBI has jurisdiction to pass such an order?

Rules/ laws involved in this case

Following are the legal provisions and aspects which were looked into by both the members of SAT while passing their verdicts:

Article 19(2) of the AOA of the Company

The Articles of Association is a set of rules which governs the internal functioning between the entire staff of the Company, and the Company, as well as its staff, is bound to follow these rules.

Article 19(2) of the AOA of the present company provides for offering further shares to any person for cash or anything other than cash if it is authorized by a special resolution passed by the Company and if the valuation/price of such shares is determined by way of valuation from a registered valuer.

The Companies Act, 2013

Section 6

As per the aforesaid section if there is any provision in the AOA, Memorandum of Association (MOA), Article of Company, Resolution, or any other document executed by the company which is contrary to or against the provisions of the Companies Act, then the provisions of the Companies Act will prevail and the provision so provided in the AOA, MOA, Article of Companies, etc, which is contrary to the Companies Act, will become void in the eyes of law.

Section 14

Section 14 provides for alteration of articles of the Company and provides subject to provisions of the Companies Act and MOA of the Company, an alteration can be made in the articles of the Company, by the Company through a Special Resolution, such alteration can also include the conversion of a Company from Private to Public and vice versa, further it also provides for its effect and certain compliances with the Registrar to get the altered articles registered. 

Section 24

It provides that provisions relating to the issue and transfer of shares, and non-payment of the dividend of/by Listed Companies or those Companies that intend to get listed, provided under Chapter III of the Companies Act which provides provisions relating to Prospectus and Allotment of Securities, Chapter IV of the Companies Act which provides provisions relating to Share Capital and Debentures and under Section 127 of the Companies Act which provides punishment for failure to distribute dividends, except as provided under the Companies Act shall be administered by SEBI and Exchange Board by making regulations to do so, it also provides for matters which are not to be administered by SEBI and Exchange Board under this Section.

Section 62(1)(c)

It provides for the issuance of further shares by the Company to any person if it is authorized to do so by a Special Resolution, in exchange for cash or any other thing than cash if the amount for shares is determined and valued by the valuation report of a registered valuer, subject to such conditions as may be prescribed.

Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014

For the purpose of Section 62(1)(c) of the Companies Act, which we have seen above, Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 provides that once a Special Resolution is passed in a general meeting, the Company can issue shares in any manner whatsoever, including a preferential offer to investors, subject to compliance of conditions laid down in Section 42 of the Companies Act, 2013. Further, it provides that the price of the share to be issued by a Listed Company need not be determined by the Valuation Report of a Registered Valuer. 

Regulation 164 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

This Regulation provides for a method to calculate the value/price of the share to be allotted under its preferential allotment.

Rules of natural justice 

It consists of three rules:

I. All the parties to the proceedings are to be heard

II. The Court/Tribunal/Authority shall be biased-free while taking decisions.

III. The Judgement/Order given by the Court/Tribunal/Authority shall be a reasoned one.  

insolvency

Observation and verdict of sat

Since a split verdict was passed in this case, the judgement was delivered by Justice Tarun Agarwal (Presiding Officer) and Justice M.T. Joshi (Judicial Member) is both dealt with respectively.    

Justice Tarun Agarwal (Presiding Officer)

Issue No. 1

  • To answer the principal question, of whether the valuation report of a registered valuer is required for the issuance of preferential shares, the relevant provisions of the AOA of the company and the provisions of law applicable to such issuance were considered.
  • At the outset Section 6 of the Companies Act, 2013 was looked into, which makes everything in a document executed by the Company including AOA, MOA, Resolutions, and Agreements, which is contrary to the provisions of the Companies Act, 2013, void. On the same point, placing reliance upon the judgment of Madanlal Fakirchand Dudhediya vs. Shree Changdeo Sugar Mills Ltd. (1962) 32 Company Cases 604 (SC) it was observed that any provision in the AOA of the Company which is repugnant to the Companies Act, 2013 would be void and the Companies Act, 2013 will prevail.
  • Keeping the above in mind, Article 19(2) of the AOA of the Company was looked into which made a provision for the determination of allotment price of preferential shares which is to be determined by a valuation report of a registered valuer, even Section 62(1)(c) of the Companies Act, 2013, provides for further issue of raising capital which can be offered to any person if authorized by a special resolution, requires the price of such shares to be determined by the valuation report of a registered valuer subject to such conditions as may be prescribed and for compliance with the applicable provisions of Chapter III of the Companies Act, 2013. 
  • Thus, Rule 13(1) and Rule 13(2) of Companies (Share Capital and Debentures) Rules, 2014 were read together as per which a listed company whose shares or other securities are listed on a recognized Stock Exchange is not required to determine the value of shares through a registered valuer, and the price is required to be determined in accordance with the Regulations framed by SEBI. 
  • Further, Section 24 of the Companies Act, 2013 was also considered which empowers SEBI to make regulations for the administration of provisions relating to the issuance and transfer of shares. Therefore, in pursuance of both these conditions, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, (ICDR) and more particularly Regulation 164 were delved into as the same provides for pricing machinery for valuation of such shares.
  • While considering the mechanism for pricing under Regulation 164 of the ICDR, it was observed that the words “shall not be less than” are not to be interpreted as not less than the value determined by the registered valuer. If a listed company does not have a provision in its AOA or any other binding instrument for valuing its shares through a registered valuer then it will have to follow Regulation 164 of the ICDR and thus there will be two sets of procedures for valuation of shares of listed companies which is not permissible as the same would be against the provisions of Section 62(1)(c), Section 6 and Section 14 of the Companies Act read along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.
  • Therefore, it was held that Article 19(2) of the AOA requiring valuation of shares by a registered valuer was dispensed with and the Notice/Order of SEBI dated 18th June 2021 was held illegal and bad in law.

Issue No. 2

  • It was observed that SEBI erred in holding that the agenda for conducting the EGM in the resolution passed by the Company was ultra vires as it would go to say that the company does not have authority to conduct the EGM and to put forth the agenda before shareholders for their deliberation. Since the order of the SEBI was passed without any notice and without hearing the Company, it was held to be violative of the rules of natural justice.  
  • Thus, it was held that SEBI was incorrect to pass such an order in a manner that is violative of the rules of Natural Justice.  

Issue No. 3

  • The Ld. Tribunal observed that SEBI has acted at a pre-mature stage and without any jurisdiction by stepping in at the stage where only a resolution was passed by the Board of Directors which was yet to be placed before the shareholders in the EGM, had it been the case where the agenda at issue was put before the Shareholders and approved by them, and where such a resolution was in contravention with the ICDR Regulations only then SEBI would have jurisdiction intervene and take steps. Reliance was placed on the case of Praful Patel vs. SEBI (1999) 19 SCL (Bom.) facts of which were akin to the present case, and thus its decision was squarely applicable.

Justice M.T. Joshi (Judicial Member)

Issue No. 1

  • Justice M.T. Joshi harmoniously constructed all the provisions while determining whether Article 19(2) of the AOA is repugnant to Section 6 of the Companies Act. Referring to the judgment passed in the matter of Naresh Chandra Sanyal vs. Calcutta Stock Exchange Trader Association (1971) AIR 422 Supreme Court, it was also observed that the AOA of a Company is like a contract that governs the internal relationship between the Company and the shareholders and therefore is binding upon both.
  • It was observed that Regulation 13 of the Companies (Share Capital Debentures) Rules, 2014, which is not mandatory, only provides that the price of shares to be allotted shall not be required to be determined by the report of a registered valuer, hence, the said regulation does not restrict the company from getting the price determined by a registered valuer. Also, Regulation 164 of the ICDR provides for the minimum value at which such shares are to be allotted and there is no bar to allot such shares at a price that is arrived at by a valuation done by a registered valuer until and unless the value is above the minimum value as is provided under Regulation 164 of the ICDR. 
  • Therefore, it was held that there is no repugnancy or contradiction between all these provisions and they can stand together. 

Issue No. 2

  • After the company made a corporate announcement on both the boards i.e. NSE and BSE, the Company was called upon to provide information in pursuance of which a joint report of both the boards came to be submitted before SEBI. SEBI also called upon the Company to provide certain information and after perusing the said information, it was found that the Company has not followed the procedure as prescribed by Article 19(2) of its AOA, due to which the order came to be passed and therefore it cannot be said that the order passed by the SEBI was arbitrary or was faulted upon.

Issue No. 3

  • It was observed that SEBI has passed such an order in the exercise of its primary duty of protecting the rights of the investors, hence SEBI has acted well within its jurisdiction while passing the said order in the interest of the investors.  

Outcome

As there was a difference of opinion between both the members that resulted in the split verdict, the papers, and proceedings of this Appeal was referred to the Presiding Officer of the Administrative side for appropriate orders. However, after the present order was passed by SAT, SEBI approached the Supreme Court challenging the same. Soon thereafter, rather than going into a legal battle, the Company scrapped the deal with the four institutional investors and moved an application before SAT seeking permission to withdraw the Appeal, which came to be allowed on 16th November 2021, thereby putting an end to the litigation. 

Opinion 

Keeping in mind that the function of the judiciary is to interpret the existing laws and not to introduce new laws, one might feel that the findings of Justice Tarun Agarwal are correct and just, however, one must not forget that if two laws can be interpreted and constructed in a manner consistent each other, then such an interpretation ought to be upheld and such provisions are to be constructed harmoniously (M.S.M Sharma v. Krishna Sinha, AIR 1959 SC 395), provided it fits within the boundaries of the law, which approach has been taken by Justice M.T. Joshi.

Thus, it can be safe to say that the view taken by Justice Tarun Agarwal did not consider the interpretation of the exact intention of the statutes as he construed the provisions by taking a strict and literal approach which was unnecessary. Even while determining the principal question of how having two sets of procedures for valuation of shares of listed companies would be against the provisions of the law was not clarified in the verdict which can be termed as a loophole in his verdict.

On the other hand, the verdict of Justice M.T. Joshi seems to hold more water. On fine consideration of the provisions and the intent of the legislature, it becomes crystal clear that the law does not restrict such companies from following the procedure as is provided in the relevant statute or strictly following their AOA as far as the valuation of shares is considered. Such liberty has been given in the statute itself therefore the Company was at liberty to act in the way it acted, as there is no specific bar restricting the Company to not acting so.

Conclusion 

The question involved in the matter was straightforward yet a technical one, the interpretation and construction of the provisions involved in this matter would have been the determining factor of the results of this litigation. Irrespective of the Appeal being withdrawn, the determination as to the principal question raised in the Appeal needs to be dealt with as the same has pointed out a lacuna in the provisions provided by the statute. 

References

Pnb Housing Finance Ltd vs Sebi on 9 August, 2021 (indiankanoon.org)

The Companies Act, 2013

The Companies (Share Capital and Debentures) Rules, 2014 

Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. 

Principles of Natural Justice – iPleaders

Indiakanoon.org


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Article 76 of the Indian Constitution

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This article is written by Sambit Rath, a B.A LL.B student of Dr. Ram Manohar Lohiya National Law University, Lucknow. In this article, the author analyses Article 76 of the Indian Constitution, which deals with the role, powers, and duties of the Attorney General of India.

This article has been published by Sneha Mahawar.

Introduction 

Have you ever wondered who represents the Union Government in the courts? The Union Government has a law officer who represents them in the courts. This law officer is known as the Attorney General of India, and he is the highest law officer in the country. He manages the legal matters of the Union Government and that of the President. His advice is sought by the President on legal issues when it is needed. Article 76 deals with the Attorney General of India. To be eligible for such a prestigious position, one needs to have the qualifications of a Judge of the Supreme Court, which include five years of experience as a Judge of a High Court or ten years as an advocate of a High Court, or in the opinion of the President, that person is a distinguished jurist. Let’s look at Article 76 of the Indian Constitution and everything else about the Attorney General of India in depth in this article.

Who is the Attorney General 

According to Article 76 of the Indian Constitution, the Attorney General (AG) of India is the highest law officer in the country and a Union Executive member. 

The functions he needs to perform include

  • advising the government on legal matters referred to him by the president; 
  • appearing on behalf of the central government in the Supreme Court or any High Court;
  • performing legal duties assigned to him by the President, and 
  • other functions conferred upon him by the Constitution. 

According to the Supreme Court in P.N. Duda v. V. P. Shiv Shankar and Others 1988, the Attorney General of India is a “friend, philosopher, and guide of the court.”  Currently, the person holding this position is K.K. Venugopal. He was appointed as the 15th Attorney General of India in 2017 and his term was extended by a period of one year in 2020. The first Attorney General of independent India was M.C. Setalvad.

Let’s take a look at all the Attorney Generals of India to date:

Name of Attorney GeneralTenure
M.C. Setalvad28 January 1950 – 1 March 1963
C.K. Daftari2 March 1963 – 30 October 1968
Niren de1 November 1968 – 31 March 1977
S.V. Gupte1 April 1977 – 8 August 1979
L.N. Sinha9 August 1979 – 8 August 1983
K. Parasaran9 August 1983 – 8 December 1989
Soli Sorabjee9 December 1989 – 2 December 1990
J. Ramaswamy3 December 1990 – 23 November 1992
Milon K. Banerji21 November 1992 – 8 July 1996
Ashok Desai9 July 1996 – 6 April 1998
Soli Sorabjee7 April 1998 – 4 June 2004
Milon K. Banerjee5 June 2004 – 7 June 2009
Goolam Essaji Vahanvati8 June 2009 – 11 June 2014
Mukul Rohatgi12 June 2014 – 30 June 2017
K.K. Venugopal30 June 2017 till date

Appointment of Attorney General of India

The Attorney General of India is appointed by the President of the country. To be eligible, the person must be qualified for the post of a Supreme Court Judge. This is provided under Article 76 of the Indian Constitution. The qualifications required for a Supreme Court Judge are given in Article 124 of the Indian Constitution. The qualifications are as follows:

  • The person must be a citizen of India.
  • He has to be a High Court Judge for at least five years or of two or more such Courts in succession; or
  • That person has to be an advocate of a High Court for at least 10 years or of two or more such courts in succession; or 
  • In the opinion of the President, that person is a distinguished jurist. 

Term of office of Attorney General of India 

As per Article 76, the Attorney General of India will hold office during the pleasure of the President. There is no specific term of office given in the Constitution and also nothing about removal from office, like the procedure or grounds of removal. This is the reason why the first Attorney General, M.C. Setalvad, served for 15 years. This changed when the Law Officer (Conditions of Service) Rules, 1987 came into existence. According to this legislation  and the provisions provided in these rules, a law officer shall hold office for a term of three years, which can be extended for a maximum of three years. This is mentioned under Section 3 of the Rules. Recently, after completing his term of three years, K.K. Venugopal was given an extension of one year.

Remuneration provided to the Attorney General of India

The Attorney General’s remuneration is determined by the President as there is no remuneration fixed by the Constitution. This is provided in Article 76(4) of the Indian Constitution. His functions are not restricted to representing the government. He can take up private practice too. For this reason, he is not paid a salary but a retainer by the President. The retainer is said to be equivalent to the salary of a Supreme Court judge and is paid from the Consolidated Fund of India.

Removal of Attorney General of India

It can be inferred from the Article that he’s in office for as long as the President wants and he can be removed by the President. It is important to note that the President cannot take decisions on his own. This is because, according to Article 74, the President has to act on the advice of the Council of Ministers, including the Prime Minister. This means that if the President wishes to remove the Attorney General from office, then in order to take such action, he must consult with the Council of Ministers, including the Prime Minister. The President must remove the Attorney General of India if the Council advises him to. But he has the option to send this advisory back for reconsideration. After reconsidering, if the Council stays firm and stands by its earlier decision, then the President must execute it. 

Another way the Attorney General can vacate the office is by resigning. This resignation has to be given to the President. His tenure also ends if the government is dissolved or replaced.

Role of Attorney General 

The highest law officer in the country has certain duties to perform. The duties are stated in the Law Officers (Condition of Service) Rules 1972. These include:

  • Advising the Union Government on legal matters referred to him by the President.
  • Advising the President on legal matters referred to by him.
  • Performing other such duties of legal nature assigned by the President.
  • Appearing in the Supreme Court on behalf of the government
  • Under Article 143, when the President approaches the Supreme Court for consultation, it is the duty of the Attorney General of India to represent the Government of India if any reference to it is made.
  • Appearing in a High Court to represent the government of India in a case.
  • Fulfil duties assigned to him by the Constitution or any other law.
  • He is also the ex officio member of the Bar Council of India and is considered the leader of the Bar.

Powers and privileges of the Attorney General of India 

Being the highest law officer in the country, the Attorney General of India enjoys certain powers and privileges:

  • The Attorney General of India has the right to take part in proceedings of both the Houses of Parliament, their joint sitting, and any committee of the parliament in which the Attorney General of India is named a member. The Attorney General of India also has the right to speak during these proceedings. This is provided under Article 88.
  • He gets to enjoy the privileges and immunities available to a Member of Parliament.
  • He is not barred from private legal practice as he does not fall into the category of a government servant.
  • The Solicitor General of India and the Additional Solicitor General of India help the Attorney General of India fulfil his official responsibilities.
  • The Supreme Court may take action for criminal contempt on a motion made by the Attorney General of India.

Limitations of functions of Attorney General 

As is the case with every position of responsibility, the Attorney General has some limitations as well:

  • Even though the Attorney General of India has the power to take part in proceedings of both the houses, he doesn’t have the right to vote.
  • He can not make statements that are against the Government of India.
  • He can’t advise parties who are against the Government of India in litigation.
  • He can not accept an appointment in a  private company as a director without the Government’s permission.
  • He can not defend accused persons in criminal cases without the government’s permission. 

Difference between Attorney General of India and Solicitor General of India

S.noBasisAttorney General of IndiaSolicitor General of India
1FunctionThe Attorney General of India is the advisor and primary lawyer for the Union government in the Supreme Court and High Courts.The Solicitor General of India  performs similar functions but also exists to assist the Attorney General in the performance of his functions.
2AuthorityThe Attorney General of India is the highest law officer in the country.The Solicitor General of India is subordinate to the Attorney General of India.
3ConstitutionalityThe Attorney General of India is a Constitutional post as per Article 76.The post of the Solicitor General of India is statutory.
4AppointmentThe President of India appoints the Attorney General of India on the advice of the Union Cabinet.The Appointments Committee of the Cabinet recommends the appointment of the Solicitor General of India, who is then appointed by the President.

Important judgements 

Union of India v. R.K. Jain (2017)

In this case, the Delhi High Court had to decide if the office of the Attorney General of India came within the meaning of Section 2(h) of the Right to Information Act, 2005.

Facts of the case

  • The respondent had filed an application with the office of the Attorney General of India (Attorney General of India) to obtain certain information under the RTI Act, 2005. 
  • The office of the Attorney General of India responded by returning the respondent’s application, stating that as per the decision of the CIC, the Attorney General of India is not a “public authority” as per the meaning of Section 2(h) of the Act. 
  • Another application by one of the respondents was also rejected on the same grounds.

Issue

  • Whether the office of the Attorney General of India is a “public authority” within the meaning of Section 2(h) of the Right to Information Act, 2005?

Judgement

  • As per Article 76 of the Indian Constitution, the Attorney General of India is appointed by the President and his duties include representing the Union Government in the courts. The relationship between the Attorney General of India and the government is a fiduciary relationship as the predominant function of the Attorney General of India is to advise the government on legal matters. The Supreme Court has reiterated numerous times that the relationship between a lawyer and his client is a fiduciary relationship. Due to this, the Attorney General of India cannot put in the public domain his opinions or materials provided to him by the Government of India.
  • Since the Attorney General of India is not reposed with any administrative duties that affect the rights or liabilities of persons, it cannot be called an ‘authority’. Looking at the objective of the RTI Act, it cannot be said that an office like the Attorney General of India would come under Section 2(h) of the Act.

Mr. Ajitabh Sinha v. Supreme Court of India (2012)

In this case, a Full Bench of the Central Information Commission had to decide if the office of the Attorney General of India came within the meaning of Section 2(h) of the Right to Information Act, 2005.

Facts of the case

  • The complainant had filed an RTI application seeking certain information from the Attorney General. It included questions about communication between the Prime Minister and the Attorney General and he asked for a copy of the communication.
  • He filed a complaint after receiving no response from the office of the Attorney General.
  • Other complainants, in this case, had received a response stating that the office of the Attorney General of India is not a public authority.

Issue

  • Whether the office of the Attorney General of India is a “public authority” within the meaning of Section 2(h) of the Right to Information Act, 2005?

Judgement

  • The word ‘authority’ has not been defined under any law. Its meaning has to be construed as per the rulings of constitutional courts. According to the Supreme Court’s observations, the word ‘authority’ means any person or body having the power to alter his or others’ rights, liabilities, and other legal relations. Hence the office of the Attorney General of India cannot be said to be a “public authority”.
  • The office of the Attorney General of India is sui generis, which means “consisting of a class alone, unique.” Therefore, even though he is appointed by the President under Article 76, he is not a public authority under Section 2(h) of the RTI Act, 2005.

