Armed public : countries that allow arms possession to the general public and how it affects the order of the State

October 1, 2021

This article is written by Varchaswa Dubey from the School of Law, JECRC University, Jaipur. The article highlights the issue of possession of firearms to the general public and the nations which have allowed possession of firearms to its public. The article further highlights the issues of allowing citizens to possess firearms.

Table of Contents

Introduction

The concerns of firearms have always continued to haunt the peaceful society and the innocent people residing in it. The consequences of allowing possession of firearms to the citizens is not only a matter of concern for the citizens but also for the State which seeks peaceful behavior of its citizens.

According to a report, more than 2,50,000 worldwide died due to firearms in 2016, and half of the deaths were reported only from 6 nations, i.e. Brazil, the United States, Mexico, Venezuela, Colombia, and Guatemala.

Only three countries in the world have bestowed a constitutional right to possess firearms, i.e. The United States of America, Mexico, and Guatemala.

Origins of the State allowing its citizens to possess arms

The Greeks always considered arms with nuanced views and the Spartans always refused to hand over their weapons to a would-be conqueror, while the Athenians considered removing the arms from the citizens and the reason for such removal was demonstrated by political consequences. They considered arms as a lack of civil society and betrayal.

The origins of modern firearms can be traced back to 850 A.D. to China where it was initially used for firework purposes but the gunpowder later found its way to firearms when it was used for cannons and grenades. During the 13th Century, the expansion of firearms took place through the silk road when it expanded in Asia and Europe.

Which countries allow their public to possess arms?

The Second Amendment in The United States of America is the most significant law concerning the rights of citizens to possess firearms. The Second Amendment was drafted in the year 1791 under the Bill of Rights.

The Constitution of Mexico being adopted in the year 1917, gives its citizens the right to possess firearms at their homes, for self defence and protection of themselves with an exception of those arms which are exclusively used for the army of Mexico.

The Constitution of Guatemala, adopted in the year 1965 also allows its citizens to possess weapons but only for personal use, and at home. The citizens are not bound to hand over the arms except for the order of the competent court.

Other countries which allow possession of firearms

Numerous other countries allow possession of firearms to the citizens, however, such right is not guaranteed by the Constitution of such countries and citizens can only allow firearms after undertaking an established procedure by the respective state. Such countries include Japan, New Zealand, South Africa, Mexico, Australia, Austria, Canada, India, Germany, Britain, Brazil, Russia, Israel, China, and Yemen.

In all of these countries, one must first undergo a fitness test and then give reasons for demanding the possession of firearms. The place where such firearms are to be stored must also be within the knowledge of the State and such firearms shall not be possessed by any other person.

The issue of firearms in the U.S.

Individuals in the US can legally possess firearms in the public in all the states of the US but the citizens are only allowed to use the firearms during self-defence and not otherwise, however, the impact of possession of such firearms is already an issue in the US. It has been discovered that most of the firearms victims are African American and most of them are killed due to discrimination despite being just 13% in the general population, 58.5% of the African Americans are a victim of firearms.

The United States also witnesses several mass shootings in the country, which refers to the shooting by a firearm at a large group of people. According to a report, the incidents of mass shootings are found to be increasing. Such incidents are not only accountable for the lives of innocent people of the society and degradation of public health but also such incidents are an attack on the nation, its sovereignty, and its economy.

Firearms are also responsible for a large number of suicides in the US, according to a report, around 60% of the total deaths by firearms were suicides. The other impacts of gun violence include the loss of the economy of the country, permanent fear of firearms in the society, loss of medical resources, loss of state resources, etc.

What are the effects of allowing citizens to possess arms?

According to a report, Brazil has the highest number of deaths in the world due to firearms, with 43,200/250,000 in the year 2016, followed by The U.S. with 37,200 out of 250,000 in the year 2016.

Increased rate of homicide

The U.S. has 46 percent of the world’s civilian-owned guns, according to a 2018 report and it also has the highest number of homicides in the world. The U.S. also has the highest suicide rate in the world with 39,707 in the year 2019. 14,861 people died in the year 2019 due to firearms homicide in the U.S. which amounts to 37% of the total deaths caused by firearms. The approximate per annum cost of gun injuries in the year 2012 was more than $229 billion, which is equivalent to 1.4% of the GDP of the United States. According to Amnesty International, more than 500 people die and another 2,000 are injured due to firearms every day and such violence affects the lives of many others.

Mass shootings

Allowing citizens to possess firearms increases the incidents of mass shootings and lives of innocent citizens causing a heavy loss to the country and its economy by exhausting legal and administrative resources like hospitals and police. According to a report, the incidents of mass shootings are increasing at an alarming rate and the reason behind such an increase in the possession of firearms with the citizens.

Violation of international treaty

The United Nations Arms Trade Treaty reflects a duty and responsibility of the State to provide its citizens with public safety and human security, however, the possession of firearms by the citizens themselves is a violation of the objectives of the said treaty.

Other impacts on the state

According to a United Nations report, the direct impact of firearms on the State includes lost productivity, increased costs of treatment and rehabilitation, financial costs at household, community, municipal, and national levels. The indirect impacts on the State include increased armed crimes and increased number of armed homicides, attacks on healthcare and education workers, child mortality, increase in transport and shipping costs, degradation of the infrastructure of the country, loss in the economic sectors of the country, minors being indulged in criminal activities, including armed gangs, security threats, an unstable and insecure environment of the country, etc.

Violation of human rights

The impacts of firearms caused by the possession of firearms is a violation of inalienable human rights enshrined in The Universal Declaration of Human Rights especially Article 3 which provides with a right of life, liberty, and security of person.

How can casualties by firearms be decreased?

Violence by firearms is an issue every country in contemporary times has witnessed, however, most of the countries have banned the possession, manufacturing, transportation, buying, selling, etc to its citizens except for defence purposes. The death rate in countries like the United Kingdom, Norway, and Japan are the lowest because these nations have enacted very strict laws concerning the possession and practice of firearms.

The Australian policy

Australia is often considered as a shining example of gun laws and has restrictive policy i.e. the applicant of the license of the gun gives satisfying reason for allowing him to possess firearms instead of authorities being required to show why such applicant was not given license to possess firearms.

The Australian firearms policy is considered as the most comprehensive regulation internationally which is governed by the National Firearms Agreement, 1996 which restricts the possession of automatic, semi-automatic weapons, etc. The person applying for the license of the firearms must have a genuine reason to possess such firearms and the person applying for such a test must undergo a test consisting of criminal background, mental and physical health, residence, etc. The policy also has a buyback provision according to which the government would buy back the firearms at the market price of prohibited firearms.

The Japanese policy

Japan has the lowest gun homicides in the world and the credit to such a low rate is their Firearm and Sword Possession Control Law, being written in Japanese and English, the Act aims at prevention of harm related to the possession and use of firearms and swords. According to a report, Japan only witnessed 9 gun deaths in the year 2018 and the reason behind such a low mortality rate by guns is the strict law Japan has adopted concerning possession of firearms to the citizens.

To obtain a license for firearms in Japan, the applicant must attend an all-day class and then pass a written exam and then pass a shooting-range test with at least 95% accuracy. The applicant must also pass a mental health evaluation which shall be performed at a hospital and a background test is conducted of the applicant and such procedure is being repeated every three years.

The Australian policy and the Japanese policy are considered as one of the most efficient firearms policies in the world due to their compulsory procedure which determines the reason behind possessing firearms in their respective country.

What are the advantages of gun control laws?

Decrease in the incidents of a mass shooting: Most of the incidents of mass shootings take place by a firearm legally purchased by misusing the State policies. If the laws control the possession of firearms to the public, incidents of mass shootings will fall resulting in saving lives of many people at the same time.
Deduction in the violence rate: Most of the contemporary violence is conducted by firearms and if there is a lack of availability of firearms to the general public, the incidents of violence shall fall. Easy access to firearms is one of the top reasons for numerous firearms fatalities each year.
Reduction in the injuries relating to firearms: Most of the time, legally purchased firearms do not take the life of an individual and lead to fatal injuries, but if there are gun control laws, such injuries will fall.
Decrease in the suicide rate: More than 50% of firearms death are suicide and to decrease the number of suicides, gun control laws must be enforced.
Improved human conditions: The decrease in the atrocities of firearms shall witness the improvement of the human living conditions in the society and shall boost up the morale of the society, which is living in the fear of the use of firearms daily.
Rise in the economy of the country and saving of other resources: The gun control laws will not only benefit individuals in the society but also the nation which allows its citizens to possess firearms easily. Gun control policies shall improve the economy of the countries and shall assist in saving other resources including health, police, etc.

Conclusion

Most of the nations in contemporary times do not guarantee possession of firearms through their Constitution, and those nations which do, are witnessing many issues in their country, including loss of innocent lives and falling of the economy. The nations which allow their citizens to possess firearms especially, the US, Brazil, and Guatemala witness more firearms casualties compared to nations that allow citizens to possess firearms after undergoing the established procedure.

The firearm injuries are on the edge of being declared a pandemic and the nations which allow their citizens to possess firearms must take a relook on the firearms policies and must adopt better policies so that the firearms atrocities can be eliminated.

References

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Doha health declaration : patent laws in developing countries with a special reference to India

Diva Rai

October 1, 2021

AdobeStock_270092142 — Image source - https://bit.ly/3D0o0Ki

This article is written by Daksh Ghai, from Symbiosis Law School, Noida. The article provides a brief overview of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. It also talks about the Doha declaration and its impact on developing nations.

Table of Contents

Introduction

The World Trade Organization (WTO) is a multilateral member organisation whose goal is to liberalise trade by reducing barriers to trade and enabling enhanced global trade while also assisting developing countries and least developed countries (LDCs) in their integration into the WTO multilateral system. The pharmaceutical industry is a high-risk industry. The danger of failure outweighs the danger of success. The Doha Declaration was created to acknowledge public health issues.

Doha health declaration : an insight

The World Trade Organization is a group of 164 countries formed in the year 1995. The Ministerial Conference, which occurs every two years, is the WTO’s highest decision-making authority. In the 4th Ministerial Conference in Doha in 2001, the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was a key topic. When TRIPS was first introduced, it went far beyond the Paris Convention; it allowed members to use certain kinds of flexibility like granting compulsory licenses for the purpose of supply in domestic markets. TRIPS issued the Doha declaration of Public Health, which allowed for the granting of a compulsory licence for export reasons. The Doha Declaration acknowledged that this constraint on compulsory licencing could make it difficult for nations with little or no pharmaceutical manufacturing capacity to apply it effectively. It was mainly to prevent or remedy the legal impediment created by the regulations of the TRIPS agreement, which stated that a compulsory licence could only be given for the purpose of delivering domestic markets, thereby creating legal barriers for exports through compulsory licences.

The role in developing countries

Public health benefits

Invoking Article 51 of the Thai Patent Act, the Thai government announced its decision to exercise the Compulsory licence on Efavirenz in November 2006 and held that the usage of Efavirenz’s patent right will be valid until December 2011, and the drug will be provided to 200,000 patients covered by the National Health Security Act. The patent holder would be paid a royalty of 0.5 per cent of the overall value of Efavirenz sales, whether imported or produced locally, according to the notification. Despite the fact that the drug’s price was fairly high and the Thai government’s budget was less, there were numerous disputes. However, eventually, WHO officials published a letter stating that they supported the Thai government’s decision to satisfy the drug’s demand.

Aids in obtaining price reductions

In July 2001, Malaysia’s Ministry of Health requested price reductions on a variety of HIV drugs in order to enhance the country’s HIV treatment coverage. After failing to reach an agreement with the patent owning corporations, the government decided to allow generic manufacturer imports. Despite the fact that patent owning businesses decided to reduce the drug costs following the authorization, the government moved forward with its choice to import. The monthly cost of the medication dropped from US$362.63 in 2001 to $115.14 in 2004, well after the advent of the generic supply.

India and Doha health declaration patent laws

Throughout the years, the Indian patent system has routinely been amended, partially as a result of divergent viewpoints and shifting priorities among government, local industry, public, NGOs, and other stakeholders. The move to product patents in India was rapid. As a signatory to the TRIPS Agreement, India has amended its Patent Act ,1970, once in 1999, allowing for the filing of product patent applications in the areas of drugs, pharmaceuticals, and agrochemicals, even though such patents were previously prohibited, as well as adding a mailbox facility to accept product patent applications and exclusive marketing rights (EMR). In 2002, the Act was amended again, and the patent period was increased to 20 years. From January 1, 2005, full patent protection was granted in all disciplines of innovation, including pharmaceuticals, under provisions relating to the issuance of compulsory licences. While this is expected to limit the generic industry’s ability to develop generic pharmaceuticals during the life of a protected product, the Patent Act modifications ensure that India can exercise flexibility to a great extent. In December 2004, an ordinance was passed, followed by the Patent (Amendment) Act, 2005 which was passed by Parliament in March 2005.

Measures taken to stop the monopoly powers of the MNCs

The government of India enacted Section 3(d) of the Patents Act of 1970 to keep medicine prices under control. It was created to prevent the patents from becoming evergreen. Any pharmaceutical company’s goal would be to maximise profits. Companies used to appoint a research team after 20 years, i.e. when the protective period ended and a patent became an off-patent. They would conclude that the drug’s efficiency had decreased in 20 years. They would make some minor changes, come up with a new product and apply for a patent. If the patent is awarded minor changes to the previous product, the corporation will have a 20-year monopoly. Section 3(d) made it harder for corporations to apply for a patent without improving the substance’s established efficacy.

