×

or

PANORAMA 2015: A Snapshot of all Cover Stories

PANORAMA 2015: A Snapshot of all Cover Stories

Come 2016, Lex Witness takes you through the year 2015 by running a snapshot of all its cover stories in the last year. The exercise is to showcase the variegated issues we grappled with in the year gone by.

The Jan 2015 issue of Lex Witness was a detailed snapshot of all the cover stories that it had run in 2014. Therefore, starting with Feb 2015, we take you through the journey that we travelled while recording, documenting and commenting on the issues that mattered to the word of legal and corporate affairs in the year 2015.

FEBRUARY 2015
India’s Taxing Woes and FDI: Is there a Favourable FDI Policy on the Horizon?

The story highlighted the problems associated with the FDI policies in India. In those days, companies in India were upset with unpredictable tax rulings and the interpretation of law by tax authorities. Most foreign investors, as well as Indian companies, were at sea by the lack of clarity in law regarding application and contexts. The expert had pointed out that the FDI Policy needed more clarity, transparency and elaboration for the sake of potential investors. They had said FDI Policy formulation needed more deliberations on continuous basis with stakeholders, including law and policy experts.

According to a Tax Administration Reform Commission (TARC) report published at that time, “the current practice of blind pursuit of revenue targets has an adverse impact on tax officer equilibrium and leads to harassment of taxpayers. The TARC Report further said, “In the direct tax area, ordinarily, transfer pricing examination between associated enterprises should be used as a tool to minimize tax avoidance. In India, transfer pricing measures are used for revenue generation, which comprises a completely wrong approach. This is revealed through the allocation of revenue targets to transfer pricing officers (TPOs) from transfer pricing adjustments. This is unheard of internationally.

“Accordingly”, the report further said, ” India has clocked by far the highest number of transfer pricing adjustments, demanding adjustments even for very small amount. There is also a high incidence of variation among TPOs in their adjustments for similar transactions or deemed transactions. Taxpayers reported that they often succumb to such adjustments simply to carry on with business activity for, otherwise, they would have to allot or divert huge and unavailable financial and staff resources to such activities. Several other avoidance measures are also interpreted by the administration to be used for revenue generation, which comprises wrong policy”.

The story went on to discuss the issues related to Vodafone, Nokia, Shell oil Tax disputes, IBM Tax disputes and retrospective taxation. It also discussed why GAAR was being dreaded by the investors in India. According to the figures quoted by the media, there were about 3 lakh pending direct tax legal disputes with about $ 73 billion locked up in the tax disputes. The number of transfer pricing cases had risen from 1,0161 in 2004-05 to 2,638 in 2011- 12. The Indian government said in 2013 that 27 companies, including units of HSBC, Standard Chartered and Vodafone, underpaid taxes in the fiscal year 2011-12 after they sold shares to their overseas arms.

The TARC report recognized that the credibility of tax administration depended to a very great extent upon the credibility of its dispute resolution mechanism. So, it recommended the clarity in law and procedures, timely intervention to clarify contentious matters, avoidance of tax demands which are not on merits, predispute consultation, and proper control over quality of show cause notices, demands, or questionnaires issued to the taxpayers and an approach to resolve conflicts before conclusion of audits.

Highlighting some silver linings in the dark clouds, the story concluded, “India will require around US $1 trillion in the 12th Five-Year Plan (2012–17) to fund infrastructure growth covering sectors such as highways, ports and airways. The need of the hour is the flow of investments to India, and this could only happen when the policies are made favourable and unnecessary litigation is avoided. This requires clear policy guidelines from the government.”

MARCH 2015
Director’s Liabilities in the Times to Come: Changing Legal Framework

From the first law broadly dealing with corruption in pre-independent India, the Criminal Law (Amendment) Ordinance, 1944 to the Prevention of Money Laundering Act, 2002 and the host of other laws dealing with grand to petty corruption in businesses and in the public and private life of the individuals, the regulation of corruption in some form or the other has really a long history in India.

In the year 2013, the government amended Companies Act 1956 and brought a new Companies Act 2013. And in February 2014 the government introduced the Prevention of Corruption (Amendment) Bill, 2013 to amend further the Prevention of Corruption Act, 1988 the Delhi Special Police Establishment Act, 1946 and the Criminal Law (Amendment) Ordinance, 1944 in order to widen the description of both demand and supply sides of corruption. The Bill was aimed at criminalization of i) bribe giving by any person/organization to public servant; ii) bribe taking by public servant by direct or indirect manner; and iii) corporate liability in bribe giving.

COMPANY ACT 2013 AND THE DUTIES AND LIABILITIES OF THE DIRECTORS

In the Company Act 2013, many provisions were made to fix the responsibilities and the liabilities of the directors. According to Section 2(34) of the Companies Act, 2013, a director means a director appointed to the board of a company. He has the responsibility for determining and implementing the company’s policy. Unlike employees, directors cannot absolve themselves of their responsibility for the delegated duties.