Conclusion 

The highest law officer of the country has been given the responsibility to represent the Union Government in the Courts and to advise the President on legal matters. To be entrusted with such duties, one has to be the best legal practitioner out there. This is why the qualifications are required to be those of a Supreme Court Judge. Over the years, there have been many great minds fulfilling their duties as the Attorney General of India. On numerous occasions, the Attorney General of India has won the case for the Union Government. Recent cases of a challenge to the repeal of Article 370 and Vombatkere vs Union of India, 2022, a case challenging Section 124A of the Indian Penal Code, are some of the examples. 

Frequently Asked Questions (FAQs) 

What does Article 76 of the Indian Constitution deal with?

Article 76 of the Indian Constitution deals with the power of the President to appoint a person qualified enough for the post of Attorney General of India. It also provides the Attorney General of India’s duties, rights, tenure, and remuneration.

Who decides the salary of the Attorney General of India?

The President of India has the power to decide the remuneration of the Attorney General of India as per Article 76(4). 

Who is the current Attorney General of India?

K.K. Venugopal is the current Attorney General of India. He was appointed in the year 2017 as the 15th Attorney General of India. After the completion of this 3-year term in 2020, he was given an extension of one more year.

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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Retrospective operation of statutes

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Rule of noscitur a socii

This article is written by Parth Verma, a law student at the School of Law, Christ University, Bengaluru. This article seeks to explain the concept of retrospective operation of statutes with the help of case laws. In addition, it aims to look into the issues existing in this concept and its relation with the rights of citizens.

It has been published by Rachit Garg.

Introduction

Laws are made in any country to punish wrongdoers for the heinous crimes they might commit. These are generally formulated when there are increased instances of people being left scot-free despite committing an offence due to the lack of proper legal provisions. A prime example of this is the anti-defection law, introduced in 1985 owing to mass defections. As a result, these laws are applicable to similar crimes that might be committed in the future. However, there have been several instances in which the newly formulated or amended laws could be used to hold a person liable for offences committed before the introduction of that law as well. These types of laws or amendments are very rarely found in any country and are known as retrospective laws or statutes. 

Retrospective laws can generally be made for both criminal as well as civil offences. In recent times, such legislation has become a topic of debate. While certain scholars are of the opinion that such legislation directly violates the rights of the people, others feel it is necessary that the wrongdoers get punished even though they committed a wrongful act that was unrecognized at that point in time owing to the lack of any statutory provisions. This article will delve deeper into all these aspects and resolve the existing ambiguities in such laws.

What is retrospective operation of statutes

The term ‘retrospective’ essentially means speculating or looking into the events or incidents that have taken place in the past. When any law that was already existing is changed, altered, or some portion of it is removed, it doesn’t remain the same as it was previously. However, the new changes still have an influence on the events that occurred in the past. In other words, if a person commits an act that was not considered to be an offence at that point under any legislation, but becomes one after some changes in the existing laws or the introduction of a new law, the person could be held liable even for the acts committed by him in the past that are now an offence. 

This operation of a statute acts contrary to the general perception that any law is introduced to consider the crimes that might be committed in the future. When a statute operates retrospectively, however, the new law can be applied to the facts or the actions that were carried out even before such a law had been proposed. When such a statutory provision is introduced which aims to consider past actions as well, it is clearly stated that the act was said to be in operation from the given date in the past. From that date forth, all the offences would be included within the purview of the statute and the people would be punished. These statutes are also known as ex-post facto laws. There can be four different scenarios that might arise when retrospective legislation is introduced.

Recognition of crime

In this scenario, if a person carries out an act that was not wrongful at that point of time but later on, due to the passing of legislation recognizing the same act as wrongful, he could be held liable. This would happen when the law has a retrospective operation, making the person liable for acts committed in the past that are wrongful or criminal in nature, due to the introduction of legislation or a statute.

Removal of a crime

In a very rare scenario, ‘if a person has been sentenced for around 7 years for committing any wrongful act, but 2 years later, the act committed by him is no longer unlawful with a retrospective impact, the person could be directly released.’ It is a very rare situation to actually happen that an act previously declared unlawful becomes a legal act. 

An example of this is the decriminalization of Section 377 of the Indian Penal Code, 1860, which stated that it had declared homosexuality a criminal offence. It is applied retrospectively to all the citizens who were criminally charged because of their sexual orientation before the introduction of this Act.

Reduction in punishment

Under this scenario, if the person has been punished for an act under any given statutory provision but later on, some changes are made, leading to a reduction in the period of punishment. This is a situation of a retrospective law dealing with amnesty to decriminalize certain acts and grant a pardon to the wrongdoer. A person serving a prison sentence for a specified period will have the punishment reduced owing to the same. 

An example of this is the Amnesty Scheme. The government may introduce it to reduce the payment of the late fee for tax filing. This would reduce the punishment for the late payment of taxes.

Increase in punishment

When an existing law is amended with a retrospective impact to bring a wrongful act into a more severe category than it was while being committed, the sentence or the term of punishment might be increased for the wrongdoer. This might involve an increase in penalties, increasing the fines payable, increasing the sentence of imprisonment, or any other factor. 

These are some of the general impacts that a statute with a retrospective operation might have on a person who committed a wrongful act recognized by the statutes later on. 

General application of retrospective operation of statutes

Substantive laws

Retrospective laws are generally applied in a country to either increase or decrease the punishment for any particular crime. They may be placed into a more serious category or reduce the punishment of the crime, thereby reducing their sentence. However, the treatment of retrospective laws also varies for the various laws. A retrospective operation can only be given to a statute affecting the substantive rights of the people and could be made applicable to the events that took place in the past. For example, if a person committed a crime 2 years ago, which was held to be a punishable offence, the act now is no longer a crime with a retrospective effect. It would be applicable to the person and he would be released. This is an example of a retrospective operation on substantive law.

Procedural laws

On the other hand, the above-mentioned is not applicable to procedural laws. The procedural laws generally have a retroactive operation and not a retrospective operation. The retroactive operation essentially means that the statute introduces a new obligation or transaction and, at the same time, impairs certain vested rights. Hence, the retrospective operation of laws applies only to the substantive laws and not to the procedural ones.

Declaratory laws 

A declaratory statute refers to a statutory provision that aims to remove any ambiguities related to prior law, either by explaining the previous statute or by reconciling the conflicts in various judicial decisions. The declaratory laws, as a result, have a retroactive operation as they aim to improve the prior laws. It is only when the rights are vested or the litigation is settled that they are applied retrospectively, as stated in the case of Commissioner of Income Tax v Sriram Agarwal (1986).

Explanatory laws 

Explanatory statutes are also very similar to declaratory statutes and have a retrospective application. These statutes aim to explain the law and rectify all the omissions that existed in the previous laws.

Criminal applicability of retrospective operation of statutes

Retrospective laws can certainly be made for criminal acts. However, these are not encouraged in India. This is so because holding a person liable for an act committed by him in the past, which was not unlawful at that point but now is, would be clearly unjustified. Most of the interpreted legal provisions state that the punishment for the offences is prohibited from having a retrospective effect. Only if stated in an implied manner with the appropriate intention, the new punishments introduced under the laws are allowed to have a retrospective impact. 

Difference between retrospective laws and ex-post facto laws

Though both the retrospective and ex-post facto laws might have the same effect most of the time, there are slight differences that exist between them. While all the ex-post facto laws are necessarily retrospective laws, all retrospective laws are not ex-post facto laws. While ex-post facto laws are prohibited in India, there is no such express prohibition on retrospective laws. There are several retrospective laws that aren’t ex-post facto laws that are allowed to be introduced for the purpose of amnesty in taxation, criminal punishment, etc. The retrospective laws only look backward at the events of the past, but the ex-post facto laws act on the things that are in the past. The retrospective laws aim to focus on acts committed in the past before the commencement of the statute. On the other hand, any ex-post facto law might impose various new obligations on the transactions or any act committed by an individual or impair the vested rights.

These are the major differences between ex-post facto laws and retrospective laws. In most situations, these terms can be used synonymously. Yet, there are several laws that can have a retrospective operation but can’t be ex-post facto laws, such as the amnesty schemes of taxation.

Ex post facto lawsRetrospective laws
All ex post facto laws are to be necessarily retrospective laws.All retrospective laws are certainly not ex post facto laws. These are a bigger set of which ex post facto laws form a part.
Ex post facto laws are prohibited to be formulated in India.Retrospective laws, if explicitly mentioned, are allowed to be introduced, however, with certain restrictions.
Ex post facto laws impose various new obligations on the transactions or acts committed by an individual or impair certain vested rights.Retrospective laws focus on all the acts committed in the past before the commencement of the statute.

Difference between retrospective and retroactive laws

The retrospective and retroactive laws both aim to look into the past, but the method of dealing with the laws is different. While the retrospective laws just aim to look into the legal provisions of the past, the retroactive laws not only look into the past but also aim to act upon them. 

In the case of Jay Mahakali Rolling Mills v. Union of India (2002), the Supreme Court provided the distinction. The Court stated that retrospective means the law which contemplates the past, referring to a given statute that was there previously. It is made applicable to all the events that occurred in the past before the new law came into force. On the other hand, a retroactive statute refers to any statute that aims to look into the previous legislation and create certain new obligations or transactions. At the same time, it might even impair or destroy certain vested rights. 

The Court further went on to say that retroactive laws aim to cover two distinct concepts. One is true retroactivity, which involves the application of a new rule to an act that was carried out before the rule had been made. The other is quasi retroactivity which applies to an act that is still in the process of completion. On the other hand, the retrospective operation might become very ambiguous. Such statutes, however, generally operate in cases that affect, even if only for the future, the character of acts the person has previously indulged in.

These are some of the major differences between retrospective and retroactive laws, but the one thing common to both is that they both focus on past acts. 

Applicability of retrospective operation of statutes in India

In India, the retrospective operation of any statute is prohibited for any civil offence. The Constitution of India doesn’t permit a retrospective operation of any given act unless there is any implication in law stating that the law that is there has to be retrospective in nature. Any Act that is introduced in India that is held to be retrospective but has not been specifically implied in the act, is said to be unconstitutional as well as void. 

Making ex-post facto laws is completely prohibited under the fundamental rights stated in the constitution of India. Under Article 20(1) of the Constitution, it has been clearly stated that there could be no retrospective impact of the formulated laws on offences committed before the introduction of the statute. The primary objective of this article is to ensure that the law and order are maintained properly and that there is absolutely no illegal detention taking place. The person who carried out an act at that point was completely aware that it was not unlawful, and later on, if it is declared to be unlawful, it is clearly violative of his rights. The person won’t have knowledge of any sort that the act he committed would be in the future declared unlawful or illegal and hence should not be punished.

Examples of retrospective legislation in India

There are various examples of retrospective legislation in India. Though these laws primarily deal in the field of taxation, there have been several other laws introduced in India. 

One of the examples of such legislation is the Karnataka Scheduled Caste and Scheduled Tribe (Prohibition of Transfer of Certain Lands) Act, 1978, which was retrospective in nature. This Act aimed to prohibit the transfer of land granted by the government to people belonging to the Scheduled Castes and the Scheduled Tribes. This law was also applicable on the land under the ownership of the Scheduled Castes and the Scheduled Tribes before the enactment of this law. Nobody was even allowed to purchase the land owned by the people belonging to SC and ST communities.

Another major legislation was the Tamil Nadu Land Acquisition (Revival of Operation, Amendment, and Validation) Act, 2019, whose constitutional validity was recently upheld by the Supreme Court, which was going to be applied retrospectively till the year 2013. The reasoning behind this decision of the Supreme Court was that the basic principle of the legislature is to protect the public interest at large. The legislature is at the helm of protecting the rights of the people and ensuring a democratic polity among the people. Hence, any step taken towards achieving this purpose is considered to be lawful, and the contention raised by the petitioner that it violated the principle of the separation of powers is completely invalid. For the public good, any law can be operated retrospectively without any stoppage since the law doesn’t completely prohibit the same. 

However, if any retrospective law is to be introduced, it is only allowed for criminal matters and not in the case of civil matters. 

Retrospective laws for taxation

The retrospective laws are generally utilized for tax-related matters, such as the Amnesty scheme. Those who fail to file their taxes on time are provided with some rebate, especially in the times of Covid-19. There were crores of people who lost their jobs and many even went bankrupt. Even small industrialists suffered a lot during this period. Many of them become incapable of paying their taxes on time. 

It is at this point in time that the government can make good use of retrospective statutes. People would need to pay fewer taxes if the government amended the Income Tax Act, 1961 to state fewer taxes to be paid with a retrospective effect. At the same time, this operation can be used to impose some justified charges on transactions that have been carried out in the past. Such retrospective taxes help in rectifying any deviations in the taxation policies that previously allowed businesses to benefit from any kind of loophole. 

There were several amendments that took place in this Act that were retrospective in nature. An example of the same is explanation 7 to Section 9(1)(i) of the Income Tax Act, 1995, which had to be applied retrospectively. It was declared by the Court in the case of Augustus Capital PTE Ltd v DCIT (2020) that explanation 5 of the Income Tax Act was applied retrospectively for the removal of any doubt with respect to the payment of the interest amount. Later explanations 6 and 7 were introduced that had to be read along with explanation 5 for providing further clarity regarding the accrued income. Since explanation 5 was applied retrospectively, the same should be the treatment of explanations 6 and 7. Hence the assessing officer, in this case, was ordered by the Court to read the concerned explanation 7 of Section 9(1)(i) as applicable from the year under consideration and that there shall be no further additions or questions regarding the same.

Another landmark case with regard to Section 9 of the Act is Ishikawajima Harima Heavy Industries Ltd v. Director of Income Tax (2007). Section 9 of the Act gave a whole new dimension to the concept of ‘income deemed to have accrued in India’. The company concerned in this case was involved in selling its products in the Indian market but was incorporated in Japan. There was a question in this case regarding the tax treatment of the fees for technical services that were to be paid by the non-resident companies in India. The Apex Court in this particular case held that two conditions are to be fulfilled for explanation 7 of Section 9 of this Act to be made applicable. The services from which the company is earning money on which the taxes are to be imposed must be rendered as well as utilized in India. If both these conditions are satisfied, the income is said to be accrued in India. 

This judgement completely reversed the general perception that if the technical or consultancy services were provided in India, the company would be liable to pay the taxes regardless of whether these services were rendered outside India or not. 

Further, the retrospective operation can also be used when the policies in the present and the past were very different owing to the fact that firms were required to pay a lesser amount of tax. In order to create a level playing field and to ensure justice and fairness in the payment of taxes. The most recent example of a retrospective taxation law is the policy under the Union Budget 2022-23. It brought about certain amendments to the Income Tax Act, 1961, which carried a retrospective impact. The examples of various amendments brought about under the Income Tax Act, 1961 are as follows.

  1. The government allowed an exemption on the amount received for the medical treatment and on the account of death due to Covid-19 retrospectively from April 2020.
  2. The gifts and freebies provided to the doctors are not going to be treated as business expenditures under Section 37 of the Income Tax Act of 1961. Further, even capital expenditures of a personal nature are not to be reflected as expenditures under this given act.
  3. There was also a retrospective change brought about in the financial year 2005-06 wherein it was stated that any form of cess or surcharge couldn’t be deducted in the form of expenditure. 
  4. With respect to the funding of companies, it has also been laid down in the budget that the source of funding for any given loan or borrowing for its recipient is going to be reflected only if the source of funds is appropriately explained in the hands of the creditor. This measure is retrospectively going to impact all the major business ventures in their funding processes. It would have a much more adverse impact on the Startups if the creditor is not a venture capital fund that is legally registered with the SEBI (Securities and Exchange Board of India). Earlier, only the PAN of the creditor by the taxpayer would suffice, but now this is no longer the case. The recipient is required to prove that it is the right source of income and that the creditor’s net worth was appropriate to provide this amount.

Hence, the retrospective operation of the various amendments in the Income Tax Act, 1961 has played a vital role in ensuring the fair payment of taxes by every individual on time. Secondly, it has facilitated the introduction of amnesty schemes to provide some relief to small businessmen and industrialists.

Relevant judgements

Commissioner of Income Tax v. Hindustan Electrographite Ltd (1998)

In this particular case, the assessee was a public limited company, which had filed the income tax. Apart from that, there was an additional amount representing the cash compensatory support that wasn’t offered to the tax as an adjustment. It was not required under the Act prevailing in 1989. However, there was the introduction of the Finance Act of 1990 with a retrospective effect, stating that the tax is also required to be paid on cash assistance. 

The suit was henceforth filed in the Court, stating that these provisions are penal in nature. However, the Court in this case declared that the provisions of this Act were not penal and, hence, this legislation can certainly be retrospective in nature. It is only a penal law on which the retrospective operation can’t take place.

Garikapatti Veeraya v. N Subiah Choudhary (1957)

In this case, there was an issue in the appeal from the trial court to the Supreme Court. Since the amount of the suit was Rs 11,000 but the amount required for an appeal before the High Court was required to be Rs 20,000, the appeal was not allowed. In this case, the Court stated that if there is an absence of any statement to show that the law has a retrospective operation, it can’t be determined to be the same. Hence such laws also cannot change the existing laws that are to be applicable for determining the validity of any claim in the Litigation.

Ratan Lal v. State of Punjab (1964)

In this particular case, a boy who was 16 years old was held liable for committing trespass and for outraging the modesty of a 7-year-old girl. He was ordered to rigorous imprisonment by the magistrate and a certain amount of fine was also imposed upon him. However, later on, the legislation known as the Probation of Offenders Act, 1958, came into force, in which it was stated that any person below the age of 21 should not be imprisoned. The Court in this case held that any legislation could be operated in a retrospective manner for the benefit of that person to reduce the punishment. Hence, any form of ex-post facto law which is required for the benefit of the accused is not prohibited from being introduced retrospectively under Article 20(1) of the Indian Constitution.

Assistant Excise Commissioner, Kottayam and Ors v. Esthappan Cherian and Anr (2021)

In this case, a writ petition had been filed wherein it was demanded that the amendment to Rule 13 terminating the liquor license should be quashed. As a result, a certain amount that was sought to be recovered by him for giving the liquor license in the past had been stuck.

The decision in the High Court of Kerala was passed in favour of the licensee. However, an appeal was made before the Supreme Court. The Supreme Court overruled the High Court’s decision and stated that any rule or law that is passed cannot be interpreted to be retrospective unless it explicitly mentions the opposite. Hence, the state was allowed to claim only 50% of the departmental management fees that were due for the period after the contract of sale for the liquor was terminated from the licensee.

Hitendra Vishnu Thakur v. State of Maharashtra (1992)

This case defined the scope of the amendment brought in an Act and whether it should be allowed to operate retrospectively. The Court laid down that if any given law affects the substantive rights of any individual, then it should not be allowed to operate retrospectively. Apart from this, several other general principles were also laid down in this case, which are as follows.

  1. If any Act affects the substantive rights of an individual, it is assumed to be prospective in its operation unless stated expressly, either in oral or written form that the law is said to operate in a retrospective manner.
  2. Each and every person who approaches the court for certain claims is said to have certain rights stated in substantive law but these are not stated in any procedural law.
  3. All the laws relating to forum and limitation are said to be procedural, but all the laws relating to the right to appeal or the right to take any given action are substantive.
  4. Any Act that changes the procedure or leads to a change in the period of punishment shall be presumed as prospective in operation unless stated otherwise either in spoken or through a written mode.
  5. A procedural statute should not be applied retrospectively where the impact of the same is going to create new rights or obligations or even impose new duties on any transaction that has already taken place. 

Applicability of retrospective operation of statutes at the global level

The retrospective statutes are still used in several countries, however, within certain restrictions. Some of the countries have been mentioned below.

United Kingdom (UK) 

Under English law, there is a presumption that, unless stated specifically, the statutes are not assumed to have a retrospective effect. However, if a clear intention of any law being applied retrospectively has been specified, there is no need to stop the same from being implemented. An example of it was the Wireless Telegraph (Validation of charges) Act 1954, which provided the basis of a statutory provision for the wireless license fees that have been collected for the last 50 years. In the Supreme Court judgement of Walker v Innospec Ltd and Ors, 2017 it had been clearly stated by the Court that any enactment unless a contrary intention has been expressly stated, is going to be prospective in nature. Hence similar to the rule in India, every statute shall, by default have a prospective application.

