Research Journal On Consentia On Law

JOURNAL
ON
CONSENTIA ON LAW
Issue 1 VOLUME 1
RESEARCHERS CLUB
thinking beyond!
JOURNAL ON CONSENTIA ON LAW

Volume: I | issue: 1
Inaugural issue: October 2013
Editorial board
PROF. (DR.) G.P. TRIPATHI
DIRECTOR, MATS LAW SCHOOL, RAIPUR, CHATTISGARH, INDIA
MR. ASHISH MITTAL

PARTNER, MAHESHWARI & CO. (SOLICITORS & ADVOCATES), NEW DELHI
ADV. ANIL DSOUZA

SENIOR ADVOCATE MUMBAI HIGH COURT, MUMBAI, MAHARSHTRA
ADV. PADMAKAR TRIPATHI

LEGAL MANAGER, HDFC BANK, LUCKNOW, U.P
MS. NAYANA DAS

ASSOCIATE, OASIS LAW ADVISORY, MUMBAI, MAHARASHTRA
MR. BHUBNESHWAR RAI

ASSISTANT PROF. MATS LAW SCHOOL, RAIPUR, CHATTISGARH
MR. AKASH KUMAR

ASSISTANT PROF. MATS LAW SCHOOL, RAIPUR, CHATTISGARH
2013. All Rights Reserved Researchers Club
MESSAGE FROM THE EDITORIAL BOARD
Researchers club is proud to announce the publication of the first volume of JOURNAL ON CONSENTIA ON LAW. This Journal provides a glimpse into a few of many high quality research activities conducted by the talented researchers in the field of law. The Journal is a compilation of outstanding research papers from numerous disciplines of law submitted by students, faculties and legal professions who have been involved in research, scholarly and creative activities. We would like to thank all the contributing authors for providing such a rich variety of outstanding research articles on a broad range of exciting topics. If you have any questions or comments about the Journal, please contact the editorial board by sending an email to inforesearchersclub@gmail.com The journal is also available online, please visit the following website: http://www.researchersclub.org
The Editorial Board

JOURNAL ON CONCENTIA ON LAW
JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB
VOLUME 1 | ISSUE 1 |
OCTOBER 2013
TABLE OF CONTENTS
1. AUTHOR PROFILES
2. ARTICLES
MECHANICS OF AMERICAN DEPOSITORY RECEIPTS (ADR) Asst. Prof. Bhuvaneshwar Rai THE ART OF GIVING-CORPORATE SOCIAL RESPONSIBILITY IN INDIA Asst. Prof. Yogesh Bais CARTELS AND COMPETITION: ANTI ETHICAL RELATIONSHIP Tanvi Gadkari and Devarshi Desai AMENDMENT OF THE ARTICLES OF ASSOCIATION- SCOPE AND AMBIT- A CRITICAL STUDY WITH REFERENCE TO THE LEGAL LITERATURE AND CASE LAW Akshay Srivastava COMPARATIVE STUDY OF CORPORATE CRIMINAL LIABILITY WITH REGARD TO INDIAN AND USA LEGAL SYSTEMS Ayush Verma A CRITICAL STUDY OF FUNDAMENTAL RIGHTS AVAILABLE TO CORPORATE BODIES WITH REFERENCE TO LEADING CASES Debmita Mondal and Apoorvi Shrivastava DISINVESTMENT FOR BETTER GOVERNANCE: HOW REGULATORY BODIES REINFORCE PSUS IN THE SLUMP Jayshree Mishra and Shagun Singh
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THE VODAFONE CONTROVERSY: THE IMPLICATION ON COMPANIES ACT Karan Dhall CORPORATE GOVERNANCE APPROACH FAVOURABLE TO INDIAN CORPORATE REALITY (CHALKING THE PATH TO A GLOBALLY INTEGRATED APPROACH) Shagun Singh DIRECTORS LIABILITY IN INDIA: AN ANALYTICAL NOTE MAKING A BRIEF COMPARISON WITH THE ENGLISH LAW Sumit Lalchandani and Vikram Shah INSIDER TRADING- ITS ILLEGALITY AND LEGALITY Sayoni Chaudhuri THE CHANGING ROLE OF THE COMPANY SECRETARY - A FOCUS ON GOVERNANCE Skandh Natham INTRODUCTION TO INDIRECT TAX Anandita Sahu CORPORATE GOVERNANCE A MUCH FACTOR IN THE PRESENT-WORLD ECONOMIC SCENARIO Shayamvar Deb and Madhurjya Jyoti Gogoi INTERFACE BETWEEN ANTIDUMPING AND COMPETITION LAW: A CRITICAL ANALYSIS Mirza Juned Beg and Sachin Sharma
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DISCLAIMER
The Articles and Research Papers published in Journal on Consentia on Law and views expressed there in are personal views of the Authors. The Board of Editors in Researchers Club shall not be liable for anything expressed there in. Authors alone are legally responsible for everything including views or contents of the matter included in Journal on Consentia on Law. Articles/Researchers are purely an academic venture.
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AUTHOR PROFILE
BHUVANESHWAR RAI ASST. PROF. MATS LAW SCHOOL MATS UNIVERSITY RAIPUR, CHHATISGARH YOGESH BAIS ASST. PROF. MATS LAW SCHOOL MATS UNIVERSITY RAIPUR, CHHATISGARH TANVI GADKARI 7TH SEMESTER, INSTITUTE OF LAW NIRMA UNIVERSITY AHEMDABAD DEVARSHI DESAI 7TH SEMESTER, INSTITUTE OF LAW NIRMA UNIVERSITY AHEMDABAD AKSHAY SHRIVASTAV 3RD YEAR (B.A. LL.B) SYMBIOSIS LAW SCHOOL PUNE AYUSH VERMA 3RD YEAR DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY LUCKNOW DEBMITA MONDAL LL.M NATIONAL ACADEMY OF LEGAL STUDIES AND RESEARCH (NALSAR) HYDERABAD, ANDHRA PRADESH APOORVI SHRIVASTAVA LL.M NATIONAL ACADEMY OF LEGAL STUDIES AND RESEARCH (NALSAR) HYDERABAD, ANDHRA PRADESH
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RESEARCHERS CLUB

JAYSHREE MISHRA B.A. (HONS) LL.B (HONS) 4TH YEAR NATIONAL UNIVERSITY OF STUDY AND RESEARCH IN LAW (NUSRL) RANCHI, JHARKHAND SHAGUN SINGH B.A. (HONS) LL.B (HONS) 4TH YEAR NATIONAL UNIVERSITY OF STUDY AND RESEARCH IN LAW (NUSRL) RANCHI, JHARKHAND KARAN DHALL 3RD YEAR B.A. LL.B (HONS) RAJIV GANDHI NATIONAL UNIVERSITY OF LAW PUNJAB SUMIT LALCHANDANI 4TH YEAR SYMBIOSIS LAW SCHOOL NOIDA, UTTAR PRADESH VIKRAM SHAH 4TH YEAR SYMBIOSIS LAW SCHOOL NOIDA, UTTAR PRADESH SAYONI CHAUDHARI 5TH YEAR, MATS LAW SCHOOL MATS UNIVERSITY RAIPUR, CHHATISGARH ANANDITA SAHU 5TH YEAR, MATS LAW SCHOOL MATS UNIVERSITY RAIPUR, CHHATISGARH SHAYAMVAR DEB 3RD YEAR, MATS LAW SCHOOL MATS UNIVERSITY RAIPUR, CHHATISGARH MADHURJYA JYOTI GOGOI 3RD YEAR, MATS LAW SCHOOL MATS UNIVERSITY RAIPUR, CHHATISGARH
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RESEARCHERS CLUB
SKANDH NATHAM 3RD YEAR, MATS LAW SCHOOL MATS UNIVERSITY RAIPUR, CHHATISGARH
MIRZA JUNED BEG ACADEMIC ASSISTANT INDIAN INSTITUTE OF MANAGEMENT, LUCKNOW, U.P SACHIN SHARMA ASSISTANT PROFESSOR MATS LAW SCHOOL RAIPUR, CHHATISGARH
OCTOBER 2013
RESEARCHERS CLUB
Mechanics of American depository Receipts (ADR)

ASST. PROF. BHUNANESHWAR RAI
With the opening of Indian financial market in nineties, Indian corporates joined the worldwide rush to raise funds from issue of depository receipts. The question of how the corporate finance themselves and what options they have is not new, however the issue of shares through depository receipt mechanism has provided the corporates with a great option of raising funds from international markets with relatively low risks as compared to the other options available for the corporates in the international markets. In the depository receipt mechanism the issuer company actually issues its equity shares in another market by complying with certain terms and conditions as prescribed by their relevant market regulators. In the depository receipt mechanism, the overseas depository banks have their vital role to play because the issuer company is a non-resident company and they need to bring local intermediaries in order to issue their shares through depository receipt mechanism. The history of American depository receipt (ADR) takes us to 1927, when J.P. Morgan introduced the concept of ADR for the first time in order to facilitate the trading of equity shares of a U.K. based company into the U.S. market. What is an ADR? According to Regulation 2(d) of Issue of foreign currency convertible bonds and ordinary shares (through depository receipt mechanism) Scheme 1993 any instrument in the form of a depository receipt or certificate (by whatever name it is called) created by the Overseas Depositary Bank outside India and issued to non-resident investors against the issue of ordinary shares.