DUTIES & LIABILITIESOF DIRECTORS

Directors have a fiduciary relation with the company which enjoins upon them a duty to act on behalf of the company with utmost good faith and exercise due care and diligence in managing the affairs of the company. The company as a separate legal entity is subject to statutory controls and the directors are responsible for ensuring that the company complies with such statutory controls.

DUTIES OF A DIRECTOR

In fact, the Companies Act 1956 did not contain any provisions that specifically identified the duties of directors. But the Companies Act 2013 has set out the following duties of directors:

  • To act in accordance with company’s articles;
  • To act in good faith to promote the objects of the company for benefit of the members as a whole, and the best interest of the company, its employees, shareholders, community and for protection of the environment;
  • Exercise duties with reasonable care, skill and diligence, and exercise of independent judgment;
  • The director is not permitted to: i) Be involved in a situation in which he may have direct or indirect interest that conflicts, or may conflict, with the interest of the company; ii) Achieve or attempt to achieve any undue gain or advantage, either to himself or his relatives, partners or associates.
  • If a director of the company contravenes the provisions of this section (Section 166) such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

THE PREVENTION OF CORRUPTION (AMENDMENT) BILL, 2013
Offering of Bribe is an Offence

The Prevention of Corruption Act, 1988 does not have provision to deal with the supply side of corruption directly. However, only Section 12 of that Act deals with supply side of corruption indirectly through the route of abetment which provides minimum punishment of six months extendable to five years with fine. But Section 24 of that Act provides that statement made by the bribe giver in any proceedings against public servant for the crime of corruption (described under Sections 7 to 11, 13 & 15 of the Act) shall not subject that person to prosecution.

In order to plug such deficiencies in the law, Section 8 of that Act has been substituted by introducing a new definition of ‘bribe giving’ which is largely based on Section 1 of the UK Bribery Act, 2010 under Clause 3 of the Bill. As per this provision of the bill, any person who now offers promises or gives financial or other advantage to another person (third party / intermediaries) or public servant to induce or reward the public servant to perform improperly any public function or activity would constitute as an act of corruption. Even the offering/giving or promising financial other advantage by the bribe giver itself constitutes ‘improper’ performance of relevant public function or activity’ The minimum punishment proposed for that offence is three years which is extendable to seven years of imprisonment with fine. The punishment prescribed for bribe giver is equal to the punishment prescribed for the bribe taker in corruption cases. At the same time the immunity provided to the bribe giver for subsequent reporting during proceedings in the Court of law has been proposed for abolition under Clause 12 of the Bill.

Corporate Liability in Bribe Giving to Public Servant

The proposed new Section10 under Clause 3 of the Bill provides for punishment to any director, manager, secretary or any other officer of the commercial organization if it is proved that the offence is committed with consent or connivance of or is attributable to any neglect on the part of that person for punishment of three years extendable to seven years of imprisonment with fine. But if it is proved that the offence is committed without his/her knowledge or he/she has exercised all due diligence to prevent commissioning of such offence the commercial organization may be liable to fine proposed under new Section 9 coupled with proviso to proposed new Section 10 (1) of the Act under Clause 3 of the Bill.

LAW COMMISSION REPORT ON THE AMENDMENTS

The Law Commission in its report submitted to the government in February 2015 told the government to amend certain provisions of the proposed Prevention of Corruption Act (Amendment) Bill in which every person in charge of and responsible to a fraud shall be deemed guilty, unless he/she can prove that the offence was committed without their knowledge or that they had exercised all due diligence. The Law Commission has recommended amendment of the proposed PC Act bill to provide for a section, along the lines of Section 9 of the UK Bribery Act, introducing a statutory obligation on the government to publish guidance as to the procedures that commercial organizations can take to put in place adequate systems.

As per the recommendations of the law panel, directors of a firm shall only be held guilty in a situation where they have digressed from the set procedure. The commission has said that to provide for consistency and coherence between Sections 9 and 10 of the PC Act (Amendment) Bill and to remove the overbroad elements of negligence, Section 10 should be redrafted and modified” to make directors guilty only if such “offence is proved to have been committed with the consent or connivance of any director, manager, secretary or other officers of the commercial organization.+

APRIL 2015
Land Acquisition: Problems & Challenges

When India became independent it adopted the Land Acquisition Act, 1894. The Act being vague remained a controversial piece of legislation. The Act was grossly misused and abused. In the name of public purpose, the state exercised its ‘colourable exercise of power’ and created a great deal of mistrust. In many instances, it robbed its citizens of their land and livelihood. According to experts, two key issues with land acquisition in India stood out across most of the cases. First, very little meaningful negotiation was undertaken, very little attempt was made to involve stakeholders in a consultative discussion in order to understand their concerns about land ownership and to decide upon an equitable and mutually acceptable compensation package.

CONTENTIOUS ISSUES: PUBLIC PURPOSE, CONSENT CLAUSE, COMPENSATION & RESETTLEMENT & REHABILITATION

While compensation being the heart of the controversy, the other issues that have been debated all over –in the media and courts – are public purpose as seen by the government and the infringement of fundamental right to property. Though the intention of the government is welfare of the people at large, the larger issues that the government had to confront while administering or enforcing this law were the question of livelihood, the rights of citizens and the welfare of the people.