Australia

In Australia, both the state and the Central Government have the power to make retrospective laws that would also apply to past events. However, this has been criticized time and again in Australia for being violative of the rule of law. This is so because, under the Australian principle of the rule of law, the law must be known to all so that they can comply with it. In the case of R v Kidman (1915), the retrospective operation was challenged for the first time. However, the High Court, in this case, stated that though the power of the Australian Parliament is limited by the Constitution, there is no limit on either the State Legislature or Parliament to formulate any retrospective law.

France

In France, the formulation of ex-post facto laws was completely prohibited, as per Article 2 of Code Civil or the Napoleonic Code. The basic reasoning given in this Article is that the law should only look into the future and shouldn’t be retrospective in nature. However, it was later determined by the Constitutional Council, one of the highest authorities in France, that retrospective laws could be introduced within certain limits. Similar to India, the council generally also introduces retrospective laws relating to taxation. In criminal law, the punishments as per the ex-post facto laws are still prohibited except in those cases where this legislation might benefit the wrongdoer. 

United States of America (USA)

Congress in America is prohibited from making any ex-post facto laws. This is one of the very few restrictions imposed by the Constitution of the United States of America on both the state and federal governments. When deciding upon the ex-post facto cases, the Court has relied upon the judgement given in the case of Calder v Bull (1798), in which it proposed the four forms of unconstitutional ex-post facto laws. However, it has not always been the case that ex-post facto laws aren’t allowed. There was an Act introduced in 2006 known as the Adam Walsh Child Protection and Safety Act that imposed certain new rules for registration for convicted sex offenders, also applying to those who had committed these offences in the past. Hence, for the common good of society, retrospective operation of statutes is prohibited in most situations.

Difference between retrospective and prospective operation of statutes

  1. A prospective operation of any statute essentially means that the statute as it is formulated is solely focused on the future acts or offences that might be committed. It doesn’t consider any past act or incident that happened that in the present times would have constituted a crime. On the other hand, the retrospective operation of the law is in absolute contradiction with prospective laws. Under this form, the law that has been passed or the amendment made to the current times is also going to be applicable to the events carried out in the past which would now constitute an offence. Hence, this contradicts the general presumption of the law being effective in the future.
  2. Any law, unless stated otherwise, is considered to be prospective in nature, i.e., to be effective from either the date of its enforcement or from any other future date. This is not the case with retrospective legislation. If such legislation is to be introduced, the legislators need to specify the past date from which the law is going to be applicable. Also, the Supreme Court has the power to decide whether a law should be enforced retrospectively or not. 
  3. In India, all the laws relating to both civil and criminal matters can have prospective operation. In other words, all the statutory provisions are going to be applicable to future events or any of the acts. However, the retrospective statutes can only be used for criminal matters and not civil ones.
  4. The retrospective operation of any statute is most of the times highly criticized by the people for violating their rights. While committing that act, they didn’t have the knowledge that it was going to become unlawful in the future for which they could be punished. On the other hand, there is general acceptance by the public for the prospective operation of the statutes because they acquire complete knowledge about the various offences and hence don’t commit them to attract any penalty.
  5. Most countries in this world don’t recognize the retrospective operation of any statute or with certain restrictions. Even in India, Article 20(1) of the Constitution prohibits the enforcement of any retrospective law or amendment which might be harmful to the rights of the citizens. However, the same is not the case with prospective legislation. They are always given preference because it upholds the values of democracy and, at the same time, is the most favourable path to follow as  people acquire the necessary information about offences.

These are some of the major differences between the retrospective and prospective operation of the statutes.

Retrospective operation of statutesProspective operation of statutes
Such a statute focuses on the events of the past, and the new laws introduced are applicable to those past events.Such a statute focuses solely on events resorting to wrongful acts after the introduction of the act or the amendment.
No statute is presumed to ever be retrospective in nature.Any statute introduced, unless expressly stated otherwise, is considered to be prospective in nature.
A statute can have a retrospective operation only when it is concerned with civil matters and not criminal matters. Criminal matters can only have a retroactive operation.Any statute, whether concerned with civil or criminal matters, is presumed to have prospective operation.
Retrospective statutes are generally criticized by society and not recommended by governments because of their being unfair and unjustified toward the citizens.The prospective statutes enjoy acceptance from the general public and the governments are also mostly in favour of such statutes. These uphold the democratic values of justice and the rule of law.
The retrospective operation of statutes is still not recognized in most countries. In several other countries, these can be introduced with several restrictions.All countries generally accept all the new laws to be applicable for future events, i.e., prospective operation of the laws.

Issues with retrospective operation of statutes

The primary intention behind introducing retrospective laws is to ensure that the people who escaped liability in the past are held responsible or to reduce their punishment. However, its enforcement poses many challenges to democracy and also brings the government under scrutiny. Some of its ill effects are as follows:

  1. It is violative of the basic rights of the people. It is directly violative of the principle of the rule of law since the people aren’t treated equally in this situation.
  2. When a retrospective law is introduced, the people who previously committed the offence don’t have the required knowledge to comply with the same. The law is enforced later but the person is punished for his/her past acts which is completely unjustified.
  3. In the case of retrospective laws, the assent of the Supreme Court is required which could certainly cause some delays.
  4. A statute can have a retrospective operation only in criminal and taxation matters thereby reducing its scope significantly.
  5. The retrospective laws can be used to obtain certain taxes which were evaded by the people previously making use of the loopholes. At times, it becomes very difficult to determine the year in the past from which it should be made applicable because the interests of both the government and the people are to be considered.
  6. The amendments which are retrospective in nature are most of the time very short-sighted or short-lived that it steals the existing law of its stability which is essential for its healthy growth. 
  7. Only the substantive civil laws can be operated retrospectively; the rest all have to be operated retroactively. This acts as a limit to the retrospective laws.

These are some of the major limitations of retrospective legislation. There are problems not only with the procedural aspects of it with the various formalities but also with respect to the democratic values, including the people’s rights.

Conclusion

The retrospective operation of statutes is highly beneficial in certain areas but, at the same time, could be violative of people’s rights. The procedural aspects could also be very complicated if seen along with the Constitution of India. As a result, there is a need to balance the interests of both the government and the citizens by some measures. After observing all the aspects relating to it, it is fair to conclude that such laws have more negative as compared to positive impacts on society. Hence, except for certain circumstances in which there is no other alternative, these laws or amendments should not be allowed. Even with the recent Supreme Court judgements, legislators have the power to make retrospective legislation. They should still be used within reasonable limits so that there is fair justice for all. The purpose of law-making would be fulfilled only by ensuring fair justice. Any law, regardless of its retrospective or prospective application, should always uphold the democratic principle; if it is otherwise, as could be possible in the case of retrospective legislation, appropriate action must be taken. 

Frequently Asked Questions (FAQs)

Is civil law retrospective in India?

According to Article 20(1) of the Indian Constitution, only retrospective criminal laws are prohibited. There is no prohibition on imposing civil liability retrospectively.

What is the presumption of any law?

Any new law introduced is presumed to be prospective in nature unless expressly stated to be retrospective with the date in the past from which the statute shall apply.

What are the examples of retrospective laws in India?

The various examples of retrospective legislation in India are the Income Tax (Amendment) Act, 2021, Finance Act, 1990, and also the Karnataka Scheduled Castes and Scheduled Tribes (Prohibition on transfer of certain lands) Act, 1978.

References


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Difference between interpretation and construction

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Rules of Interpretation of Statutes
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This article is written by L M Lakshmi Priya, a student from the school of law, Sathyabama Institute of Science and Technology, Chennai. This article provides an exhaustive overview of interpretation and construction and their rules and the differences between them..

It has been published by Rachit Garg.

Introduction 

The word ‘interpretation’ literally means ‘to provide meaning’, but it also refers to a technique for bringing together unrelated data and the process of presenting something to readers based on your ideas in a situation in which the interpretation of the law would reveal its true meaning and intention. This construction conveys the meaning of a complex concept. If there is any ambiguity, then the court may decide the meaning of the words which should be used further in that case. When there is uncertainty, construction aids in concluding, whereas interpretation aids in understanding the meaning of the words. Let’s now examine the interpretation and conclusion from a broader scope to see how they differ from one another.

What is interpretation 

According to Blackstone, “the fairest and rational method for interpreting a statute is by exploring the intention of the legislature through texts, the subject matter, the effect, and consequences or the spirit and reason of law.”  The Latin term ‘interpretaria’, from which the word ‘interpretation’ is derived, implies to expound or explain, particularly the actual meaning of anything. When there are irregularities and ambiguous words in the law, the court should interpret them properly by determining the actual meaning of the words by applying various rules of interpretation. Interpretation of statutes is simply the process of understanding the meaning of the text in the law and applying it to the case in the appropriate manner. The court can determine the exact intent of the legislature by interpreting the legislation and the interpretation of statutes. When a statute’s language is unambiguous, interpretation is not essential, but in cases when particular phrases may have more than one meaning, the statute should be interpreted to ascertain its literal meaning.

Rules of interpretation

When terms in laws are ambiguous or uncertain, it is the court’s responsibility to interpret them to imply exactly what is written there. If mistakes go undiscovered, judges may refer cases to the four rules of interpretation to elucidate the statute. The aforementioned heads serve as the foundation for the rules of interpretation. The main objectives of the interpretation are to determine the word’s true meaning and to establish the intention behind adding that specific term to the law.

  • The Literal Rule
  • The Golden Rule
  • The Mischief Rule
  • The Purposive Rule 

The Literal Rule

The literal rule of interpretation is one of the principles of interpretation the court applies to understand the basis of the statutes. This literal rule of interpretation is regarded as the most fundamental one. This rule, which is also known as the plain meaning rule or the grammatical rule as its name suggests, is important to use to identify the meaning of the words in statutes, but judges are not required to change the words when they are in the right perspective and can be properly interpreted in cases. 

The safest rule of interpretation is that the court and judges should adhere to the definition clause attached to the legislation in determining the meaning of the relevant words, and they should not depart from that definition for any reason. In this literal method of interpretation, the court can determine the words’ natural and ordinary meaning, but judges are not capable of exercising their judicial mind beyond the actual meaning specified in the legislation. A literal rule of interpretation makes the law simple and plain while respecting the sovereignty of the parliament. However, the rules cannot always be applied, which can lead to incorrect judgments being issued.

Case laws

R v. Harris  (1836) 

 In this case, the victim’s nose was bit by the defendant. The Court found that under the literal rule, the act of biting did not fit within the definition of ‘to stab,cut, or wound,” as these terms meant an instrument had to be employed. The statute made it an offence “to stab, cut, or wound’. As a result, the conviction of the defendant was overturned.

Fisher v. Bell (1961)

In this case, the appellant was a Chief Inspector of Police, whereas the respondent had a retail store in Bristol. A police officer observed the presence of a flick knife with a price tag. The respondent was notified by the police officer that the knife was a “flick knife” and that the respondent would be reported for selling flick knives, which was against the act, and claimed that the display of the flick weapon was illegal. However, the respondent disagreed with it. 

The Court used the literal rule of statutory interpretation, which resulted in the dismissal of his conviction, because the products on display in stores are not technically “offers” but rather an invitation to treat. 

The Golden Rule

Viscount Simon L.C says, ” The golden rule is that the words of a  statute must prima facie be given their ordinary meaning.”  When the literal rule cannot resolve inconsistency or ambiguity in the statute, the golden rule of interpretation is used to resolve this inconsistency. It is also known as the modifying rule of interpretation or the grammatical rule. When it comes to the golden rule, errors in the law are immediately addressed by amending the literal rule of interpretation. Judges are only permitted to slightly alter the language when there is a contradiction, since they occasionally act to their advantage. 

The golden rule of interpretation is the statutory rule, which permits a departure from the common meaning of words when the context of the entire document so requires. There are two methods to apply the golden rule of interpretation. First, it is employed in the most restricted context when there is some ambiguity or absurdity in the words themselves. Secondly, it is used in a broader context to avoid using language that is offensive to public policy values even when there is just one meaning.

Case law

R v. Allen (1872)

In this case, Section 57 of the Offences against the Persons Act of 1861, the defendant was implicated in the crime of bigamy. According to the law, “whosoever being married shall marry any other person during the lifetime of the former husband or wife is guilty of an offence”. If this clause were to be read literally, it would be impossible to commit the offence because civil law does not recognize second marriages. Any attempt to get married under these circumstances would not be recognized as a legal marriage.

Tarlochan Dev Sharma v. State Of Punjab (2001)

In this case, the Court applied the golden rule of interpretation to the phrase “abuse of his power” contained in Section 22 of the Punjab Municipal Act of 1911, which denotes an intentional or willful misuse of power.

The Mischief Rule

The Mischief rule of interpretation, which is narrower than the literal and the golden rules of interpretation and gives judges more discretion than the other two rules to decide, is considered the third rule of statutory construction. The word “mischief” generally refers to loss or damage to a person or property. The primary goals of this rule are to develop a remedy for the flaw in the statute.

Case law

Heydon’s case (1584)

The Mischief rule of interpretation was first established in this case, in which a college had a particular property in their name and the management decided to give a particular portion to W S and G and their sons for their later lives later during the 16th century in England, where the system known as doubling of estates was valid in these acts of giving property. The English Parliament passed ‘The Statute – 31 Henry VIII’  to stop the doubling of estates. 

Heydon contested this action taken by the crown under the use of this Act, but the Court upheld the action by the crown after applying the mischief rule of interpretation. The primary goal of the legislation passed by the parliament was to safeguard the assets of religious institutions. Because the Court found that the statute was invalid for the doubling of estates, it was upheld. Lord Coke noted the following four points for interpretation of the statutes.

  • What was the common law before passing the Act?
  • What was the mischief and defect for which the common law did not provide?
  • What remedy had Parliament resolved and appointed to cure the disease of the Commonwealth.?
  • The true reason for the remedy.

This ambiguous rule of interpretation served as the court’s explanation for departing from the statute’s plain language to grant remedies, and as such, it has been characterised as a flexible rule of interpretation.

Royal College of Nursing v. DHSS (1981)

In this case, the RCN contested the involvement of nurses in abortion under the offences against the person act, which is unlawful. The Abortion Act of 1967 states that it is legal for medically registered practitioners to perform abortions. The court supported this by interpreting the mischief rule. 

The Purposive Rule 

Purposive interpretation is a term that appears frequently in both legal writing and court rulings. Understanding that “purpose” is a subjective concept is the common theme connecting most references to purposive interpretation. In recent years, the purposive approach has gained popularity. The Law Commission recommended the courts to use this strategy in 1969. Prior to reading the wording of the law, a purposive approach to statutory interpretation looks for the legislation’s goals. It is commonly said that the purposive approach is a hybrid of domestic rules however, domestic rules require for courts to apply the literal rule first to examine the Act’s words, whereas the purposive approach begins with the mischief rule to determine the purpose or intention of Parliament. This makes it a considerably more flexible approach, providing judges more freedom to shape the law in accordance with what they believe to be Parliament’s intent.

Case law

Pepper v. Hart (1992)

In this case, it was up to the House of Lords to determine whether a teacher at a private school was required to pay taxes on the benefit he got in the form of decreased fees. The teacher attempted to rely on a Hansard statement made at the time when the Finance Act was passed, in which the minister specified his precise situation as one in which tax would not be payable. The courts were not permitted in the early years. In contrast to Davis v. Johnson, the House of Lords took a more positive approach to interpretation, concluding that Hansard could be cited and that the teacher was exempt from paying tax on the benefit he received.

What is construction 

  • According to Salmond, “interpretation and construction is the process by which the court seeks to ascertain the meaning of the legislature through the medium of authoritative forms in which it is expressed.”
  • According to Cooley, “construction is the process of concluding, respecting subjects that lie beyond the direct expression of the text, which is in the spirit though not within the letter of law”.
  • Judges should take into account the factual circumstances before giving a particular meaning to the phrase, words, or expression that are present in the legislation because construction in law is about giving meaning to the ambiguous words in the provisions of the law to resolve the inconsistency.

Difference between interpretation and construction 

The definition of a statute is a written expression of the direction or intent of a legislature. A law can be interpreted or construed to determine its intended meaning. The judicial authorities can define the meaning and objectives of the legislation with the aid of this process of interpretation and construction. Let’s now explore their variances.

InterpretationConstruction
Interpretation is the process of ascertaining the true meaning of the words and the Purpose of the legislationConstruction is the process of using the legal text to draw conclusions that go beyond its plain language to solve Inconsistencies
Interpretation may be performed when a certain term or phrase in law has an unambiguous meaning,Construction may occur when the language and the meaning attached to specific phrases in the laws are unclear and ambiguous.
The process of interpretation identifies the methods that can be used to interpret any statute.Construction intends to bring it to a conclusion.
Interpretation is used to determine the linguistic meaning of a legal text.The legal impact of the legislative text can be ascertained through construction.
Ambiguity is removed by interpretation.Construction works to create standards to overcome ambiguity
A legal text can be partially interpreted.It is necessary to complete construction as a whole.
Interpretation can be seen as a broad form of constructionConstruction is almost like an interpretation in which the words are considered 

Conclusion

Interpretation and construction are necessary to ensure that every citizen of a nation receives fair justice. The court must be quick to apply the law to the situation. By using interpretation, the court can examine the meaning of the statutes’ words, while construction aids in the explanation of the laws.

Frequently Asked Questions (FAQs)

What is the role of interpretation?

The English language serves as the medium through which our nation’s laws are expressed, and since word meanings can change depending on the context, interpretation becomes necessary when ambiguous or unclear wording appears in a statute.

What is the purpose of the interpretation of the statute?

The two primary grounds for interpretation of laws are as follows:

  1. To be conscious of the word’s true meaning and
  2. To explain the addition of that specific phrase to the statute.

What are the types of interpretation?

Liberal interpretation and strict interpretation are the two types of interpretation.

  • Liberal interpretation – Liberal interpretation refers to the idea that the law should be interpreted broadly in order to give it a deeper and more comprehensive interpretation.
  • Strict interpretation – Strict interpretation states that each word of the law should be read literally, without considering the intent of the statute.

References 


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Types of debentures

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Types of Debentures

This‌ ‌article‌ ‌has‌ ‌been‌ ‌written‌ ‌by‌ ‌‌Sujitha‌ ‌S‌,‌ ‌pursuing‌ ‌law‌ ‌at‌ ‌the‌ ‌School‌ ‌of‌ ‌Excellence‌ ‌in‌ ‌Law,‌ Chennai.‌ ‌This article briefly deals with the various types of debentures classified on a certain basis. Further, this article tries to analyse other related aspects of debentures. 

This article has been published by Sneha Mahawar.

Introduction

Typically, a company can issue shares to raise capital. However, the money generated through the sale of shares is rarely sufficient to cover a company’s long-term financial requirements. As a result, the majority of firms rely on issuing debentures, which are sold either through a private placement or to the general public. Debentures, also referred to as long-term debt, are a method of raising money. Moreover, the issuance of debentures to the public is similar to that of equity shares. Further, there are several types of debentures classified on a specific basis. This article deals with the classification of debentures and other related aspects. 

What are debentures 

The Latin term “debere,” which means to borrow, is the root for the English term “debenture.” A firm can borrow money from the general public by issuing certificates for a specified period of time and at a fixed rate of interest if it needs money for expansion and growth without raising its share capital. This is referred to as a debenture. In simple words, a debenture is a written document that bears the company’s common seal and acknowledges a debt.  It includes a contract for the payment of interest at a given rate due often either half-yearly or annually on fixed dates, as well as for the repayment of principal after a pre-determined period of time, at intervals, or at the company’s discretion.

As per Section 2(30) of the Companies Act, 2013, a “debenture” is any security issued by a company, including bonds, debenture inventory, and other securities, irrespective of it constituting a charge on the assets of the company.

Additionally, it is stipulated that:  

  1. the instruments listed in Chapter III-D of the Reserve Bank of India Act, 1934; and 
  2. any other instrument that may be authorised by the central government in conjunction with the Reserve Bank of India, issued by a corporation.

Features of debentures

  • Commitment: It is a commitment made by a firm that it would pay the holder of the debenture a specific amount of money.
  • Face Value: A debenture’s face value often bears a large denomination. It is a multiple of 100 or is 100.
  • Repayment: They are issued with a due date that is specified on the debenture certificate. At the time of maturity, the debenture’s principal is paid back.
  • Priority in Repayment: Debenture holders have preference over all other claims to the company’s capital when it comes to repayment.
  • Assurance of Repayment: A debenture is a long-term obligation. They come with a guarantee of payment by the due date.
  • Interest: For debentures, an agreed-upon set rate of interest is paid on a regular basis. The corporation has a set obligation to pay interest. Regardless of whether the firm earns a profit or not, it must be paid by the company.
  • Parties to Debentures:
  • Company: This is the entity that borrows money.
  • Trustees: If a business offers debt securities to more than 500 individuals, a debt trustee must be appointed. A trust deed is an agreement made between the entity and trustees. It includes the company’s duties, debenture holders’ rights, the trustee’s authority, etc. 
  • Debentureholders: These are the individuals or organisations that make loans and obtain a “debenture certificate” as proof.
  • Authority to issue debentures: The Board of Directors has the authority to issue debentures, as stated in Section 179(3) of the Companies Act (2013).
  • Status of debenture holder: His legal status is that of a creditor of the firm. Due to the fact that a debenture is a loan taken out by the corporation, interest is accrued until it is redeemed at a pre-determined rate and interval.
  • No Voting Right: In accordance with Section 71(2) of the Companies Act 2013, no firm may issue debentures that include a voting right. Debenture investors are not permitted to cast ballots at the annual general meeting.
  • Security: Debentures are often secured by a fixed or floating charge on the company’s assets. The holder of a debenture may dispose off the firm’s chargeable property in order to recoup their investment if the company is unable to pay interest or return capital.
  • Issuers: Debentures may well be issued by both public limited companies and private companies.
  • Transferability: Using the instrument of transfer, debentures are easily transferable.