A brief overview of the Novartis case

In Novartis Ag v. Union Of India & Ors (2013) Gleevec, a cancer medication was developed by Novartis and granted exclusive marketing rights (EMR) in 2003. Following the EMR, additional Indian companies making the generic version of Gleevec were forced to halt production. Natco, a generic producer, filed a pre-grant opposition arguing that Novartis’ crystalline modification of the medication is an ever-greening technique and that the claimed “polymorph” is the same molecule with a 1993 patent date. As a result, Novartis’ patent application for Gleevec was denied by the Chennai Patent Office in January 2006. If Gleevec would have been given a patent, the generic producers would then have been required to discontinue its production, and the cost of Gleevec, which should be taken by cancer patients for the rest of their lives, would have been Rs 1,20,000 per month, as opposed to Rs 8000 per month if made by generic companies. The Indian patent office refused to issue a patent on Gleevec, allowing generic manufacturers to continue producing the drug. The Supreme Court in the Novartis case defined enhanced efficiency as therapeutic efficiency and minor improvements can not be considered as therapeutic and rejected the application.

Compulsory license

Compulsory licencing can be given for a variety of reasons. It will be determined by national legislation. The goal of giving a compulsory licence in India is to ensure that patented inventions are commercialised in India and that the interests of anyone working on or developing an invention are not harmed. Section 82 to 94 in Chapter VI of The Indian Patent Act. These Sections cover the following topics: general principles relevant to the operation of patented inventions; the basis for grant of Compulsory licencing; matters to be considered by the patent controller when considering Compulsory licencing applications; procedures for dealing with compulsory licencing applications; general purposes for granting Compulsory licencing; and terms and conditions of compulsory licencing.

Pros of the Doha Agreement

The right to issue a compulsory licence for export purpose

“The right to grant compulsory licences” is one of the Doha Declaration’s flexibilities. A compulsory licence is a licence granted by a government agency or a court to make specific uses of a patented invention without the patent holder’s approval. This approach is available in most patent laws and is recognised as a valid alternative or flexibility under the TRIPS Agreement, and has been implemented in the pharmaceutical industry by a number of WTO countries. TRIPS laws, on the other hand, initially limited compulsory licence to serving primarily the local market, unless they were issued to address anti-competitive behaviour. The Doha Declaration acknowledged that this constraint on compulsory licencing could make it difficult for nations with little or no pharmaceutical manufacturing capacity to apply it effectively. The TRIPS agreement has been amended to address this problem by introducing a new type of compulsory licence: a compulsory licence specifically designed for the export of medicines to developing nations.

Access to patented medicines to the countries that can not manufacture the medicines themselves

The TRIPS Agreement’s new Article 31(b) gives full legal validity to this arrangement, allowing low-cost generic pharmaceuticals to be produced and exported under a compulsory licence solely to meet the needs of nations that cannot manufacture those items themselves. An interim waiver will continue to apply to the minority of WTO members who have yet to adopt the change. Developed countries will also be required to provide the least developed countries with incentives to enterprises and institutions in their territory in order to promote and encourage technology transfer, according to paragraph 7 of the Doha Agreement.

Cons of the Doha Agreement

Commercialisation of medicines

Patents serve as a motivator for the growth of the pharmaceutical business in the private sector. The rationale for granting exclusive rights to patented medications is that, while the development of new drugs is expensive, copying an existing drug is very simple. Despite the commercial sector’s desire for patent protection, a number of developed and developing countries had typically placed public policy constraints on medicine patentability. To prevent commercialization in the health industry, the Patents Act of 1970 imposed restrictions on product patents for medications. The adoption of the TRIPS agreement required nations with patentability limits, such as India, to substantially change their patent laws in order to meet their WTO legal commitments. While the TRIPS agreement required patent protection to be granted for 20 years, India granted patent protection for a term of merely 5 to 7 years.

The road ahead of the Doha negotiations

The Doha Declaration is a minor step toward recognising the unique health situation in the context of patent laws and treaties. According to the World Health Organization, a number of socioeconomic reasons have contributed to the decreasing availability of cheap pharmaceuticals in developing countries. The World Health Organization (WHO) acknowledges four main elements that influence medicine access: reasonable selection and use, affordable costs, sustainable finance, and a solid supply system. Many diverse stakeholders have a role to play in transforming these variables into enablers rather than barriers. These stakeholders can be the Governments of developing nations, governments of developed countries, manufacturers, consumer groups, non-governmental organisations, international organisations, and private foundations. As a result, TRIPS-related reforms will be insufficient and importance can be given to other recommendations.

1) Public funding for health research in developing countries should be increased.

2) The additional funding should be utilised to utilize and improve existing capacities in developing countries, as well as to promote new capacity in the public and private sectors.

3) Governments in both developing and developed countries should take a more active role in creating risk-prevention strategies, including increased funding for scientific research, improved monitoring systems, and better global information access.

4) International efforts to find realistic, cost-effective, and transparent ways to increase access to low-cost drugs should be encouraged.

5) In the case of disease crises, international collaboration should be encouraged and WTO should collaborate with other relevant international institutions and non-governmental organisations.

6) The pharmaceutical companies should uphold their corporate social responsibility and address public concerns about accountability and the social and economic consequences of its relatively expensive goods.

Conclusion

The Doha Declaration is a notable accomplishment for the developing and least developed countries attempting to obtain access to patented medicines. It promotes the use of the patent right of the innovation for public purposes without the permission of the patent holder. The declaration underlines the importance of intellectual property protection for developing new medicines whilst highlighting the scope of the TRIPS Agreement, enabling the state better access to medicines. The domestic patent law reforms adopted in India enable the manufacture of patented drugs and, as a result, provide access to medicines both within and beyond the country to a considerable extent.

References

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All you need to know about Blue Chip mutual funds

Shoronya Banerjee

October 1, 2021

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This article has been written by Shivani Bharti from Symbiosis Law School, Pune, pursuing the Diploma in General Corporate Practices from LawSikho. This article has been edited by first evaluator Amitabh Ranjan (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).

Introduction

A majority of a Blue Chip mutual fund is invested in Blue Chip stocks. These are stocks in well-known companies with a strong track record of long-term performance. We’ll learn more about Blue Chip funds, how they work, and more in this article.

The origin of ‘Blue Chip’

In 1923, a Dow Jones employee named Oliver Gingold developed the term ‘Blue-Chip.’ Gingold coined the term after noticing many stocks trading at $200 or more per share while standing near a stock ticker at a brokerage firm. He used the term ‘Blue-Chip Stocks’ to describe them and authored an article on them. The name ‘blue-chip’ was coined as a result of this. The term has been used to refer to high-priced stocks since then, although it is currently used to refer to high-quality stocks.

What exactly is Blue Chip funds?

Blue Chip funds are mutual funds that invest in the equity of significant companies with a high market capitalisation. These are well-established businesses with a long track record of success. However, according to SEBI mutual fund classification, there is no formal category for Blue Chip funds. The term ‘blue chip’ is frequently used to refer to large-cap funds.

Some mutual fund schemes may have Blue Chip in their name, which is preceded by the word ‘emerging.’ These are large and midcap schemes that solely contain the term ‘Blue Chip’ in their name. Therefore, it is advisable that one should not choose a scheme solely because it’s called Blue Chip. Large-cap funds must invest at least 80% of the corpus in the top 100 companies by market capitalization, according to the SEBI mandate. Blue Chip funds, which invest in the top 100 companies, have a similar description.

How do Blue Chip mutual funds work?

Blue Chip funds enable investors to profit from Blue Chip companies’ financial success. Blue Chip mutual funds mostly invest in the equities of the top 100 companies in terms of market capitalisation. These funds can invest in bonds and cash equivalents for some diversification. As younger investors can tolerate the higher risk associated with these companies because they have a longer investment horizon, they can allocate a larger amount of their portfolio to stocks and equities. To build your core portfolio, you can invest in Blue Chip funds. It accounts for 60% to 70 % of your portfolio and provides stability.

The safety of Blue Chip stocks

While a Blue Chip firm or company may have weathered a number of adversities and market cycles, this does not always imply that it is a secure investment. There are cases and evident possibilities when even the most successful companies can stumble during times of extreme market stress.

Blue Chips as part of a larger portfolio

While blue-chip companies are appropriate as core assets in a bigger portfolio, they shouldn’t make up the entirety of it. Bonds and cash are typically included in a diversified portfolio. An investor should consider buying mid-caps and small-caps as well as large-caps in their stock portfolio. Younger investors can generally tolerate the risk associated with investing a bigger portion of their portfolios in stocks, including blue chips, but senior investors may want to focus on capital preservation by investing more in bonds and cash.

Advantages of investing in Blue Chip funds

Capital growth

You can grow wealth over time by investing in Blue Chip funds. It enables you to invest in financially healthy businesses with a proven track record of success. Blue Chip funds can be included in the main portfolio to provide stability in the face of unpredictable stock markets.

Financial goals

You may consider investing in Blue Chip funds to achieve your long-term financial goals. For instance, you could invest in Blue Chip funds for the long term to buy a house or for retirement plans.

Economic moat

Blue Chip companies may benefit from an economic moat because of their scale. It’s a competitive advantage these businesses have over their competitors and colleagues. It equates to a large market share and helps you achieve long-term gains that outperform inflation.

Liquidity

Blue Chip funds are open-ended, which means you can immediately redeem units. It allows you to get out of an investment when you’re in a financial bind. You can also take out a loan against Blue Chip fund units.

Blue Chip safety considerations

Track record of the AMC

Before investing your money, you should look into the AMC’s (asset management company) track record. If you choose Blue Chip funds with big assets under management, it will help (AUM). Furthermore, these funds can withstand huge investors’ unexpected withdrawal pressure.

Investment style

You should look at the fund manager’s investment style and choose funds that you are comfortable with. For example, the fund management may favour growth, value, or a combination of both.

Expense ratio

Blue Chip funds with a reduced expense ratio are the way to go. It is the expense of running a mutual fund. Furthermore, choosing funds with a lower expenditure ratio may allow you to earn a little more money over time.

The fund’s portfolio

To obtain an indication of where the Blue Chip fund invests your money, look at its portfolio. Ascertain that the large-cap fund adheres to its investment objectives. Don’t be deceived by the moniker Blue Chip; look at the portfolio because some Blue Chip funds are large-cap and mid-cap funds.

Performance against benchmark

Check the performance of the Blue Chip fund versus the benchmark during the last three to five years. Furthermore, you must choose Blue Chip funds that have beaten their rivals and the benchmark over time.

Best Blue Chip stocks in India

Before we get into talking about the best Blue Chip stocks in India, it’s worth mentioning that some people associate Blue Chip stocks with blue betting discs in poker, with the blue disc having the highest value and the white disc having the lowest. Blue Chip companies can be identified using a variety of criteria. Along with market capitalization and price-to-earnings ratio, they include steady annual revenue over time, a stable debt-to-equity ratio, average return on equity (RoE), and interest coverage ratio (PE). According to market capitalization, there are a few Blue Chip firms whose stocks will provide good long-term returns.

Here is a list of the top 10 Blue Chip stocks that are faring well in the stock market:

Indian Tobacco Company (ITC) Limited,
Infosys,
Hindustan Unilever Limited (HUL),
Tata Consultancy Services (TCS),
State Bank of India (SBI),
Reliance Industries,
Housing Development Finance Corporation (HDFC),
Oil and Natural Gas Corporation (ONGC),
Eicher Motors,
Sun Pharmaceuticals Industries Limited.

How to invest in Blue Chip stocks and funds?

A Demat account is required to invest in Blue Chip Stocks. Investors can invest in preferred stocks directly or through a broker. When you invest through a broker, though, you must pay a brokerage charge. If you wish to put money into Blue Chip funds, you can do it in two ways:

Online: Blue Chip Funds can be purchased online through online platforms or directly through the websites of the AMCs that offer the fund. Some top mutual funds in the country are Canara Robeco Bluechip Equity Fund, Axis Blue Chip Fund, BNP Paribas Large Cap Fund, DBI India Top 100 Equity Fund, Kotak Bluechip Fund, etc.
Offline: This traditional method of investment entails filling out a form and submitting it to a fund house location near you, or investing through a broker.

Investing in Blue Chip funds

When compared to other mutual fund schemes, blue-chip funds are more expensive. It is popular and expensive due to the reliability it provides. Investors must understand how these funds operate. Blue Chip funds can help you develop a stable portfolio. Only investing in Blue Chip funds, on the other hand, can result in lesser returns. Investors should diversify their portfolios.

Higher returns can be obtained through equity plans, mid-cap funds, and other similar investments, but they can also raise the risk. When a person invests in Blue Chip funds, however, they can build a well-balanced portfolio. Blue Chip funds’ dependability can boost returns. Blue Chip funds can help high and medium-risk investors diversify their holdings effectively. Short-term investments in Blue Chip funds may not help an investor’s financial situation.

In the event of adversity, blue-chip funds provide more consistent returns than other funds. Many investors desire Blue Chip stocks in their portfolio because they are low-risk. Investors should be aware, however, that Blue Chip funds can be costly. Blue Chip funds are a good option for investors who want to earn a good return while taking moderate risks. Even in hard times, Blue Chip funds have a track record of delivering returns. If an investor seeks a steady increase in returns, Blue Chip funds are the way to go.