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013
CONSENT CLAUSE

The Act, 2013 introduced the consent clause which requires taking the consent of the people before acquiring the land. According to the Act 2013, the provisions of this Act relating to land acquisition, consent, compensation, rehabilitation and resettlement, shall also apply, when the appropriate Government acquires land for public private partnership projects and for private companies for public purpose as defined in sub-section (1).

It also provided that in the case of acquisition for

  • Private companies, the prior consent of at lest eighty per cent of those affected families, as defined in sub-clauses (i) and (v) of clause (c) of section 3; and
  • Public private partnership projects, the prior consent of at least seventy per cent. Of those affected families, as defined in sub-clauses (i) and (v) of clause (c) of section 3, shall be obtained through a process as may be prescribed by the appropriate government:
SOCIAL IMPACT ASSESSMENT

Apart from tightening the provisions on public purpose, the new Act of 2013 introduced social impact assessment mechanism. According to this provision, the government has to conduct a Social Impact Assessment (SIA) study, in consultation with the Gram Sabha in rural areas (and with equivalent bodies in case of urban areas). After this, the SIA report shall be evaluated by an expert group. The expert group shall comprise two nonofficial social scientists, two experts on rehabilitation, and a technical expert on the subject relating to the project. The SIA report will be examined further by a committee to ensure that the proposal for land acquisition meets certain specified conditions.

The Act says that the Social Impact Assessment study referred to in sub-section

  • Shall, amongst other matters, include all the following, namely:—
    • Assessment as to whether the proposed acquisition serves public purpose;
    • Estimation of affected families and the number of families among them likely to be displaced;
    • Extent of lands, public and private, houses, settlements and other common properties likely to be affected by the proposed acquisition;
    • Whether the extent of land proposed for acquisition is the absolute bare-minimum extent needed for the project;
    • Whether land acquisition at an alternate place has been considered and found not feasible;
    • Study of social impacts of the project, and the nature and cost of addressing them and the impact of these costs on the overall costs of the project vis-à-vis the benefits of the project:

    The new Act also said that the government would require the authority conducting the Social Impact Assessment study to prepare a Social Impact Management Plan, listing the ameliorative measures required to be undertaken for addressing the impact for a specific component referred to here in subsection (3).

THE RIGHT TO FAIR COMPENSATION AND TRANSPARENCY IN LAND ACQUISITION, REHABILITATION AND RESETTLEMENT (AMENDMENT) BILL, 2015

The new NDA government first introduced the ordinance in December 2014 in which it proposed many drastic changes. But due to criticism of taking the ordinance route, it brought the bill 2014. The Bill was introduced in the Parliament and was passed by the Lok Sabha.

Exemption of five categories of land use from certain provisions: The Bill created five special categories and exempted them from certain provisions of 2013 Act such as Consent Clause, Social Impact Assessment study and from any restriction such as multi cropped and agricultural land. These five special categories are: (i) defence, (ii) rural infrastructure, (iii) affordable housing, (iv) industrial corridors, and (v) infrastructure projects including Public Private Partnership (PPP) projects where the government owns the land.

According to an article published in the media, Pratap Bhanu Mehta said that the NDA’s bill and the proposed amendments destroy the normative framework of the Act 2013 by which it had tried to address the deficit. The amendments, the experts said, were contentious.

MAY 2015
The Saga of Corporate Governance: Satyam & Beyond

The sentencing of Ramalinga Raju and others by the Special Court in Hyderabad in May 2015 brought the matter of corporate governance on the discussion table once again. Touted as India’s Enron, the Satyam scandal revealed how deep was the rot in the system of governance in the big business houses in India. The poster boy of India’s corporate was in the thick of some of the worst corporate malfeasance. It was the scandal that shook the conscience of the nations.

COMPANIES ACT, 2013 & CORPORATE GOVERNANCE

The government of India changed the Companies Act, 1956 and brought about a new Companies Act, 2013, with many changes and amendments. New Companies Act, 2013 provides a comprehensive provisions pertaining to corporate governance.

Under the Companies Act, 2013, companies must have a resident director, i.e., a person who has stayed in India for a total period of not less than 182 (one hundred and eighty two) days in the previous calendar year. In the new Act, the emphasis has been placed on ensuring greater independence of independent directors. The overall intent is to ensure that an independent director has no pecuniary relationship with, nor is he provided any incentives (other than the sitting fee for board meetings) by it in any manner, which may compromise his / her independence. The new Act empowers independent directors with a view to increase accountability and transparency. Further, it seeks to hold independent directors liable for acts or omissions or commission by a company that occurred with their knowledge and attributable through board processes.

Under the new Act, there must be a woman director in the board, and an auditor cannot perform non-audit services for the company and its holding and subsidiary companies. This provision seeks to ensure that there is no conflict of interest, which is likely to arise if an auditor performs several diverse functions for the same company such as accounting and investment consultancy services. Auditors also have the duty to report fraudulent acts noticed by them during the performance of their duties.