On the basis of security of instrument 

Secured or mortgage debentures 

These are the debentures that have a charge placed against the company’s assets as security. They are also called mortgage debentures. Secured debenture holders have the right to demand repayment of their principal as well as any unpaid interest on those debentures from the company’s mortgaged assets. Section 71(3) of the Companies Act, 2013 deals with the issues of secured debentures. There are two categories of secured debentures:

  • First mortgage debentures: Debentures with first mortgages provide their holders priority access to the assets pledged.
  • Second mortgage debentures: The holders of second mortgage debentures have a second claim on the assets charged.

Unsecured debentures

  • Unsecured debentures are debt instruments issued by enterprises that allow investors to contribute money for investments or large-scale expenditures in return for a certificate acknowledging the debt and a written commitment to pay back the principal at a pre-determined time with a pre-determined interest rate.
  • Unsecured debentures are by definition those that are not backed by any assets, revenue streams, or holdings of the firm. Holders of unsecured debentures have the same rights as other unsecured creditors of the issuing corporation in the event of default.
  • To avoid making the repayment of the debentures subordinate to the repayment of secured loans, corporations typically promise to investors in debentures that they would not secure other loan agreements with their assets prior to the debenture issue.
  • As no government buildings or assets ensure bond repayment, government bonds issued under the nation’s seal are equivalent to unsecured debentures.

On the basis of convertibility of instrument

Non-convertible debentures

  • Certain debentures provide the option, at the owner’s discretion, to convert debentures into shares after a set period of time. Non-convertible debentures are those debentures that cannot be converted into shares or equity.
  • Companies utilise non-convertible debentures as a mechanism to obtain long-term capital through a public offering.
  • When compared to convertible debentures, lenders often receive a greater rate of return to make up for the disadvantage of non-convertibility.
  • Additionally, they provide the owner with a number of other advantages such as high mobility through the stock market listing, source tax exemptions, and security because they can be issued by businesses with a solid credit rating in accordance with the RBI’s issuing guidelines.
  • These must typically be issued in India with a minimum maturity of 90 days. Housing loan firms, gold loan companies, and non-banking financial companies are the main participants in the NCD market. With the systemic fall in interest rates, these companies discovered it to be a useful source of funding.
  • Banks, mutual funds, and insurance firms, in addition to ordinary investors, also invest in non-convertible debentures.

Convertible debentures

  • According to Section 71(1) of the Companies Act, 2013, convertible debentures are those debentures which have the option of conversion into shares at the time of redemption. Insofar as main collateral is concerned, a convertible debenture is often an unsecured bond or loan.
  • They are long-term debt securities that provide bondholders with interest payments. 
  • Convertible debentures have the distinction of being convertible into shares at certain intervals. By providing some security, it may help the bondholder mitigate some of the risks associated with investing in unsecured debt. It is a hybrid security that aims to balance debt and equity.
  • An investor will receive a fixed rate of return and the chance to profit from a rise in stock price. He can retain the bond until it matures and earns interest even if the issuer’s stock price declines.
  • In the case of Deputy Commissioner of Income Tax v. I.T.C. Hotels Ltd. (2003), the Karnataka High Court came to the conclusion that even if the convertible debentures were to be converted into shares at a later time, the expense incurred on such convertible debentures had to be treated as revenue expenditure.
  • A convertible debenture is a highly practical financing tool for startups.

Fully convertible debentures

At the expiration of the time period provided, the investors may completely convert these debentures into equity shares. The holders of these debentures eventually become shareholders of the firm after being converted. Additionally, only up to the date of conversion, the interest on these debentures will be paid. Besides, the ability of the firm to compel the conversion into equity shares in accordance with the notice is a key distinction between a fully convertible debenture and other debentures. Even startups with no prior track record might benefit from a fully convertible debenture. 

Features of fully convertible debentures

  • The price at which holders change their debentures into shares is known as the conversion price. It is determined by a number of variables, including the book value at the time of conversion, the market price, the anticipated growth in the value of equity shares, etc.
  • The number of equity shares that the holder receives in return for a fully convertible debenture is known as the conversion ratio.
  • A proportion of the face value is designated as the number of debentures to convert. Additionally, based on pricing, the total money to be converted is converted into the number of equity shares.
  • The investor’s right to receive equity shares determines the conversion value of the debentures. They must thus multiply the conversion ratio by the current market rate per equity share in order to arrive at the fully convertible value.
  • It begins on the day when the debentures were allocated. The issuer may also exercise the option to convert them into equity shares when the tenure has ended.
  • A completely convertible debenture’s coupon payments are determined by the interest rate and creditworthiness of the issuer. The issue’s condition specifies whether the corporation will make coupon payments every six months or every year.

Partially convertible debentures

Debt instruments known as partially convertible debentures allow investors to convert only a portion of their investment into business equity shares at the end of the pre-determined period. At maturity, the investor has the option to redeem the remaining amount of the debenture. Additionally, at the time of issuance, the enterprise chooses the conversion ratio for these debentures. Moreover, the holders of these debentures become shareholders in the corporation to the extent of their holdings after being partially converted into equity.

These are appropriate for businesses with a proven track record. As the conversion results in a smaller equity capital base, they are, thus not particularly well-liked by investors.

Features of partially convertible debentures

  • The price at which the real equity share was granted and assigned to the holder is known as the conversion price. The conversion price is determined by a number of variables, including the book value at the time of conversion, the market price, the anticipated growth in the value of equity shares, etc. Therefore, it is important to avoid setting these conversion prices too high or too low.
  • The quantity of equity shares the holder acquires in exchange for these debentures is known as the conversion ratio.
  • The amount of convertible debentures is expressed as a percentage of face value. Additionally, based on pricing, the partial conversion value is transformed into the number of equity shares.
  • The investor’s right to acquire equity shares determines the debentures’ conversion value. As a result, they must multiply the conversion ratio by the present market price per equity share to get the convertible value.
  • It fluctuates based on the expiration of the debentures, which typically ranges from one year to five years from the date of allocation.
  • The coupon payments are determined by the current interest rate and the creditworthiness of the issuing corporation. The issue’s condition specifies whether the corporation will make coupon payments every six months or every year.
  •  The market price of these debentures is influenced by the conversion value and investment value. This product thus combines financing and an opportunity to purchase an equity stake in a company.

On the basis of the ability of redemption

Redeemable debentures

As the necessity of repayment is one of a debenture’s most important characteristics, not all debentures, however, have a set repayment deadline. Debenture issuers generally have the option to pay down such debts at any point before fully winding up. However, this is not the case in terms of redeemable debentures, which have a set repayment deadline. The Issuer is required to pay back such a loan to the original lender or debenture holder by a certain date. Companies can draw in more investors with a redeemable debenture because of this feature. This is so that investors may rest easier knowing they will be paid back. 

The company has the authority to keep the redeemed debentures alive for the sake of re-issues if there is no clause contrary to the Articles of Association or the terms of the issue, or if there is no resolution indicating a willingness to cancel them. The same debentures or alternative debentures may be issued again by the company. The holder of the debentures retains the same rights and privileges after such re-issuance as if the debentures had never been redeemed. In addition, a redeemable debt has many of the same characteristics as a fixed-income product, such as monthly interest payments to investors and the lack of market volatility. The interest they produce is often lower than that of regular debentures, though, a redeemable debenture has a pre-determined payment date. Such a system does not mimic market instability.

Features of redeemable debentures

  • Repayment: Repayment is the main characteristic that sets this loan instrument apart. The method of repayment, however, might differ. An issuer has the option to redeem all of its debentures in a single go. Alternatively, a business may decide to make monthly payments or instalments over the course of the loan.
  • Redemption value: Another crucial aspect of a redeemable debt is the amount at which it Is redeemed. A Company or issuer can redeem at par its lot of such debentures. On the other hand, it can also choose to redeem at a premium. That means paying a price that is higher than the face value of such debentures. 

Irredeemable debentures

One form of debenture that is categorised based on the ability of redemption is the irredeemable debenture. Such debentures cannot be redeemed while the issuing firm is still in existence. To put it another way, irredeemable debentures may only be redeemed once the issuing firm dissolves. Section 120 of the Companies Act, 1956 dealt with irredeemable debentures. However, there is no such provision in correspondence with the Companies Act, 2013.

They can also be redeemed when they run out or if the firm issuing them is prepared to pay back the borrowed money. However, such a thing does happen pretty seldom. These bonds are also known as perpetual debentures or perpetual bonds since the corporation issuing them does not have a plan for repaying the money borrowed. Additionally, they don’t have a pre-determined redemption date at the time of issuance. It should be mentioned that the issuing enterprises are obligated to pay the pre-determined interest on the debt instruments. 

It is seen as a financially advantageous method of borrowing. Moreover, the call option is available to issuers, and the timing for it is specified every five years after issuance. These debentures are often issued by major manufacturing entities or financial institutions.

Features of irredeemable debentures

  • Perpetual bonds do not have a maturity date, as was previously said. However, the right to issue callable debentures is reserved for issuers.
  • On these bonds, investors are entitled to interest. Notably, the payout is based on how profitable the issuing firm was in the previous year.
  • High liquidity risk and low to moderate credit risk are associated with irredeemable debentures. The debt instrument is further exposed to a moderate interest rate risk.
  • Rs. 10 lakh is the minimum investment value for this debt product. It should be emphasised that high net-worth investors (HNI) or retail investors can get irredeemable debentures in the resale market, with the maximum investment value being Rs.560 lakh or higher. Additionally, the price is largely influenced by the interest rate that will be charged, both now and in the future.

On the basis of registration

Registered debentures

These debentures are listed in the debenture-holders register of the entity with each holder’s complete information. Any securities of the Company that are issued and exchanged for the debentures in accordance with the Registration Rights Agreement and contain terms identical to the debentures are referred to as registered debentures. However, these securities will be registered under the Securities Contracts (Regulation) Act (1956) and  will not contain terms relating to transfer restrictions. In simple words, these debentures are such in which all information, including addresses, names, and holding details of the debenture holder, is recorded in a register maintained by the company as per Section 88 of the Companies Act, 2013.

These bonds are payable to registered holders, or those whose names are included in the register. Debentures that are registered are not negotiable. These bonds cannot be transferred by simple delivery. Similar to shares, these debentures are transferable in accordance with Section 56 of the Companies Act, 2013. These cannot be transferred to someone else unless the company’s board approves the standard instrument of transfer. 

The registry of debenture holders contains the names of these holders as well as information about the quantity, face value, and kind of debentures they currently possess. The register is filled out with the buyer’s name. Only the people whose names the debentures are recorded receive the interest coupons.

Bearer debentures

Debentures that may be transferred by simple delivery and are paid to the bearer of the instrument are known as bearer debentures. The registry of debenture holders does not keep track of bearer debentures, and registration of transfer is not required. These debentures are transferable, like negotiable instruments by means of simple delivery. In the case of Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat (1970), the Calcutta High Court observed that the debenture holder is entitled to recover the principal and interest in case of due. When it is not paid, he or she can seek winding up and if the suit is otherwise competent, the company cannot ask him to explain how he came by the debenture or why he did not collect the interest for a long time. Further, the Court highlighted that Section 118 of the Negotiable Instruments Act (1881) applies and therefore, every holder of a bearer debenture is presumed to be a holder in due course unless the contrary is proved.

Features of Bearer debentures

  • Bearer debentures are printed on paper and issued in physical form.
  • The Bearer debenture holder must present the interest payment coupons that are physically linked to the security to the bank or the issuing corporation in order to collect interest payments.
  • Bearer debentures may be redeemed within 30 days of the maturity date.
  • When selling bearer debentures, there is no need for a third party or middleman, making the process relatively simpler. As a result, it may be easily transferred by just giving the other person the certificate.

On the basis of coupon rate

Specific coupon rate debentures

  • Debentures are categorised as specified coupon rate debentures when the interest rate is pre-determined at a certain rate, or the coupon rate, which may be fixed or floating. 
  • In most cases, the bank rate and the floating interest rate are related.

Zero-coupon rate debentures

  • There is no set interest rate on these debentures. Such debentures are issued at a significant discount in order to recompense the investors, and the difference between the issue price and the nominal value is regarded as the amount of interest associated with the length of the debentures.
  • Debentures with a zero-coupon rate have no coupon rate, or we may argue that there is no coupon rate at all. In these kinds of debentures, the holder will not get any interest. The discrepancy between the issue price and the debenture’s face value is the implicit interest or advantage. These debentures must be redeemed for their full face value. These are also known as “Deep discount bonds.”
  • For instance, a debenture having a face value of Rs. 100, is issued at a 50% discount. In this scenario, the investor simply has to spend Rs. 50 to subscribe to the debenture. She does, however, receive Rs. 100 back when the loan matures.

Overview of the classification of debentures

BasisClassification
On the basis of security of instrumentSecured or mortgage debentures and unsecured debentures
On the basis of convertibility of instrumentNon-convertible debenturesConvertible debenturesFully convertible debenturesPartly convertible debentures 
On the basis of the ability of redemption Redeemable debentures and Irredeemable debentures
On the basis of registration of debenturesRegistered debentures and unregistered / bearer debentures
On the basis of coupon rateSpecific coupon rate debentures and zero coupon rate debentures

Advantages of issuing debentures

  • It has become more typical for company directors to lend their own company and secure debentures that will eventually protect them from current and future market insecurities as most banks are becoming less willing to offer business loans (especially to startup firms) combined with the heavy obligations they face.
  • Debentures mature over time and assist in securing long-term capital for the establishment and expansion of enterprises.
  • Debentures, as opposed to other debt instruments, have a fixed/definite maturity period and a fixed (unchanging) rate of interest throughout their term. As a result, investors receive a fixed amount as specified at the time the debenture was issued, which over time can be a reliable source of income to support oneself financially.

Disadvantages of issuing debentures

  • Debentures have the significant drawback of having no influence over ownership, notwithstanding the possibility that equity shareholders may be required to periodically exert control over its operations by issuing debentures and/or compelling conversions). Holders of debt obligations do not have voting rights to safeguard their interests in the event of market instability, unlike holders of other fiscal instruments.
  • Another drawback is that investors must pay taxes on debenture interest rates in accordance with government regulations, whereas owners are exempt.

Conclusion

To sum up, a debenture is just an acknowledgement of a debt. It is a kind of  loan capital raised from the general public by the firm. In the realm of finance, a debenture is a note of promise for a long-term corporate bond that is often secured by the goodwill and moral character of the borrower as well as certain assets. Typically, a company or firm is the borrower, while the general public is the lender. Based on different factors including security, duration, convertibility, etc., there are many types of debentures. Accordingly, there are many different forms of debentures, including registered and bearer debentures, secured and unsecured debentures, redeemable and irredeemable debentures, convertible and non-convertible debentures, and debentures with zero coupon rate and specific rate. Debentures stand apart from other types of debt in part because they lack collateral backing, meaning that no money or asset of any kind is guaranteed to support the obligation. Debenture issuing companies have an opportunity to succeed with a safe source of long-term capital. Due to its limited liquidity and lack of collateral or other means of securing ownership, crowdfunding has several drawbacks, particularly for businesses that struggle to win over the trust of investors.

FAQs

How does a debenture differ from a bond?

One form of a bond is a debenture. It specifically refers to bonds with longer maturities and is an unsecured or non-collateralized debt issued by a company or other entity.

What’s the risk factor involved while redeeming debentures?

If the debentures are removed and sent, there is a risk of losing the interest payment coupons. Therefore, the bond must be physically presented to a bank for redemption at the time of maturity.

What’s the significant risk associated with unregistered debentures?

The main threat in buying bearer debentures is that they may be readily utilised for tax evasion and money laundering. The rationale is that bearer debenture holders are unable to realise any income from owning this kind of debenture.

What is the major difference between registered and bearer debentures?

Since they can be transferred by simple delivery, bearer debentures are known as unregistered debentures. On the other hand, Registered Debentures cannot be transferred by simple delivery, and all necessary information is recorded in the debenture holders’ Register.

How do partially convertible debentures differ from fully convertible debentures?

Partially Convertible Debentures, also known as PCDs, are different from Fully Convertible Debentures in that the investor can retain a portion of the debenture value in cash as security value. At the same time, the remaining debt is converted to equity.

References


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

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

https://t.me/lawyerscommunity

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

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Corporate governance and business ethics

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This article has been written by Kumar Rajiv Ranjan, Ex-General Manager (Legal), SECL & Dip. In GCP (Aug ’21 Batch). 

This article has been published by Oishika Banerji.

Corporate governance

The term ‘corporate governance’ is a much used, abused, and at times misused term in the business world today. In layman’s terms, corporate governance refers to the methodology of governing a corporate entity which includes rules, regulations and bye-laws by which a corporate firm is governed, managed, run and controlled. The concept of corporate governance works on the principle of balance of equity, balancing the interest of the company, stakeholders, customers, suppliers, financers, government and shareholders on one hand and the community at large on the other hand. 

The ICSI defines corporate governance as “the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility, for sustainable development of all stakeholders.”

The Organisation for Economic Cooperation and Development (OECD) in 1999 had framed six (06) principles of corporate governance which were further developed in 2004 and today they are considered as the international benchmark in corporate governance. A brief of the six principles are presented hereunder:

  1. The First Principle deals with ensuring the basis for an effective corporate governance framework. It advocates transparency, fair markets as well as effective and efficient allocation  of resources in order to have its impact on overall economic performance, market integrity and market participants with legal and regulatory requirements governing corporate governance being in consonance with the applicable laws.
  2. The Second Principle deals with the rights and equitable treatment of shareholders and other key ownership functions. It advocates that the shareholders should have a right to secure methods for ownership registration, right to be sufficiently informed about and have a right to approve and participate in decisions concerning fundamental corporate changes consequent upon changes to statutes, Memorandum or Articles of Association etc.
  3. The Third Principle deals with the Ethical principles for Institutional investors, stock market and other intermediaries. It advocates that the institutional investors acting in a fiduciary capacity should be sufficiently transparent in disclosing their corporate governance policies as well as voting policies with respect to investments, and insider trading. It further advocates that zero tolerance towards market manipulation should be adopted and the applicable rules be enforced etc.
  4. The Fourth Principle advocates that the role of stakeholders in corporate governance should be like enlightened democratic participants and they should recognize the rights of stakeholders established by law or through mutual agreements and should encourage active cooperation between corporations and stakeholders in creating wealth, jobs and sustainability of financially sound enterprises etc.
  5. The Fifth Principle relates to disclosure and transparency mandates. An ideal corporate governance framework should ensure that timely and accurate disclosure is made on all material issues relating to the organization including its financial situation, performance, ownership etc.
  6. The Sixth Principle exhaustively sets out various responsibilities of the Board and a few of them are like members to act on a fully informed basis, fair treatment to all shareholders, applicant of high ethical standards, ensure a formal and transparent board nomination and election process, overseeing the process of disclosure and communication etc.

By analysing the above principles and the definition given by ICSI, we can say that the very essence of corporate governance and the corporate governance principles lies in having well defined policies, practices and defined standards of business ethics and moral principles which have been set out internationally and expected to be followed by corporate business houses across the globe.