Conclusion

You can increase your wealth over time by investing in a Blue Chip fund to achieve your long-term financial goals. It allows you to invest in financially sound businesses and achieve long-term gains that outmatch inflation. It is important to tread with caution when it comes to investing, hence it is advisable to keep the provided Blue Chip safety considerations in mind.

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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The need for SEBI to correct the stand on superior voting rights

Shoronya Banerjee

October 1, 2021

SEBI (REIT) Regulations — Image source : https://bit.ly/35SA8Qc

This article has been written by Palak Gupta pursuing the Diploma in Global Corporate Practices from LawSikho. This article has been edited by Amitabh Ranjan (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).

Introduction

The rush of filing of new shares by some start-ups such as Paytm, Zomato, etc. has put the limelight on the legal provisions of Superior Voting Rights Shares (“SR Shares”). The concept of SR shares was introduced two years ago. It assured the founders of start-ups that they’d be allowed to hold maximum ownership even after the Initial Public Offer (“IPO”). But the promoters have been saying that these rules are very cumbersome. Here’s a detailed look into the issue:

What are SR shares?

Superior voting rights shares do not follow the principle of one share equals one vote. The dividend given on these shares is usually higher than the ordinary shares. These shares give founders the right to control their companies even after the new investors join.

Why did SEBI introduce this framework?

SEBI released a consultation paper on 1st July 2021. In this article, while explaining the concept of SR shares, SEBI said, “Founders or promoters of the companies may have the required skills and vision to carry out their day-to-day activities; they may not be able to invest as much capital as needed. Therefore, they go through significant shareholding dilution to raise capital for the company in the beginning.”

One of the reasons for introducing SR shares was to encourage the founders or promoters to retain a specific amount of control with them for five years, extendable by five more years (Sunset Clause) with balances and checks.

Although SR shares were introduced recently in India, countries like the US, Singapore, Hong Kong are pretty familiar with this concept. But the corporate governance norms in these countries are stricter than in India. For instance, while taking the company public, Mark Zuckerberg, Founder, and CEO of Facebook issued shares carrying ten votes each to himself and his associates to control social media networks compared to one vote to public shareholders.

Previously, SEBI was concerned that promoters or founders could misuse the power given to them by this concept, and it may go against the shareholders’ interest. In 2019, the regulator allowed the founders of tech-oriented start-ups (for instance, nanotech, data analytics, infotech, biotech) to issue shares to themselves in the ratio of 10:1 (i.e.,1 share equals 10 votes). At the same time, they were asked to issue shares in the ratio of 2:1 (i.e., 1 share equals 2 votes) to public shareholders. According to those rules, SR shares should be converted to ordinary shares after five years of listing or if the shareholder with superior rights dies or exits the company.

https://lawsikho.com/course/diploma-companies-act-corporate-governance

What are the new proposals to revise the framework?

The new proposals to revise the framework were stated in the consultation paper. They are:

Net worth requirements of SR shareholders

According to the current regulatory framework, regulation 6 (3) (ii) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) states as follows:

Clause 3 of regulation 6 states that “If an issuer has issued SR equity shares to its promoters/ founders, the said issuer shall be allowed to do an initial public offer of only ordinary shares for listing on the main board subject to compliance with the provisions of this Chapter and these clauses.
Sub-clause (ii) of Clause 3 states that “The SR shareholder shall not be part of the promoter group whose collective net worth is more than rupees 500 crores:

Explanation: While determining the collective net worth, the investment of SR shareholders in the shares of the issuer company shall not be considered.”

Background

SEBI has received feedback from the market participants that the SR shareholder’s provision should not be part of the promoter group whose collective net worth is more than ₹500 crore, is too cumbersome to comply. Also, it is probably keeping the prospective and deserving SR shareholders away from using the SR shares framework.

Concerns

Under the ICDR Regulations, the definition of promoter group and promoter is very broad and can include a large set of entities/relatives. Hence, the net worth of such entities or relatives will also be taken into consideration to determine the collective net worth. Furthermore, a company may have multiple founders, and the promoter group has many members, which complicates the whole matter.

Matter for public consultation

Although the explanation of the regulation makes it clear that the SR shareholders’ investment in the company of the issuer shall not be taken into consideration while calculating the collective net worth, a situation can arise wherein the SR shareholders’ family members would also be the owners of some shares of the issuer company. According to the current regulatory framework, such an investment will be included while calculating the collective net worth. Additionally, not including the proceeds from the sale of shares by an SR shareholder in the issuer company is not precisely stated in the explanation.

Issuance of SR shares to trusts/entities on behalf of founders/promoters in executive position

According to the current regulatory framework, regulation 6 (3) (iii) of ICDR Regulations states as follows:

Clause 3 of regulation 6 states that “If an issuer has issued SR equity shares to its promoters/founders, the said issuer shall be allowed to do an initial public offer of only ordinary shares for listing on the main board subject to compliance with the provisions of this Chapter and these clauses.
Sub-Clause (iii) of Clause 3 states that “The SR shares were issued only to the promoters/founders who hold an executive position in the issuer company.”

Background

The purpose of giving SR shares only to founders or promoters was to acknowledge their significant and unique efforts towards the present and future matters of the business.

In the potential issuer companies, the shareholding of promoters or founders may be represented through either limited liability partnerships (“LLPs”) or family trusts or holding companies. It is contended that this is done for tax planning, long-term succession planning, and operational efficiencies. In the issuer company, the decisions are taken by the promoters/founders, but various entities own the company.

Further, it is also contended that wherever applicable, mostly founders will hold the holding companies. Otherwise, the family members who own minority shares in the company will hold the same. These LLPs, /family trusts/holding companies are the ownership vehicles where the partners/shareholders/trustees are the promoters/founders. Additionally, the beneficiaries are mainly promoters or founders and their descendants, if they aren’t there.

Concerns

The prevailing regulations would need to unwind these structures to allow promoters/founders’ direct holding of the SR shares. This may result in several implications, such as impacting the taxation front and the issuer company’s ability to conduct an Offer for Sale in the IPO.

Nonetheless, allowing the LLPs, family trusts, and holding companies to hold SR shares leads to various concerns as some of these structures, such as family trusts, are very opaque and make it problematic to identify where the voting power arises.

Matter for public consultation

Whether LLPs/family trusts/ holding companies where founders/promoters are the sole trustees or are in control can also be allowed to hold SR shares as long as these trustee/founders/promoters have the executive positions in the issuer company?

Timing of issuance of SR shares

According to the current regulatory framework, regulation 6 (3) (v) of ICDR Regulations states as follows:

Clause 3 of regulation 6 states that “If an issuer has issued SR equity shares to its promoters/ founders, the said issuer shall be allowed to do an initial public offer of only ordinary shares for listing on the Main Board subject to compliance with the provisions of this Chapter and these clauses.
Sub-clause (v) of Clause 3 states that “The SR equity shares have been held for a period of at least 6 months prior to the filing of the red herring prospectus.”

Background

Earlier, the promoters held the SR shares for at least one year before the filing of Red Herring Prospectus (“RHP”). Based on the comments received, this provision was modified, and the period was brought down to 6 months instead of 1 year.

The concept of SR shares is relatively new for India. The examples of many tech start-ups and companies preparing for IPOs and gearing to enter public markets in India are also increasing day by day.

Market participants have given their feedback to SEBI and said that this provision is too cumbersome to comply with as it makes it difficult for the issuer companies to raise funds from the capital market.

Concerns

It is contended that preparation of an IPO requires a considerable amount of time, and structuring, evaluating and issuing SR shares also takes much time.

Issuing the SR shares includes:

Sensitizing the shareholders.
Understanding the SR construct.
Enabling authorized capital for SR shares with required corporate actions.
Seeking board and shareholders’ approval.
Meeting other conditions relevant for SR shares and higher compliance in terms of the constitution of the board and committees.

All of these tasks are also time-consuming.

Matter for public consultation

Whether the requirement of holding SR shares for six months before the filing of RHP should be deleted?

How have tech companies reacted to these proposals?

As expected, tech start-ups and companies have accepted these proposals with enthusiasm. For instance, IndiaTech, an industry association representing investors and start-up founders, has suggested that the net-worth requirement for start-up founders should not be calculated as a group; instead, it should be calculated individually.

IndiaTech also suggested that the Sunset Clause of five years, extendable to ten, should be prolonged. Last but not the least, it is also recommended that SEBI consider the capital requirement of IPO for promoters to 5 percent. It can also mandate the founders with less than a 20 percent holding if they want to lock in their shares for a year.

The need for SEBI to correct stand on superior voting rights

It is difficult to comprehend the reason why SEBI is promoting SR shares. The purpose of these shares is to help the promoters/founders of new-age tech companies, yet other companies can issue these shares. The contention that it isn’t easy for these promoters/founders to retain control over their new business for a specific period is not appealing as it was earlier.

There are numerous instances where it has been proved that if the investors feel that the company has excellent potential, they invest without asking for something unreasonable. Therefore, these promoters/founders get the capital required in the initial stages of the business.

Then why is it a problem for them to dilute control of the same? Undoubtedly, in today’s time, raising capital is more accessible than ever because many ideas in China and the West can be adapted to India’s conditions, and the capital is sloshing around. As mentioned earlier, if your business idea is commendable, plenty of private equity firms are waiting to write you a cheque.

Conclusion

Because of the poor corporate governance standards prevailing in India and their more than ever poor implementation, promoters/founders don’t need more powers. It is not wise to believe that these start-ups will follow these rules better than any other well-established business. They are more likely to adapt to shortcuts if they think these shortcuts will help them grow faster.

The question that comes to almost everyone’s mind is why these companies are so adamant that the shareholders might not accept their proposals. SEBI should also take care of the small shareholders in this chaos as they can be easily marginalised if the promoters/founders have superior voting rights. It has to make sure that the small shareholders don’t get a raw deal.

Although SEBI had good intentions and wanted to make the journey easier for start-ups, it is rightly said that good intentions do not always yield good results. Therefore, it’s high time that SEBI corrects its stand on superior voting rights.

References

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SEBI guidelines on fundraising by the issuance of debt securities by large entities

Oishika Banerji

October 1, 2021

This article has been written by Priya Singh pursuing the Diploma in Global Corporate Practices from LawSikho. This article has been edited by Amitabh Ranjan (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).

Table of Contents

Introduction

There are numerous requirements for operating a business. Raising capital/funds is one such critical criterion. Among other things, funds are essential to accomplish the day-to-day operations of the company, for large-scale projects – namely business expansion, growth, takeovers, mergers, or product development. To meet such requirements companies are excessively reliant on traditional banking institutions and non-banking finance firms to obtain credit.

Issuing bonds is an alternate option for companies to raise funds apart from resorting to bank loans or the sale of the company’s stocks to investors. The issuance of a bond by a corporation is termed as a “corporate bond”. Debt securities are another name for such bonds.

The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations) under its regulation 2(1)(e) defines “debt securities” as such non-convertible debt securities which create or acknowledge indebtedness, which includes debenture, bonds and other securities of a body corporate or any statutory body constituted through legislation, whether constituting a charge on the assets of the body corporate or not. The definition excludes bonds issued by the Government or other bodies as the Board specifies, security receipts and securitized debt instruments.

These Debt securities are listed on the stock exchanges in the same way shares are listed. In addition to the Companies Act, 2013, a public corporation must comply with the ILDS Regulations (Issue and Listing of Debt Securities) while listing debt securities on stock exchanges. Regulation 3 of ILDS mandates application of the regulation only to debt instruments that are issued publicly and listed on a recognised stock market, whether through a public offering or a private placement.

With the objective of lowering business dependency on banks for funding, diversifying borrowings, and enhancing the Indian corporate bond market, few concerted actions have been taken by the government and authorities. In its Union Budget release on February 1, 2018, the Ministry of Finance stated, “SEBI would also consider mandating, beginning with Large Corporates, to fulfil around one-fourth of their funding needs via the bond market.” As a result, the Securities and Exchange Board of India (SEBI) published a discussion paper titled “Designing a Framework for Enhanced Market Borrowings by Large Corporates” on July 20, 2018. After taking into account the comments received in response to the discussion paper and consulting with market participants, SEBI exercising its power under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with regulation 101(2) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 issued a circular titled “Fundraising by issuance of debt securities by large entities” dated 26th November 2018. The circular mandates Large Corporates to raise 25% of their incremental borrowings through the issuance of debt securities.

Decoding the circular

Criteria for applicability

Based on financial year:

For Entities that follow April-March as their financial year the framework came into effect on April 1, 2019.
Entities following calendar year as their financial year had the framework take effect from January 1, 2020.

Note: The expression “financial year” (FY) refers to the period from April to March or January to December, as the case may be. As a result, FY 2020 will cover the period from April 1, 2019 to March 31, 2020, or January 1, 2020 to December 31, 2020, whichever is applicable.
Listed entities

The framework applies to all the listed companies (excluding Scheduled Commercial Banks) as of the end of the financial year (March 31 or December 31).

The listed entities must fulfil the following criteria:

As per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, listed entities should have their specified securities, debt securities, or any non-convertible redeemable preference share listed on a recognised stock exchange(s); and
Should have Rs 100 crores as outstanding long-term borrowing.