CALUSE 49 OF THE LISTING AGREEMENT

In 2014, Market regulator Sebi reviewed the provisions of the Listing Agreement in this regard with the objectives to align it with the provisions of the Companies Act, 2013 and to adopt best practices on corporate governance as well as making the corporate governance framework more effective. The revised Clause 49 is applicable to all listed companies with effect from October 01, 2014. Under the Caluse, there should be more disclosures about the remuneration of senior executives and also asked companies to put in place a system to evaluate the performance of independent directors and other board members. There should be at least one woman director on the board of every company, something already mandated under the Companies Act. There will be a compulsory whistle-blower mechanism in every company and to expand the role of the audit committee. The clause also prohibits offering stock options to independent directors, and asked companies to have separate meetings of independent directors and put in place a stakeholders’ relationship committee.

A person can be an independent director in seven companies at the most and three in case he or she is already a whole-time member in a listed company. It also capped the total tenure of an independent director to two terms of five years each.

The Clause makes regulations for related party transactions stricter. According to this, the companies should seek prior approval of the audit committee for all material related-party transactions. Besides, they should also seek the nod of shareholders for all material related-party transactions through a vote on a special resolution in which all the related parties should not participate. The Clause 49 has also mandated that all companies should have nomination and remuneration committees, with the chiefs of such committees being independent directors on the board of the companies

JUNE 2015
Foreign Portfolio Investors in India and the Challenges Ahead: The MAT Conundrum of FPIs

Investments by FIIs/FPIs have seen a steady growth in India since the opening of the equity markets in 1992. But of late, foreign portfolio investment flows into India have slowed down. The data suggested that the FIIs/FPIs are moving to more greener pastures such as China, Korea, etc. According to a report in the media, Adrian Mowat, Chief Emerging Market and Asian Equity Strategist at JP Morgan, said that JP Morgan had moved some money out of India into South Korea and Taiwan. Moreover, three Australian fund managers also said they had reduced their Indian exposure in favour of China. Why is there a flight of capital? Is it reflection of bad economics?

MINIMUM ALTERNATE TAX (MAT)

The lack of clarity around MAT (minimum alternate tax) was the major reason for the bearish FII sentiment. The revenue department had sent notices to FIIs demanding 20 per cent MAT on their capital gains till March 31, 2015. A large number of FIIs protested the notices and demands saying they were exempt from long-term capital gains tax. The government claimed that it was making an effort to make investors understand why issue of MAT (on capital gains made by them) rose.

However, the government also made it clear that for the future MAT would not be applicable. A provision to this effect was included in the Finance Bill and approved by the Parliament. But the government refused to relent on Rs 40,000 crore past tax demand saying the remedy lied in judicial appeal. A fund manager, Arild Johansen, FMG EM Funds, while talking about the MAT controversy told the foreign press Reuters, “the debate over retro taxes on capital gains is noise for investors, who may take the opportunity to reduce their Indian equity exposure and look for value elsewhere.”

HISTORY OF MAT

MAT was first introduced into the Income tax Act, 1961 (ITA) in 1987. An entirely new Chapter XIIB was introduced into the ITA vide Finance Act, 1987. The rationale for bringing in these provisions were that as a result of some deduction and concessions, certain companies were making huge profits by managing their affairs in such a way as to avoid payment of income-tax. So a new provision to levy minimum tax on “Book Profits” of certain companies was introduced.

In the Finance Act, 1990, MAT was abolished. However, it was reintroduced in Finance Bill, 1996 with effect from assessment Year 1997-98. In the current form, Section 115JB of the current ITA has the provision of MAT.

However, it is important to note that at the time of introducing the MAT provisions, the then government had domestic entities in mind. So, in the petition to the government the FPIs maintained that because provision of Section 115JB is in plain language applicable only to domestic companies, the imposition of MAT on the petitioner was an illegal extension of a law meant to apply to domestic assesses to book profits that are in financial statements outside India — thereby imparting extra territorial application to domestic tax law. The petition also said that such understanding of law defeated the obvious objective of the law to exempt FIIs from regular tax on such income, thereby to promote investments in Indian capital markets by FIIs.

FINANCE ACT 2015: PROSPECTIVE EXEMPTION

In the Finance Act 2015, the government finally passed the prospective exemption to FPIs from MAT in relation to capital gains from transfer of securities (except capital gains from transfer of unlisted securities held for less than 3 years and listed securities held for less than one year and transferred off the floor of the stock exchange). The government also extended this exemption to all foreign companies and to the following streams of income: (i) all capital gains from transfer of marketable securities, (ii) interest, royalty and fees for technical services accruing to a foreign company.

However, the amendment continued to be prospective in nature and did impact or benefit FPIs that had received tax notices in the past on the basis of applicability of MAT to past gains on investments.