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Hence, in the light of above mentioned definition we can deduce that an American depository receipt (ADR) is a negotiable security representing ownership in some underlying shares of a non-US company, which can be traded on US stock exchanges. ADRs are denominated in US dollars and function on the lines of the shares of a US company in terms of trading and dividend payment. EURO Issue (GDRs) As a part of globalizing the economy of India after 1991, Indian corporate world was permitted to float their securities in, and raise funds from the Euro markets. The shares issued in the form of depository receipt for trading in the international markets apart from United States of America are called as Global depository receipt (GDR). ADR Mechanism After getting introduced with the concept of ADR we must look upon the working of the ADR, in other words the ADR mechanism. We can understand the working of ADRs by taking example of a scenario. Suppose there is one Mr. A who buys shares of a Company X ltd. From the Indian stock market for example BSE. Now, A deposits those shares purchased by him to the custodian bank (Let us say Royal Bank of Scotland) who is registered as custodian of securities under the SEBI Custodian of securities Regulation, 1996. Thirdly, A makes an agreement with overseas depository bank (ODB) for example J.P. Morgan to issue ADRs on behalf of A thereafter, The ODB requests confirmation from the Domestic custodian bank in order to ensure that securities are deposited as specified by A. After getting confirmation by the Domestic custodian Bank the overseas depository bank issues ADR to A. The ADR so issued are freely traded on stock markets similar to stocks of U.S. companies.
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The non-resident entity issuing the securities under ADR mechanism does not necessarily participate in the arrangement. The depository (overseas depository bank) may have no direct connection with the company sponsoring ADR other than appearing on its records as a shareholder. There is no direct contractual relationship between the ADR holder and the company sponsoring ADR, but rather between the holder and the overseas depository bank. Although formal contracts or depositary agreements originally are prepared to observe the relationship between the depository bank and the ADR holder, modern ADR agreements include the terms of the arrangement on the ADR certificate itself. Pricing and returns of ADR Like all ADRs we can see this in Indian ADR prices that these are almost never equal to the price of Indian shares they represent, after adjusting for the exchange rate differences. Derivative instruments like ADRs trade at a premium or discount in relation to their underlying securities within the band of transaction costs so that there is no arbitrage opportunity. In the case of ADRs, however, the transaction cost barrier necessary to prohibit arbitrage is difficult to determine a priori, particularly in light of restrictions to cross-border investment, as is the case in India. ADRs issued by Financial sector companies, like those of HDFC and ICICI Bank, have enjoyed high premiums. As an industry financial companies probably have been able to sustain the highest and most stable premiums among the Indian companies who have issued ADR. Returns of ADR appear to have unanticipated factors that brings fluctuations in prices. The return on the underlying stock, the US-India exchange rate, the BSE national index movements as well as the movement on two important US indices the S&P 500 and NASDAQ together account for less than half of the total market volatility of ADR returns in most cases.
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The ADRs generally enjoy considerable premium over their underlying stocks, indicating effective market segmentation between the US and Indian markets. Infosys enjoys particularly high premiums but much of its premium is determined by the swings in the NASDAQ1 index. US market indices also affect the premium on other ADRs from India, though it affects to a smaller extent. Classification of ADR ADR can be divided into two broad categories: Unsponsored ADR: The unsponsored ADR is not issued by the company directly. The company has got no agreements with the custodian bank and depository bank. These ADR are sponsored by a third party Issuer. These are generally traded at over the counter (OTC) markets instead of regular stock exchanges.
Sponsored ADR These ADRs are sponsored by the company itself. Here the foreign company itself proposes to issue ADRs and it does so by making an agreement with an overseas depository bank that will issue ADRs in the foreign market on the behalf of the issuer company. There are three types of clearances under the sponsored ADRs a) Sponsored ADRs of Level 1: These are a type of sponsored ADRs. These are traded only on the OTC market. The issuer company is supposed to comply with minimal US Securities and Exchange Commission (SEC) compliance requirements and is not required to publish reports in accordance to US GAAP standards.
NASDAQ stands for National Association of Securities Dealers Automated Quotations.
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b) Sponsored ADRs of Level 2: These ADRs are of second level; these ADRs are listed on a recognized US stock exchange and can be traded thereafter similar to ordinary U.S. Companys shares. The stock exchanges where these ADRs can be traded are New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX). In such ADRs, the company is supposed to comply with higher level of SEC compliance requirements and is also required to publish annual reports in accordance with US GAAP or IFRS (International Financial reporting Standards). c) Sponsored ADRs of Level 3: These ADRs are of highest level in sponsored ADRs categories. As such, it requires compliance to more stringent rules and regulations as compared to level 2 similar to the US companies. In this type of ADRs, the company rather than letting its shares from the home market to be deposited in for the ADR program, actually issues fresh shares in the form ADRs to raise capital from the US market. Issue of shares by Indian Companies under ADR Mechanism For Indian Companies the better way to raise funds from international markets with minimum risks is through ADR or GDR. In India issue of shares under ADR mechanism is governed by the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme 1993 issued under Foreign Exchange Management Act. Under the Scheme they have set guidelines for eligibility conditions, limits of foreign investment, issue structure, listing conditions, transfer and redemption and tax related guidelines. According to regulation 3 of the Scheme An issuing company desirous of raising foreign funds by issuing foreign currency convertible bonds or ordinary shares for equity issues through Global Depositary Receipt is required to obtain prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India. The Scheme also provides for Indian
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companies engaged in information technology software and information technology services are eligible to offer to their non-resident/resident permanent employees (including Indian and overseas working directors) global depository receipts against the issue of ordinary shares under the scheme subject to the operational guidelines/conditions issued from time to time by the Government. In this respect, the Scheme defines Software Company as a company engaged in manufacture or production of software where not less than 80 per cent of the company's turnover is from software activities. Under the Scheme, ordinary shares issued under depository receipt mechanism will be treated as foreign direct investment in the company sponsoring or issuing ADR. Also, the aggregate of the foreign investment made either directly or indirectly (through Depositary Receipts Mechanism) shall not exceed 51% of the issued and subscribed capital of the issuing company. Provided that the investments made through Offshore Funds or by Foreign Institutional Investors will not form part of the upper limit specified as above.
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The Art of Giving-Corporate Social Responsibility in India

ASST. PROF. YOGESH BAIS
Introduction:..Society is not just the environment of the enterprise. Even the most private of business enterprise is an organ of society and serves a social function... The very nature of the modern business enterprise imposes responsibilities on the manager. Simply put, Corporate Social Responsibility (CSR) maybe defined as the ethical behavior of a company towards the society. The incentives in CSR are: (A) Compliance in letter of the law; (B) Observing norms of common morality, like ethics and fair play, in its internal management and dealings; and (C) A social trusteeship mindset in deploying its resources. According to Sunil Mittal, Chairman of Indias telecom giant Bharti Airtel CSR should not be made compulsory and that voluntary compliances are always better than forced. Over the years CSR has become an effective marketing strategy, a way for a company to enhance its positive image. CSR creates short term employment opportunities for the company by undertaking various projects. It improves operational efficiency of the company and is accompanied by increase in productivity. It gives a feeling of satisfaction and meaning to the lives of all those associated. Evolution CSR originated in the 1930s and 1940s. It became concretized in 1953 with the publication of Social Responsibilities of the Businessman, by Howard Bowen, the Father of CSR. Bowen asked: what responsibilities to society can business people be reasonably expected to assume? The meaning expanded during the 1960s with Keith Davis definition of CSR as businessmens decisions and actions taken for reasons at least partially beyond the firms direct economic or technical interest.