Note: Here outstanding long-term borrowings signifies any outstanding borrowing with an original maturity of more than one year, not including external commercial borrowings and inter-corporate borrowings between a parent and its subsidiary(ies);

Entities must have a credit rating of “AA and above”,

Note: These credit ratings should be of the unsupported bank borrowing or plain vanilla bonds of an entity, which have no structuring/support built.
If an issuer has multiple ratings from different rating agencies, the highest of those ratings will be considered for the framework’s application.

What are large corporations according to the framework?

A listed entity that meets the criteria outlined above is classified as a “Large Corporate” (LC). Under the framework, such a LC must raise at least 25% of its incremental borrowings in the financial year following the financial year in which it is classified as a LC, through the issuance of debt securities, as defined under SEBI (Issue and Listing of Debt Securities) Regulations, 2008.

What is incremental borrowing according to the framework?

For the purpose of the circular, the expression “incremental borrowings” means any borrowing done in a particular financial year, which has an original maturity of more than a year, nevertheless if such borrowing is for refinancing/repayment of existing debt or for any other purpose. However, such borrowings should not include external commercial borrowings and inter-corporate borrowings between a parent and its subsidiary(ies).

Applicable guidelines for large corporates

The requirement to achieve the incremental borrowing norms is applied yearly for FY 2020 and 2021.
As a result, a listed organisation designated as a LC on the last day of FY 2019 and FY 2020 would have to comply with the condition of raising at least 25% of its incremental borrowings, through the issuance of debt securities by the last day of FY 2020 and FY 2021, respectively.
In a situation where a LC is unable to meet the foregoing criterion, it must explain the reason for the shortfall to the Stock Exchanges in the manner as discussed further in the disclosure requirements.
The criterion of mandatory incremental borrowing by LC from FY 2022 will have to be met over a contiguous block of two years. This means a listed entity classified as a LC as of the final day of FY”T-1,” must meet the criteria of additional borrowing for FY”T,” over FY”T,” and “T+1.”
However, if there is a shortfall in the required borrowing at the end of two years (which means if the actual borrowing through route of debt securities is found to be less than 25% of the incremental borrowings for FY”T”), a monetary penalty/fine of 0.2 percent of the gap in the borrowed amount will be imposed and paid to the Stock Exchange(s).

What are the disclosure requirements for large entities?

As provided under the framework a listed entity, identified as a Large Corporate, must make the following mandatory disclosures to the stock exchanges, where its security(ies) are listed:

Large Corporates must disclose their status as a LC within 30 days of the commencement of the FY, using the format provided in Annexure A of the circular. The Company Secretary and the Chief Financial Officer of the LC must both certify such disclosures.
These disclosures must be included in the entity’s audited annual financial reports.
All details related to the incremental borrowings done during the FY, are to be provided in the format as provided in Annexure B1 and B2 under 45 days of the end of the FY.
The illustration of the framework and disclosure requirements are provided in Annexure C.

Here is a link to the disclosure by WIPRO Limited confirming that it does not fall under the category of a LC.

https://www.wipro.com/content/dam/nexus/en/investor/corporate-governance/stock-exchange-filing/initial-disclosure-to-be-made-by-an-entity-under-sebi-circular-on-fund-raising-by-issuance-of-debt-securities-by-large-entities.pdf

Here is a link to the annual disclosure applicable for FY 2021 by Tata Steel Limited, an entity identified as a LC.

https://www.tatasteel.com/media/13674/fund-raising-by-issuance-of-debt-securities-by-large-entities.pdf

What is the responsibility of the stock exchanges in such conditions?

The Stock Exchange(s) is required to consolidate the information about the LC disclosed on their respective platform and submit the compiled information to SEBI within 14 days of the last date of submission of the annual financial reports.
In case of a shortfall in the required borrowing, the Stock Exchanges must collect the mandated fine and remit the same to the SEBI IPEF (Investor Protection and Education Fund) within 10 days of the same month in which the fine was collected.

Current scenario

As banks and NBFCs have been hesitant to issue large loans to corporates on account of rising NPAs (non-performing assets), companies have been choosing the route of fundraising through means of debt securities due to relatively low interest cost on bond issuance, emerging demand from institutional investors and capital expansion plans of many companies.

Scheduled Commercial Banks (SCBs) like ICICI Bank and Yes Bank [Note: SCBs are exempt from the 25% norm as given in the circular] and major corporations like Tata Steel Limited and Hindustan Copper Limited (HCL) are increasingly opting for debt securities to raise funds.

According to data available with markets regulator SEBI, companies listed on BSE and NSE Listed firms raised Rs 7.72 lakh crore through issuance of bonds on a private placement basis in 2020-21, an increase of 14 percent from the preceding fiscal, owing to low interest rate and surplus liquidity in the system. This also marks the highest level of fund raising through such a route in a financial year.

Advantages of raising finance through debt securities

It can help strengthen the company’s finances by enabling them to take on large loans at a set interest rate. This provides some protection against fluctuations in interest rates or the economy.
Because the redemption period for bonds might be several years after the issue date, more cash can be kept in the business.
When bonds are sold in the public market, they can be traded – similar to shares. Some corporate bonds are structured to be convertible, which means they can be exchanged for shares in the future.
It provides opportunities to investors to diversify their investments.

Disadvantage of issuing debt securities concerning the circular

Companies have to comply with various listing rules in order to increase the tradability of the bonds listed on an exchange.
Companies are to have a credit rating of “AA and above” which is a mandatory requirement. Having a good credit rating can help in a successful launch of a bond issue but receiving a credit rating is time consuming and will be an added cost to issuing the bonds.
Lower-rated corporates have been exempted from the framework for the time being due to the limited demand for such securities.
The “Comply or Explain” framework of SEBI would require companies to disclose non-compliance as part of “continuous disclosure requirements”.
In case of any shortfall in the requisite bond borrowing, a monetary penalty of 0.2% of the shortfall can be levied.

Conclusion

Bonds are an excellent approach to fund certain types of capital intensive businesses such as Oil & Gas, Automobiles, Manufacturing Firms, Real Estate, Metals & Mining, Infrastructure projects. Few projects take a long time to complete. Building dams, toll roads, flyovers, and huge power plants all require years to develop and install. The project developer will not have enough cash flow to service debt until the project is up and operating. Resorting to the bond market could be a viable option for such companies. A healthy corporate bond market is also thought to relieve a lot of strain on banks that are struggling with bad debts.

As corporates with a ‘AA and above’ rating have been given preference by SEBI this helps to ensure investor confidence in the company as corporates with such a high rating are less likely to default on their obligations to investors.

If the entry barrier for lower-rated corporate bonds is removed, the pool of investment-grade issuers will grow. A Debt fund would also enable retail investors to invest in such initiatives and expand the investor base. Small borrowers have traditionally relied on institutional finance and inter-corporate deposits. They might be able to use the bond market as a way to raise funds at a reasonable cost. Further, it also opens up avenues for greater development and deepening of the fledgling corporate bond market in India. Going forward, it would be crucial to observe the growing trend and sustainability of such a move while also keeping the necessary dispute resolution mechanism in place.

The circular can be accessed on the SEBI website at www.sebi.gov.in under the headings “Legal Framework” and “Corp Debt Market.”

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Transfer of shares contravening Section 56 of the Companies Act : Manalal Khetan & ors. v. Kerdarnath Khetan & ors

Oishika Banerji

October 1, 2021

This article has been written by Hritika Jannawar pursuing the Diploma in Global Corporate Practices from LawSikho. This article has been edited by Amitabh Ranjan (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).

Table of Contents

Introduction

Securities issued by the company are assets and its transfer plays a vital role in the dynamics of the Company management. S.56 of the Companies Act, 2013 and Companies (Share Capital & Debenture) Rules, 2014 prescribes certain procedures for the same. This movement of securities occurs through two processes one being transfer and other transmission. Further the nature of the procedure prescribed for the transfer should be considered as directory or mandatory is a question of importance which has been discussed extensively in the case of Mannalal Khetan & Ors. V. Kedarnath Khetan & Ors. The article discusses the meaning and differences between transfer and transmission of the shares and the case of Mannalal Khetan for its decision regarding the nature of the procedure prescribed for share transfer. The author analyses the reasoning of the Hon’ble Court, whether it was justified and the reasoning behind the same.

Meaning of transmission and transfer of shares

Transmission of shares takes place due to the operation of law and it is not a voluntary act. It could happen by the death of a shareholder, where his heirs inherit his shares or if the deceased bequeath it upon them. Then this process by which the heirs get ownership of the shares is known as ‘transmission’. Transmission also takes place in case if the shareholder has become lunatic or insolvent. On the other hand transfer of shares is a voluntary Act of the transferor and the transferee. Distinction between the transmission and transfer lies in the fact that the transfer in the former is initiated by the receiver or legal representative and the latter the by transferor or transferee. Furthermore, unlike the transfer of shares there is no consideration in case of transmission. Also, the execution of a transfer deed is not necessary. [Life Insurance Corpn. Of India v. Bokaro & Ramgur Ltd]. In case of transfer of shares, the liabilities on the shares ceases to exist post-transfer and on the other hand original liabilities continue in transmission. S.56 of the Companies Act, 2013 prescrithe bes procedure for transfer of securities such as executing transfer deed and a penalty to the Company and its every officer in default of it.

Mannalal Khetan & Ors. V. Kedarnath Khetan & Ors.

It is pertinent to discuss this judgement extensively as it deals with a very important subject matter in Company law i.e. transfer of shares. The nature of the provision prescribing such transfer whether to be taken as directory or mandatory was the question raised herein. S.56 prescribes the provision for such transfer in the Companies Act, 2013, but the present case has been brought up prior to the enactment of this new companies Act and hence it has been dealt under S.108 of the Companies Act, 1956. If the nature of the aforementioned provision is taken as directory, the company can transfer the shares at its will which will be detrimental to the rights of the shareholders and hence Hon’ble Supreme Court’s observation in said matter built a sound pathway to such transfers and ultimately protected everyone’s right.

Background

In the present case, Appellant group included Mannalal Khetan, Sagarmal Khetan, and Ganeshnarayan Khetan whereas Respondent group included Kedarnath Khetan, Durgaprasad Khetan and a private Company ‘Devi Sugar mills Pvt. Ltd.’ Appellants and Respondents belonged to two branches of the Khetan family. Khetan Family held shares in three companies: the Respondent Company, Maheshwari Khetan Sugar Mills Pvt. Ltd. and Ishwari Khetan Sugar Mills Pvt. Ltd.

On the account of filing the dissolution of the Partnership firm by the appellants, the Bombay High Court appointed a Receiver. There were large income tax arrears outstanding against the Firm as well as the Individual Partners. The Income Tax department issued a notice under Sec. 46(5A) of Indian Income Tax Act, 1922 directing the Respondent Company to pay the department any amount due to Partnership Firm or its individual Partners. The Receiver, so appointed by the Collector of Bombay later took possession of shares in the names of Appellants along with blank transfer deeds signed by them. Subsequently, the Collector of Deoria attached certain shares of the Respondent Company under Order 21 Rule 46 of CPC because of the certificate issued by the Additional Collector of Bombay.

On 31^stJuly 1957, Appellants and the respondents entered into an agreement to exchange the bloc of shares among them i.e. Appellants were to transfer their shares in Respondent Company and Maheshwari Sugar Mills Pvt. Ltd. to the Respondents and in lieu of which Respondents had to transfer their shares in Ishwari Sugar Mills Ltd. These Agreements acknowledged the part that the Appellant shares in the Respondent Company were under attachment under Income Tax Authorities and soon as the transfer of these is permitted the agreement will be fully effective. But, the Respondent Company passed a Board Resolution on 8^th April 1958 to transfer the shares in the name of the Appellants to Respondents 1 and 2.

Subsequently, the Appellant sent two notices on 14^th January 1962 to the Respondent Company one notifying them that the shares of the Ishwari Khetan Sugar Mills Pvt. Ltd. which were attached under income tax Authorities were sold by the Additional Collector of Bombay on 23^rd September 1961, it further stated that the aforementioned agreement has become impossible to perform and the consideration for reciprocal promise had disappeared and also revoked power of Attorney in favour of Respondent Company by the Appellants in regards of shares in Maheshwari Khetan Sugar Mills Pvt. Ltd and the Respondent Company Itself. The Second notice stated that the transfer made by the respondent Company on 8^thApril 1958 is void and illegal as requirements under S.108 of Companies Act, 1956 was not fulfilled and also certain shares among those were in possession of Additional Collector of Bombay. To which the Respondents denied and therefore, the Appellant approached Allahabad High Court where the Single Judge ruled in favour of the Appellants but, when respondents appealed to the Division Bench of Allahabad High Court its decision favoured the Respondents. Later, the appellants approached the Supreme Court where the division bench’s judgement was set aside with no costs.

Issues involved

There are two major issues involved in the present case:

Whether the provisions under S.108 of Companies Act, 1956 are mandatory concerning transfer of shares?
Whether the Company can transfer the shares and make changes in its register of members when it has been informed that he said shares have been attached under the order of attachment?

Rules applied

S.46 (5A) of Indian Income Tax Act, 1922

Income Tax Officers direct a person by a notice to pay any money which is due to assessee to the Income tax Officer to an extent of the arrears of income tax by the assessee or less than that.