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Corporate governance in the Indian context

With a view to have the highest degree of corporate ethics, fairness and transparency in the business world, the Government of India along with SEBI had set up a number of Committees over a period of time. These committees have submitted a series of recommendations. Some of them, upon acceptance by Govt. of India, have culminated into formal legislations e.g. the Companies Act 2013, SEBI Takeover Regulation, SEBI LODR, SEBI ICDR Regulations, etc. Many other recommendations were adopted as moral principles. Hence, it is pertinent to have a look also at the developments in the field of corporate governance in Indian Context which is being presented herein below:

  1. Corporate Governance Code (1998): Developed and designed by Confederation of Indian Industry (CII). The Code has denounced the German system of two tier boards and has also set out some other ethical standards.
  2. Kumar Mangalam Birla Committee (1999): It was another committee on corporate governance which was set up by SEBI in 1999. It submitted its recommendations under two heads-mandatory and non-mandatory. Composition of Board of Directors was its mandatory recommendations while role of Chairman, remuneration committee of Board, etc were part of non-mandatory recommendations.
  3. Naresh Chandra Committee (2002): It was another committee set up by SEBI which submitted its recommendations in 2002. The Committee’s recommendations were mostly on audit related matters. The Committee also listed a number of activities as prohibited non-audit service like actuarial services, valuation services, auditor’s disclosure of contingent liability etc.
  4. Narayan Murthy Committee (2003): In 2003, SEBI constituted another committee under the Chairmanship of Mr N R Narayan Murthy, the then Chairman of Infosys. The Narayan Murthy Committee submitted certain mandatory recommendations for strengthening the Audit Committee, improving the quality of financial disclosure and certain non-mandatory recommendations like evaluation of the performance of the board, instituting a system of training of the Board members etc.
  5. CII Task Force (2009): CII Task Force on Corporate Governance was constituted under the Chairmanship of Mr Naresh Chandra. The Task Force also suggested certain voluntary recommendations for adoption by the industry.
  6. Voluntary Guidelines on Corporate Governance (2009): While CII had constituted task force for examining corporate governance and suggesting measures for improvement in 2009, in the same year i.e. 2009 itself, Ministry of Corporate Affairs (MCA) issued corporate governance voluntary guidelines which were expected to be followed by industries and corporate houses.
  7. CII Task force-II (2009): Another task force was constituted by CII under the chairmanship of Mr Naresh Chandra. This task force also submitted a number of extremely significant and exhaustive recommendations which included having a well functioning nomination committee, having a fixed contractual remuneration to directors, audit committee constitution, separation of the offices of Chairman and Chief Executive Officer, etc.
  8. Adi Godrej Committee (2012): It was another committee which was constituted by MCA in 2012 under the Chairmanship of Mr Adi Godrej. The Committee formulated guiding principles for corporate governance which included recommendations on key areas like board composition and diversity, selection process, on boarding process, board evaluation etc.

Various recommendations were finally encapsulated into legislation and the Companies Act, 2013 was born wherein various provisions like provisions on Corporate Social Responsibility (CSR) under Section 135, insider trading, role and responsibility of Audit Committee, etc were incorporated to strengthen corporate governance. Code of Conduct or Ethics Policy was introduced in reference to Section 149(8) and Vigil Mechanism Policy was included in reference to Section 177(8) of the 2013 Act. Accounting standards issued by Institute of Chartered Accountants of India are all parts of corporate governance reforms initiated in India.

Another important legislation towards strengthening corporate governance was enactment of SEBI LODR 2015 and SEBI ICDR 2018 where under various listing requirements were made mandatory.

In 2017, another committee under the Chairmanship of Mr Uday Kotak was constituted which submitted its various comprehensive recommendations on composition and role of board of directors, minimum number of independent directors, board meetings, enhanced monitoring of group entities, disclosure and transparency, accounting and audit related issues etc.

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The ground reality of business world : the existence of business frauds

It is thus observed that corporate governance principles or business ethics policies are internationally accepted policies and principles for a noble cause of promoting fairness in business dealings, equitable treatment to all and transparency and accountability in business dealings. A number of reformative actions for strengthening corporate governance were also taken in India. However, on a number of occasions, maintenance of business ethical standards have taken a beating and have fallen prey to human greed and desire to amass wealth at all costs resulting in a number of corporate frauds internationally and also in India. Bank frauds or loan defaults by corporates are grim realities today which put a question mark on practising corporate governance policies or maintenance of ethical standards by the corporate. Our economy is struggling, a number of banks have failed and the share market is highly fluid today. 

People’s confidence in our banking sector has received a big jolt and there are a number of cases where the persons have lost their lifetime earnings and security of future at the hands of faltering and failing banks and NBFC. People’s confidence in our banking sector as a secured mode of investment is at an all time low. To examine what is happening around us,let us took a look at a few cases which had rocked the nation and also the business world during last about 30/40 years are:

  1. Harshad Mehta Scam.
  2. Failure of Satyam as a corporate giant.
  3. YES Bank scam.
  4. DUPING BY MEHUL CHAUKSI and NIRAV Modi with active connivance of officials of Punjab National Bank (PNB).
  5. Vijay Mallya: The fugitive offender and collapse of United Breweries.
  6. VMC Systems Limited Scam which erupted in Aug’2021. In this case also, Punjab National Bank [PNB] is found to be at the central stage.
  7. DHFL Fraud Case.
  8. Lost investment of Provident Fund money of UP Power Corporation and Coal Mines.
  9. Provident Fund Money into the equity shares of DHFL.

With such a huge amount of money getting syphoned out from Indian economy as a result of these scams, there is a very strong need to arrest the slide as well as plight of the Indian economy, and the policymakers of the Country are required to give a deep thought to the subject and they should come out with some preventive, regulatory and also punitive mechanism.

Reserve Bank of India (RBI) is the highest regulatory authority for the banking and NBFC sector and it has also been presenting highly disturbing figures in its different reports. The RBI Annual Report 2019-20 has stated that during Financial Year 2019-20, banking sectors reported 8707 frauds wherein a total sum of Rs 1.85 Trillion was involved. The Report has further stated that during 2017-18,a total of 6799 cases were reported involving a total sum 71543 Crores. 

As per RBI Annual Report 2020-21, the value of the reported fraud was stated to be at Rs 81901 crores. These figures are sufficient to indicate how badly our economy is suffering and if the slide is not arrested, it will collapse sooner than later. How the corporate frauds are taking place and what methodologies are adopted by corporate fraudsters, it would be interesting to examine a few real life cases which have taken place in last around 30-35 years globally and also in India and a few of the landmark cases have been examined as presented hereunder.

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Corporate frauds in business world : an analysis

A study of the corporate fraud cases in India and abroad has reflected some common unethical practices in corporate governance field as listed herein below:

  1. As far as corporate frauds are concerned, the corporate houses use their guile and professional expertise, at times with the help of their statutory auditors or system auditors or internal auditors who manipulate their financial statements and present a very rosy and inflated figure which is a far cry from truth. The corporate thereafter presented before the banking authorities these manipulated and grossly inflated financial statements to secure finances. They, being big brand names having an established reputation, also exercise their own influence subsequently upon the banking personnel, either by palming the grease of some corrupt bank officials, or by exercising their own political clout or through their planted agents within the banking system. In this way, they get these inflated reports and financial statements accepted by the banking authorities on its face value without much verification. This methodology was adopted in the Satyam case by its CEO B Ramalinga Raju wherein the big accountancy firm Pricewaterhouse Cooper (PwC) as the statutory and independent auditor of the company was no less responsible and their irregular and unethical act of allowing inflating and manipulating the books of account of Satyam Group is still a big blot on corporate governance in India.
  2. These inflated financial statements and unreal profit figures are used to obtain from the banks and NBFC loans or finances running into multi-crores of rupees. For obtaining bank finances, the corporate also takes recourse to some other banking instrumentalities. It has been experienced that instrumentalities like BG [Bank Guarantee], LoC [Letter of Credit/Letter of Comforts] etc were extensively used and abused by such Corporate Houses for furthering their business goals.
  3. In the recently detected case of VMC Systems Limited, Hyderabad, the modus operandi had remained the same. The Company before the banking authorities had declared their receivables to be at 262 crores by manipulating their books of accounts and financial statement by active connivance of their statutory auditors while in reality, they had pending dues and receivables of Rs 33 Crores only which they were to receive from BSNL and these inflated and manipulated figures were accepted by PNB authorities without proper verification. The Company had also claimed certain receivables from other private companies which were unreal and not true. With the help of these inflated, manipulated and false financial figures, VMC Systems Limited succeeded in securing a loan from a consortium of banks including PNB. Post unearthing of the fraud, the matter is under investigation by CBI and the estimated value of the fraud is above Rs 1700 crores.
  4. In the PNB Scam also, Nirav Modi and Mehul Chauksi,the big diamond merchants, exercised their personal clout and succeeded in obtaining fake Letters of Undertaking [LoU] by the Bankers at a small branch of PNB. The Branch of PNB which was involved in this mega financial scam was a small Brady house Branch of PNB which was located at Fort, Mumbai. These LoUs were issued by the officials of PNB working at the Brady House Branch in favour of branches of Indian Banks in overseas destinations for import of pearls and other costlier stones for a period of One Year. Such LoUs for a period of one year were issued despite the fact that the RBI had prescribed a total time period of 90 days only from date of shipment. The duo of Nirav Modi and Mehul Chauksi succeeded in obtaining a total of 1212 LoUs within a period of 74 months from their first fraudulent guarantee obtained by them from PNB on March 10, 2011. Later investigation by CBI revealed that they obtained these LoUs mostly in favour of dummy firms which were operating from the British Virgin Island and the fund received through fraudulent LoUs was transferred into their account.
  5. It is also observed that the frauds committed are sooner or later detected and, thereafter, the corporate become defaulters. Soon, they or some operational or financial creditors file insolvency resolution proceedings against them. The courts, thereafter, accept some resolution plans brought before them by some other corporate at a much-discounted rates and in this manner many of big names in the corporate world get themselves absolved of their financial liability. One big example of getting relieved from financial liabilities is the case of Ruchi Soya Industries Limited[RSIL] which had an outstanding loan of over Rs 12000 Crores when insolvency resolution was filed against them but the court accepted resolution plan of Patanjali Udyog Limited for a value of Rs 4350 crores only. As a result, Central PSU Banks like SBI could recover only around 43% of the loan extended. Further, as part of the Resolution Plan, Patanjali Udyog made an upfront payment of Rs 1000 crores only and SBI and other banks extended them a further loan of 3350 Crores. So practically, nothing comes back into the coffers of the Banks through the approved insolvency resolution plan of Ruchi Soya.
  6. It has thus been observed that in the Indian corporate sector and business world, the defaulting corporate, in this way, get away with negligible losses but the bigger sufferer has always been the banks and NBFC as financial creditors, retail investors, other secured and unsecured operational creditors. The biggest sufferer has always remained the economy of the country as huge money running into millions of dollars/rupees is taken out from the system.
  7. However, in foreign corporate world, major panel actions are also taken whenever corporate frauds of a mega nature have been detected and an exemplary penalty against the defaulters has been also awarded.
  8. The cases of World Com Inc and Enron Corporation are two of the biggest corporate scandals in the corporate and business world of the USA. In the WorldCom fraud or in the other case of The Enron Scandal, the modus operandi was similar, that of playing with and manipulating the books of account wherein their statutory auditor and external Auditor Arthur Anderson actively connived. In the case of WorldCom Inc, the Company with active connivance of its Auditor had overstated its assets by over USD 11 Billion. When the fraud was unearthed, it was the largest accounting fraud in American history which was just recovering from the shock of another mega Enron Scandal. It was a slap on the corporate governance principles and business ethics policies . Its external auditor Arthur Anderson lost its credibility permanently as it was found to have indulged itself in similar manipulation of books of accounts in the Enron case also. WorldCom filed for bankruptcy on 21st July, 2002. Criminal cases were instituted against officials of World Con Inc and conclusion of criminal proceedings resulted in conviction of Bernard Ebbers, its Founder President and CEO on nine counts of securities fraud. He was sentenced to 25 years of prison in 2005.
  9. The Enron Scandal had just preceded the World Com Inc Case. In this case, Mr. Andrew Fastow as CFO of the Company, had also manipulated the books of account of the Company and, in a like manner, had engineered and developed a financial accountancy fraudulent plan through which he was able to show in the books of the company that Enron was having a very sound financial health despite the fact that many of its subsidiaries were struggling and losing the money but this fact was suppressed from the investors and Wall Street regulators through manipulation of accounts.
  10. For the purpose of hiding the financial realities from the Investors and other stakeholders, Fastow &amp, others at Enron engineered a scheme to use off-balance-sheet special purpose vehicles (SPVs) or special purposes entities (SPEs), with the sole intention to hide the debts figures and toxic assets of Enron from investors and creditors as well as Stock Market regulators. These SPVs were engineered exclusively for the purpose of hiding accounting realities and were not aimed at any operating results. Fastow and his team were simply transferring some of Enron’s rapidly rising stock to the SPV in exchange for cash or a note. The SPVs were subsequently using the stock to hedge an asset listed on Enron’s balance sheet. In return, Enron was giving guarantee to the SPVs the value to reduce apparent counterparty risks.
  11. Sadly in this notorious accounting fraud, they were joined by their external auditors, one of the most reputed and trusted accounting firms in Arthur Anderson LLP, who were according to their stamp of approval despite extremely poor and at times suspicious accounting practices of Enron. The inflated bubble of Enron was ultimately deflated and the dubious accounting procedures practised throughout the 1990s by Enron in active connivance with its auditor Arthur Anderson were unearthed which rocked the entire business world. Wall Street was shaken, the share price of Enron dipped to an all time low and finally Enron was forced to file bankruptcy on 2nd December 2001. Its share prices doomed to pennies from a high of USD 90.56 during the summer of 2000.
  12. The Enron Scandal was the biggest corporate scandal in the USA (until the WorldCom scam unearthed in 2002) resulting in USD 11 Billion losses to the shareholders. The Wall Street Darling crumbled beyond imagination. A number of criminal cases were filed and Arthur Anderson as the Auditing firm became one of the biggest casualties resulting from the fall of Enron Empire. A number of criminal charges were filed against them also. With the WorldCom scandal following in 2002, their credibility has suffered such an irreparable damage from which they have never recovered. They were disgraced beyond imagination. A group of former partners bought the name in 2014 and created a new accounting firm by name Anderson Global and thereby trying to rebuild themselves.
  13. Further, criminal cases were instituted against most of Enron’s executives. They were charged with conspiracy, insider trading and securities fraud. Mr Kenneth Lay, founder of Enron as well as its former CEO, was convicted on six counts of fraud and conspiracy and four counts of banks fraud. However, before sentencing, he had a heart attack and finally died in Colorado. Its Star CFO Andrew Fastow also pleaded guilty for two counts of wire fraud and securities fraud for facilitating Enron’s corrupt business practices. He was sentenced to imprisonment and he spent more than five years in prison. The uproar following the Enron Case and Worldcom Inc case was huge.The collapse of Wall Street, dwindling faith of investors, falling business etc forced the US government to intervene to regain the confidence of the people and the investors. In July 2002, the Sarbanes-Oxley Act was enacted after its signing into law by the then President Mr George Bush. The Act introduced strict regulatory norms and punitive measures as it also prescribed the consequences for destroying, altering or fabricating financial statements and for trying to defraud the shareholders. Additionally, the Financial Accounting Standard Board (FASB) raised its level by several notches as far as ethical conduct is concerned.
  14. The Enron case and the following WorldCom Inc case impacted Indian market also and Indian Government finally rose from a state of slumber and in the year 2002, the Govt. of India appointed Naresh Chandra Committee with a mandate to principally examine and recommend inter alia amendments to the existing laws involving the auditor-client relationships. The Committee was also asked to examine the role of independent directors and submit its recommendation. Significant developments took place thereafter as a number of Committees were constituted to examine corporate governance in India and to submit reports/recommendations to strengthen it. The reports and recommendations submitted by these Committees finally found its reflection in the Companies Act, 2013, SEBI LODR Regulations 2015 etc thereby bringing more accountability in the corporate world.

Conclusions and suggestions

Corporate governance is essentially about how the organisations and corporations are directed, managed, controlled and held accountable to all the stakeholders. Accountability, transparency, security and responsibility are its pillars particularly in the era of globalisation and liberalisation but like in foreign countries, India has also witnessed some mega financial scams viz. Harshad Mehta Scandal, Satyam case etc. thereby throwing open the question of managing financial risks and ensuring corporate governance. The recent Tata- Mistry feud has yet again raised debates on protecting interest of minority shareholders and role of independent Directors and for many, in this case also, ethical business practices took a beating as reflected in the manner in which Mr Mistry was exited from the Board of Tata Sons. For many observers, it reflected an autocratic style of functioning of Mr Ratan Tata under the garb of corporate democracy. Questions of ethics have been also repeatedly raised when big companies and established names do allot preference shares to their promoters at heavily discounted rates.

Clause-49 Listing Agreement by SEBI and enactment of Companies Act, 2013 repealing the old act followed by enactment of SEBI LODR 2015 were some of the major developments towards transparency and ethical corporate governance. Some other steps like strict following of integrity pact in business contracts, zero tolerance on corruption, prioritising risk management, evaluation of Board performance biannually and placement of reports in AGMs etc, if taken, shall lead us towards productive ethical and transparent governance. Clause 29 A of the Insolvency and Bankruptcy Code, 2016 should be strictly followed to ensure fairness and accountability in the insolvency procedure as also repeatedly urged by Apex Court. Timely disclosure of accurate information on financial matters, performance etc has to be the key for ethical and transparent governance.

However, the biggest threat today is the corporate banking frauds and NPAs(Non performing assets) which are practically unrecoverable. The tentacles of such frauds are menacing, impacting our economy in a much bigger way in consideration of the fact that a single banking fraud is seen to be valued around Rs 1000 Crores or even more. In 2021 alone, as per a written reply tendered by Union Minister for Finance before Rajya Sabha [Upper House], 13 bank frauds, each of a value of more than 500 Crores, have been reported by the State Runs Banks for the period up to June’21. Such an astonishing figure for the first quarter of the Financial

Year 2021-22 is an admitted fact by the Government of India. It was further stated by the Minister in the reply tendered before the Upper House that such types of cases were79 in 2019-20 and 73 during 2020-21. In all these frauds, almost similar methodology is adopted. The Fraudsters Corporate are using forged financial statements, forged instruments, manipulated books of accounts, borrowing of funds against fictitious accounts, unauthorised credit facilities, fraudulent foreign exchange transactions and they are further assisted by managerial failures at the stage of credit sanctions/disbursement.

In consideration of all the above facts, some preventive measures as well as punitive measures, tightening of administrative set up, enactment of new rules etc would be essentially required and in this nefarious game, sadly some big names in the world of Accountancy and Auditing firms have also been found to be involved which is also an area of grave concern. 

To curb and control the menace of corporate frauds is a big challenge today and it is happening principally due to non-practicing of ethical practices in business as well as non-adherence to corporate governance principles which are fast eating up into our economy. This slide is required to be at once arrested. If it is allowed to continue unabated and suitable

preventive and punitive measures are not taken, the business sector and economy may collapse due to cash crunch and absence of financial liquidity sooner than later and one of the principal contributory factors for such happening shall be the non-adherence of corporate

governance principles and ethical business practices and a stage of anarchy and hooliganism shall result as we are witnessing in Srilanka today.


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Difference between monarchy and dictatorship

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This article is written by Parth Verma, a student of the School of Law, Christ University, Bengaluru. This article seeks to explain the difference between a monarchy and a dictatorship. In addition, it aims to determine which system is better among the two and their global presence in current times. 

It has been published by Rachit Garg.

Introduction

In recent years, there has been significant growth in the adoption of the democratic form of government all over the world. Countries have now realized the need for people’s participation in governance to ensure their welfare. Yet, there are still several countries in the world in which democracy is still not followed. In such countries, either there is the rule of a king (monarchy) or a dictator (dictatorship) who has the sole authority and control over the entire country. Both these systems are considered to violate the rights of citizens, though in several countries there are certain exceptions to this notion. There is no legally elected government under these systems. The country is run entirely at the whims and fancies of the ruler who could be a king or a dictator. They have the power to make laws without any consultation, and the people would be forced to obey them.

As observed, these two systems almost seem to be the same in hindsight and have the same adverse impact on any nation. However, if observed minutely, there exist several differences between these systems of governance. This article seeks to look into all these differences and determine which one would be better in the context of any particular country. In this way, it will also answer the very important question of whether democracy should be considered in such countries.

Difference between monarchy and dictatorship

Meaning

Monarchy

A monarchy is a system of governance under which there is a king or a queen who has the absolute power of governance and decision-making in that particular country. The term monarchy is a word that has been derived from the Greek word ‘monarkhia’ which means ‘alone’. In the case of a monarchy, the succession of the kings takes place as a matter of heredity, i.e., only the members of the royal family can succeed in becoming the king or queen and ruling over the people. No other person from outside that family could become a monarch. 

Dictatorship

A dictatorship is a form of government in which there is a single leader or a group of leaders who assert their authority over the people of that country. The person who dictates the laws of that country is known as the dictator. The term ‘dictator’ has been derived from an office in Rome, which was only a temporary position kept for one person to have the absolute authority to make the rules in the event of an emergency. Unlike in a monarchy, however, the powers are not transferred to the dictator as a matter of their heredity. This power is usurped from the lawfully elected government by a military coup or through a collective revolt by a group of people who then assert their control. 