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The concept of voluntarism was seen first in Clarence C. Waltons 1967 book, Corporate Social Responsibilities, when he linked CSR with the idea that companies need to voluntarily accept their obligations to society. The 1970s and 1980s saw attention being focused on the responsibilities of a corporation. Peter Drucker, the Father of Modern Management said that the organizations first social responsibility was to make a profit to cover operational costs in future. Gradually, corporations started to realize the importance of their public image. They began to understand that they needed a strategy to convince the public that they could play a meaningful role within the society. CHARITY BEGINS AT WORK: Exemplary CSR Initiatives in India You can spend a lot of time making money. The tough time comes when you have to give it away properly.- Lee Iacocca. Sachin Kaushik reported that he was surprised that more than 90% organizations surveyed by TNS India and The Times Foundation, were involved in CSR initiatives. A majority of CSR ventures are being done as internal projects whereas a small proportion are in the form of support extended as direct financial assistance to voluntary organizations or communities. CSR in India has followed a chronological evolution of 4 thinking processes: Ethical Model (1930s-1950s) - Businesses were motivated to manage their business entity as a trust held in the interest of the community. Statist Model (1950s-1970s) -Important feature of this model was that state ownership and legal requirements decided the corporate responsibilities. Liberal Model (1970s-1990s) As per this model encapsulated by Milton Friedman, CSR is confined to its economic bottom line. It implies that it is sufficient business to obey the law and generate wealth, which through taxation and private charitable choices can be directed to social ends. Stakeholder model (1990s-Present) - The model came into existence as a consequence of the realization that with growing economic profits, businesses also have certain societal roles to fulfill. The First Kind Merchants Respect is the first thing we look for when doing anything, says N.R. Narayana Murthy, Chairman Infosys Technologies. It is no surprise that Narayanmurthy holds J.R.D. Tata in great esteem. Quoting Late J. Tata;
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Be sure to lay wide streets planted with shady trees, every other of a quick-growing Variety, be sure that there is plenty of space for lawns and gardens, and reserve large areas for football, hockey and parks. Earmark areas for Hindu temples, Mohammedan mosques and Christian churches. Unquote. Explains the chairman of the Tata Group, Ratan N. Tata, We do not do it for propaganda. We do not do it for publicity. We do it for the satisfaction of having really achieved something worthwhile. Ages ago when CSR was not in fashion, Tata initiated various labour welfare laws, like the establishment of Welfare Department was in 1917 and enforced by law in 1948 or Maternity Benefit was introduced in 1928 and enforced in 1946. They introduced the eight-hour working day in 1912 an astonishing thirty-six years before the Indian government. About 7000 villages benefit from programmes run by the Tata Steel Rural Development Society. The Community Development and Social Welfare Department at Tata steel carries out medical and health programmes, mass screening of Tuberculosis patients and drug de-addiction and AIDS awareness. Tata Steels Centre for Family Initiatives was successful in influencing 59 per cent of Jamshedpurs couples practicing family planning (compared to the national figure of 35 per cent). The Tata Council for Community Initiatives has created the Tata Guidelines on Community Development. An effort of over three years from the field evolved into a framework of best practices. Tata Teas Social-Cause Marketing (SCM) initiative, Jaago Re! is a huge success with the youth. As part of this campaign, Tata Tea aired commercials on social problems corruption, bad roads, irresponsible politicians, etc. EDUCATION Padhega India Badhega India FMCG major Procter & Gamble (P&G) in partnership with Child Relief and You (CRY) and Sony Entertainment Television launched Shiksha, with the motto padhega India, badhega India, a programme to educate underprivileged children. It allows consumers to participate via simple brand choices.- all an individual has to do is purchase a large pack of common-use products like soaps and shampoos and he/she will help support one days education of one child per pack purchased. P&G India closed Shiksha '08 with the largest-ever contribution of Rs 3.2 crore to CRY. Irrespective of the sale from Shiksha, P&G has committed a minimum of Rs. 1 crore to CRY. For The Girl Child
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The K. C. Mahindra Education Trust was established in 1953 by late Mr. K. C. Mahindra with an objective to promote literacy and higher education. The Nanhi Kali project was initiated in 1996 with the aim of giving primary education to the underprivileged girl child. The Project supports over 57,000 children under it. Technologically Yours Computer Based Functional Literacy Solution is a promising teaching method started by Tata Consultancy Services to eradicate illiteracy. It uses multimedia software to teach adults to read within 30-45 learning hours over a period of 10 to 12 weeks in 1 to 1.5 hour sessions thrice a week. Taking one-third of the time required by writing-oriented methods and solving the problem of lack of infrastructure and qualified teachers, the project is a win-win. Till date 1, 20,000 people have been trained. HEALTH CARE Lasting Legacy G.D.Birla, the founding father promoted the concept of holding wealth as a trust for stakeholders. Aditya Birla carrying on the legacy believes in creating sustainable livelihood. He opines Give a hungry man fish for a day, he will eat it and the next day, he would be hungry again. Instead if you taught him how to fish, he would be able to feed himself and his family for a lifetime. The Birla group runs as many as 18 hospitals in India and has touched lives of more than 5000 physically challenged individuals. Acts of Faith Novartis and the Novartis Foundation for Sustainable Development (NFSD) are involved in the fight against leprosy. Novartis has worked with the World Health Organization leading to the cure of 4.5 million patients so far. The Novartis Comprehensive Leprosy Care Association, a project sponsored by NFSD and Novartis India, helps in recovering leprosy patients with rehabilitation, including income generation assistance. We Care Reliance Industries Limited has made great progress in the field of health care. Its various initiatives include the Dhirubhai Ambani Hospital, Lodhivali which renders quality medical services to the rural population and prompt service to highway accident victims. Trauma patients are provided free life saving treatment. A community medical centre was established in Moti Khavdi, a village near Jamnagar Manufacturing Division, which provides services free of cost. The Reliance HIV and TB control centre provides treatment and support to patients afflicted from these two dreaded diseases.
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RIL extends financial support and professional expertise to Sir Hurkisondas Nurrotumdas Hospital and Research Centre, a charitable hospital offering tertiary health care facilities to all strata of society and providing free and subsidized services to the poor patients. The Hospital continues its tradition of rendering free treatment to all in the casualty ward. ENVIRONMENT Go Green The ITC Green Centre in Gurgaon is the physical expression of commitment to sustainable development. It is one of the world's largest green buildings and the first non-commercial complex in the country to be awarded the United States Green Building Council-Leadership in Energy and Environmental Design's platinum rating- the highest in the order. The building is designed to maximize the effect of natural light during daytime, largely eliminating the need for artificial ones. The window glass, while allowing light inside, does not allow heat. With a water re-cycling plant, the building is now a zero water discharge building. Waste to Wealth You cannot escape the responsibility of tomorrow by evading it today.- Abraham Lincoln Excellent example for waste minimisation is Mc Donald in which all napkins, bags and tray liners are made from recycled papers. Ambuja Cements Ltd. established a foundation, called the Ambuja Cement Foundation in 1993. Natural Resource Management (NRM) by far forms the largest part of the community initiatives of ACF. Water being the prime mover in rural life and an essential factor for rural development, presets their work in the area of water resource management. AGRICULTURAL AND RURAL DEVELOPMENT Milk Miracle Till 1961, Moga was a non-descript village in Punjab until Nestle stepped in. Nestle decided to help create a farmer-centric model. Starting with coverage of 180 farmers, it has expanded to over 85,000. Apart from improving production and quality of milk, Nestle has undertaken the responsibility of general betterment of the district. From providing infrastructure to the schools to funding treatment of tuberculosis patients, Nestle has transformed Moga into an industrial hub. Think Grass Root E-Choupal is an initiative which provides farmers with know-how and services, timely and relevant weather information, transparent price discovery and access to wider markets. Farmers
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can access the latest local and global information on weather, scientific farming practices as well as marker prices at the village itself through a portal. It assists rural farmers in procurement of agricultural/aquaculture produce. Today 4 million farmers use e-Choupal to advantage. Being linked to futures markets is helping small farmers to better manage risk. Launched a decade ago e-Choupal has won over even the staunchest sceptics. WOMENS EMPOWERMENT Woman Power Project Shakti was started in 2001 in Nalgonda district, Andhra Pradesh, by Hindustan Unilever Limited with the objective to uplift rural underprivileged women by providing them with small scale employment enterprise opportunity. Women are trained to become direct to home distributors of HUL products through various self-help groups. Not only does it give them the much needed money but more importantly a sense of self-esteem. Promoting Well-Being among the Cola Generation Unhealthy produce such as potato chips, chocolates and burgers being advertised on five 24-hour childrens TV channels in India set the panic alarm ringing. Seven food and beverage companies have come together for a voluntary initiative to promote healthier lifestyles among children. Their commitment is no advertising products (except for products that fulfil specific nutrition criteria based on scientific evidence) where more than half of the audience is below the age of 12 from December 31, 2010. India is the 12th country to be party to such a pledge. Conclusion CSR can make a valuable contribution to society. Organizations consider the interests of society by taking responsibility for the impact of their activities on customers, employees, shareholders, communities and the environment in all aspects of their operations. However, to make CSR a success it should be treated like any other aspect of business and not merely philanthropy. The organization as a whole should be involved in it. References:1) Peter Drucker, The Practice of Management (1955), Page 375 2) Definition proposed by World Business Council for Sustainable Development 3) Business Daily from THE HINDU group of publications, Friday, Oct 12, 2009, e Paper 4) H. R. Bowen, Social responsibilities of the Businessman, Harper and Row, 1953, pg xi 5) Davis, K. (1960). Can business afford to ignore social responsibilities? California Management Review, 2, pp.70-76
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6) The New Meaning of Corporate Social Responsibility California Management Review, Winter, Vol. XXVI, No. 2, pp. 54-62.