Order 21 Rule 46 CPC

Provisions regarding attachment of debt, share and other property not in possession of judgement debtor.

S.108, Companies Act, 1956.

Prescribes procedure for transfer of shares and debentures.

S.629 A, Companies Act, 1956.

Prescribes a penalty where no specific penalty has been provided for an act prohibited in this Act.

Court’s observations

The legality of the transfer of shares was the major concern in the present case and
Appellant contended – 1) that the transfer of shares in the register of Respondent Company was illegal and void as it was contravening mandatory requirements under S.108 of the Companies Act, 1956 because the transfer was without any proper instrument duly stamped and executed by the Appellants or on their behalf was delivered to the Respondent Company. 2)that the legality of this transfer can be questioned on the ground that the shares of the Appellants were surrendered along with the blank share transfer forms to the receiver appointed by the Collector of Bombay in execution of proceedings of tax recovery and the other shares were attached by the collector Deoria under Order 21 Rule 46 of CPC.
The Respondents in turn contended that the said case is not of transfer of share but of transmission.
The learned Single Judge of Allahabad High Court rejecting the contention of Respondents held that the present case is not a case of transmission as transmission is something which happens by operation of law and the acts of the Parties herein were of voluntary nature so could not be attributed to transmission. It further held that S.108 of the Act is mandatory in nature and when the Appellant divested themselves of power and control over those shares when they executed the power attorney in favour of the Respondent Company it did not mean the divesting of possession and the agreements to which reference is made in present case were not instruments of transfer. Also the shares were attached by Additional collector under Order 21 and Rule 46 of CPC and others were surrendered to the Receiver appointed by Collector of Bombay in Income Tax Proceedings. Thus directing the Respondent Company to restore the name Appellants in the register of the Company.
Diametrically opposite view was observed by the Allahabad High Court’s Division Bench, it held that the nature of S.108 of the Act is not mandatory but directory in nature as no penalty has been provided under this provision in the event of non compliance of the Sec. It also held that mere appointment of Receiver does not divest one from its Right to Property and hence said transfer is perfectly valid in the eyes of law.
Aggrieved by the decision of the Division Bench the Appellants approached the Supreme Court. The Hon’ble Court pointing out the inconsistency in the Division Bench’s Decision made following observations-

The wording of S.108 of the Act is imperative to take note of, the construction is negative that means prohibitive in nature.

S.108 – “a company shall not register a transfer of shares …….unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or behalf on behalf of the transferee has been delivered to the company along with the certificate relating to the shares or debentures or if no such certificate is in existence along with the letter of allotment of shares.”

Emphasis on “shall not” usage of negative words is always done to indicate mandatory in nature. In Raza Buland Sugar Co. Ltd. V. Municipal Board Rampur the five Judge bench that there are various tests to determine whether a provision is directory or mandatory and language is one of them. The Hon’ble Court held that the negative words can rarely be directory and one way to obey the command is by not doing what is forbidden by the provision which in turn provides it a mandatory colour.

The reasoning of the Division Bench that S.108 is not mandatory is flawed in its one more observation that absence of penalty in non -compliance of S.108 makes it directory. The Division Bench was erroneous as S.629 A of the Act prescribes the penalty where no specific penalty is provided elsewhere in the Act. Therefore, when a penalty is provided to prohibit an act, the contract made in violation of it is void without the statute expressly declaring it as there would not be any penalty for a legal act, it will always be intended for an illegal act. Likewise, the transfer made in the present case is void.
According to Order 21 Rule 46 the shares in whose name they are, is prohibited to transfer the same. Also the separate prohibitory order was issued to the Company under Form. No 18 in Appendix E of the first schedule of the CPC.

In presence of all these provisions in place entering Respondent’s name in the Register of the Respondent Company and thereby permitting such transfer the Respondent Company has acted in Contravention of law and therefore such transfer was held by the Hon’ble Supreme Court as illegal and void in the eyes of law.

Analysis

In the first instance of the present case, the Single judge Bench Judge of the Allahabad High Court rightly rejected the contention of the Respondent that the said case is of transmission. The Respondent’s contention went wrong on the lines that the ‘transmission’ takes place after the death of the shareholder i.e. the shares are inherited by his/her heirs or bequeathed upon and in another case if the shareholder becomes lunatic or insolvent; the important point here being that transmission occurs by operation of law and the transfer is process that occurs voluntarily by a contract. The Respondents herein tried to acquire the benefit of the proviso prescribed under S.108 that provides an exception to the requirement of delivery of duly stamped and executed share transfer forms by the transferor to the company in case of transmission but failed miserably.

Furthermore, the three Judge Bench of Supreme Court has thrown light upon the nature of S.108 and had brought in place an aptly correct interpretation while keeping in regards the consequences of it in development of Company Law. The Author regards the decision of the Hon’ble Supreme Court accurate in this present case due to the reason that the transactions related to share transfers have an vital role in the Company’s fate because it may change the management of the company, so the informal way of such type of transactions would necessarily may have an ill impact for both shareholders and the company. To deter the practice of such transfer of shares informally so as to protect the Company from adverse impact to its administration S.108 was brought in first place.

The Hon’ble Supreme Court held that the S.108 of the Act is mandatory in nature. The Hon’ble Court attributed this interpretation owing to the negative construction of the provision which made it prohibitory. Emphasis was laid down on the word ‘shall not’ in S.108. The reasoning of the Hon’ble Court that negative construction of provisions give them a mandatory colour irrespective of penalty prescribed in the event of its violation is not an unprecedented one. It is indeed the duty of the Courts to determine the real intention of the legislature by carefully attending to the whole scope of the statute to be construed, as held by Lord Campbell in Liverpool Borough Bank v. Turner 1860. The five Judge Bench of Supreme Court Raza Buland Sugar Co. Ltd. V. Municipal Board Rampur held that one of the tests to determine this intention of the legislature is the language which was rightly pointed out by the Court in the present case.

It was also held by the Hon’ble Supreme Court in the year 1961 in M.Petiah V. Muddala Veerampala that “negative words are clearly prohibitory and used as a legislative device to make the statute imperative” Thus the decision taken by the Supreme Court was is consonance with the then Position of law. Also the division Bench of the High Court erred as it overlooked S.629 A of the Act which provided for penalty where the specific penalty was not provided in the Act. Thus with negative construction of S.108 and the penalty present in case of its violation, S.108 is through in through mandatory and not directory.

This reasoning of the Hon’ble Supreme Court was later upheld in various judgements and to this date it holds a strong ground as seen in the recent decision of the three-Judge Bench of this Court in Asha John Divianathan v. Vikram Malhotra in which they relied on the present case and observed that “prohibited or negative words can rarely be directory and the seeking prior permission from RBI under S.31 of the FERA, is in the nature of the prohibition and hence the permission is mandatory requirement and where penalty is provided by statute for doing an act it is not intended that statute would impose penalty for a lawful Act, it only prescribes penalty for unlawful Act, then the thing prohibited if done will be treated as void”

All these Judicial pronouncements of past and present have time and again upheld the reasoning of this Court and thus proving its sound interpretation in the present case. Also, by the fact that the shares in dispute in the present case were attached under Order 21 Rule 46 of CPC and under income tax recovery proceeding there is no way the instrument of the transfer was delivered to the Respondent Company in the Mandatory Procedure prescribed under S.108 and therefore the transfer of shares was rightly held to be void.

Conclusion

The judgement in Manalal Khetan prevented blatant abuse of power to transfer shares by the company. It provided as an important precedent to assign mandatory nature to the clauses constructed in a negative and prohibitory manner. The Hon’ble Supreme Court’s stance in the present case regarding the order of attachment of shares also provides us with a glimpse that sometimes law prevails over individual autonomy.

S.56 of the Companies Act, 2013 is the counterpart of S.108 of the old companies Act. There are few striking differences between them such as S.56 deals with the transfer of an interest in companies with no share capital, transfer of securities wherein the securities have been prescribed wide connotation under the 2013 Act whereas S.108 only provided for the transfer of Securities and Debentures. Also, S.56(6) prescribes a penalty to the company or every officer of the Company who is/are in default of the prescribed provisions therein, successfully reinforcing the mandatory nature to the procedure of transfer of Shares in the new Act.

References

Difference between Share Transfer and Share transmission, Cleartax, available at https://cleartax.in/s/share-transfer-share-transmission-difference last seen on 06/09/2021
All about Transmission of Shares, TaxGuru, available at https://taxguru.in/company-law/transmission-shares.html last seen on 06/09/2021
Mannalal Khetan & Ors. v. Kedarnath Khetan & Ors. Company Ninja, available at https://thecompany.ninja/mannalal-khetan-and-ors-v-kedar-nath-khetan-and-ors/ last seen on 04/09/2021.

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Population control in India – a violation of fundamental rights or a necessary step

Sneha Mahawar

October 1, 2021

Population Regulation Bill, 2019 — Image Source - https://rb.gy/zftdkl

This article is written by Shruti Yadav, from Jagran Lakecity, Bhopal. This article talks about population control in India, its constitutionality and its drawbacks. Also, the article deals with the possi+ble alternative measures India can take to regulate the population.

Introduction

According to statistics, India is currently the second most populated country. It is expected to topple China, the top-ranked, by 2027. The total estimated population of India is 1.38 billion people, which is about 17% of the total world’s population. As per the last census conducted in 2011, the growing population can be advantageous to India with a proper structure as India possesses one of the youngest global populations with an average national age of approximately 29 years, while 41 per cent of our population is below 18 years of age. This implies that most Indians have a preponderance of their working years ahead of them. This population can add to nation-building and economy if provided with the right skills, education and employment. However, population increase or explosion has many downsides too. It can hinder the overall growth of a country. So let us further analyse whether population control is needed in India or not.

Need for population control

People are means as well as ends of economic development. They are an asset to any country, but as we all know, anything in excess is harmful. So is the case with population. Population outburst in India has proved to be a significant hindrance to economic planning and development progress. Population control in India is a dire need of the time because of the following points:

Capital formation

One of the most severe effects of the rapidly increasing population is its impact on saving, investment and capital formation. The composition of the population in India hampers the increase in capital formation. A high birth rate and low expectancy of life mean an increase in the number of dependents in the total population. In India, 35 per cent of the population is constituted of people less than 14 years of age. They are unproductive consumers. Such individuals are a drag on the economic growth of the country. They are mainly responsible for the low rate of saving, low investment rate, and low rate of capital formation since they are not employed and do not receive remuneration to invest, save or partake in capital formation.

Per capita income

The large size of the population in India and its rapid rate of growth result in low per capita availability of capital. From 1950-51 to 1980-81, India’s national income increased at an average annual rate of 3.6 per cent per annum. However, per capita income had risen around one per cent. It is because population growth has increased by 2.5 per cent. This sluggish growth rate of per capita income has resulted from a high population growth rate despite high national income in specific years.

Unemployment

With the brisk increase in population, the most daunting responsibility for India is to provide employment not only to the increasing labour force every year but also to decrease the accumulation of the unemployed from the past years. The massive size of the population results in a large multitude of the labour force. However, due to a deficiency of capital resources, it becomes challenging to present lucrative employment to the entire working population. Disguised unemployment in rural areas and open unemployment in urban areas are the standard hallmarks of a developing country like India. With the growth in the labour force at an average annual rate of 2.4 per cent, there is only a slight possibility of reducing unemployment for years to come.

Poverty

In the face of an ever-growing population, inequitable distribution of income and inequalities within the country broaden. The growing population is deepening poverty in India as there is a scarcity of resources which is also concentrated in the hands of a few. Also, people have to spend a large share of their resources for bringing up their dependents.

Maternity welfare

In India, population explosion is the effect of a high birth rate. A high birth rate impacts the health and welfare of women. Recurrent pregnancy without an appropriate gap is perilous to the health of the mother and the child. This leads to a high death rate among women of procreative age due to early marriage. Hence to improve the welfare and stature of women in our society, we have to lessen the birth rate.

Environment

Population explosion results in environmental degradation. The growing population can lead to more pollution, the generation of more toxic waste and the destruction of the biosphere. Excessive deforestation and overgrazing by animals have led to land degeneration. A significant cause of biodiversity loss has been the depletion of vegetation to grow agriculture by the rapidly surging population. Industrialisation, urbanisation, increasing vehicular traffic have led to air pollution, and domestic sewage and industrial effluents have led to water pollution.

Scarcity of resources and services

The rapid rise in population puts a massive burden on infrastructures like health care, education, housing, water supply, sanitation, power, roads, and railways. Infant mortality is already relatively high. Malnourishment in children is widespread. Ample villages are devoid of any source of drinking water in India due to the scarcity of financial resources. India has not provided many essential services adequately due to a significant increase in population. India has the largest illiterate population in the world. There is mass illiteracy among women, especially in rural areas. The goal of the universalisation of education is far away.

Inflation

Food production and distribution have not been able to catch up with the increasing population. Hence, the costs of production have increased. Inflation is a significant consequence of overpopulation.

Standard of living

Rapid population growth is to be blamed for India’s low standard of living. Even the bare necessities of life are not available adequately since resource distribution has been a major issue.