Features

Monarchy

In a monarchy, the monarch has the absolute power to make laws. It is still prevalent in a large number of countries. The features of a monarchy are as follows:

  1. Under this system, there is generally only one person who acts as the monarch. Though two monarchs can also rule simultaneously in a given country, it is known as a Diarchy. 
  2. It is a family-based system of rule. In other words, only the members of any given family succeed in assuming the position of the monarch.
  3. If the family member who is to succeed after the death of the previous monarch is a minor or is debilitated, then the regent can rule in that given situation. The ceremonial beginning of the monarch is known as a coronation.
  4. The monarch can have various titles. For example, in European countries, a monarch is given the title of king or queen, emperor or empress, duke or duchess. On the other hand, in the Middle Eastern Muslim nations, the monarch is known as the Caliph, Sultan, or Malik. 
  5. There are two types of monarchic systems which are absolute monarchy and constitutional monarchy (or a limited monarchy). 
  1. Absolute monarchy refers to a system in which the monarch has the supreme authority to govern the nation and to make laws. The monarch has unrestricted powers in this system.
  2. In the case of a Constitutional monarchy, the monarch is required to exercise his powers as per the provisions stated within the constitution of that country. There are several restrictions that might be imposed on the monarch in this system. Most of the time, the monarch only has some ceremonial powers.

Dictatorship

Under this system, the power to make the rules is solely in the hands of the leader or dictator. Dictatorship has the following features:

  1. In a dictatorship, power is concentrated in only one person, who is the single leader. The leader is then supposed to represent all the people in that country.
  2. The powers of dictatorship are assumed by the use of force on the part of the leader. They either carry out a military coup or revolt to overthrow the existing leader or the government. 
  3. Dictatorship is completely totalitarian in nature. It means that a complete influence is imposed by the dictator on all aspects of the human activity and personality of all citizens in the nation.
  4. The dictator brainwashes the minds of the citizens that they are the most superior people as compared to the rest of the world. This is also known as Racialism. Hence, a dictator has to be a good orator if he/she aims to influence the people.
  5. A dictator is not elected by the process of voting. As a result, a dictator may or may not have majority support but due to their military power, they impose their control over the citizens of the country.
  6. There are different types of dictatorship, which are military dictatorship, single party dictatorship, personalist dictatorship, and hybrid dictatorship.
  1. Military dictatorship refers to a regime in which the leaders, or the group of officers holding power, are the military officials and lead the country. Under this form of dictatorship, there is a rule of the professionalized military as an institution. The officers under this system are known as Junta Members.
  2. Single Party dictatorship refers to a regime in which there is only one political party that dominates over the given nation. This group of officers has complete control over the selection of the party members and makes the policies for the benefit of only the party supporters.
  3. Personalist dictatorship is the most common form of dictatorship in which power is concentrated within a single individual. The dictator might be a member of the military or any party, but the difference is that they have complete control over all institutions and it is not divided between the different persons.
  4. Hybrid dictatorship is a blend of the qualities present in all three previous types. The most common form of such a dictatorship is the personalist hybrid dictatorship.

Method of seizing power

Monarchy

There is no process of the seizure of power in the case of the monarchy. The power is in the hands of the royal family staying in that given country, the members of which become the monarchs. It is based on a family tradition in which a member from the same family succeeds the previous monarch. The power to rule is generally accepted among the citizens. and as a result, they don’t seize the power. It is a tradition that has been prevailing for a long period of time.

Dictatorship

In a dictatorial system, power is generally seized by the dictator or the group of leaders, either through a military coup or a collective revolt of the group of leaders. The powers are seized either from the existing government or from the monarch, generally through an attack on their army. Hence, power in a dictatorship is seized by a protest or a revolt by a person or a group of persons to seize the powers from the existing government.

Control

Monarchy

The control in a monarchy system lies in the hands of the monarch, or the king, or the queen. They can frame the laws of the country and can also control the activities of their citizens. However, the magnitude of control declines in the case of a constitutional monarchy. Under this system, the Constitution ideally has complete control over the king as well as the people of that country. The powers of the monarch are limited in a Constitutional monarchy and they are bound by the Constitutional provisions. However, in a non-sovereign monarchy, the monarch can be subjected to the authority of some person having higher authority. An example of such a system in the monarchy could be the puppet leaders of the Princely States of India during British Rule. They were allowed to control the state but had to work under the authority of British Colonial rule. 

Dictatorship

In the case of a dictatorship, full control over the citizens is in the hands of the dictator. A dictator can make and enforce the laws as per their whims and fancies. The government going to rule the nation would be presided over by the dictator in case there were a group of leaders. The military control would also completely lie in the hands of the dictator. In a dictatorship, unlike a monarchy, the dictator is submissive or accountable to any other individual or a group of leaders. They have absolute authority over the nation in all possible circumstances. There is absolutely no division of powers among the different individuals. Even those who have the authority are directly answerable to the dictator, i.e., they would always be subordinate to the dictator.

People’s satisfaction

Monarchy

Since in the system of monarchy, the king has complete control over the citizens, they might feel that their rights are being violated. This is generally what happens in any monarchy. Freedom of the citizens is inhibited and the system also leads to a class divide, i.e., the population gets divided into the privileged, which includes the royal family and their subjects, and the commoners, who suffer due to the monarchy. The people in most countries following this system aren’t satisfied as they don’t enjoy any freedom and their rights are outrightly violated under this system.

However, this is not always the case. In certain countries, the monarch is considerate of the needs and rights of the people. As a result, they lead the people towards the development of the country at large and are not driven by the motive of their self benefits. The most recent example is the system of monarchy in Bhutan. The people are satisfied with the monarch and during the regime of the current king, the crime rate has been on a decline, the country has achieved carbon neutrality, and the employment rate is also on a continuous rise, thereby making it the happiest country in the world. Hence, the people might not be satisfied with a system of monarchy, but there are certain exceptions to it. Even for those who are unhappy, the situation is not as bad as for those who are living under the regime of a dictator.

Dictatorship

The dictator, as explained in the previous section, aims to promote racialism among the people, which creates a feeling of the superiority of one community over the other. As a result, those who don’t belong to the community of the dictator face a lot of discrimination. Many a time, they even become the victims of genocide because they are considered impure by the dictator. Yet, for the rest of the citizens, they would become the beneficiaries of all the privileges that would be provided to them by the dictator. 

The most appropriate example of dictatorship is that of Adolf Hitler. He was the dictator of present-day Germany and Austria and considered the German Aryans to be the most superior community. As a result, he highly discriminated against the Jews living in Germany and also carried out mass killings or genocide of the Jews to make the community extinct. Many Jews lost their lives and many were forced to migrate to other nations in order to save themselves. Even for the people of the same community, certain injustices might be imposed upon them which could go against their interests. Most of the people, if not all, are not satisfied at all under this system, and unlike monarchy, there are no exceptions to it in the world till now. Hence, in this system, people might need to face greater atrocities in comparison to the system of monarchy. 

Relevance of the Constitution

Monarchy

In a monarchy, the constitution may or may not be relevant. When the monarch has absolute authority over the citizens, he/she might not create an entire Constitution but only make some general rules to be conveyed to the people. Yet, they can still create a Constitution if they wish to do so. However, even the constitution would contain the same rules as had been envisaged by the monarch. 

In a Constitutional monarchy, however, the constitution holds a lot of relevance. The powers and the role of the monarch are defined in the Constitution, which he/she can’t exceed in any given situation. Further, the rights of the people are appropriately guaranteed with the help of the Constitution. Hence, the Constitution holds a lot of relevance in a Constitutional monarchy but in an absolute monarchy, the rule of the king is given primary importance.

Dictatorship

In a dictatorial system, the constitution is made by the leader himself to fulfil his/her aspirations. A dictator, in other words, is not bound by the Constitution and can rather make the Constitution by themselves. They can only focus on promoting their propaganda and ideologies through the Constitution if they make one. Another reason for making a constitution by a dictator is to emphasize his supreme leadership and the concentration of power of all organs of the government in his/her hands. As a result, the Constitution doesn’t hold much relevance in a dictatorial regime. 

Examples

Monarchy

  1. The most prevalent example of monarchy in current times is the Royal Family in the United Kingdom. Queen Elizabeth II assumed the position of the monarch seven decades ago and is still holding it. However, since the United Kingdom is a constitutional monarchy, the powers of the queen are limited and fixed by the Constitution. The basic principles of human rights are followed and there is no control or influence of the queen over the people, which could possibly violate their rights. As a result, the position of the queen is more ceremonial in nature with the Constitution being the binding authority.As a result, there is no issue of violation of citizens’ rights because it is a well-framed constitution based on the guiding principles of liberty, equality, sovereignty, etc. The people are satisfied under this system and the country is still thriving.
  2. Saudi Arabia is also a monarchy that is based on the Islamic religion. It’s a form of absolute monarchy that is completely totalitarian. This monarchy is headed by the King, who has control over the military and is also the legal custodian of the mosques in that given region. Below him in the hierarchy is the Crown Prince. The primary function of a Crown Prince is to help the King in the performance of all his duties effectively. At the same time, they are in line to become the successor immediately after the King. Nobody in the country is allowed to criticize the King or the government. This acts as a major restriction on the Freedom of Speech and Expression of the citizens since they aren’t allowed to dissent or disagree with the existing government. If they do so, they might be executed or sent to jail. Saudi Arabia has also received global criticism for not providing women with equal rights as compared to males in society, which is a highly regressive and patriarchal mindset in current times. The King of Saudi Arabia is Salman Al Saud, who assumed the reign in 2015. Under the reign of the Saudi Arabian Kings, the people have not been very satisfied and have been subjected to a large number of atrocities. Press freedom and creative liberty are also taken away from  journalists and they are always facing the risk of being punished if they speak anything against the King.
  3. Japan is also an example of a Constitutional monarchy with a parliamentary form of government. The monarchy is headed by the Emperor, who is the principal symbol of the Japanese State. They essentially rule the country but the Constitution has the binding authority in the nation. The current monarch of Japan ‘Naruhito’ has had his education in the United Kingdom and is well aware of the new world standards to take the country ahead. The country has a Prime Minister who heads the executive department of the Japanese government and is also the Commander in Chief of the Army. The current Prime Minister of Japan is ‘Fumio Kishida’ and is elected by the Emperor of the country. The Prime Minister exercises his powers as has been laid down in the Constitution which includes certain Statutory and Constitutional roles. The citizens are highly satisfied with the Constitutional monarchy in Japan and there is absolutely no violation of their rights. In the survey conducted in 1997 by Asahi Shimbun, it was determined that around 82% of the total citizens in Japan were in support of the system of Constitutional monarchy that was being followed. This was so because people believed that the system even brought them closer to their ancestors, history, and spiritual core. Hence, there is no question about the levels of satisfaction of the people in the Constitutional monarchy of Japan.

Dictatorship

  1. The most important example of dictatorship in current times is the rule of Kim Jong Un in North Korea. It is a form of dynastic dictatorship in which the last three generations of the Kim family have been ruling the country. The dictators have over the years increased their powers by purging many top officials and consolidating their control by bringing changes to the Constitution. The Elections in the country take place, but the citizens have no choice but to vote for the party headed by the dictator as there is no other competing party. The King resorts to absolute totalitarian policies which are highly unfair to the citizens and lead to the concentration of wealth of the nation among a few elites. The country is among one of the poorest nations in the world, and a large number of people during the pandemic died due to starvation. Even certain basic human rights aren’t provided to the people in North Korea. They don’t have any form of access to the rest of the world and are also not allowed to leave their country. As a result, it is also known as a ‘Hermit Kingdom’ which is segregated from the rest of the world. As a result, in such a form of dictatorship, the people are certainly not satisfied and even the Constitution doesn’t hold much relevance.
  2. Vietnam, a country located in the eastern part of Asia, is an example of a one-party dictatorship in which there are no direct elections at the national level. The nature of the elections is highly influenced by the monopoly or the influence of the Communist party on the people of Vietnam, limitations on free speech, and interference in the elections. There is only one party that contests the elections, as a result of which it becomes a form of dictatorship, even if it is indirect. The country follows the principle of Communism, and hence the sole party is the Communist Party of Vietnam. However, the people in Vietnam don’t enjoy much freedom, as shown in the Freedom in the World Index, 2022, published by the organization Freedom House. The country was declared to be not free in this index. The basic rights of the people are still being violated. However, in the last few years, the situation has been continuously improving. There has been rapid growth in the agricultural sector as well as in information technology, making Vietnam one of the fastest-growing economies in the world. Hence, the situation in Vietnam under a one-party dictatorship is much better in comparison to the dictatorship being followed in North Korea.
  3. As mentioned previously, the regime of Adolf Hitler is the prime example of dictatorship in the world. He indulged in mass killings of the Jews and spread his propaganda of the supremacy of the blue-eyed German Aryans all over the world. His acts later were highly criticized and the Jews were killed in gas chambers. He tested them in the camps by doing various experiments on them, and, as a result, the hardships being faced by the Jews owing to it were gruesome. The Jewish children were separated from their families and due to starvation, they also had to face death. Hence, the situation for Jews was adverse in Germany during Hitler’s regime.

Overview of the difference between monarchy and dictatorship

CriteriaMonarchyDictatorship
MeaningIt refers to a system of government in which the monarch has the absolute power to make laws.It refers to a system in which a leader or a group of leaders rules over the citizens of a country and imposes their rules and will upon them.
Method to seize powerThe power to rule over the citizens is given to the monarch through a hierarchical system prevailing in the royal family.The power in the case of dictatorship is seized either by pulling a military coup or a collective revolt.
TypesMonarchy can be divided into two types namely constitutional monarchy and absolute monarchy.A dictatorship can be divided into various types such as military dictatorship, personalist dictatorship, hybrid dictatorship, and single-party dictatorship.
Satisfaction among peopleThe citizens may or may not be satisfied with a monarchy, depending primarily upon the type of monarchy and the pursued policies by the monarch.Only the majority community or the community of which the dictator is a part would be satisfied since the policies framed would be in their favour. The rest of the population would  be subjected to discrimination.
ControlThe control of the monarch might be absolute or might not be in a constitutional monarchy wherein they are bound by the powers conferred on them in the Constitution.The dictator is going to have absolute power to control the citizens and make the laws in that country.
ExamplesUnited Kingdom, Bhutan, JapanNorth Korea, Vietnam, and Laos

Conclusion

Both dictatorship and monarchy are forms of government that are generally seen against the democratic system of governance. In the past, it was used by the royal families just to fulfil their personal needs. Yet some monarchs certainly thought of the welfare of the people and peace due to which the monarchy has still survived in countries such as Bhutan. In a monarchy system in the country of Bhutan, the King still follows the democratic principles of liberty, equality, fraternity, and the freedom of the people, due to which the system has still been accepted by the citizens of the country. On the other hand, in Saudi Arabia, the people are discontent with the monarchy being followed there. They are deprived of their basic human rights.

From this comparison of different monarchies, it could be determined that it is not always necessary to have a Republican system to provide the people with basic human rights or ensure their social participation. It can be ensured under any system of governance that the protection and promotion of democratic principles and values of liberty, equality, and fraternity are the most appropriate means to achieve the same. However, the same can’t be ensured in a dictatorship since the dictator is not bound by any other individual. It is generally not possible for a dictator to respect the equality of all communities because they have propaganda to promote racialism or give preference to a particular race over another. Equality and peace can’t be ensured in a dictatorship and can certainly not be ensured as the dictator himself assumes power with the use of force.

Hence, in all possible circumstances, a monarchy would be better from the point of view of the citizens as compared to a dictatorship. This is so because, in a monarchy, there is still some possibility of the protection of people’s rights as the monarch himself might be bound by the Constitution in the case of a Constitutional monarchy. However, this is certainly not possible in a dictatorship, as preference would always be given to one community over the other by the dictator. To address all the problems that exist in both these systems, democracy could be an effective solution because it ensures the proper participation of the people in the process of decision-making. Hence, there is no scope for the violation of their rights because then the responsibility would be on the state to uphold the rights of the citizens. Therefore, a democracy or a republican system of governance is better than both these systems, but if dictatorship and monarchy are compared, the monarchy would always be preferred because it is slightly better in terms of protection of citizens’ rights.

Frequently Asked Questions(FAQs)

Which are the countries that still follow monarchy?

Some of the countries following monarchy in the current times are Bhutan, the United Kingdom, Saudi Arabia, Japan, and Jordan.

What is a Constitutional monarchy?

A constitutional monarchy refers to the system in which the monarch has the authority as has been defined in the Constitution of that country. Hence they don’t have uncontrollable authority.

Which countries still follow dictatorship?

Dictatorship is still prevalent in the countries of North Korea, Vietnam, and Myanmar which is the most recent case of Military dictatorship. 

References


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Section 308 IPC

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Section 120A

The article is written by Tejaswini Kaushal, a student at Dr. Ram Manohar Lohiya National Law University, Lucknow. This article deals in detail with Section 308 of the Indian Penal Code, 1860, and analyses its nature, scope, and ingredients in light of statutory provisions and judicial precedents.

It has been published by Rachit Garg.

Table of Contents

Introduction

Section 308 of the Indian Penal Code (IPC), 1860 deals with the offence of ‘attempt to commit culpable homicide’. According to Section 308 of the Indian Penal Code (IPC), whoever does any act with such intention or knowledge and under such circumstances that, if he causes death by the act, he would be guilty of culpable homicide, not amounting to him committing murder. Further, he shall be punished with imprisonment of either description for a term which may extend to three years, or with a fine, or with both. 

A person is said to have committed an offence under this Section if he does something with the intent or knowledge that, if it results in death, he would be guilty of culpable homicide not amounting to murder as specified in Exceptions 1 to 5 to Section 300, IPC. In order to use this provision, the intent to conduct culpable homicide that does not amount to murder must be proven. This article discusses the concept, scope, ingredients, and nature of the offence under Section 308 of the IPC. 

Concept of Attempt to Culpable Homicide 

Concept of culpable homicide

Section 299 of the Indian Penal Code defines culpable homicide. It declares that whoever causes death by executing an act with the goal of causing death or producing any physical damage that is likely to cause death, or with the knowledge that such an act is likely to cause death, commits the crime of Culpable Homicide.

‘Attempt’ under the Indian Penal Code

The punishment for an ‘attempt’ to commit an offence is outlined in Section 511 of the Indian Penal Code. If an act is punishable under the Indian Penal Code, attempting to commit that crime is equally punishable under Section 511 of the Indian Penal Code. An attempt to commit a crime happens when a person has the intention to execute a criminal act and makes an effort or performs an act/conduct in support of that crime, by organising the means and techniques required for the commission, but fails to do so. An effort to commit a crime is what this is known as.

As previously stated, the Indian Penal Code considers merely attempting to commit a crime to be a crime in itself. Every failed effort generates a danger in the eyes of the public, which is the harm produced, and therefore, the offender’s moral blame is equated to the offender’s guilt if he or she had succeeded in committing the crime.

Sections 307 (Attempt to murder), 308 (Attempt to culpable homicide), and others deal specifically with efforts to conduct crimes. Section 511 of the IPC stipulates that if an offender attempts but fails to commit a crime punishable by life imprisonment or regular imprisonment, he or she should receive half the sentence for the crime attempted but not committed. This is due to the fact that the harm is not as severe as it would be if the planned crime had been performed.

Attempt to culpable homicide

Section 308 states that anyone who commits any act with the intent or knowledge of causing death as a result of that act would be guilty of culpable homicide not amounting to murder if that act resulted in death, shall be punished with imprisonment of either description for a term not exceeding three years, or with a fine, or both. If harm is inflicted as a result of such an attempt, he or she will be punished with imprisonment of any sort for a time up to 7 years, or a fine, or both.

The attempt to commit culpable homicide is covered by Section 308 of the Indian Penal Code (not amounting to murder). A person is liable to be punished if the person has committed any act in pursuance of implementing their criminal intentions, be it any act that fell short of a crime commission of a crime. For the accused to be punished under this section, the court must be satisfied that he or she attempted to commit culpable homicide (rather than murder), i.e., if the accused had been successful in carrying out his or her desired conduct or completing the act, he or she would have committed culpable homicide rather than murder. With the use of clear proof, the court must be assured of such an act.

Essentials for an attempt to culpable homicide

The following are the requirements for proving an offence under Section 308 of the Indian Penal Code (Attempt to Culpable Homicide):

Nature of conduct 

The nature of the conduct being undertaken should be such that if it is not prevented or intercepted, it will result in the victim’s death.

Intention or knowledge of committing the crime

The intention to murder must be established beyond a reasonable doubt. The prosecution can utilise circumstances such as an attack by deadly weapons on the victim’s essential bodily parts to show this, but the purpose to kill cannot be judged just by the severity of the harm caused to the victim. If culpable homicide does not amount to murder, the person attempting to conduct it does so with the goal or knowledge that if the act he commits results in death, he will be found guilty.