The story concluded that even as the matter was before the Court and the government had set up a committee under the chairmanship of JP Shah to look into the applicability of MAT on FPIs before April 2015, there was no effort from the government or RBI to halt the flight of capital. However, according to Geoff Lewis, Executive Director-Global Market Strategist, JPMorgan AMC, reported in the media, “history seems to show that India is blessed with a greater degree of persistence than the average emerging market (EM) when it comes to portfolio inflows. The recovery in portfolio flows after each disruption has tended to come sooner and more convincingly in India’s case than forother emerging markets”. Looking at an expected turbulent June, these words were great hope.

JULY 2015
The Black Money Menace in India

The rise in the black money in India continues unabated even as we try to overcome the menace with growing public awareness and by mounting pressure on the political parties. The Enforcement Directorate, as part of its efforts to crack down on illicit funds in India and abroad, in the financial year 2014-15 registered a mammoth 400 percent rise in the numbers of assets attached, over 500 percent increase in the number of criminal FIRs lodged, over 600 percent more numbers of arrests made of people suspected to be involved in laundering crimes and more than 200 percent jump in the filing of prosecution complaints or charge sheets as compared to the 2013-14 fiscal.

BLACK MONEY (UNDISCLOSED FOREIGN INCOME AND ASSETS) AND IMPOSITION OF TAX ACT, 2015 (BLACK MONEY ACT)

The Finance Minister said, “The government is taking a number of steps to compress the flow of black money. The most important step…is to weed out the root causes.” For the government, the important step was the enactment of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) having provisions of subjecting undisclosed foreign Income of a defaulter to be taxed at 30% and levying of penalty of up to three times the tax amount. The provisions of the Act will be attracted when an ordinarily resident of India has any income from a source outside India not reported in a tax return, or where no return has been filed to report such income. The provisions are also attracted when there is failure to disclose overseas assets generated out of income taxable in India. However, if they make the disclosure and pay the tax and the penalty, they can get out of the mess. While the new law was going to come into effect from April 1, 2016, the government was to put in place a compliance window for those with undeclared assets abroad to come clean by paying the penalty. The government was preparing a time frame of the compliance window.

The Finance Minister said, “I am going to announce in the next few days a compliance window that within so many days, disclose the assets, pay the tax plus penalty. And if you use that compliance window, you pay the tax, penalty and get out. But if you do not use the compliance window and thereafter if you are caught, because the world is now moving towards an automatic disclosure, you are not only going to pay a much higher level of penalty, but you also would be prosecuted.”

PREVENTION OF MONEY LAUNDERING ACT (PMLA), 2002

The Prevention of Money-laundering Act, 2002 (PMLA) has been aimed at combating money laundering in India with three main objectives – to prevent and control money laundering, to confiscate and seize the property obtained from laundered money, and to deal with any other issue connected with money laundering in India. The Act came into force from 1st July, 2005. The Act provides that whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property, shall be guilty of offences of money-laundering. For the purpose of money-laundering, the PMLA identifies certain offences under the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, the Arms Act, the Wild Life (Protection) Act, the Immoral Traffic (Prevention) Act and the Prevention of Corruption Act, the proceeds of which would be covered under this Act.

AUGUST 2015
Greek Financial Crisis & India’s Concerns

When the global meltdown hit the world in 2008, it brought many changes in the economies world over. Some countries were better positioned to weather the storm. But Greece was badly prepared for this. In early 2009 a new government was elected in Greece and in October 2009 it revealed, much to the horror of the entire world, that its predecessor had been cooking the fiscal books. The new government announced that the Greek government had been understating its deficit figures for years and the budget deficit of 6.8% of GDP for 2009 was actually 12.7%, which was, however, later revised to 15.7%. For the world reeling already under the global meltdown, the Greece’s admission of gross financial misconduct came as a double whammy.

The decade of overspending had weakened Greek economy and public finance. It was immediately shut out from the borrowing in the financial market, because, there was a concern about the soundness of its public finances. And by the year 2010 Greece had sent a distress signal, and since then there has been a constant struggle by the Greece to bring its nation’s economy back on the rails.

WHY CRISIS DOES NOT END

The budgetary austerity drove Greece into a vicious spiral and its economy contracted by 25% between 2010 and 2014, fatally weakening Greece’s ability ever to repay its debts.Much of the previous bail out funds went into paying off Greek bonds held by private investors and the other eurozone governments. They were not used for stoking up growth. It was not used by banks to lend money and revive growth.

Interestingly, an important reason for the Greece’s persistent misery is the fact it is a Eurozone member, which does not allow devaluation of its currency by allowing them to print more money. If Greece had not been a eurozone member, it might have gone for devaluation of its currency and restructuring of its debt.

The key to understanding the sovereign debt crisis in the Eurozone has to do with an essential feature of a monetary union. Members of a monetary union issue debt in a currency over which they have no control. As a result the governments of these countries cannot give a guarantee that the cash will always be available to pay out bondholders at maturity. It is literally possible that these governments find out that the liquidity is lacking to pay out bondholders.

Where as in the case of countries that issue debt in their own currency, they can give a guarantee to the bondholders that the cash will always be available to pay them out. The reason is that if the government were to experience a shortage of liquidity it would call upon the central bank to provide the liquidity. So, Greece is missing crucial options for adjustment because she is an eurozone member.