Social problems

Population explosion leads to a rise of several social problems. It causes the migration of people from rural areas to urban areas, causing the creation of slum areas. People live in the most unhygienic circumstances. Unemployment and poverty lead to frustration and resentment among the literate youth. This leads to robbery, prostitution and crimes. The terrorist movements that we find today in numerous sections of the country exhibit frustration amidst unemployed professional youth. Overcrowding, traffic congestion, frequent accidents and pollution in large cities are the immediate result of overpopulation.

Population Regulation Bill, 2019

The Population Regulation Bill, 2019 introduced by Member of Parliament Shri Rakesh Sinha in the Rajya Sabha on July 12, 2019, calls for penal action against people with more than two living children, including debarment from being an elected representative, dismissal of financial benefits and decrease in benefits under the public distribution system.

The bill also proposes that government employees should give an undertaking that they will not conceive more than two children.

There are limited ecological and economic resources at hand. Therefore, the justification of the bill held that it is imperative and critical that the provision of necessities of human life, including affordable food, safe drinking water, adequate housing, access to quality education, economic/livelihood opportunities, power/electricity for domestic consumption, and an unharmed living is accessible to all citizens.

The draft bill then insists that it is essential to control and uphold the state’s population to encourage sustainable development with more equitable distribution.

The criticism of the bill states that it will widen the gap between the poor and the rich. The poor will suffer if benefits under public distribution schemes or other government-funded schemes are taken away from them. Health care facilities and finance for contraceptives are also not available to the lower strata group. Also, without proper education and knowledge, the poor do not understand the importance of small families and further procreation as it implicates more financial burden on them.

Will a population control bill be under the ambit of fundamental rights or ultra vires

A few years back, the Prime Minister expressed concern over the prospect of a ‘population explosion’ in India in his address to the nation on Independence Day and said that keeping small families was patriotic. It has since sparked a keen interest and debate on population control policies. The two-child policy has been presented in the Parliament over 35 times since 1947. Key points of the debate on the population control bill are as follows:

Procreation, reproduction and family planning are sensitive and private facets of every citizen’s life. The rights and liberties in these aspects must be assiduously protected from groundless invasion.
Nevertheless, the government needs to implement population control policies to solve many issues such as poverty and the lack of satisfactory social and health services that torment India presently. However, a law for this purpose would always be questioned of its constitutionality.
A policy to control and monitor the number of children a family is allowed to have is a crass infringement of human rights and the right to a citizen’s reproductive autonomy. A right to reproduction is not explicitly written in the Constitution, but It falls under the purview of Article 21 (right to life and right to personal liberty). This kind of policy would strip individuals of their fundamental right to life, personal liberty and personal autonomy which includes reproductive rights, which involves making sexual, intimate, private and reproductive choices.

Indeed, the government has already found valid reasons to intervene in various spheres pertaining to procreation, family, personal, private and sexual life. Polygamy is against the law, adultery was just recently decriminalized, there is a minimum age requirement for marriage, and the state decides upon what grounds couples may legally divorce. Consequently, it is inexact to say that the government has not previously intervened in private matters and the sexual conduct of its citizens. It is just that the aim is different when it comes to population control.
There is a requirement for alternative laws that may confront constitutional scrutiny. For population control legislation to work, it would require the fabrication of innovative and compelling grounds that affect the ability of people to think a certain way without encroaching upon the rights and the Constitution. This will have to be conducted by united efforts to propagate contraceptives and family planning awareness.
Decisions regarding procreation and the size of a family are very personal choices and the privacy of citizens must be maintained. Therefore, stringent population laws are against the notion of fundamental rights and another approach is required to curb population. Health awareness and financial burdens of a large family must be propagated to all and especially to the poor and the less fortunate.

Alternative measures to control the population in India

A population control policy is not only a coarse violation of fundamental human rights; most of its bearing will be on the people at the bottom-most level of socio-economic strata. It could have devastating, long-term, irreversible outcomes. In China, the population control policy failed. There needs to be a shift in standards that equip and empower the country’s youth and expand quality procreative health assistance. India must invest in sustainable methods that shield the rights and matters of its citizens with non-coercive family planning policies as the core. Access to family planning knowledge, adequate health care systems and counselling sessions require attention. Overpopulation is a deeply rooted social issue. Efforts should be made to eradicate it from its root. Steps taken can be:

Legal marriage age

As fertility depends on the age of marriage, the legal age to marry should be increased. In India, the legal age of marriage for men is 21, and for women, 18. Marriage at a young age devoids people of knowledge regarding family planning and sensitization towards the issue of population. A task force constituted last year by the Narendra Modi government to examine its proposal of increasing the age of marriage for women has submitted its report, recommending an increase in the age from 18 to 21. The task force consisted of secretaries of the Health and Family Welfare, Women & Child Development, Ministry of Education, and the Legislative Department of the Ministry of Law and Justice. Other members included Najma Akhtar, Vice-Chancellor of Jamia Millia Islamia; Vasudha Kamath, former Vice-Chancellor of SNDT Women’s University, Mumbai; and Gujarat-based gynaecologist Dr Dipti Shah.

Health care system

The problem with developing countries like ours is the mediocre health service system. There is also a vast urban and rural divide. Rural areas have hardly any adequate health services, and therefore infant mortality rate is high. This is also why people prefer to have several children in rural areas.

Standard of women

It is also vital that we raise the standard of women in our country. If they are educated, made aware of the importance of their health and are not seen as objects to bear and rear children, population growth would surely decrease. Women need to grow socially and economically for that to happen.

Literacy

Illiteracy also plays a role in a population explosion. Literate people prefer to have small families, are aware of contraceptive methods and realize the consequences of a large family.

Contraceptives

Contraceptive methods should be made economical. Stigma related to it must be uprooted. People should also be made aware of contraceptive measures and their importance.

Spreading awareness

The benefits of family planning should be propagated through mass media. The population is also a cause for illiteracy, illnesses, and malnutrition and its adverse effects need to be preached to the general populace to develop their reasoning and understanding.

Population control during an emergency – violation of human rights

There has been much debate on population control in India, and many bills were proposed on the same. The lack of proper implementation and hesitance of India towards a population control law is due to a sort of post-trauma trigger of the population control policy during the emergency. Since then, population control policies in India have always been perceived with a negative connotation. During the emergency period of 1975, the Indira Gandhi led government began a gruesome campaign to sterilize men for population control. Laws for compulsory sterilization of men were against the notions of democracy. More often than not, it was done without the consent of the individual. People were coerced and dragged by policemen and government officials to surgery. Pressure on people was formed using not only force but manipulative methods. The government propagated that promotion and payments to employees would not be provided until they complied with the sterilization policy. Free medical treatment in hospitals was also stopped until a sterilization certificate was presented. Unfortunately, poor and illiterate people were picked up from railway stations or bus stops by government officials, completely negligent of their age or marital status.

A staggering 6.2 million men were sterilized in one year. India comes with its sordid history of state-sponsored population control methods. The poor and marginalized sections of the country mostly bore the brunt of it. There are ripple effects of those mass sterilizations seen even now. It is why India is always apprehensive of rigid population control policies. Therefore, we can conclude that the population control drive during the emergency was a grave violation of human rights.

Countries that have population control laws

Population control in the People’s Republic of China

One-child policy

China has the largest population on earth. Fearing that overpopulation would hinder their economic development, the Chinese government in 1979 implemented a one child per family policy. Per the policy, pregnant couples were required to file for a family planning service certificate. Then the government issued a birth permit through a complex procedure, making the task of having a baby more difficult. The government treated the applicant’s mother and father with intense scrutiny. The Chinese government uses an identification number to keep track of the wombs in China. If parents did not acquire the certificate before the child’s birth, the hospital would not circulate a birth certificate, and thus, there would be no legal document or record of the child’s birth. These methods discourage people in China from having more children. The Chinese government deems reproduction as a privilege it awards only upon the citizen’s accomplishment of their duties towards the state. Once a couple has been granted the right to have a child, they must use contraception to block further pregnancies. Because China’s society has deeply inherent patriarchal customs, the burden for contraception falls primarily on the woman. Officials typically granted certain types of contraception, namely intrauterine devices (IUDs) and tubal ligation. These methods are easily checked, lasting, and offer bureaucratic expediency. Ordinances urged women with one child to use IUDs and those with two children to undergo tubal ligation.

Two child policy

Then in 2016, China eradicated its decades-long one-child policy to combat an ageing society and narrowing workforce. Espoused couples could have two children and no longer had to appeal for a family planning service certificate. While the relaxation did result in some improvement in the proportion of young people in the country, the policy change was deemed insufficient in averting an impending demographic crisis.

Three child policy

A shrinking working-age population and a growing retired population would hamper China’s economic growth and strain social services. The one-child policy also led to selective sex-based abortions, causing a sex imbalance to form over time. Therefore from May 2021, couples in China will be allowed to have up to three children, as policymakers seek to address the country’s long-term demographic imbalances.

Population control in Indonesia

Indonesia has one of the most robust and most thriving national family planning initiatives in the world. With the aid of Muslim leaders, the country doubled its contraceptive ubiquity rate to nearly 60 per cent between 1976 and 2002. It halved its fertility rate from 5.6 to 2.6 children per woman. This unquestionably helped lay the foundation for Indonesia’s rapid and effective annual economic growth of at least 5 per cent since 1980. Among other things, the government authorized to:

Strengthen the program at district levels to sustain local access to family planning.
Render family planning services and supplies free of charge as part of the country’s Universal Health Coverage Program started in January 2014.
Boost health worker training efforts, particularly around long-acting reversible processes.
Refine 23,500 family planning clinics by the end of the year.
A much more substantial budget supports these endeavours. This outreach will be joined with the “Right Time, Right Method, My Choice” mass media and social media campaign, which intends to reach 2.9 million women of conceptive age in the target areas through radio, TV, print and online outlets. The government is also optimizing smartphone apps to reduce obstacles to obtaining reliable and timely family planning knowledge, including information on health centres and providers.

Conclusion

The ever-growing population is a severe issue at hand which needs to be resolved. Coercion and manipulation of people to keep the family size bare minimum are repugnant and a breach of fundamental human rights. High birth rates create large numbers of children relative to the number of working adults, savings that might otherwise be invested in the country’s infrastructure and development instead must be diverted to meeting the immediate food, health care, housing and education needs of growing numbers of children and adolescents. This prevents countries and families from making the longer-term investments needed to help lift them out of poverty. India needs sensitized ways of population control like awareness on family planning, contraceptives, awareness on health adversities due to less gap between children and economic and social pressures of a large family. Essential means like education and health facilities also need to be provided adequately for the population to decrease. Population control which promotes the advantages of small families and spreads awareness of the ill-effects of large families so that people choose to have only one or two children is required to control the population without infringing people’s rights. Although the high court declared population control laws as unconstitutional and against people’s rights, a plea has been filed and trial is ongoing in the Supreme court on the basis that the high court failed to appreciate that the right to clean air, the right to drinking water, the right to health, the right to peaceful sleep, the right to shelter, the right to livelihood and the right to education guaranteed under Articles 21 and 21A of the Constitution could not be secured to all citizens without controlling the population explosion.

References

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‘Silence not consent’ in light of the case of Virendra Khanna v. State of Karnataka

Sneha Mahawar

October 1, 2021

‘Silence not consent’ — Image Source: https://rb.gy/cc7gwa

This article is written by Sarthak Kulshrestha, a student of Jagran Lakecity University, Bhopal. This article deals with the right of the accused to remain silent during a criminal investigation and the process of the polygraph tests. This article has also cited several case laws referred to in Virendra Singh v. State of Karnataka and issues involved in it.

Table of Contents

Introduction

In the case of Virendra Khanna v. State of Karnataka (2020), it was held that the mere silence of the accused on administering a polygraph test does not amount to his consent for the same. The consent of the accused has to be categorical and clear enough to indicate his willingness to administer the polygraph test on him. Silence cannot be regarded as his consent because it is ambiguous and the investigating authorities need to ensure the explicit consent of the accused of the same. This article further analyses the issues regarding investigation procedures raised in this case and the rights of the accused against such a compulsive test concerning the Virendra Singh case.

Insight on the polygraph test

A polygraph test is usually used in the process of criminal investigations. It is also called a lie detector test. It is a technical and mechanized test consisting of six wires or sensors which are attached to the person’s body. A whole series of questions are asked to the accused which is related to the main subject so that some vital information can be extracted out of the accused. This test observes and records the physical reactions of the accused to the questions that have been asked to him during the conduct of the test. Generally, when a person lies, his heart rate increases, he begins to sweat and his body reacts in a certain manner involuntarily. Before conducting the actual polygraph test, a small session called “pretext interview” is carried out in which the examiner explains the process of the original test and also reviews the questions which are to be asked.

When the test is being conducted on an accused, a lawyer is allowed to be present during the “pretext review” phase. During the actual test, the examiner, called forensic psychophysiologist, asks some irrelevant questions such as “what is your name?”, “how are you?”, etc. along with the questions relevant to the main subject for which the test is conducted.

Mere silence does not amount to consent

Virendra Singh, the petitioner, in this particular case was asked by the police to provide his mobile phone password to unlock the phone and access the two email accounts belonging to him. Following the remand of Virendra Singh, the second respondent applied to a special court for an order of permission to conduct the polygraph test of the petitioner. This application was filed by the second respondent because allegedly the petitioner did not provide the access to his mobile password and his email. However, the same has been denied by the petitioner’s counsel and claimed that he maintained full cooperation with the police in the investigation process.