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CARTELS AND COMPETITION: ANTI ETHICAL RELATIONSHIP

TANVI GADKARI AND DEVARSHI DESAI
ABSTRACT: There are a variety of International Competition laws that are working actively towards the motive of eradicating the system of cartels from the economy and there is one feature that unites all these statutes i.e. that they all condemn the hard core cartel agreements even if they differ in the ways in which such agreements maybe prosecuted and punished. This essay focuses on the anti competitive agreements which are entered into by various companies, narrowing it to the existence of cartels in the economy and the laws working against its existence, curtailing the functioning of the same. The essay also discusses the international perspective of the problem of cartels, the Acts which are working. Since cartels are international in nature whereas most systems of competition law are purely national in scope, special care has to be taken in this regard. Cartels are agreements between enterprises (including association of enterprises) not to compete on price, product (including goods and services) or customers. The objective of a cartel is to raise price above competitive levels, resulting in injury to consumers and to the economy. For the consumers, cartelization results in higher prices, poor quality and less or no choice for goods or/and services. This works on the basic principle that: Competitors are meant to compete with each other and not cooperate to distort the process of competition. In this essay, I focus upon how the existence of cartels curbs healthy competition among companies, deteriorate the quality of the products and services and create a comfortably stable market for the consumers.
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Article
Under section 2 (c) of the Indian Competition Act 2002 (the Act), the term cartel is defined as including an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services. It is increasingly recognized that competition in the markets creates increased efficiency, improves quality, boosts choices, reduces costs and leads to lower prices of goods and services. By forming cartels there exists a clear violation of the basic unwritten rules of the market and economies, since the power goes to the hands of the owners of the company and thus they work solely towards one motive: Maximization of profits. The competition laws of a country are working towards the existence of a cartel-free economy and it must be noted that there is widespread consensus against cartels formation and it exists in various Acts of various countries.1 The rise of cartels has a variety of reasons behind it. Due to small number of firms in a particular industry and in scenarios of barriers to entry or low technological advancements there are high chances of cartels being formed in a particular industry. The competing firms are usually strong players of the market and have an ability to exchange information on prices and other terms of sale, uniformity in costs or efficiency. Moreover, these cartels eventually become like a cult or a group of highly influential people and severe punishment maybe inflicted on those who are found to cheat. Moreover firms dont put any of their agreements to cartelize on paper, which reduces majorly the risk of detection and punishment. 2 In India, Cartels are alleged to have influenced a number of Industries, namely the cement, steel, tired and family planning devices industries etc. There has also been some international cartelizing, in the industry of petrol and bulk vitamins. Forming of these associations tends to raise the price of the products and reduce the choices available to the consumer. There is no improvising of the economy and the basic objective of a healthy trade practice is violated. In light of the Competition Act, cartels are considered as the most serious infringements of the act.
1 2
G.R Bhattiai, Combating Cartels in Markets: Issues and Challenges. Gibbon R.(1992( Game Theory for Applied Economics.
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Developing countries are a bigger victim of this, due to inability to detect, discover and prosecute domestic as well as international cartels. The Competition Act defines what anti competitive agreements are. It includes in its ambit, any such agreement, which is presumable expected to have appreciable adverse effect on the competition (AAEC). It essentially includes-directly or indirectly fixing the prices; limiting or controlling production, supply, markets, technical development, investment or provision of services; sharing or allocation of geographical area of market, customers or in any other similar way; and directly or indirectly resulting in bid-rigging or collusive bidding. The above mentioned activities which are restricted as per the Act, are essentially also the basic feature of cartels. The formation of cartels are included in the AACEs and clearly not permitted by the law.3 An obvious question arises as to why a Cartel is presumed to have AAEC. In a layman language, competition law seeks to promote, maintain and sustain competition in market being beneficial to various stakeholders in society. In case of Cartel, competitors agree not be compete on price, product, customers etc. since in the case of a Cartel, direct competitors agree to forego competition and opt for collusion, the consumers and business houses lose the benefits of competition. Thus, cartels are inherently harmful. Further, competitors know that such an agreement is unlawful and it compels them to keep such agreement secretive and resultantly it is invariably not reduced to writing and it is often found to be in the form of arrangement or understanding. Moreover, the best evidence against Cartel is usually in possession of the charged parties, which are not likely to easily part with and make available to the investigator or enquiring authority. These compulsions seem to have persuaded the law makers to prescribe that Cartel is presumed to have AAEC.4 When cartels are formed in a market, competitors agree not to compete on price, the product or customers. All the rules are pre planned, discussed and nothing is left to the discretion. It creates a situation where in the customers are left helpless and at the pure mercy of the organizations who are a part of them cartel. What they deicide must be accepted by them, and there is no alternative made available. Due to the arbitrary nature in which cartels dominate the markets of
Hard Core Cartel: Third Report on the implementation of the 1998 recommendation
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any flourishing economy, they are strongly condemned by The Competition Act, 2002. The Act aims at fostering competition and protecting Indian markets against anti-competitive practices by enterprises. The act prohibits abuse of dominant position by enterprises and regulated entering into combinations (although mergers and acquisitions or amalgamations are legally enforceable and provided for in the Companys Act yet, they need to be regulated so as to maintain checks and balances) with a view to assure that there is no adverse effect on competition in India. Thus, agreement needs not be in writing, not necessarily to be legally enforceable and an arrangement or understanding is as good as a formal written agreement. It is has been established that cartels are not only inherently harmful but also an illegal association, in which the members agree to not compete on price, product and customers etc. Direct competitors agree to forgo competition and opt for collusion and thus the consumers and business lose the benefits of competition. Competitors know that such an agreement is unlawful and are compelled to keep it secret and therefore such agreements are never reduced to writing. The best evidences which are available against cartels are usually in possession of the charged parties, which they are not likely to easily part with and make available to the investigating authorities. Since the competition commission acts like a police to the cartel organizations, thus the cartels are compelled to function in secrecy and the members of cartels seek to camouflage their activities to avoid detection by the commission. Even within those cartels, there exists a system of rules to be followed by all member organizations. Perpetuation of cartels is ensured through retaliation threats. The effective competition in an economy makes it difficult for cartels to be formed and function effectively. High concentration, high entry and exit barriers, homogeneity of products, similar production cost, and excess capacity are some of the factors that are conducive to cartelization. 5 If we look into the legal remedies for such cartelization, the answer can be found in Section 19 of the Act, the Commission may inquire into any alleged contravention under section 3(3) of the Act that proscribes cartels. The Commission, on being satisfied that there exists a prima facie case of cartel, shall direct the Director General to cause an investigation and furnish a report. The Commission has the powers vested in a Civil Court under the Code of Civil Procedure in respect of matters like summoning or enforcing attendance of any person and examining him on
5
A quick Guide to Cartels, Competition Commission of India.
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oath, requiring discovery and production of documents and receiving evidence on affidavit. The Director General, for the purpose of carrying out investigation, is vested with powers of civil court besides powers to conduct Search and Seizure. Competition Act does not fall behind while taking into account the checks to be made on cartels and their formations. The Commission is empowered to inquire into any cartel, and to impose on each member of the cartel, a penalty of up to 3 times its profit for each year of the continuance of such agreement or 10% of its turnover for each year of continuance of such agreement, whichever is higher. In case an enterprise is a company its directors/officials who are guilty are also liable to be proceeded against. When cartels are formed the police bodies of the corporate world immediately spin into action, and work toward contributing positively to the removal of such exigencies from the economic society. While the formation of a cartel amounts to an anticompetitive trade practice, which is indisputably against the public interest, the existence of a cartel is seldom proved by direct evidence. Generally speaking, no express agreement showing its existence is ever found. It has to be proved by circumstantial evidence, and by setting up and proving a chain of events leading to a common understanding or plan. The underlying issue is what, at the minimum, constitutes that meeting of the minds which must be directly or circumstantially established to prove that there is a restrictive effect on competition.
However once discovered, the cartels are then subject to the conditions as imposed upon them by the Competition Commission. Under Section 27 of the Act, later the commission on discovery of such cartels may pass inter alia, orders to ensure discontinued existence of the cartels and direct the enterprise concerned to modify the agreement or to abide by such other orders as the Commission may pass and comply with the directions, including payment of costs. However the Act does portray some leniency toward the one who provides full, true and vital information regarding the cartel. The scheme is basically designed to induce members to help in detection and investigation of cartels. Similarly leniency schemes have proved very helpful to competition authorities in successfully proceeding against cartels.6
G.R Bhattiai: Combating Cartels in Markets: Issues and Challenges in Times of India, 12-03-2011.