CONCERNS FOR INDIA

Worried that the Greek crisis may trigger capital outflows, Finance Secretary Rajiv Mehrishi assured in June this year that the government was in touch with the Reserve Bank which will take necessary steps to deal with the issue. “Obviously we are in touch with the RBI but they will do what they have to do,” he told reporters as uncertainty over Greece pulled down the BSE index, Sensex, by over 500 points in June this year.

Experts say that Indian can withstand the Greece crisis because of its huge foreign reserves and strong economic fundamentals. India’s foreign reserves have reached a record high of $355.46 billion as of June 19 this year. Dr Raghuram Rajan said recently while talking to the media, “Because the direct impact from Greece is limited, our sense is after the initial burst of volatility, which undoubtedly there might be if developments turn adverse, investors will start differentiating and when they start doing that they will see that the India story continues to be a good one. We not only have good macro-policies in place but growth prospects are quite healthy as compared to the rest of the world.”

SEPTEMBER 2015
Right to Privacy Debate: Constitutional guarantee or Contradiction

Arguing before a three-judge bench of the Supreme Court of India in the UID case, the Attorney General of India on July 22, 2015 challenged the constitutional guarantee of the right to privacy. Speaking in the defenceof the legality of the Aadhar scheme, the Attorney General said that the right to privacy was neither guaranteed under the Constitution of India nor made available to Indian citizens through any settled judicial pronouncement. He referred to two Constitution Bench judgments –M P Sharma and Others vs Satish Chandra (1954), an eight judge decision, and Kharak Singh vs State of Uttar Pradesh (1962), a six judge judgment –in support of his argument.

However, the three-judge bench of Justices J Chelameswar, S A Bobde and C Nagappan, hearing the case, said, “If the observations made in M P Sharma (1954) and Kharak Singh (1962) cases are to be read literally and accepted as the law of this country, the fundamental rights guaranteed under the constitution of India and, more particularly, right to liberty under Article 21 would be denuded of vigour and vitality.” The bench then asked a five-judge constitution bench to determine whether citizen’s right to privacy qualified to be part of the fundamental right to life and also to define and determine its character and contours.

Different judgments by the Hon’ble Supreme Court of India have touched upon the right to privacy and many experts have pointed out the fallacy of the argument by the Attorney General in this case. Some also believe that this was a tactic adopted by the government so that the UAID matter could be deferred to an indefinite date (see interview for more). Others have pointed out that the evolving constitutional jurisprudence in India on privacy rights after M P Sharma and Others vs Satish Chandra judgment unambiguously affirms the right to privacy as an integral component of the right to life and personal liberty. According to experts neither of the two judgments referred to by the AG pertains to citizens’ right to privacy per se. All that the judgments said was that theRight to Privacy is not mentioned in the Constitution. Subsequent judgments, though all by smaller Benches, specifically debatedthe right to privacy and held it to be a fundamental right, thereby broadening the scope of Article 21, which deals with the citizen’s Right to Life and Liberty.

OCTOBER 2015
Merger of FMC with SEBI: A Milestone in Regulatory Merger

When Finance Minister Arun Jaitley struck the gong on the historic event of merger of the Forward Market Commission (FMC) with Securities and the Exchange Board of India (SEBI) at Mumbai on the 29th of September this year, it marked a beginning of another chapter in India’s financial reforms. The event was marked as a landmark event in India’s financial markets, especially in terms of regulation. The commodity futures market in India was now under SEBI for the purpose of an integrated regulation of both the securities and commodities markets in India.

When two years ago the National Spot Exchange Limited (NSEL) scam came to surface, it triggered the need for a better and stronger regulator to safeguard investor interest and restore confidence. The then UPA government started to think about the merger seriously and finally, after two years of the NSEL scam, the Forwards Market Commission, the commodities market regulator, has been merged with the Securities and Exchange Board of India. It is the first and biggest regulatory merger ever to happen in the country.

However, this merger has not come about suddenly and easily. Much sweat and blood has been spent on it. In fact, the idea for a unified regulator was discussed and debated much before the NSEL scam. Many commissions were set up to study the idea and they all recommended convergence of these two. Most recently, the Financial Sector Legislative Reforms Commission (FSLRC) led by Justice Srikrishna also stressed on the need to move away from sector-wise regulation. FSLRC proposed a system in which RBI would regulate the banking and payments system, and a Unified Financial Agency (UFA) would subsume all other financial sector regulators such as SEBI, IRDA, PFRDA and FMC, to regulate the rest of the financial markets. But these recommendations never saw the light of the day and the matter was caught up in battles within the government committees and corporate rivalries.

WHAT MERGER ENTAILS

Until now the commodities market was regulated by the Forward Contracts Regulation Act (FCRA), which stands repealed after the merger, and the regulation of the commodity derivatives market shifts to Sebi under the Securities Contracts Regulation Act (SCRA), 1956. The FMC, set up under the provisions of the FCRA , was more an advisory and monitoring body than one with regulatory powers. The real regulatory powers remained in the hands of the Central Government, while the FMC’s role was supposed to be that of being one of offering recommendation and advice to the Ministry.