The application to subject the petitioner to a polygraph test was questioned by the petitioner’s counsel as its copy was not provided to him. Moreover, it was contended that the petitioner or his counsel was not given any opportunity to defend the application. The order permitting the polygraph test was passed by the Court without the knowledge of the petitioner and apparently, he did not provide his consent for the same. The order was passed behind the back of the petitioner. He was silent on submitting himself to such a test and it does not mean that he consented to it as he never affirmed clearly that he is willing to subject himself to such a test.

How to prove the above statement

Silence does not amount to consent because the person so concerned has remained silent on the part for which he has been asked to provide his consent. He has not made any affirmative statement that would indicate his consent for the same. In the given case, the Court said that an accused person neither accepting nor rejecting the administration of the test will not have consented to it. In Selvi v. State of Karnataka (2010), it was said by the Court that in any case, compulsory administration of such impugned tests prevents the subject’s right to choose between remaining silent and offering substantive information. The power of using one’s own will becomes irrelevant when the subject is compelled to convey personal information irrespective of his own will.

Related case laws

The Karnataka High Court referred to several case laws while deciding the present case. The petitioner’s counsel contended that the second respondent filed the application to subject the petitioner for a polygraph test without obtaining his consent and it amounts to testimonial compulsion as held by the Hon’ble Supreme Court in the case of Selvi v. State of Karnataka (2010). This was taken into consideration that subjecting the accused to a polygraph test is violative of his fundamental right, “right against self-incrimination” under Article 20(3) of the Constitution of India. The decision of the same case was recently approved by the Supreme Court in Tofan Singh v. State of Tamil Nadu (2020).

The principles of Selvi’s case were reiterated in Justice K.S. Puttaswamy v. Union of India (2017) and indicates the violation of the “right to privacy” which is a fundamental right. The polygraph test measures the physical responses and their measurement becomes the means of transmission of personal information and that knowledge can be used against the subject of the test himself in order to prosecute him.

To substantiate the element of the right to privacy in the present case, the Court also mentioned the Maneka Gandhi v. Union of India (1978) case which held that a law is necessary to safeguard the right to privacy, even of an accused.

The right to remain silent has been supported by relying on the judgment of the Supreme Court of the U.S.A in the case of Miranda v. Arizona (1966). In the above-stated case, the Supreme Court of the U.S.A said that the right to remain silent by the accused must be respected by the authorities during the investigation when he wants to. And in the present case, the same was not respected and the application of a polygraph test was filed without the knowledge of the petitioner. The court also cited the apex court’s judgment of Nandini Sathpathy v. P.L. Danis (1978), which declared that the continuous insistence made by the police to the petitioner for providing the password of his mobile phone is contrary to his right to remain silent.

As per the famous judgment of State of Bombay v. Kathi Kalu Oghad (1961), witnessing was defined as imparting some information related to the main subject either in oral or written form by a person who communicates the same to the investigating authorities.

In the same judgment, the 11-judges bench held that providing a thumb impression and other biometric details, or access to mobile phone passwords and email accounts for identification would not amount to testimonial compulsion. It would be used by the investigating officer as a mere evidence source only.

Background of the case

The petitioner, Virendra Khanna was living in Bengaluru and worked as an event organizer. As per the facts of the case, on Sept. 03, 2020. He was in Delhi with his family and CCB police came to his residence in Delhi and arrested him in a drug case of 2018 fixed in Banaswadi police station that was punishable under Sec.21(c) of NDPS Act, 1985 and Sec.14 of Foreigner’s Act.

He was brought to Bengaluru for interrogation and was produced before the City Civil & Sessions Judge and Special Judge for NDPS cases. Allegedly, when the second respondent police brought him to Bengaluru, his mobile phone along with the SIM card was seized on Sept. 04, 2020. The petitioner claimed that he cooperated with the police in the investigation but still the prosecution falsely alleged that he refused to cooperate and to unlock his mobile phone and on Sept.16, 2020, the petitioner was remanded to judicial custody.

On Sept. 23, 2020, the second respondent filed the application to subject the petitioner to a polygraph test before the Special Court without the knowledge of the petitioner or his counsel.

On Oct.03, 2020, the petitioner’s counsel filed an application to recall the order of polygraph test as their consent was not obtained and it was passed without their knowledge. This application was put before the court on Oct.05, 2020, and on Oct.15, 2020, the Special Court rejected the recall application dated Oct.05, 2020.

Thus, the petitioner sought the issuance of a writ of Certiorari under Article 226 and Article 227 of the Constitution of India to quash the order of the Special Court of Bengaluru dated Sept.14, 2020, & Sept. 23, 2020.

Issues involved

Based on the arguments put forth, the main issues involved in the present case are as follows:

Can an accused be directed to furnish the password or biometrics to access his/her mobile phone?

The investigating officer can of course direct or request the accused to provide the password or any identifiable biometric for investigation as required.

Can a suo motu order be issued by the court itself to the accused to furnish his password or biometrics?

The court by itself cannot issue a suo motu order to the accused to furnish the password or biometrics because the court does not form part of the investigation process in our country. Thus, the issuance of suo motu order by the court cannot take place.

In a situation where the accused is not providing the password or biometrics, what legal remedy can the investigation officer exercise?

In such a situation, the investigation officer can approach the court in order to issue a search warrant for the mobile phone or any other device.

Would the accused be found guilty if the required data is gathered from his mobile phone/device?

No, if the data is gathered from the mobile phone or any other device belonging to the accused, it does not mean that he is ipso facto guilty of the crime.

Would furnishing the password and other details amount to testimonial compulsion or self-incrimination?

The judge addressed this issue by negating it as he opined that this does not amount to any testimonial compulsion or self-incrimination. The mere presence of a concerned document or file in the mobile phone of the accused doesn’t prove his guilt and the accused would be given an opportunity to prove himself.

Would furnishing the password or giving access to email accounts violate the right to privacy of the accused?

The court has clearly stated that the use of personal and confidential data by the investigation officer during the course of the investigation, does not amount to a violation of the right to privacy and would come within the exception of Justice K.S. Puttaswamy v. UoI case. However, the responsibility of protecting such information in secrecy would be borne by the investigating officer only.

Court’s observation

The court observed that in light of the cases referred to in the judgment, the validity of such a compulsive polygraph test cannot be justified as to when the consent of the accused has not been obtained.

The judge is of the view that when the accused has not consented then no such test can be administered and even if it is administered, the result need not be considered by the court. Also, the examination of the mobile phone and data contained in it is subject to the search warrant and cannot be done without issuing the same. Proper procedures and processes have to be undertaken to maintain the authenticity of the investigation, the judge said.

Judgment

The judgment encapsulated the guidelines for search and seizure of mobile phones and other electronic equipment belonging to the accused and also discussed the technical outlines as under the IT Act, 2000 relevant to the matter of the present case.

Holding Selvi’s judgment of the Hon’ble Supreme Court as categorical, the judge allowed the petition partly. It set aside the order of the trial court dated Sept.14, 2020, which directed the petitioner to furnish the password of mobile phone and access to email accounts.

Secondly, the order directing the petitioner to administer a compulsive polygraph test without his consent dated Sept.23, 2020, was set aside. It also ceased the survival of the order rejecting the recalling application which was submitted by the petitioner’s counsel. Lastly, it also ordered the parties to bear their respective costs.

Analysis

Justice Govindaraj relied upon Selvi’s judgment of 2010 to substantiate the importance of consent of the accused before making him subject to such a test. It also talked about the right of the accused to remain silent during an investigation. Silence actually does not amount to consent as authenticated by some case laws cited above in the article.

The Karnataka High Court also added that the consent of the accused has to be obtained in written form and that too after letting him know the effect and impact of the test as its consequences. So from a critical point of view, it can be proved that mere silence does not amount to consent as it lacks clarity and element of knowledge of the consequences which the accused may have to face after the test,

Conclusion

The polygraph test, being in practice in criminal investigation, has to be conducted properly by the investigating authorities ensuring no transgression of any of the fundamental rights of the accused. The present judgment safeguarded the rights of the accused by considering the fact that his consent was not obtained.

Taking the right against self-incrimination, right to privacy, etc. Justice Govindaraj set aside the trial court’s order which did not bother to protect the rights of the petitioner. The proper procedure was laid down as to how the search and seizure are to be conducted to examine the electronic equipment of the accused and use the data extracted from it.

Relying on the above-cited case laws, the court held that the entire investigation has to be based on proper procedure and mere silence does not amount to consent. And with these observations, the court set aside the orders of the trial court.

References

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Prime Minister Wi-Fi Access Network Interface (PM-WANI) and legal complications of a public internet service

Sneha Mahawar

October 1, 2021

Prime Minister Wi-Fi Access Network Interface — Image Source: https://rb.gy/g1mmap

This article is written by Anurag Singh from ILS Law College, Pune. This is a comprehensive article that critically analyses Prime Minister Wi-Fi Access Network Interface (PM-WANI) and the legal complications of public internet service.

Table of Contents

Public internet connectivity in India

“Our future success is directly proportional to our ability to understand, adapt and integrate new technology into our work.” Sukant Ratnakar (Author)

In a world full of competition, the optimum use of the internet is quintessential. This has been understood by most of the world including India. Since launching the internet in 1986 for research purposes, India has never looked back. It is the fastest-growing country in the internet space with around 54.3% of the population already using the internet, according to TRAI data, however, this number was far from achievable with only 21% of the total population being the users of the internet in 2014. It will be safe to say that India has seen tremendous growth in internet users as the number doubled in just 6 years. It will not be out of place to state here that the recent pandemic and the growth in the telecom industry can be credited for the growth in the usage of the internet in the country.

Digital India mission

The Indian government launched the Digital India campaign on 1st July 2015 under the guidance of Prime minister Narendra Modi. Digital India is a campaign to make the services of the government available on the internet for the convenience of the people. Moreover, it also aimed to provide better internet connectivity and empower the citizens of India with the newest technology.

The initiative digital India was a step towards connecting the rural area with the rest of the world, as these are the people who are less aware and require help. Therefore, the government aims to set up high-speed internet in rural areas in order to create a digital infrastructure all over the country and provide digital literacy to the rural parts of the country. The major objective is herein laid down below:

To provide high-speed internet to all the gram panchayats
To provide easy access to the common service centre in every locality.
To make the e-governance transaction easier.
To increase the number of internet users in the country.
To help the business optimize under the “Make in India” initiative by moving them on the internet.

The government has also developed apps under this initiative such as Digi lockers, BHIM, E hospital, and E-Pathshala. The country hugely benefited from them during the pandemic. The government not only promotes the use of government apps but the general shift towards the internet for the benefit of the citizen.

About PM-WANI

“Historic PM-WANI (Wi-Fi Access Network Interface) scheme will revolutionize the tech world and significantly improve Wi-Fi availability across the length and breadth of India. It will further Ease of Doing Business and Ease of Living” – Shri Narendra Modi

India has one the youngest workforce in the entire world. However, most of the young population is unemployed due to the lack of opportunities. Moreover, the internet has made the world a really small place. Therefore, with access to the internet, the Indian unemployed section can generate opportunities outside India and contribute towards the economic growth of the country.

Especially during the pandemic many people lost their jobs and were forced to go online and search for work and the world of the internet welcomed them with open arms. As a result, a 22 percent jump in hiring in January 2021 compared to January 2019 was seen on a freelancing site called ‘indeed’. Therefore, the government saw this as an opportunity and introduced PM-WANI (Wi-Fi Access Network Interface) in December 2020. It will be safe to say that this is an extended part of the Digital India campaign.

Through this scheme, the government aims to provide free internet across the country for its citizens. Let the free in the sentence not confuse you. The ‘free internet’ here stands for the free access of the internet and not its usage, you still have to pay for the amount of internet that you use, just the access is made free by setting up hotspots in various parts of the city. This initiative was started so that people can access high-speed internet wherever and whenever they want.

PM-WANI infrastructure

The government has tried to keep everything really simple under the scheme. Therefore, the government has gone ahead with only four organizations under the PM-WANI scheme, they are:

Public Data Offices (PDO): Do not get confused with the word ‘offices’ in the name, PDOs is nothing but a place where the setup of WiFi will be installed and managed. They are responsible for providing the customer with the WiFi Hotspot. However, the government is not planning to set up any new offices under the scheme, they have kept the floor open for all the shops, malls, and restaurants, etc. Moreover, the government is also planning to keep no paperwork or registration fees to create more hotspots. Furthermore, only after 7 days of registration, the WiFi will be set up and that particular shop will be known as a PDO thereon.

Public Data Office Aggregators (PDOA): The primary role of PDOA is facilitating PDOs in providing services to the end consumer. Moreover, they will look after the authorization of PDOs and look after their accounting as well. It will be safe to say that PDOAs are the authority that will overlook the functioning of the PDOs.

App provider: In order to use the services under the scheme one has to be aware of where the PDOs are and an app from which they can access the internet. This is where the role of app developers comes in, they are responsible to develop an app to register users and ‘discover’ and display PM-WANI.

Central Agency: The role of the central agency is to maintain the data regarding PDOs, PDOAs, and App providers in a digitally signed XML format. Moreover, they will have to overlook the functioning of all the Authorities under the scheme.

Public internet – how does it affect the privacy of an individual

The International Association of Privacy Professionals (IAPP) defines information privacy as “the right to have some control over how your personal information is collected and used”. Moreover, the right to privacy refers to a legal framework that provides individuals with a legal right to protect their data’s privacy.