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International Perspective: A system of competition law which is intended to protect the process of competition is typically concerned with three major issues: firstly the anti competitive agreements that have the object or effect of preventing, restricting or distorting competition; secondly the abusive behavior by a monopolist or dominant firm with significant market power that is and could be harmful to consumer welfare; and thirdly mergers that would reduce (or which have reduced) rivalry between firms in the market, again with detrimental consequences for consumer welfare. The widespread condemnation of cartel agreements, the important lead that the OECD7 has taken in the fight against cartels, and some legal points about anti cartel legislation and judicial practices are noted and discussed, while providing details of recent cartel cases from a number of jurisdictions around the world. There are many complex issues that arise in systems of competition law, for example, the extent to which the unilateral conduct of firms with market power should be controlled; the price with a competitor or customer should pay for access to an essential facility such as a gas pipeline or a sea port; the extent to which mergers should be prohibited, or transactions modified, because of potential harm to competition.8 The OECD has been at the forefront of policy in relation to cartels. This in itself reflects an obvious but important point, that cartels are often international in nature, whereas for the most part, systems of competition are purely national in scope. The rules of European Union are an important exception, since they apply throughout the 25 Member States as well as three additional contracting states of the European Economic Area. International business phenomena such as cartels necessitate an international response, and the OECD is in an important position to give lead in this respect. The OECD has published a number of documents which are of particular interest to the issue of cartel enforcement. In its 2001 Report on leniency Programs to fight Hard Core Cartels,9the OECD discussed the need to penetrate the cloak of secrecy that surrounds hard core cartels, and the contribution that the encouragement of whistle-blowers can make to this need. It is noted that the seriousness of the penalties, including the risk of personal liability can be a powerful motivating force in encouraging whistle blowing or leniency application.10
7 8
Organization for Economic Cooperation and Development Richard Whish, Control of Cartels and other Anti-competitive agreements in Competition Law today. 9 See www.oecd.org/dataoecd/49/16/2474442.pdf 10 Crampton and Reynolds: Cartels and International Law, 19th Edition.
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Firms go to great lengths to keep cartel agreement secret, and are in some cases explicit in their contempt for the competitive process. The principle purpose of sanctions in cartel cases is deterrence. Strong sanctions against enterprises and individuals increase the effectiveness of leniency programs. And although there is a move towards the imposition of larger penalties for infringement of anti-cartel legislation, sanctions have yet to reach the required level for deterrence. It is increasingly recognized that the remarkable increase in the number of successful hardcore cartel (HCC) cases as well as in the level of fines imposed in those cases in jurisdictions such as US, the European Union and Canada is largely attributable to refinements that have been made to the leniency programs in those jurisdiction.
Cartel construction is more probable to appear and occur in a concentrated than in a fragmented industry. The lower is the number of firms in the market, the easier is for the trust members to control and detect the conduct of other partners. In a concentrated market, besides, the typical firm gets a greater share of benefits if prices become higher: the deviators short term gain is in fact smaller since it started with a larger market share. Thus, the more concentrated is the market, the larger are the benefits from collusion and the smaller is the cost of cooperation. Instead, in a fragmented market, given that observing a price cut becomes harder because the number of enterprises increases, superior is the earnings from cheating. In fact the higher is the number of undertakings, the more likely is one of those acting as a maverick, that is, a firm acknowledged for practicing aggressive pricing strategy (actually, even in the circumstance of a concentrated industry with few enterprises, the presence of such a firm could threaten the collusive nature of the agreement). All this is confirmed, anyway, by the fact according to which, with an increasing number of participants to cartel or more generally to oligopolistic structure, the market tends progressively to assume a perfection competition form: consequently, the price comes up to the marginal cost and the production to the efficient level.11 Cartels can occur in almost any industry and can involve goods or services at the manufacturing, distribution or retail level. Some sectors may be more susceptible to cartels than others because of their structure or the way in which they operate. For example, a cartel may be more likely to exist in an industry where there are a few competitors, the products have similar characteristics
11
Cf. Besanko D., Dranove D., Shanley M., Schaefer S. (2006), Economics of Strategy, John Wiley & Sons
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and communication channels between the competitors are already established for example by way of Trade Unions.12 The best defense against secret cartels is to be alert to the fact that they exist and to operate an effective purchasing policy that takes this into account. It is helpful to make clear dealings with suppliers that are well aware of the temptations of cartel activities but are on the lookout for signs of price fixing or market sharing and will bring any suspicions of such activity to the attention of the authorities.13 Conclusively, Cartelization of the industry is a deterrence of the basic principle of Business and they need to be complied with. For this purpose, the Competition policies, worldwide as well as in India, continue to work towards eliminating the phenomena from the global economy. Efforts are being made all over the world to rid ourselves but sadly, with the growing number of industries and the benefit of technology to conceal wrongful acts, the cartels and its existence becomes easier to hide and the main key to erasing cartels lies in actually discovering one.
12
Richard Whish, Control of Cartels and other Anti-competitive agreements in Competition Law today. Law of Monopolistic, Restrictive & Unfair Trade Practices by Dr.S.M.Dugar (1997 Edition)
13
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AMENDMENT OF THE ARTICLES OF ASSOCIATIONSCOPE AND AMBIT- A CRITICAL STUDY WITH REFERENCE TO THE LEGAL LITERATURE AND CASE LAW
AKSHAY SHRIVASTAVA
For a company there are two documents which form its constitution and its main body, which are- Memorandum of Association (MoA) and Articles of Association (AoA). Section 2(2) of the Companies Act, 1956 articles means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies laws or of the present Act, i.e. the Act of 1956. AoA is the document which regulates the internal management of the company. It lays down the powers of its officers. They also establish a contract between the company and the members and between the members inter se. This contract governs the ordinary rights and obligations incidental to membership in the company. 1Articles provide for the matters like the making of calls; forfeiture of shares; directors qualifications, appointment, powers and duties of auditors; procedure for the transfer and transmission of shares and debentures. AoA and MoA are closely related as AoA is supplementary to the MoA. MoA lay down companies objects and various powers it possesses; while AoA determine how those objects shall be achieved and those powers exercised. In Ashbury v. Watson2 it has been laid down that the articles are subordinate and controlled by the memorandum of association which constitutes the general constitution of the company. Thus it is always taken into consideration that while drafting the articles; it is kept in mind that it in no way exceeds the clauses of memorandum of association. Therefore the Articles going beyond the Memorandum are ultra vires.3 Thus the simplest way to explain the relation between Articles of Association and Memorandum of Association is that Memorandum is to relate it to the Constitution of India.