SCRA is a stronger law, and gives more powers to Sebi than FCRA offered to FMC. Market players feel that commodity markets will now be better regulated, with more stringent processes — and will thus evoke greater confidence. SEBI in order to effect the merger, has amended Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC Regulations) and SEBI (Stock Broker and Sub-Broker) Regulations, 1992 and SEBI (Regulatory Fee on Stock Exchanges). These regulations enable functioning of the commodities derivatives exchanges and its brokers under SEBI norms and integration of commodities derivatives and securities trading in an orderly manner.

CHALLENGES AHEAD?

The merger is aimed at streamlining the regulations and curb wild speculations in the commodities market, while facilitating further growth there. “The merger will increase economies of scope and economies of scale for the government, exchanges, financial firms and stakeholders,” finance minister Arun Jaitley has been quoted as saying. He also promised a more steps measures to further develop the market. He said there is no reason why the commodities market should not have options or index futures. He also said in future banks and foreign portfolio investors would also be allowed to participate in the markets. As the finance minister emphasized that the market participants and the regulators have to brace themselves to face the challenges thrown by global developments and integration of markets, the Sebi member Rajeev Kumar Agarwal, who would oversee the commodities market regulation in the new entity under the overall guidance of the Sebi chairman UK Sinha, said that a well-developed regulated market will help discover the best price and he would “spare no efforts” to build robust commodity markets in India.

NOVEMBER 2015
National Green Tribunal: Securing Justice between Development & Environment Protection in India

When the Indian Express carried a news report ‘death by breadth’ in April this year, the National Green Tribunal (NGT), the crusader for environmental justice in India, banned the entry of ten years old diesel trucks into Delhi. The Principal Bench headed by Justice Swatanter Kumar in Vardhaman Kaushik Vs. Union of India & Ors and Sanjay Kulshrestha Vs. Union of India & Ors directed that all diesel vehicles (heavy or light) which were more than 10years old would not be permitted on the roads of NCR, Delhi. It also ordered that the petrol vehicles which were more than 15 years old and diesel vehicles that were more than 10 years old would not be registered in the NCR, Delhi.

However, the NGT’s order imposing the ban was challenged by a PIL in the Supreme Court of India. It argued that the NGT could not exercise powers of a constitutional court and issue directives to the centre for implementing its order in National Capital Region (NCR) or across the country. The Supreme Court however, lent its support to the NGT saying that the tribunal was empowered to issue directives to the Centre for banning vehicles more than 15 years old from plying on Delhi roads. “We see nothing wrong with the tribunal issuing directions to the Union of India,” said the Apex Court bench while declining to admit the PIL. The Chief Justice HL Dattu, heading that bench, further said that a judgment by the tribunal in July 2014 which declared the NGT to be a “court”, holding that it has “all the trappings” of a judicial body holds good. Later on, the NGT, after intervention of the government, following the noise made bythe truck owners, passed another judgment in which it ordered that the trucks and heavy vehicles entering Delhi would ply on Delhi roads but they would have to pay environmental compensation which would be in addition to the toll tax otherwise payable by the trucks in accordance with law in force. The amounts collected on account of the environmental compensation would be paid to the Delhi Pollution Control Committee (DPCC), which shall utilize it for taking steps for improving the air quality in Delhi and a separate account in that behalf would be maintained. The amount will be collected by the NCT of Delhi toll posts and diverted to the DPCC.

TRANSGRESSING JURISDICTION?

The NGT turned five in 2015, and since its inception it has relentlessly passed order to save environment from the catastrophes. But some questions relating to its power and jurisdiction remained unclear. The NGT on many occasions was accused of transgressing its jurisdiction and taking actions, even by the Union Ministry of Environment, Forests & Climate Change (MOEF). However, noted environmentalist, MC Mehta, while talking to this magazine two years ago, had said that the pre-emption of an environment disaster was not just NGT’s statutory duty but also their constitutional obligation. “It is part of inherent jurisdiction of every court/tribunal to do complete justice. If there is an incident violative of environmental statutes and there is no complainant then do you expect NGT not to do anything in that regard because it has no suo motu powers? I think that will not be consistent with the mandate of the Tribunal,” Mehta had said.

According to Moatoshi Ao, Assistant Professor, Campus Law Centre, University of Delhi, “ The tribunal has three jurisdictions – Original, Special and Appellate. The jurisdiction of the Tribunal is very wide and extensive and can be exercised ex debito justitiae. The Tribunal is also vested with jurisdiction to examine both question of law and fact, however power of judicial review is limited. The Tribunal in exercise of this power of judicial review only performs the functions which are supplemental to the higher judiciary but do not supplant them. The Tribunal is vested with same powers as are in a civil court under CPC, 1908 but it is not bound by the procedure laid down under the CPC, however it is guided by principles of natural justice.”