If you are not charged for the service, then you are the product. This is true when we look at the giants on the internet like Google, Facebook, Amazon, etc. They don’t charge their customers for using their website or app. Instead, they store the information and then show ads based on the information they have. However, these are private companies and do have to deal with the welfare of the people in the country.

The question that we need to worry about is what the government will do with the data that the government collects and how it will be managed. Interestingly, the government has ensured that all the data that they store will be safe and secure. However, there is no proper legislation in order to protect such data. There are provisions to regulate the use of data by a corporate body and if they fail to protect it and the data leaked contains sensitive information of the customer then the corporate body has to face legal consequences under Information Technology Act, 2000.

Moreover, the Supreme Court in the case of Puttaswamy v. Union of India (2018) has declared that the right to privacy is a fundamental right protected under Article 21 of the Indian Constitution. A nine-judge bench in the instant case explicitly overruled previous judgments of the Supreme Court in Kharak Singh vs State of UP & Ors (1962) and M.P Sharma vs Union of India (1954), which held that there is no fundamental right to privacy under the Indian Constitution. After this judgment, the right to privacy had a clear stand in the constitution and under no circumstances can be violated.

Furthermore, the security of data was already a big concern in today’s world as everything is just a click away and with the recent pandemic the dependency on the internet has increased even more. It will be safe to say that with the infrastructure that the government is planning, there will be loads of data with the PDO’s and PDOA’s. Therefore, if someone hacks into the system, they can have unlimited access to the registered accounts of every individual present under that portal, along with being violative of the individual’s fundamental rights, which is a threat to national security as well. Therefore, by setting up this public wifi in various parts of the country, the government has a greater responsibility that the data is protected at all costs.

Countries that have a legal structure regarding public Wi-Fi

India is not the first country to come up with the concept of free internet for its citizens, many countries have done it before and declared the internet as a basic human right. We are going to talk about a few countries, they are:

Estonia

In 2000, the parliament launched a massive program to expand internet access to the countryside. The internet, the government argues, is essential for life in the 21st century. Therefore they added Article 5 in their Constitution which states that the set of telecommunications services specified in subsection (1) of this Section comprises internet service which is universally available to all subscribers regardless of their geographical location, at a uniform price.’ The 2007 interview with Estonian former prime minister Mart Laar, on Spiegel Online, describes how all four corners of the country became connected through a robust infrastructure.

Greece

Greece amended its Constitution with the introduction of Article 5A among other provisions, which states that “all persons have the right to participate in the Information Society. Facilitation of access to electronically transmitted information, as well as of the production, exchange, and diffusion thereof, constitutes an obligation of the State, always in observance of the guarantees of Articles 9, 9A, and 19.”

Finland

Finland followed suit last year when it declared broadband access a basic right. The right was proclaimed via an amendment in the Communications Market Act,2003 which stated that universal service also included a functional internet connection. This meant that from the beginning of July 2010, the telecom operators that are defined as universal service providers were able to provide every permanent residence and business office with access to a reasonably priced and high-quality connection with a downstream rate of at least 1 Mbit/s.

There are many countries like France, Spain, Costa Rica, and the European Union that have made the internet a basic human, and other countries might not have gone to such extreme measures but have a robust mechanism to provide internet to their citizens via Public WiFi.

Advantages of a public Wi-Fi plan

Better connectivity of internet in rural as well as urban areas
An additional source of income for the shops and malls as they will be recognized as PDO.
With better connectivity, a boom can be seen in the business as they will be able to connect a lot more people.
Economically, socially and culturally this will transform how Indians communicate, educate, work, and relate.
Cheap internet will be available, as the cost of the internet will be decided by the market forces and the government will not intervene.
Under this scheme, the economy of the country will surely rise, as it can lead to a 10% rise in the internet penetration which in turn can lead to a 1.4% increase in GDP.
The discovery of the internet for rural business will help India become Atma Nirbhar, which is another initiative where the government promotes small business.

Challenges faced by PM-WANI

Privacy is the biggest challenge that the government has to deal with under the scheme because there is no law in place to protect public data.
Moreover, WiFi has lost its relevance due to the cheap data being available to the people by the telecom industry.
The speed of the internet is also a major issue, if the internet is very cheap and people are drawn towards it as the government claims it to be, then they either will have to set up more PDOs or increase the bandwidth.
The government is planning to set up only 1 crore PDOs all over India, this number is very less considering the Indian population. Therefore people might find it difficult to find a PDO in every area.
One of the objectives is to increase the penetration in rural areas. However, if people are not educated on how to use the internet to their advantage it will be of no use to them. Therefore the government should educate the rural areas about the wide scope of the internet.

Conclusion

With the internet penetration increasing with each passing year, providing people with free access to the internet is a must for personal growth and the growth of the country. However, the government should keep in mind the privacy concerns that come with and address the same because if the issues regarding privacy are not addressed then the people will not have faith in this scheme by the government and people will quickly switch to their regular broadband connection, they might not be the cheapest option available but they surely will be the reasonably priced and a more comfortable one as well.

References

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

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

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Case analysis of Delstarr Commercial and Financial vs Sarvattam Vinijaya Ltd. and ors

Oishika Banerji

October 1, 2021

This article has been written by Kushani Weerakoon pursuing the Diploma in Global Corporate Practices from LawSikho. This article has been edited by Amitabh Ranjan (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).

Table of Contents

Introduction

For a student of India who studies innovation and technology, there is a family that holds great importance. This is the Somany family. Somany family started its first business venture in the form of a banking business in 1696 A.D., later adding in to its profile trading and manufacturing activities. The Group is presently divided in different sectors mainly due to the major family business partition that they underwent in 1994. This is partly the evolution story of the group which now controls a considerable number of business entities and avenues in India. Steel, Engineering, Oil and Energy, Education and Interior Design and Ceramic Industry to name a few.

Importance of the case

This case is important not only because it was one of the many disputes that the Somany family had to undergo after its partitioning, but also as it defines the scope of certain important legal principles relating to the family business structures and the application of the principles of partitioning in India.

Background and facts

The judgement of this case is based on 9 petitions which have been filed by 9 companies that are under the control and management of Shri S. K. Somany (SKS). SKS belonged to the Somany family which controlled a considerable number of business entities. The Somany family business was partitioned in 1994 which resulted in a division of the family business and an allocation of the companies. According to the family settlement reached thereto SKS and his brother H.L. Somany (HLS) agreed to jointly manage the two major companies SPL Ltd. (SPL) and Soma Textile Ltd. (STL) and any other companies in their group. The two manufacturing units of SPL were managed by SKS and HLS while HLS was the chairman of SPL and SKS was a Director. But the two manufacturing units of STL were wholly under the control of SKS. The Respondents in this matter are 9 investment companies which collectively hold 17% and 36% of the shares of SPL and STL respectively. The main dispute arose when HLS tried to take control of these 9 investment companies by inducting his own family members and associates as directors without notice to SKS in the AGMs of these companies in February and April, 1998. Another allegation was a further issue of shares of Sarvapori which resulted in a downgrading of the shareholding of SKS and a consequent upgrade of the shareholding of HLS. There is a further allegation of sale of shares in one of the investment companies called Sarvottam without the knowledge of SKS.

Legal issue underlying the case

Whether there should be equality of directors from both SKS and HLS groups in these companies and also as an independent Chairman?

Contentions of the parties

For petitioners

Accordingly, it was submitted for the Petitioners that it has been agreed between SKS and HLS that all the investment companies which hold shares in SPL and STL would be jointly managed by appointing those mutually agreeable to both as directors. Therefore, SKS should also have equality in the Board of Directors of the nine Respondent-Companies. The Petitioners stated that there should be equality of directors from both SKS and HLS group in these companies and also an independent Chairman. They further sought for an Order and a declaration of the Bench partitioning the assets held by SKS and HLS groups in the respondent-companies equally between the two groups. It was also submitted for the Petitioners that taking into account the nature of the Respondent-Companies (i.e. they being family companies structured in the nature of incorporated companies that partnership principles should be applied and assets of these companies should be distributed between SKS and HLS equally.

For respondents

It was submitted for the Respondents that the Company Law Board to which this matter has been referred to had no jurisdiction to determine the issue relating to the claim of 50% ownership as there is a pending proceeding in the High Court where the Petitioners have made a claim on joint management and that to avoid any conflicting decisions the Company Law board should either stay these proceedings or dismiss these petitions. It was further submitted that even though joint management could be established, it does not necessarily mean equal shareholding. As there is no deadlock in the management of the companies there is no foundation for a claim of division of the assets between the two groups. As none of the Petitions contain allegations of mismanagement or financial impropriety as required under the Companies Act. There are no sufficient grounds established in the Petition to justify the winding up of the company and grant relief under Section 402, and as no shareholders can claim the properties of a company except in a winding up the claim of Petitioners for the division of assets does not arise. However, Petitioners went on to state that per Articles 136/142 of the Constitution that even when the allegations of oppression are not established, the court is not powerless to strive for justice between the parties, but that cannot be applied in a proceeding under Section 397/398 before the Company Law Board.

For the 9^th Respondent it was submitted that by its nature, SPL was a joint venture company with foreign collaboration and is currently a publicly listed company. As it is not a family company, the division of the business on partnership principles does not arise. The partnership principle is also not applicable in the case of the respondent companies as SKS and HLS do not have an equal shareholding in them. Citing the case in K.N. Bhargava v. Trackparts of India Ltd., he stated that the Company Law Board directed for division of assets to avoid any deadlock in the management of the company as both groups were involved in the management. But as in many of the Respondent companies of this case SKS is not even a shareholder the only order that could be passed is that the petitioners complaining of oppression should be asked to sell their shares held in the respondent companies. In answer the Petitioners submitted that as all the Respondent companies were promoted by trusted employees to both HLS and SKS and that their Directors were approved by both HLS and SKS and that HLS and SKS held no directorship in them. But, when equality in the management is disturbed by removing common employees and putting the people of one group, it would definitely amount to a gross act of oppression.

How did the court interpret the regulations associated to this case law?

The Court adamantly refused the contention that the Company Law Board has no jurisdiction to hear this matter and stated that the observation of the apex court that the court is not powerless ensure justice between the parties even when acts of oppression are not established, is a proposition made with reference to the powers of a court in dealing with Section 397 petition, and thus is applicable to the Company Law Board as well. The Court further observed that in the exercise of its equitable jurisdiction the Company Law Board has the discretionary power to ensure justice between the parties in the manner it considers fit with a view to protect the interest of the shareholders and the company. The Company Law Board also noted that the Respondents submission in the Needle Industries (India) Ltd.’s case is not correct and in that the Court had only observed that the case is not a proposition to compel the company or the unwilling respondents to purchase the shares of the petitioners when the acts of oppression are not established and it has not observed that no equitable remedy could be considered if the acts of oppression are not established. It further held that the said case has been applied by various High Courts to the effect that even when acts of oppression are not established, in facts of a case, appropriate relief/directions could be given.

Answering the allegations made by the Petitioner – companies on the non-receipt of notices for the AGMs in which certain directors were appointed the Court noted that the Petitioners and SKS has been unable to establish that if they had participated in the AGMs of the respondent-companies, the appointment of directors would not have been approved. Accordingly, the Court further held that they cannot consider that the appointment of directors in these AGMs is an act of oppression against the petitioners/SKS. However, in light of the non-receipt of notices the Court directed that the respondent-companies to convene an Extraordinary General Meeting within a month from the date of receipt of this order with a notice to the petitioners and also to SKS in respect of the companies in which he is a shareholder and get the appointments rectified and also all other resolutions carried through in the AGMs held in 1998. With regards to the allegation of shares issued by Sarvopari the Court held that SKS not rebutting the claims made by the Respondents that SKS utilised consideration received for investment in Soma which is under the control of SKS and that the share certificates had been issued under the signature of SKS and thus SKS cannot allege oppression. With regards to the allegation relating to sale of shares held by Sarvottam in SPL, the Court held that as the pledgee had sold the shares as averred by the company, then such cannot be considered as an act of oppression.

The Court stated that taking into consideration the family settlement and to the fact that there has been a joint management of SPL and STL, it should order division of assets of these 9 respondent companies between SKS and HLS. It further stated that even though both SKS and HLS groups hold shares in the respondent companies, a substantial percentage of the shares in these companies are held by various companies known as common companies, whose shareholding patterns are also complicated. Court found that the interest of SKS in both Soma and SPL are protected and also due to the pending proceedings before the Calcutta High Court declined making an order on the division of the assets of the companies. However, the Petitioners were granted leave to appear before the court in the event the declaration requested by them is granted by the Calcutta High Court.

Conclusion

There were several points of law that were established in this case.

It was concluded that any court that has the power to deal with a Section 397 Petition is not powerless to do substantial justice between the parties under Section 402 of the Companies Act, 2013, even when acts of oppression are not established.

It was also concluded that even though the pendency of a civil suit need not be a bar to consider the prayer of the petitioners for division of assets, such a prayer can only be granted upon the issue of declaration of equality and joint management which is already filed before another High Court which has given an interim order on it, in order for the Court to consider such prayer for division of assets, it has to stay the proceedings before it.

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/joinchat/J_0YrBa4IBSHdpuTfQO_sA

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