1 2
Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. , AIR 1971 SC 422 [1885] 30 Ch. D 376 CA 3 Shyam Chand v. Calcutta Stock Exchange, AIR 1947 Cal. 337
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Memorandum of Association is the constitution, while the Articles of Association for that matter are the other laws of the land which are in no way can surpass the constitution. The memorandum and the articles can be read together in order to remove an ambiguity or uncertainty. For that matter if the memorandum is completely clear, then a doubt as to its meaning cannot be raised by referring to the articles. One thing should be kept in mind that articles in no way can surpass the memorandum. For better understanding, the Duncan Gilmour & Co. Ltd., Re4 is a classic example, where the memorandum had exhaustively defined the rights of preference shareholders, and the articles provided that at the time of winding up, the companys surplus assets, after paying all its debts and repaying share capital, should be distributed among all its shareholders. It was held that preference shareholders were not entitled to share any surplus assets, because there rights were to be determined from the memorandum alone as it did not confer the right to participate on them and not in respect of the articles. The relationship between memorandum and articles has been precisely expressed by Lord Cairns, L.C. in Ashbury Railway Carriage & Iron Co. Ltd. v. Riche5 which is as follows, The articles play a part subsidiary to a memorandum of association. They accept the memorandum of association as a charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, rights and powers of governing body as between themselves and the company at large, and the mode and form in which business of the is carried on, and the mode and form in which changes in the internal regulations of the company may from time to time be made... The memorandum as it were..., the area beyond which the actions of the company cannot go; inside that area, the shareholders may make such regulations for their own government as they think fit. The Articles of Association and Memorandum of Association do seem to be similar on the terms and clauses they carry but they differ in the following context: 1. The memorandum lays down the fundamental conditions on which the company alone is allowed to be incorporated. They are the conditions which form the basis for the benefit of the creditors, and outside public as well as the shareholders. On the other hand articles
4 5
[1952] All ER 871 [1885] L.R. 7 H.L. 653
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of association are the internal regulations of the company which regulates the relationship between company and the members and the members inter se. 2. Memorandum lays down the boundary line beyond which the activities of the companies cannot go. While the articles lays down the regulations to b carried out with the set boundary line. For example, in a cricket match players can play within the boundary line which is depicted as the Memorandum as setting the boundary line to carry out their roles, while how and in what manner they play is depicted by the Articles like how to setup the field, which side to bowl etc. 3. Memorandum of association can be altered only under certain circumstances and in the manner provided in the Act. In most of the cases permission of the central government, or the Company Law Board, or the Courts is required, besides the approval of the shareholders in a general body meeting either by way of an ordinary resolution or special resolution. While in the case of articles, it can be altered by members by passing special resolution only. 4. Memorandum of association cannot include any clause contrary to the provisions of the Companies Act. The articles of association are subject to both the Companies Act and the memorandum of association. 5. Acts carried out by the company beyond the memorandum of association are ultra vires and absolutely void. In no circumstances there is any scope for the ratification. But such is not the case with the articles of association, as the act beyond it can be ratified by the shareholders provided the relevant provisions are not beyond the memorandum and the Companies act. Section 26 of the Companies Act, 1956 lays down the following companies which must have their own articles: 1. Unlimited Companies. 2. Companies limited by the guarantee. 3. Private companies limited by the shares. Whereas Section 27 provides for the regulations with respect to the companies mentioned above to provide following:
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1. In case of an unlimited company, the articles shall state the number of members with which the company is to be registered and, if the company has a share capital, the amount of share capital with which the company is to be registered. 2. In case of a company limited by guarantee, the articles shall state the number of members with which the company is to be registered. 3. In case of a private company having a share capital, the articles shall contain provisions relating to the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of subsection (1) of section 3; and in the case of any other private company, the article shall contain provisions relating to the matters specified in the said sub-clauses (b) and (c). On the other hand the company limited by shares may either frame its own set of articles or may adopt all or any of the regulations contained in Table A.6 But if it does not register any Articles, Table A applies; if it does have some regulations for the rest, as far as applicable, Table A applies in so far as its regulations are not excluded.7 Section 31 of the Companies Act, provides that subject to the provisions of the said Act and to the conditions laid down in the memorandum, a company may by a special resolution alter or add to its articles. Such alterations are permissible because of the very basic fact that each and every situation cannot be inculcated in the articles or for that matter in the memorandum at the time of drafting it. So in order to cope up with the future circumstances the Act has provided every company the power to alter its articles or the memorandum as the case may be. The right to alter just by passing special resolution is so important that a company cannot in any manner, deprive itself of this power.8 The procedure lay down under the law for the alteration of the articles of association which is required to be followed is as follows: 1. The proposal has to be approved by the Board of directors, who will then fix the date and time of the general meeting. They will also approve the draft notice of the meeting, the special resolution and explanatory statement. If there is any secretary, then he shall be authorised to convene the general body meeting.
6 7
Section 28(1) Section 28(2) 8 Walker v. London Tramway Company, [1879] 12 Ch. D. 705
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2. Where the alteration proposes to take or subscribe for more shares than the number held by the members on the date of alteration or if the alteration proposes to increase the liability of the members, then in that case the consent of the members should be in writing either before or after any such alteration is made.9 In contrary, if the company is a club or any other association and the alteration requires the members to pay recurring or periodical subscriptions or charges at a higher rate, then in that case the member shall be bound by such alteration despite the fact that the consent to such alteration was not obtained in writing.10 3. Meeting has to be convened by the secretary on the appointed day and the necessary special resolution causing the alteration in the articles of association shall be passed. In accordance with Section 581- I(1) of the Companies Act, 1956, that any amendment of the articles shall be proposed by not less than two-third of the elected directors or by not less than one-third of the members of the Producer Company, and adopted by the members by a special resolution. 4. Within 30 days of the passing of such resolution, a certified copy thereof shall be filed with the Registrar of Companies along with the Form No. 23.11 5. If the alteration of the articles has the effect of converting a public company into a private company, the company shall, within three months from the date of passing of the special resolution, make an application in Form No. 1B to the Regional Director concerned for his approval of the alteration.12 6. After getting the approval of the Central Government, i.e., the Registrar of Companies, the printed copy of the articles, as altered, should be filed by the company with the registrar of companies within one month of the date of receipt of the order of approval. 7. Six copies of the amendments (one of which shall be certified) should be sent to the stock exchange(s) on which the shares of the company are listed, as soon as they have been adopted by the company in the general meeting.
Section 38 Section 38(b) 11 Section 192(1) of the Companies Act 12 Section 31 of the Companies Act
10
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8. Alteration should be noted in every copy of the articles of association, and the articles issued after the date of alteration should be in accordance with the altered articles. 13 Failing which the company as well as every officer will be penalised with a penalty as provided under the section as a fine upto Rs. 100 for each copy so issued. The alteration so issued and implemented has to be within the limitations as imposed on such power of the company seeking the alteration. The limitations in this regard are as follows: 1. The alteration must not exceed the powers given by the memorandum or be in conflict with any provisions of the memorandum. If there is any conflict between the memorandum and the articles, then in that case the memorandum would prevail. 2. The alteration so must not be inconsistent with any of the provisions of the Companies Act or any other statute. For example, where a resolution was passed expelling a member and authorising the director to register the transfer of his shares without the instrument of transfer, the resolution was held to be invalid as being against the provisions of the act.14 3. The alteration must not be inconsistent with an order of the Company Law Tribunal under section 397 or 398 of the Companies Act, 1956. Therefore if the Company Law Tribunal has made an amendment in the articles, then the company cannot make an alteration which is inconsistent with such an order. 4. The altered articles must not include anything which is illegal or opposed to the public policy or unlawful. For example, an alteration to the articles inserted the clause that the Director of the company has the power to terminate the employment of the qualified employees at their will, will be considered against the public policy. 5. The alteration must be bona fide and for the benefit of the company as a whole. If the situation arises such that it inflicts hardship on an individual shareholder will not be outside the ambit of the benefit of the company. In a famous case , Allen v. Gold Reefs of West Africa Limited15, where a company had a lien on all shares not fully paid-up for calls due to company. There was only one shareholder A who owned fully paid -up shares. He in addition held partly paid shares in the company. A died. After which the company altered its articles deleting the provision fully paid-up and thus giving itself a
13 14
Section 40 Madhava Ramchandra Kamath v. Canara Banking Corporation, [1941] 11 Comp. Cas. 78 (Mad.) 15 [1900] 1 Ch. 656
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lien on all shares whether fully paid-up or not. Such alteration was challenged on the grounds that it had retrospective effect. It was held that the alteration was bona fide and for the benefit of the company as a whole, despite the fact that it had a retrospective effect. Thus it must be understood that the a person when becomes a member of a company, then he is not entitled to assume that the articles will always remain in a particular form, as long as the proposed alteration does not unfairly discriminate. Thus a bona fide resolution so passed cannot be open to objections.16 6. The alteration must not constitute a fraud on the minority by the majority. If it is found that the alteration was not for the benefit of the company as a whole but for the majority shareholders, then such an alteration would be bad. Thus the alteration must not give rise to such discrimination between the majority and minority shareholders in order to give the former undue advantage over the latter. In Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishing Ltd.
17
, where
it was held by the Kerala High Court that the power conferred on the company under section 31 to alter the articles by special resolution is not to be abused by the majority of shareholders so as to oppress the minority. It was further observed by the court that no majority of shareholders can, by altering the articles retrospectively, affect to the prejudice of the consenting owners of the shares. 7. Unless in accordance to Section 38 of the Companies Act, 1956, there cannot be alteration of the articles so as to oblige an existing member to take or subscribe for more shares or in any way increase his liability to contribute to the share capital. On contrary, if the company is a club or any other association and the alteration requires a member to pay recurring or periodical subscriptions or charges at a higher rate, then the written consent of the member is not necessary. 8. Approval of the Central Government is necessary if the alteration of articles is to the effect that a public company is to be converted into a private company. 9. A company cannot justify breach of contract with third parties or avoid a contractual liability by altering articles. It must also be noted that an alteration cannot be made to
16 17
Greenhalgh v. Anderne Cinemas, [1950] 2 All ER 1120 (CA0 [1992] 73 Comp. Cas. 80 (Ker)
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avoid the rigours of a contract validly undertaken. It must also be taken into consideration that where the damage is capable of being measured in terms of money, the company may alter its articles to that effect, but it must be subjected to being answerable in damages in breach. It has been observed in Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd.18 that by altering its articles, a company cannot defeat or escape from its contractual obligation with any person. Whatsoever it may be, the company will always be liable for damages in case the alteration results in a breach of the contract the company had entered into with any person. In a famous case Southern Foundries (1926) Ltd. v. Shrlaw19, where the articles of the company provided that a managing director had to be a director and if he ceased to be a director, he could not function as managing director. In this very case, in December, 1933 an agreement was entered into between S and the company, by which S was appointed as managing director for 10 years, and he could not resign his office during this period nor was the power to remove him to be exercised. Within three years of the agreement the company became a fully owned subsidiary of another company F and its articles were then altered giving the power to F to remove any director of the company, and in 1937 S was removed from the directorship with the consequence that he also ceased to be the managing director. The question was whether the company exercising this statutory right of altering the articles, committed a breach of an implied obligation to S. It was held that the altered articles had provided for dismissal of the managing director and the said dismissal would be intra vires the company, but would, nevertheless expose the company to an action for damages as the appointment had been made for a term of 10 years and he was dismissed before the term was over. 10. The amended articles of association cannot operate retrospectively, but only from the date of amendment.20 11. The statutory power of a company to alter its articles cannot be limited by way of provision of contractual obligation in articles of association of a company. In State of Karnataka v. Mysore Coffee Curing Works Ltd.21, the State Government held shares in
18 19
Supra 16 [1940] 10 Comp. Cas. 255 (HL) 20 Pyare Lal Sharma v. Managing Director, J & K Industries Ltd., [1989] 3 Comp. L. J. (SL)0 70 21 [1984] 55 Comp. Cas. 70 (Kar.)