Execution of the offence

The purpose and knowledge that resulted in the accused’s attempt at culpable homicide must also be proven for conviction under the clause.

Results in Death

The offender’s actions would result in death in its natural course.

Scope of Section 308 IPC

The offence of attempt to culpable homicide is covered by Section 308 of the Criminal Code. This Section applies when an individual acts with the intention or knowledge that if death is caused as a result of his or her actions, he or she will be guilty of culpable homicide not amounting to murder. An individual, on the other hand, is charged with an “attempt” to commit a crime when he or she takes measures to conduct a crime but fails due to deficiencies or errors.

Nature of offence under Section 308 IPC

Section 308 stipulates two types of penalties, depending on whether or not harm is accomplished during the attempt. If no harm is inflicted, the criminal faces a maximum sentence of 3 years in jail. If harm is caused, the offender faces a maximum sentence of 7 years in prison.

Punishment for Section 308 IPC

The offence under Section 308 is:

Cognizable

There are two types of offences: cognizable and non-cognizable. A cognizable offence is required by law for the police to register and investigate. Cognizable offences are generally of a serious nature and the ones for which a police officer may arrest without a warrant.

Non-bailable

This implies that if a magistrate receives a complaint under Section 308, he or she has the authority to deny bail and detain a person in court or police custody. Non-bailable offences are serious crimes for which bail is a privilege and not a norm. When a person is arrested and brought into jail under Section 308, he or she does not have the right to seek bail.

Non-compoundable

The complainant cannot withdraw a non-compoundable case at any time. These cases cannot be settled mutually by the parties, with the complainant dropping the charges against the accused, even if done willingly.

Triable by session court

The Court of Session does not have direct jurisdiction over these matters. Instead, if the cases are only triable by the session court, the Magistrate refers them to the court of session under Section 209 of the Code of Criminal Procedure, 1973. It should be noted that the Sessions Court only examines cases involving offences that carry a sentence of more than seven years in prison, life in prison, or death as a penalty.

Stages of crime under Section 308 IPC

Stages of crime as per the Indian Penal Code

In India, there are four stages of crime. Any conduct that is deemed a crime must include these elements. The four stages are as follows:

Stage 1: The individual’s intention or motivation

The mental stage is the initial stage. It is committing a crime with the purpose of doing so. It may be described as a person’s willingness to commit/perform an action. The mere intent to commit a crime, on the other hand, is not a criminal. Physical action plays a crucial role in the motivation to conduct the crime. A physical act should reveal the guilty thinking or bad purpose.

Stage 2: Getting ready to commit a crime

The stage of preparation refers to the plans made by a person to carry out a crime. However, no infraction has yet been committed at this time. Even while mere preparation for any purpose is not a crime, some conduct under the Indian Penal Code might be tried at this point. Planning to wage a war against the state, for example, and preparing to commit dacoity are both criminals at this level.

Stage 3: Making an attempt at committing a crime

An attempt to commit a crime refers to when the necessary preparations are made. That effort, which is a direct action to commit a crime, is called an attempt to commit a crime. Attempts to commit crimes are criminal under many sections of the Indian Penal Code.

Stage 4: Completion of the crime, or the Act’s outcome

The planned crime must be executed for it to be considered a full offence. After the crime has been committed, the person will be found guilty of doing it.

‘Intention’ under Section 308 IPC

It is more vital to show the accused’s intention to murder the victim than the act of killing in order to convict them under this provision. To be convicted of culpable homicide not amounting to murder under Section 308, a person must attempt to kill the victim with the knowledge that he may be convicted of culpable homicide not amounting to murder (under sudden rage or provocation).

The type of weapon used, how it was used, the crime’s motivation, the intensity of the blow, and the portion of the body where the harm was inflicted are all factors considered to evaluate the accused’s intent under this provision. Thus, if the accused had a hazardous weapon but only inflicted minor injuries on the victim, the accused would not be convicted under Section 308 of the Indian Penal Code. Similarly, if the accused stabs the victim in the stomach around the navel with a large knife blade, the accused may face charges of attempted culpable murder.

The degree of the harm, however, is not always utilised to determine the purpose, as a very significant injury does not necessarily have to be committed in an attempt to commit culpable murder. Even if the harm is minor, it may be sufficient to convict the accused under Section 308 of the Indian Penal Code if it was done with the purpose to murder someone. An offence of attemptedculpable murder cannot be created under the Indian Penal Code unless the accused has the purpose or knowledge of hurting the victim (with the intention to conduct culpable homicide).

Even if the victim does not die, the offence is complete under Section 308 of the Criminal Code. Even if no harm is done to the victim, it is nonetheless a felony under this law. However, the provision suggests that the accused’s behaviour must be capable of causing culpable homicide, not murder. An accused prosecuted under this clause cannot be acquitted only on the basis that the damage inflicted on the victim was minor.

Intention vs. Knowledge

Knowledge, as opposed to intention, more accurately refers to a mental realisation in which the mind is either a passive prey to or recipient of specific thoughts and perceptions that arise in it. It would be a simple awareness of some facts, in which the human intellect may still be dormant or inert.

On the other hand, intention denotes a state of consciousness in which the mental faculties are awakened and called to action for the purpose of being deliberately directed towards a specific and predetermined aim that the human mind imagines and views before itself.

Execution of act, i.e., attempt under Section 308 IPC

A person’s mere desire to commit a crime is insufficient to convict them of a crime, but a visible physical (and voluntary) activity is required. To be considered a crime, an effort to conduct the crime must be made in furtherance of the intended offence. For Section 308 to apply, the conduct must be capable of causing the death of another person in its regular course.

Steps to be undertaken in case one gets charged under Section 308 IPC

An attempt to commit culpable murder is a serious offence that must be dealt with carefully, whether for the offender or the victim. If convicted of attempted culpable homicide, a person might face serious consequences. On the other hand, the prosecutor faces a comparable challenge in proving his or her accusations. This is why it is critical for both the victim and the defendant to:

  1. Prepare adequately for the case. 
  2. A timeline of events should also be prepared and written down on a piece of paper to make it simpler to brief the lawyer on the issue. This will also assist the attorney in developing a plan for effectively conducting the trials and persuading the court to rule in your favour.
  3. Furthermore, in an attempt to convict someone of culpable murder, it is critical to have a thorough grasp of the law. One must get down with his or her lawyer and learn both the procedure and the law that governs the case, as well as perform some research to understand the hazards involved, as well as how to mitigate them.
  4. A person’s rights must also be understood if he or she is arrested under Section 308 for attempting to commit culpable murder. The following are the rights guaranteed by the Indian Constitution and even the Code of Criminal Procedure:
  1. The right to be informed of the reasons for an arrest- This right is protected under Section 50(1) of the Code of Criminal Procedure (CrPC), 1973 and Article 22(1) of the Indian Constitution.
  2. Right to inform relatives/friends– Under Section 50A of the CrPC, a police officer who makes an arrest must immediately inform any of the arrested person’s friends, relatives, or other persons who may be disclosed or nominated by the arrested person about the arrest and the location where the arrested person is being held.
  3. Right to be informed of one’s rights- It is also the police officer’s responsibility to advise the arrested person of his or her rights.
  4. Right to remain silent- The right to remain silent is also a crucial one. In the CrPC, under Section 313(3), this has been assured, and even the Indian Evidence Act, 1872 expounds the same.
  5. Right to contact a lawyer- This right begins the minute the person is arrested. It is mandatory for the arrested person to contact his or her lawyer as soon as possible. This privilege is also protected under Article 22 (1) of the Indian Constitution, Section 41D of the Criminal Procedure Code, and Section 303 of the Criminal Procedure Code.
  6. Attorney-client privilege- It is critical to be aware of the Attorney-client privilege if you have been charged with attempting to commit culpable murder and are drafting your version of events with your lawyer. This implies that confidential remarks made to a lawyer/advocate are protected. This sensitive information that the client discusses with the attorney is not shared with the attorneys. Hence, the best way to construct a strong legal case is to be honest and receptive to your attorney’s queries.
  7. Right to be advised of one’s right to bail under Section 50(2) of the Criminal Procedure Code- When a person is arrested without a warrant for a crime other than a non-cognizable crime, he or she has the right to be freed on bond.
  8. Right against manhandling, handcuffing, and torture- It is against the law to manhandle, handcuff, or torture someone when they are being arrested. Prem Shankar Shukla vs Delhi Administration (1980) can act as an illustration of this rule.
  9. Right to obtain a medical examination- There is also the right to be examined by a medical professional.
  10. Right to appear before a magistrate without unreasonable delay- According to Section 56 of the Cr.P.C. and Article 22(2) of the Indian Constitution, it is unlawful to detain a person for more than 24 hours without a Magistrate’s order. Section 76 of the Cr.P.C. also protects the right to not be held for longer than twenty-four hours.
  11. Right to legal aid and a fair trial- A person who has been arrested has the right to legal representation and a fair trial. In order to ensure justice, Article 39A specifies that the government shall make every attempt to offer free legal assistance to those in need.
  12. Right of a female arrested person to be searched by a female police officer- Only a female police officer can search another female in the case of a female offender. The search should be conducted in a professional manner. A female criminal cannot be searched by a male police officer. He can, however, conduct a search of the residence of a woman.
  13. Right to receive a receipt of confiscated belongings- If the police keep your personal belongings, you have the right to a receipt so that you can retrieve them when you are released on bond.

Procedure for a criminal trial under Section 308 IPC 

With the filing of an FIR or a police report, the trial or criminal court procedure begins. The following is a full description of the trial procedure:

FIR (Initial Information Report) / Police Complaint: 

A Police Complaint or a First Information Report is the first step. Section 154 of the Code of Criminal Procedure applies in this case. An FIR sets the wheels in motion for the entire case.

Officer’s Investigation and Report: 

Following the filing of the FIR, the Investigation Officer conducts an investigation. The officer completes and prepares the investigation after examining the facts and circumstances, collecting evidence, questioning witnesses, and doing other required measures.

Chargesheet in front of the Magistrate: 

After that, the police present the charge sheet before the magistrate. The charge-sheet lists all of the criminal charges levelled against the defendant.

Arguments in Court and Charge Framing: 

The Magistrate hears the parties’ arguments on the charges that have been set on the scheduled hearing day and then frames the charges.

Plea of Guilty: 

The plea of guilty is discussed in Section 241 of the Code of Criminal Procedure, 1973. After the accusations are laid out, the accused is given the chance to plead guilty, and it is the judge’s job to ensure that the plea of guilt was made willingly. The judge may convict the accused at his or her discretion.

Prosecution Evidence: 

Post the framing of the charges and the accused’s plea of ‘not guilty’, the prosecution presents its evidence. The evidence is first presented by the prosecution, who has the first (general) burden of proof. It is possible to produce both oral and documentary proof. Any individual can be summoned as a witness, and the magistrate might require him to present any document.

Accused/Counsel Cross-Examination of Witnesses: 

Witnesses for the prosecution are cross-examined by the accused or his or her attorney when they appear in court.

Accused’s defence evidence, if any: 

At this point, if the accused has any proof, it is presented to the courts. He/she is given this chance to strengthen his/her case. The accused, on the other hand, does not need to produce evidence since the prosecution, i.e., the claimed victim bears the burden of proof.

Prosecution Cross-Examination of Witnesses: 

If the defence produces witnesses, the prosecution will cross-examine them.

Evidence’s Conclusion: 

The evidence is finished by the court/judge after both parties have submitted their evidence to the court.

Arguments in Person / Final Arguments: 

The final stage, as the case approaches a decision, is the stage of concluding arguments. Both sides take turns making final oral arguments in front of the court (first the prosecution, then the defence).

The court renders its final judgement based on the facts and circumstances of the case, as well as the arguments made and evidence presented. The court presents its reasoning for the accused’s acquittal or conviction and then issues its final ruling. If the accused is found guilty, he or she is convicted, and if the accused is found not guilty, the accused is acquitted in the final judgement. If the accused is found guilty and convicted, a hearing will be held to determine the magnitude or extent of the sentence or time spent in prison. If the situation permits, an appeal to higher courts can be made. An appeal can be brought from the Sessions Court to the High Court, and from the High Court to the Supreme Court.

Procedure to obtain Bail in a Section 308 IPC case

For obvious reasons, obtaining bail in a case as serious as an attempt to commit culpable murder is difficult. Because of the seriousness of the crime, it has been designated as a non-bailable offence. In such instances, an accused would need extremely good reasons to be granted bail. If the accused has grounds to suspect that they will be arrested, they must petition for anticipatory bail before they are detained. The court will evaluate several factors, including the accused’s background, his social position, the reason for the crime, the police charge sheet, and so on. If all of the elements are in favour of the accused, bail will be granted.

Appeal for Section 308 IPC 

An appeal is a procedure in which a lower court/subordinate court’s verdict or order is contested in front of a higher court. Either party to the dispute before the lower court can file an appeal. The appellant is the person who is submitting or continuing an appeal, while the Appellate Court is the court where the appeal is being heard. A party to a lawsuit does not have any inherent right to appeal a court’s verdict or order to a higher or superior court. An appeal can only be made if it is expressly permitted by law, and it must be filed in an authorised way in the designated courts. An appeal should be submitted in a timely manner as well.

If there are strong reasons, an appeal can be filed in a higher court. The sessions court can hear an appeal from the district/magistrate court. An appeal can be brought from the sessions court to the High Court and from the High Court to the Supreme Court. 

Any individual who has been convicted in a trial before a Sessions Judge or an Additional Sessions Judge, or in a trial before any other court, and has received a sentence of imprisonment for more than 7 years against him or another person in the same trial, may appeal to the High Court.

Difference between Section 308 IPC and Section 299 IPC

A person who conducts culpable murder does so with the goal of causing death or with the knowledge that such an act is likely to cause death, according to Section 299 of the IPC. The difference between Secton308 and Section 299 can therefore be noted as the following:

Stage of crime 

Section 308 differs from Section 299 as it is simply an attempt to commit culpable homicide, and here the action has not succeeded. The offence was terminated at the stage of ‘attempt’ and did not proceed to ‘commission’. 

Seriousness of the offence

Section 308 is less serious than the offence under Section 299. The notion of actus reus is significant, and it is much more hazardous in the case of Section 299 than in Section 308. The offender of a crime under Section 299 of the Indian Penal Code is responsible for death or physical injury that is likely to result in death. For the purposes of this Section, death refers to the death of a human being and excludes the death of an unborn child. However, the person whose death was caused does not have to be the same person whose death was planned.  

Penal provisions 

The punishment under Section 308 is more lenient than under Section 299, which provides a much stricter penalty. Section 304 specifies the penalty for a culpable homicide that does not amount to murder (Section 299), which is either ten years in jail or a fine, or both. If there was an intent, it might result in life imprisonment.

Difference between Section 308 IPC and Section 300 IPC

Section 300 of the Indian Penal Code defines murder. Sections 300 and 308 are distinct in the following manner: 

Stage of offence

Section 308 only covers the offence till the stage of the attempt, while Section 300 consists of the offence till the stage of commission. The former involves only the performance of the final act to commit the crime of culpable homicide but with failed efforts, while the latter involves completion of the crime. 

Goal 

Under Section 300 of the Indian Penal Code, the act should be done with the goal of causing death to a specific person and succeeding in the same. Under Section 308, the goal is not to cause harm to the person who was/became the target of the action. Section 308 operates in areas where the attempt to culpable homicide amounting to murder was directed at some other party,  in cases of negligence, and others. In the case of an attempt to commit culpable homicide, the person whose death was caused does not have to be the same person whose death was planned.  

Seriousness of offence 

Section 308 is less serious than Section 300 since no actual crime takes place i.e. the act does not result in death. 

Penal provisions

The offence of murder is punishable with death, or imprisonment for life,  as well as a fine, which is much more serious than that for an attempt to commit culpable homicide.

Landmark cases on Section 308 IPC

Om Prakash v. State of Punjab (1962)

In this case, the primary issue involved an attempt to murder under Section 307 IPC but is also relevant to Section 308. It is relevant since the Court ruled that mere intent is insufficient to convict someone. To condemn someone, the task must be completed or attempted. Section 307 of the IPC states that an offence must be committed with intent, knowledge, and attempt. Section 511 specifies that trying to commit an offence punishable by life imprisonment or other penalty is punishable by life imprisonment or other punishment. Section 307 of the IPC, 1860, must be read in conjunction with Section 511 of the IPC, 1860.

Facts of the case

Bimla married the appellant, but their relationship worsened over time as she was mistreated and her health deteriorated due to mistreatment and malnutrition. Hence, she moved out of her husband’s home. Her husband’s maternal uncle persuaded him to return home on the promise that she would not be mistreated again. She was maltreated again after returning to her husband’s home, and she was kept in a room, but she managed to flee and reach a civic hospital in Ludhiana. Before dying, she made a statement in front of the magistrate known as a “dying declaration.” A case was filed against the appellant on that basis. The victim’s account was true, and her condition was entirely due to the mistreatment, according to the high court.

Judgement of the Court 

To use Section 308 of the IPC, the intention to conduct culpable homicide not amounting to murder must be proven, which means that it must be established that if the act had been done, it would have resulted in culpable homicide rather than murder. This is supported by the facts and circumstances of that specific case.

Overall, the Court held that intention or knowledge, as well as an act, are the two main components of Section 307 of the Criminal Code. Any or all specific acts, as well as a succession of acts, are included in the act. Thus, the appellant has committed a sequence of activities that may be regarded as an attempt, as well as having awareness of the crime he was doing. Hence, the appellant was found responsible under Section 307 IPC.

Ali Zaman v. State (1963)

This case established the fact that for an attempt of culpable homicide to take place, the offence of culpable homicide must not be committed in its entirety. 

Facts of the case

The accused used a handgun, but no one was killed as a consequence. The question here was whether the act would have constituted murder if any of the people injured by the revolver rounds had died. 

Judgement of the Court

The accused’s conviction was changed to Section 308 IPC, and his sentence was lowered to two years of harsh imprisonment after all the facts were considered. The Hon’ble Court determined that if one of the people shot died as a result of the shooting, the crime would have been culpable homicide rather than murder. The accused was found guilty of attempting to commit culpable murder. However, the act would have been culpable homicide under Section 304 of the Indian Penal Code if the shot had killed any of the people. 

Ajay Singh v. State (Govt. of NCT of Delhi) (2002)

This case is relevant for portraying the presence of intention in the offence committed under Section 308 IPC.

Facts of the case

A bus conductor was found guilty under Section 308 of the IPC because he shoved the victim off of the moving vehicle. The accused filed an appeal against an Additional Sessions Judge’s verdict and a further order, which convicted him under Section 308 IPC and sentenced him to four years in jail. That led to the present case, which questions whether the ruling of the lower courts was accurate or not.

Judgement of the Court 

The Hon’ble High Court of Delhi dismissed the appellant’s arguments as being without merit. The appellant had been correctly convicted and punished under Section 308 of the IPC, based on the testimony of the Prosecution Witness (PW). The seriousness of the injuries and the location of the fall indicated that it was not an accident, but rather a deliberate act. Thus, the accused’s appeal was dismissed. On that day, the appellant was ordered to surrender to the trial court in order to carry out the term of imprisonment imposed by that court.

State v. Vimal Singh (2017)

In this case, the Delhi District Court clarified the components that needed to be proven for an accused to be held guilty under Section 308. This case is useful as a precedent for the specification of ingredients for future cases under this Section.

Facts of the case

The basic factual matrix is that on the morning of December 2010, Nitin Nirwan (complainant) was walking from the red light to the bus station. Suddenly, a white sedan arrived, and one person with a sound body and mind exited the vehicle and approached him. He questioned Nitin why he pelted stones at his car while holding a baseball bat in his hand. The complainant stated that he did nothing wrong, but the accused did not hear him and struck him in the legs with the bat, and when he attempted to defend himself, the accused struck him in the left hand. The accused struck him in the head once more, and blood began to ooze from his head wound. He took down the licence plate number of the vehicle, and the accused fled the scene. He had dialed his relative’s number as well as the police and was then brought to the hospital. The defendant was charged under Section 308 of the Indian Penal Code.

Judgement of the Court

The Delhi District Court (Sessions Court, Delhi) stated on August 28, 2017, that the following basic components must be proven to prove an offence under Section 308 of the IPC:

  1. The accused did something wrong,
  2. The conduct was carried out with the intent or knowledge of committing culpable homicide that did not amount to murder.
  3. The conduct was done in such a way that if the accused had caused the victim’s death, he would have been charged with culpable homicide.

The prosecution was unable to show or establish its version of events by establishing circumstantial evidence precisely pointing to the accused’s guilt and ruling out any presumption of innocence, making it impossible to keep the facts together and produce an even combination. As a consequence, the accused was granted the benefit of the doubt and was acquitted of the allegations brought under Section 308 of the IPC.