SPEARHEADING ENVIRONMENTAL JUSTICE

Since its establishment on the 18th October 2010, NGT has gained the faith of the society in delivering environmental justice. According to data available, as of 31st March 2014, the Principal Bench at Delhi has disposed 1749 cases out of 2625. There is also steep increase in filing cases and the NGT has accordingly increased its pace in disposal of cases to achieve its motto of ‘expeditious disposal’ of cases. In a significant judgment, the NGT in 2012 suspended South Korea’s Pohang Iron and Steel Company’s (POSCO) environmental clearance and ordered a fresh review. The tribunal, in a PIL filed by environmentalist Prafulla Samantray, said that the clearance granted for the proposed project at this point required to be set aside as ‘arbitrary and illegal’. The bench, chaired by Justice C.V. Ramulu held, “A close scrutiny of the entire scheme reveals that a project of this magnitude particularly in partnership witha foreign country has been dealt with casually, without there being any comprehensive scientific data regarding the possible environmental impacts. No meticulous scientific study was made on each and every aspect of the matter leavinglingering and threatening environmental and ecological doubts un-answered.” Since then the NGT has constantly given ordersto preserve the natural heritage and the livelihoods of the lacs of people in that coastal area in Odisha where POSCO’s mega steel plant is to be set up.

DECEMBER 2015
Changes in FDI Policies in India: A Game Changer or a Damp Squib?

The recent changes made in the foreign direct investment (FDI) policy by the NDA government were aimed at attracting more foreign investments into India. The timing of the announcements might be attributed to some political expediency, but the policy change was expected to dispel the negativity pervading in the economy and boost market confidence. Notwithstanding the reason, bold policy initiatives were expected to change the vitiating investment climate in the country and the pall of gloom and despondency drifting across the whole of the country.

KEY REFORMS IN THE PRESS NOTE 12 2015

Manufacturing Sector Reforms: Allowed to sell products without government approval In the Press Note 12 issued by the government, the definition of the manufacture has been provided for the first time. As per the announcement, Indian manufacturers with foreign investment would be allowed to sell their products through wholesale and retail formats, including through e-commerce platform without Government approval. The Press Note also adds that ‘Indian manufacturer’ means investee companies which manufacture at least 70% of their products in-house by value and source not more than 30% from other Indian manufacturers.

Relaxation in Single Brand Retail Trading

Previously, in the single brand retail there was a mandatory sourcing of 30 % from the domestic market for proposals beyond 51%. This sourcing requirement will now have to be met annually from the date of opening of the first store. The Government may relax sourcing norms for entities undertaking SBRT of products having ‘state-of-art’ and ‘cutting edge technology’ and where local sourcing is not possible. Single brand entity operating through brick and mortar stores, is now permitted to undertake retail trading through ecommerce.

RELAXATION IN DEFENCE SECTOR

Earlier, foreign investment in the defence sector was increased to 49% under the government route. In the new policy announcement, this investment will now be under automatic route requiring no government approval. Investment above 49% will be under the Government route on a case to case basis, wherever it is likely to result in access to modern and ‘state of the art’ technology in the country. Portfolio investment and investment by FVCIs will be allowed up to permitted automatic route level of 49%. In case of infusion of fresh foreign investment within the permitted automatic route level resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, Government approval will be required. Further, the conditions that required the Indian investee company to be owned and controlled by resident Indians and to have a resident Indian chief security officer, have now been removed.

Relaxation in Construction Development Sector

This is one of the most significant policy reforms announced by the government. In order to boost investment, the condition of the minimum floor area of 20,000 sq. Mtrs to be developed under each project and USD 5 million as minimum capitalization within a period of 6 months of the commencement of the project have been done away with. Now each phase of a construction development project will be considered as a separate project for the purposes of FDI policy. The foreign investors will now be permitted to exit and repatriate foreign investment before the completion of a project under the automatic route provided that a lock-inperiod of 3 years (calculated with reference to each tranche of foreign investment) has been completed. Further, foreign investors are permitted to exit on completion of the project or after development of trunk infrastructure, i.e., roads, water supply, street lighting, drainage and sewerage. Transfer of stake from one non-resident to another non-resident, without repatriation of investment, will not be subject to any lock-in period and no Government approval will be required.

Earning of rent/ income on lease of property not Real Estate

In another big move, the earning of rent or income on lease of property, not amounting to transfer, will not be regarded as real estate business. 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres.

While moves such as raising the threshold limit for FDI approvals under government route from INR 30 billion to INR 50 billion and allowing 100 % FDI limit in LLP are good for attracting more foreign investments in India. Reforms in the governance are important for making it easier in doing business, which is vital for attracting foreign funds. Moreover, what is also needed is no derailing of reforms—any uncertainty is going to mar the process of investments.

About Lex Witness

Lex Witness Bureau

The LW Bureau is a seasoned mix of legal correspondents, authors and analysts who bring together a very well researched set of articles for your mighty readership. These articles are not necessarily the views of the Bureau itself but prove to be thought provoking and lead to discussions amongst all of us. Have an interesting read through.