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company M and the articles of the company provided that the State Government could nominate three directors and also the chairman of the Board in consideration of having subscribed to the capital of the company. Later, the company issued right shares in the ratio of 1:1 which the State Government did not take and consequently its shareholding dwindled to 19.6 percent. The company proposed to alter the relevant articles affecting State Governments right to nominate directors and the chairman. It was held that it could do so. The Karnataka High Court observed that the only restriction on the unfettered power under section 31(1) is the restriction imposed by the provision to that section, and it is, that a public company cannot convert itself into a private company by merely carrying out an amendment to the articles of association of such a company. 12. Amendments of articles to empower Board of Directors to expel a member is opposed to the fundamental principles of company jurisprudence and is ultra vires of the company. After forming of the articles of association, keeping in mind the limitations to be applied, Section 36 talks about the binding effect of the Articles of Association and the Memorandum of Association. Section 36 provides that the articles when registered, bind the company and its members to the same extent as if they have been signed by the company and by each member and contain covenants on its and his part to observe the provisions of the articles. Therefore the company and its members are bound by whatever is contained in the articles. One thing is to be kept in mind that neither the company nor its members are bound to the outsiders in relation to the articles as it is totally for the internal working. For relation with the outside world, they are bound by the memorandum. The articles of association are framed with respect to the internal management, business or administration of a company. Thus they may be binding between the persons affected by them but it does not have the same binding force as that of statute.22 The following are the internal group link as to how the people are legally affected by the Articles of Association: 1. Members bound to the company. 2. Company bound to the members. 3. Members bound to members.
22
Irrigation Development Employees Association v. Government of Andhra Pradesh [2005] 55 SCL 459 (AP)
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In Halsburys Laws of England23 it is stated, Any alteration must be made in good faith for the benefit of the company as a whole that is of the corporators as a general body. Subject to this, the articles can be freely altered. It is for the shareholder and not the court to determine whether or not the alteration is for the benefit of the company, and the court will not readily interfere with an alteration made in good faith unless it is of such a character that no reasonable man could have regarded it as made for the benefit of the company. The alteration may affect the rights of a member as between himself and the company by retrospective operation, since shares are held subject to the statutory power of altering the articles. After going through various legal aspects of the altering of articles of association above, lets look into various landmark cases the practical aspect as to the articles of association involved. In Andrews v. Gas Meter Co.24, the question which came before the court was whether a company, which had no power to create preference shares, could alter its articles by special resolution so as to authorise the issue of such shares. The Court of Appeal in this case held that a company cannot contract itself out of the power to alter its articles. The same issue again popped before the court in British Equitable Assurance Co. Ltd. v. Bailey25, where the Andrews case was observed and it was held that although under the provisions of the Act the memorandum is to state the amount of the original capital and the number of shares into which it is to be divided, yet in other respects the rights of the shareholders in respect of their shares and the terms on which additional capital may be raised are matters to be regulated by the articles of association rather than by the memorandum, and are, therefore, matters (unless provided for by the memorandum) may be determined by the company from time to time by special resolution. In another case in Sidebottom v. Kershaw, Leese & Co.26where the articles provided the power of expulsion of any member; the articles were to empower the director to require any member to transfer his shares (who carried on a competing business) at their fair value to the nominees of the directors. The alteration was held by the Court of appeal to be bonafide for the benefit of the company.
23 24
4th Edn., Vol. 7, para 454, p. 257 (1897) 1 Ch. 361 25 (1906) A.C. 35, (HL) 26 (1920) 1 Ch. 154
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There have been large debates and doubts with regard to whether an alteration of the articles of association resulting in a breach of contract would be permissible or not. It is observed that various judicial authorities could not come up to a clear position. The discussion over this mainly rest on the following considerations: 1. Retrospective alteration. 2. Contractual rights of the injured party. 3. Personal right of action. The bottom line in this regard is that bonafide for the benefit of the company as a whole must be established; else the granting of the injunction would become a regular affair. Here it must be stated that an appeal on the ground of breach of contract is secondary and not primary. It has been held that alteration could be done retrospectively also 27and that retrospective alteration of the articles affecting a person or class of persons, and not generally, should be carefully scrutinized and guarded. In such a case the onus is very much on the company itself to prove that the alteration intended is for the benefit of the company as a whole. For example, articles may be altered to reduce the preference dividend from 9% to 7%, but articles may not be so altered in case a particular shareholder holding block of shares is asked to return a substantial part of his holding as the policy decision of the company. The next point of discussion is that the injured party or parties would not only include shareholders, but also debenture- holders, creditors, and other persons dealing with the company. Thus it is held that the corporate decisions cannot deprive a person of his remedies provided under other statutes (the articles cannot override the provisions of the Act, Section 9, Companies Act, 1956). Therefore the injured party besides injunction may also claim damages and specific performance of the contract provided under other Acts. Now the final issue of consideration is that how far is the alteration of the articles, bonafide for the interest of the company should be carried so as not to affect and deprive th e minority shareholders. This issue was very well settled in a landmark case Greenhalgh v. Arderne Cinemas Ltd.28where the articles of the company provided, inter alia, that no shares were to be transferred to a person not a member of the company so long as a member of the company was willing to purchase them at a fair value. Certain majority shareholders wanted to
27 28
Last v. Buller & Co. Ltd., (1919) 36 T.L.R. 35 (1951) Ch. 286; 2 All E.R. 1120
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sell their shares to an outsider. A special resolution was passed altering the articles so as to
permit a member to transfer his shares to non-members with the sanction of the company in general meeting, without first offering them to the other members. The resolution was challenged on the ground that interests of the minority of the shareholders had been sacrificed to those of the majority. The Court of Appeal held valid the resolution. In case of a company comprising two equally balanced groups of shareholders, the articles provided (article 38) that in the event of disagreement, or on failure to resolve the deadlock the company would be wound up by a special resolution for which every member was to vote. The contention that that resolution derogated from the provisions of section 433 and was void insofar as it enabled the company to be wound up on a ground which was not specified under section 433 was not justified.29 The next point of consideration was that if an amendment to articles, though irregular, has been operative and acted upon for a long time. The Court on this point has lay down in Joseph Michael v. Travancore Rubber & Tea Co. Ltd.30 that the courts may not after a long time interfere to declare it void. In another latest judgement in Sunil Dang v. Indian newspaper Society31, where there was no provision in the articles of the company to that effect, the company was not allowed to deprive a person of his membership just only because he had defaulted in paying his subscription money particularly when the member claimed that he had made the payment and that if there was default, he was ready and willing to make it good. In Crompton Greaves Ltd. v. Sky Cell Communication Ltd.32 where a joint venture agreement provided restrictions on the rights of the members of the company created by the joint ventures on transferability of their shares. But the restriction as to transferability was not carried into the articles of the company. The Court said that restriction had not acquired its binding force on the members of the company though it was binding on the parties to the joint venture. The transfer was therefore valid and it was validly registered.
29 30
Ramakrishna Industries (P.) Ltd. V. P.R. Ramakrishnan, [1988] 64 Comp. Cas. 425 (Mad.) [1986] 59 Comp. Cas. 898 (Ker.) 31 (2009) 149 Com Cases 563 (Del) 32 (2002) 39 SCL 704 (Mad- DB)
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In another recent case, Citco Banking Corp. NY v. Pusser Ltd. 33where an alteration of articles, about voting rights attached to shares, vested voting control in the chairman of the company, thus giving him unqualified control of the company. The reason for doing so was that the company was in need of more working capital. The companys bank agreed to provide more loans provided that the chairman took over control of the company and personally guaranteed repayments. The court held that in these circumstances that the alteration was in the best interest of the company. The court said that the proper test is whether in the opinion of the shareholders the alteration is for the benefit of the company and whether there were grounds on which reasonable man would come to the same conclusion. The court felt that both these requirements were satisfied in the present case. In the last it is the Companies Act 2013, which was a mini-act in itself coming into force and bringing many amendments to the various provisions of the Companies Act, 1956. This 2013 Act has not brought many changes to the Articles of Association, just for the fact that it has inserted the provisions for entrenchment. The provisions for entrenchment provide more restrictive conditions or procedures than that applicable to passing a special resolution for altering certain provisions in the articles. For example, the articles could mandate that certain provisions in it can be altered only if agreed to by all members of the company in writing. Further the entrenchment provision shall only be made either on formation of a company, or by an amendment in the articles agreed to by all the members of the company in the case of a private company and by a special resolution in the case of a public company. Further the company shall give notice to the Registrar of entrenchment provisions. [Section 5(3)/ (4)/ (5)].