Bishan Singh & Anr v. The State (2007)

This case acts as an illustration of convicts under Section 308 IPC being later convicted of less serious offences, and subsequently, their punishment getting reduced.

Facts of the case

The two surviving accused, Bishan Singh and Govind Ballabh, who were tried and convicted for the commission of an offence under Sections 147 and 308/149 of the Indian Penal Code (IPC), are before us; the other four accused, Arjun Singh, Shivraj, Govind Singh, and Bhairav Dutt, have all died. The complainant was Harish Bhatt. The accused men reportedly beat him with lathis on September 30, 1984, about 06.30 p.m., while he was walking towards his village, and grabbed Rs.400/- from his pocket. Ghanshyam Dutt Bhatt, his brother, interfered. The accused were said to be hostile towards the wounded and had attacked him with the aim of killing him. There were severe injuries suffered by Harish Bhatt. 

Judgement of the Court

The Court held that the accused could not be claimed to have committed any offence under Section 308 IPC. The bench said that the same would be covered under Sections 323 and 325 of the IPC instead. The Court evaluated the elements that influenced it’s decision to be merciful. The Court was of the opinion that it would not be right for them to re-incarcerate the accused. The judges believed that, while their substantive sentence may be reduced to the time served, they should each pay a fine of Rs. 15,000/-, failing which they should be sentenced to one year of simple imprisonment.

Conclusion

In conclusion, a person is said to have committed an offence under Section 308 IPC if he does something with the intent or knowledge that, if it results in death, he would be guilty of culpable homicide not amounting to murder as specified in Exceptions 1 to 5 to Section 300, IPC. In order to use this provision, the intent to conduct culpable homicide that does not amount to murder must be proven.

Frequently Asked Questions (FAQs) 

What offence is defined under Section 308 IPC?

Section 308 of the IPC defines the offence of ‘Attempt to commit culpable homicide’.

What is the punishment for Section 308 of the IPC?

The punishment for Section 308 of the IPC is 3 years or a fine or both. If hurt is caused as well, then the punishment is seven years of imprisonment or a fine or both. 

What is the nature of the offence under Section 308 of the IPC?

The offence under Section 308 of the IPC is of a criminal nature. This is a non-bailable, cognizable, non-compoundable offence that can be tried in a court of sessions.

References


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Allotment and certificates – procedure of issue of share certificates and warrants

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The article is written by HARSH a law student B.com LL.B at PDM University, Haryana. This article focuses on Allotment and Certificates, and their Procedure of Issue of Share Certificates and Warrants. This article has been edited by Ojuswi (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

The share certificate serves as an important document for shareholders to prove ownership of the company. The share certificate must be issued by the company upon incorporation to its shareholders after receiving the capital money. A share certificate is also called a stock certificate and these are documents issued by companies that sell shares on the market.

A warrant gives the holder the right to buy or sell shares of stock to or from the issuing public company at a specified price before a specified date. Holders of warrants are under no obligation to buy or sell the underlying stocks. As a stock warrant is a negotiable instrument, it is transferred by endorsement and mere delivery like any other negotiable instrument.

Meaning of share certificates and warrants

Share certificate and share warrant

A share certificate is a written document that is the official proof of ownership of the number of shares mentioned in it. Every company, limited by shares, whether public or private, must issue a share certificate to its shareholders unless the shares are held in a census.

In terms of Section 45 of the Companies Act, 2013 each share of a company’s capital should be divided by a different identification number. However, such a distinction will not be required, if the shares are held by a person whose name is listed as a profitable holder according to company records.

The share certificate contains the following information on it, namely:

(i) Name of company

(ii) Date of Issue

(iii) Member details

(iv) Shares held

(v) Nominal Value

(vi) Paid-up Value

(vii) Definite number

A share certificate is issued by the company within three months of the allotment of shares to the applicants, issued under the standard company logo. Generally, a shareholder certificate holder is considered a member of a company.

Share warrant

A share warrant is a negotiable document, issued by a public limited company only against fully paid-up shares. It is also called a title deed because the owner of the share warrant has the right to determine the number of shares named in it. There is no obligation on the issue of stock authorization by the company. Although if a public company wants to issue share permits, then prior Central Government (CG) approval is required. In addition, the issue of the stock guarantee must be approved in the company’s corporate records.

A share warrant holder can only take a share certificate if the owner submits a letter authorizing the share and pays the required fee for issuing a share certificate. Thereafter, the company will cancel the title deed to the shares and issue a new share certificate and the company will put its name as a company member in the membership register, after which it will become a member of the company.

Normally, the owner of a share warrant is not a member of the company, but if the articles of association of the company provide it to you, then the manager is considered the owner of the share warrant of the company.

arbitration

Procedures for issuing share certificates

Board meeting and share allocation

A board meeting is called to decide on the allotment of shares. The board of directors appoints a board of directors known as the allocation committee. The allocation committee then decides on the allotment of shares.

Once the allocation committee has submitted its report on the allocation of shares, the Board then approves the report and decides to allocate shares to the relevant applicants. Once the shares have been assigned to the allocation committee, the company secretary sends the share letters to the appropriate members. A share letter refers to a letter informing an applicant that a company has allocated a certain number of shares. This distribution letter is considered a share certificate until the final certificate is issued.

Member register

The company secretary then prepares the Members’ Register on the list of applications received and the distribution pages. The member register provides information about shareholders and details of shares allotted to them.

Assignments for preparation and printing assignments

The company secretary must compile a share certificate form in accordance with the form proposed by the Articles of Association. The secretary must print the form and all the required particulars according to the provisions of the governing law. The clerk needs to complete all the details on the certificate of share assistance with the application register and the pages provided.

The secretary must ensure that the share certificate is signed by two directors of the company. The secretary needs to sign the share certificate. The secretary must ensure that the company’s stamp and revenue stamp are affixed to each stock certificate. Once the certificates are ready, a board meeting is called to approve the decision on the issuance of share certificates.

Notification and submission of share certificate

The company secretary needs to inform all shareholders that the share certificates are ready and will be issued in exchange for share letters and bank receipts confirming the payment of the dividend. Public notice must be issued with general information of members. Members submit their assignment letters, the share certificate is sent by registered mail to them. Local shareholders may also voluntarily collect share certificates at a registered company office or a designated posting centre.

Penalty for violating the issuance of a share certificate

If a company commits any failure to comply with the provisions relating to the issuance of share certificates, that company will be penalized with a fine not less than INR 25,000 but up to INR 5,00,000 and every official who fails to pay that company’s tax will be. may be fined not less than INR 10,000 but may extend to INR 1,00,000.

The time limit for issuing share certificates

The time limit for the allotment of shares means the allocation of a certain number of shares to the applicant in response to his or her shareholding request, that is, the distribution of shares among the applicants in writing on a fixed basis.

The company must issue a share certificate within two months after the incorporation of the company. In the event that additional shares are allocated to new or existing shareholders, a share certificate must be issued within two months from the date of allocation.

In the case of a transfer of shares, a share certificate must be issued to the transferors within one month of receipt of the transfer instrument of such company.

Procedure for issuing share warrant

Written application 

The shareholder must apply in writing to request the issuance of a letter authorizing the exchange in exchange for his share certificate. He must submit the required stamp duty and the required amount (required). 

Lodgment ticket 

After the application is received, the secretary reviews it (examines it) and issues a Lodgment Ticket. It is a document provided as a deposit certificate confirmation. 

Board’s approval

If the secretary is satisfied with the document and application, you submit the application to the Board. A Board Meeting is called for this purpose in particular. A decision is passed at this meeting on the issue of the stock guarantee. The decision also gives the authority to sign and seal the warrant. 

Preparation for share warrant

The secretary receives the correspondence that authorizes the share and is prepared by making appropriate submissions and marking them. 

Signing warrant

Share authorization is signed by the directors and signed by the secretary.

Entries in the member register

The name of the shareholder is canceled from the Register by writing down the details of the stock guarantee, such as the warrant number, date of issue etc. 

Delivery of share warrant

Then the shareholder is informed of the warrant and the warrant is delivered to him in exchange for an entry ticket.

Conclusion

The contents of this article are for informational purposes only and do not include legal advice or opinion and is the author’s personal opinion. It is based on the relevant law and / or facts available at the time and is amended with the correct accuracy and reliability. Students are requested to review and refer to the relevant legal provisions, recent judicial announcements, circulars, explanations, etc. before taking any action based on the above text. Opportunities for other ideas on this subject will not be excluded.

References 


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Banking Regulation Act, 1949

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Banking

This article has been written by Mehernaz Contractor of Siddharth Law College, Mumbai. This article provides a detailed overview of the Banking Regulation Act, 1949 along with its amendments. It deals with regulations and rules which govern banks.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Different types of banks, such as commercial banks, cooperative banks, rural banks, and private sector banks exist in India. The Reserve Bank of India (RBI) is the governing body for regulating and supervising the banks. Banking Regulation Act, 1949 is an Act that provides a framework for regulating the banks of India. The Act came into force on 16th March 1949. This Act gives RBI the power to control the behaviour of banks. This Act was passed as Banking Companies Act, 1949. It did not apply to Jammu and Kashmir until 1956. This Act monitors the day-to-day operations of the bank. Under this Act, the RBI can licence banks, put ​​regulation over shareholding and voting rights of shareholders, look over the appointment of the boards and management, and lay down the instructions for audits. RBI also plays a role in mergers and liquidation.

History of the Banking Regulation Act, 1949

The concept of banking started in India with the establishment of the Bank of Hindustan. Before nationalisation took place in India, the banking system of India was more of a private nature. Banks were struggling to keep their branches open. Low capital and reserves and greed for obtaining high profits became a reason for the failure of the banking system. The banks were supervised under the Companies Act, 1913, but this Act was not sufficient to regulate banks. The economy was not performing well, and this started to damage the banks. Also, the concept of banks was mostly used by the upper-class people. Frauds were also one of the reasons for the decline in the usage of banks. This gave a need to regulate the banking system of India. As a result, the Banking Regulation Act was introduced in 1949. It was initially applicable to banking companies, but after the Amendment in 1965, the Act was also applicable to cooperative banks. 

Objectives of the Banking Regulation Act, 1949

The objectives of the Banking Regulation Act are stated below:

  • To meet the demand of the depositors and provide them security and guarantee.
  • To provide provisions that can regulate the business of banking.
  • To regulate the opening of branches and changing of locations of existing branches.
  • To prescribe minimum requirements for the capital of banks.
  • To balance the development of banking institutions.

Scope and applicability of the Banking Regulation Act, 1949

The sections under this Act are to be interpreted along with the sections of the Companies Act, 1956, or any other laws prevalent in the banking system. This Act applies to banking companies and cooperative banks. It will not apply to a primary agricultural credit society or a cooperative land mortgage bank, or any other co-operative society, except mentioned in Part V of the Act.

Features of the Banking Regulation Act, 1949

The Act has been divided into five parts comprising 56 sections. 

The main features of the Act are mentioned below:

  • Non-banking companies are forbidden to receive money deposits that are payable on demand.
  • Non-banking risks are reduced by prohibiting trading by banking companies.
  • Maintaining minimum capital standards.
  • Regulation on the acquisition of shares of banking companies.
  • Power of the Central Government to make schemes for the banks.
  • Provisions regarding liquidation proceedings for banking companies.

Important provisions of the Banking Regulation Act, 1949

Some important provisions of the Act are stated below:

Definitions

The Act has defined some terms such as banking, banking company, branch office, etc. A banking company means a company that conducts banking business in India. Banking means to accept for lending or investment of deposits of money from the public which can be repaid on demand. Subsidiary banks have the same meaning as given under the State Bank of India (Subsidiary Banks) Act, 1959. A secured loan or advance means an advance or a loan secured against the security of assets. 

Business which can be undertaken by the banking companies

Under Section 6(1), a banking company may be involved in the business of borrowing or lending money; buying or selling bills of exchange, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures; buying or selling of foreign exchange; dealing stock, funds, shares, debentures, bonds; carrying on agency business such as clearing and forwarding of goods; conducting the business of guarantee and indemnity, etc.

Prohibition of trading

Trading is prohibited under Section 8 of this Act. 

No banking company shall directly or indirectly deal in the buying or selling, or bartering of goods except when it is selling the goods kept in its security. The bank should also not engage in any trade or buy, sell or barter goods except for bills of exchange received due to collection or negotiation.

Management of bank

The bank should not employ or be employed by the managing partner as stated under Section 10 of the Act. 

The bank should also not employ a person who has been adjudicated insolvent or whose remunerations depend on the profits of the company. At least 51% of the total members of the board must have professional experience in matters such as accountancy, agriculture, rural economy, banking, cooperation, economics, finance, law, small-scale industry, etc. The term of the office of the director should not be more than eight years.

Minimum paid-up capital and reserves

Section 11 states that if a banking company is incorporated outside India then the total value of its paid-up capital should be more than fifteen lakhs and if it has a place of business in Calcutta or Bombay or both, then it should be more than twenty lakhs. 

The banking company must deposit twenty percent of its profit for the year. If the company is incorporated in India and if it has branches in different states, then the paid-up capital is five lakhs of rupees, and if the place of business is situated in the city of Bombay or Calcutta or both, then ten lakhs of rupees must be the minimum paid-up capital. If the company has all its branches in the same state none of which is situated in the city of Bombay or Calcutta, then the paid-up capital must be one lakh rupees concerning its principal place of business, plus ten thousand rupees in respect of each of its other branches situated in the same district in which it has its principal place of business, plus twenty-five thousand rupees in respect of each branch situated elsewhere in the state otherwise than in the same district. 

The subscribed capital of the company should not be less than one-half of the authorised capital, and the paid-up capital should not be less than one-half of the subscribed capital. The banking company cannot create any charge on unpaid capital. The company shall transfer every year at least twenty percent of its profits to the Reserve Fund. The banking company must inform RBI of the appropriation of the Reserve Fund within twenty-one days from the date of appropriation.

Limitations on nature of subsidiary companies

A banking company should not form a subsidiary company unless the formed company is for an undertaking of a business or written permission was obtained from the Reserve Bank of India. The banking company can hold shares of an amount of more than thirty percent of the paid-up share capital of the company or its own paid-up capital.

Licensing of banking companies

No banking company can carry out business in India unless it has obtained a license from the RBI. RBI can hold the inspection of books before granting the license. RBI can also cancel the license if the company stops carrying on banking business in India.

Opening of new and transfer of existing branches

Every banking company must obtain the permission of RBI before opening a new branch or transferring the existing branch to a different city, town, or state. No banking company incorporated in India shall open a new branch outside India without the prior permission of RBI. However, a new branch can be opened for a temporary period not exceeding one month.

Accounts and balance-sheet

The banking companies shall prepare a balance sheet and profit and loss account on the last working day.

Inspection

RBI can cause the inspection of the banking company and must state its report to the company. The directors of the banking company must submit all books, accounts, or documents for inspection.

Power of RBI to issue directions

RBI may frequently issue directions to the banking company if it is satisfied that the directions are in the interest of the public or to prevent the banking company from detrimentally conducting business.

Restriction of certain activities by the banking company

The banking company cannot obstruct any person from entering its place of business. It cannot hold anything violent in the place of business. The banking is liable under Section 36AD for violation of the above-mentioned activities.

Powers and functions of RBI

Section 36 mentions the powers of RBI. The Reserve Bank may prohibit banking companies from entering into a particular transaction and can advise the banking company. It can also assist the banking company by granting loans or advances under Section 18. It can direct the banking company to call for a meeting of its directors to discuss the matters of the company. It can also appoint officers to observe how the affairs of the banking company are conducted. 

Suspension of business

If the banking company for a temporary period is unable to meet its obligation, it can apply for a moratorium to the High court. The High court can grant the moratorium and stop the proceedings for a temporary period as it deems proper. The period of the moratorium shall not exceed six months. The banking company is only considered valid if it has attached the report of the RBI stating that the banking company will be able to pay its debts if the application is granted. 

Acquisition of the undertakings of banking companies

The undertaking of banking companies must be done by the Central Government after consulting with the Reserve Bank of India. The undertaking must be done only after the banking companies have been provided with an opportunity for showing cause for carr

Payment of dividends

The banking companies should only pay dividends after all the capital expenses are paid up. It shall not pay the dividends until the depreciation in the value of investments in approved securities or investments in shares, debentures, or bonds are written off.

Reserve fund

Every banking company must form a reserve fund and must transfer at least twenty percent of its profit to the reserve fund. Each banking company must report to the Reserve Bank if it has appropriated any funds from the reserve fund.

Power of Central Government in respect of liquidation of companies

The Central Government may order the RBI to initiate insolvency proceedings if the banking companies have committed a default under the Insolvency and Bankruptcy Code, 2016.

Offences and punishment under the Banking Regulation Act, 1949 

Various provisions are mentioned in the Act which states that a person will be liable for imprisonment and fine if he does any act which is in contravention with the Act. It is stated under Section 46 as below:

  • A person will be liable for imprisonment of up to three years and a fine which may extend up to one crore rupees if he has misrepresented any facts or presented the wrong acts intentionally.
  • A person will be liable to a fine of up to twenty lakh rupees and up to fifty thousand rupees in case of a continuing offence if he fails to produce the documents or books or refuses to answer the questions asked by the inspection officer.
  • All the directors of the banking company will be held liable and will be imposed a fine of twice the amount of the deposits made with the banking company if the banking company has illegally received any deposit.
  • The directors or the secretary will be punished if the company has caused a default or the default occurred due to the negligence of the director.

Shortcomings of the Banking Regulation Act, 1949

The Banking Regulation Act has less scope on public sector banks. The amendments in the Act are not enough to leverage the stressed assets in the financial system. There are no strict provisions for non-performing assets (NPA), and this gives a chance to the defaulters to escape from the situation. Some provisions of this act can hamper the working of the banks.

Amendments to the Banking Regulation Act, 1949

Banking Laws (Application To Co-operative Societies) Act, 1965

Initially, the Banking Regulation Act was passed as Banking Companies Act, 1949. But with the introduction of the Banking Laws (Application To Co-operative Societies) Act, the word Companies was omitted and the word Regulation was added to the title of the Banking Regulation Act, 1949. The Act also added a new Section called Section 56 as Part V after Part IV in the Banking Regulation Act. This section will apply to co-operative societies subjected to some modifications. 

Banking Regulation (Amendment) Act, 2020 (Act 39 of 2020)

This Act came into force on September 29, 2020. The Banking Regulation Act will not be applied to a cooperative society whose main business is providing long-term financial support for agricultural development. The amendment also mentioned that the societies should not use the words ‘bank’, ‘banker’, or ‘banking’ in their name or connection with their business. A cooperative bank may issue equity shares, preference shares, or special shares on face value or at a premium to its members or to any other person residing within its area of operation after obtaining prior approval from the Reserve Bank of India. 

After the amendment, RBI may suspend the Board of Directors of a multi-cooperative bank for five years to protect the depositors. This amendment omitted some provisions like granting of unsecured loans or advances to its directors, and to private companies where the bank’s directors or chairman is an interested party, opening a new place of business, or changing the location of the cooperative bank outside of the city, town or village in which it is currently located without permission from RBI, etc. 

Conclusion

All the banking companies will be controlled under the Banking Regulation Act, 1949. This Act provides a proper structure to the banking system in India. The Act puts restrictions on the banks to avoid fraud and protect the interests of the depositors. It also states the procedure for winding up the banking company. The Act also states the acquisition and mergers of the banking companies. Thus, this Act led to the proper growth of the banking companies which was lacking before 1949.

Frequently Asked Questions (FAQs)

What is the role of the RBI under the Banking Regulation Act of 1949?

RBI performs the roles of the supervisor, regulator, and controller. RBI issues licences to banks, conducts inspections of the banking companies, lays down instructions for audits, controls mergers and liquidation, and regulates the operation of banks.

What is meant by approved securities under the Banking Regulation Act?

Approved securities means securities in which a trustee may invest money. It also means securities issued by the Central Government or any State Government or such other securities.

Who is entrusted with the power to lay down instructions to the banks in India for audits?

The Banking Regulation Act has given the Reserve Bank of India the power to lay down instructions to the banks in India for audits. RBI, under Section 30 of the Act, can direct to perform a special audit of the company’s accounts if it is for the greater good of the public.

Can a foreign bank sanction loan or advance to firms and companies in India when one of the directors, whether a foreign or an Indian national, on the foreign bank’s Board of Directors abroad has an interest in said firms or companies in India or are on the Board of such companies?

Foreign banks can grant loans or advances to companies in India under Section 20 of the Banking Regulation Act. They can grant loans to companies if the director of the foreign bank has some vested interest in the company, if the company is a subsidiary of the company in which the director is interested. 

References


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