33
(2007) 2 BCLC 483 (PC)
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COMPARATIVE STUDY OF CORPORATE CRIMINAL LIABILITY WITH REGARD TO INDIAN AND USA LEGAL SYSTEMS
AYUSH VERMA
A company can only act through human beings and a human being who commits an offence on account of or for the benefit of a company will be responsible for that offence himself, just as any employee committing an offence for a human employer is liable. The importance of incorporation is that it makes the company itself liable in certain circumstances, as well as the human beings1. G. Williams INTRODUCTION The notion of Corporate Criminal Liability has become most debated and burning topic of the Corporate Jurisprudence. Relevant questions arise in dealing with this concept is whether a corporate body as an artificial person is capable of committing a crime and can it be sued or not, if yes then who is to be held liable for such crimes? If we look at in traditional sense then the answer would be No, a corporate body cant be held liable because it is a separate legal entity distinct from its members, officers and employees and itself they dont have mind which is one of the essentials in criminal law for the commission of an offence. But in modern times, the scenario has been changed and the corporate bodies by virtue of the theory of corporate organs or the alter-ego doctrine2 are being held criminally liable. With regard to the punishment of the corporate body for business crimes, the courts are not able to take strict actions, due to lack of specific and effective laws. Inadequate laws have shortened the hands of the courts in sentencing the punishments of higher grade like death penalty and imprisonment (Both rigorous and imprisonment for definite time) which are required to put
1 2
Glanville Williams, Text Book of Criminal Law (2nd ed., Universal Law Publishing Co. Pvt. Ltd. 1961) 970. Sophia Mustafa, Corporations Liability for Commission of Crime (Vol.-1 Issue-2, RMLNLU Law Review 2010) 66.
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deterrence in anti-social elements that use the corporations as a vehicle to achieve their personal interest. The courts are bound to award them only fines in the name of punishments. The author, in this paper, is trying to find out plausible solutions in respect of emerging problems of corporate crimes through the comparative study of the status of the doctrine in India and the USA. EVOLUTION OF THE DOCTRINE OF CORPORATE CRIMINAL LIABILITY INDIA In India, the doctrine of Corporate Criminal Liability was come into existence after the gross negligence of the Union Carbide Corporation Ltd. which resulted in widespread damages and massacre in Bhopal Gas Leak Tragedy Case3 in 1984, when it became our need to pierce the corporate veil to bring the actual perpetrators of the disaster out for trial and to punish them for their inhuman acts but unfortunately at that time there were no any judicial interpretations or specific laws to tackle such problem in the archaic penal code4. Since then with emergence in law many branches of the Indian law have been grown up including the concept of Corporate Criminal Liability. But the statutory authority and the judicial precedential authority is not yet capable of imposing harsher punishment to create deterrence. The landmark authority in this regard is Standard Chartered Bank and Ors. v. Directorate of Enforcement and Ors.,5 in which a Constitution Bench of the Apex Court overruled the previous views on the doctrine of Corporate Criminal Liability. The Apex Court went through to award complete justice by imposing fines in lieu of following literal and strict interpretation rule which is the basic requirement of the penal statutes. The court in this case felt urgent need of effective laws to avoid the exemption of the actual perpetrators. USA The doctrine of Corporate Criminal Liability in the American Jurisprudence was evolved by the influence of the English Common Law. In 14th century, the fictional entities came into existence in the English Common Law but the importance of the corporate bodies grew with the spread of industrialization during 16th-17th century. Hence in 17th century there was no concept of vicarious
3 4
Union Carbide Corporation Ltd. v. Union of India [1994] 4 SCALE 973. Indian Penal Code, 1860. 5 [2005] AIR SC 2622.
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liability, it was very difficult to hold a corporation criminally liable. Evolution of principle of vicarious liability in 19th century opened a way for English courts to hold the corporations liable for the acts of their officers, agents, and employees because while doing so they were acting within the course of their employment. Therefore, in this way first time in 1842 a corporation was held liable for failing to fulfill a statutory duty. 6 The evolution of the principle of vicarious liability altered the history of American laws regarding criminal liabilities of the corporations. In the beginning of the 20th century, the United States of America adopted the principle of Vicarious Liability to hold the corporations criminally liable7. The USA SC in the landmark case New York Central & Hudson River Railroad Co. v. United State, 8provided a platform for coming future cases for holding the corporate bodies liable for the criminal acts done by their employees having mental element. STATUS OF SENTENCES AND LAW RELATING TO IT INDIA Basically Indian law recognizes mens rea as most important ingredient to be proved. Mens rea is a doctrine represented through a maxim actus non facit reum, nisi mens sit rea which means to make one liable it must be shown that act or omission has been done which was forbidden by law and has been done with a guilty mind. Corporations are artificial person having recognized by the law as a person but cant be held liable because as a natural person it does not have a mind that is responsible for the commission of the offence, as per the traditional phenomenon. With the change in time the views of courts are being changed and they are holding corporate bodies criminally liable. Statutory provisions in India to deal with such matters are Sections 45, 63, 68, 70(5), 203 etc. of the Companies Act, 1956 make the officers personally liable for their acts. Except Companies Act there are few other statutes i.e. the Negotiable Instrument Act,
Anca Iulia Pop, Criminal Liability of Corporations: Comparative Jurisprudence (2006) 52, < http://www.law.msu.edu/king/2006/2006_Pop.pdf> accessed 25 August 2013. 7 Allens Arthur Robinson, Corporate Culture As A Basis of the Criminal Liability of Corporations (2008) 29-33, < http://198.170.85.29/Allens-Arthur-Robinson-Corporate-Culture-paper-for-Ruggie-Feb-2008.pdf> accessed 01 September 2013. 8 [1909] 29 S. Ct. 304, <Miriam Maisonville, Rethinking Theories of Corporate Liability in Criminal Law: Pushing the Legislative Envelope- A Comparison of Canadian, American and English Developments <Corporate Criminal Liability: Some Insights, edited by P. L. Jayanthi Reddy, (1st edition, Amicus Books, Icfai University Press, 2008)>.
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Essential Commodities Act, and Income Tax Act etc.9 The Companies Act, 2013 has brought certain adaptations having modern approach in statutory provisions, these adaptations are sections 34, 147(5), 224, 282(3) etc.10 In making the employees criminally liable, IPC must be considered in accordance with its provision there are some kind of offences which only talk about the punishment of imprisonment, the question of putting a corporate body in prison arise. Therefore sanction given through that particular section wont be applied. Due to inadequacy of law courts are also not capable in taking any action in this regard. In a case the Assistant Commissioner, Assessment-II, Bangalore and Ors. v. Velliappa Textiles Ltd. and Ors,11 according to the court Corporate Criminal Liability cannot be imposed without making necessary changes to the statutory authorities. If there is no possibility of fine in any provision of the IPC then a judge cant at his discretion award fine in lieu of imprisonment. 12 In 2005 in Standard Chartered Bank and Ors. v. Directorate of Enforcement and Ors13the Court sentenced the actual perpetrator with fine instead of imprisonment the reason is very obvious that a corporate body cant be imprisoned. The Court in this case gave preference to the justice expect the practice which was going on from the beginning. USA Dealing with corporate crimes, the USA has statutory authority of the Sarbanes-Oxley Act, 2002, which contains provisions dealing with internal control (to ensure that a corporate body cannot be
used as a vehicle to threat the society, again) on corporate bodies and their accounting procedures.
This Act compelled to the United States Sentencing Commission for enhancing the Guidelines dealing with corporate frauds and relating offences. Therefore the Federal Sentencing Guidelines adopted by the United States Sentencing Commission, are the other instrument of the American Criminal Law, dealing with the crimes in corporate sector. These two instruments of American Criminal Law introduced an innovative approach by inclusion of a lot of new crimes and
9
Angira Singhvi, Corporate Crime and Sentencing in India: Require Amendment of Law (vol.1 issue 2, International Journal of Criminal Justice Sciences 2006) < http://www.sascv.org/ijcjs/angira.pdf> accessed 05 September 2013. 10 The Companies Act, 2013. 11 [2004] AIR SC 86. 12 See supra note 10. 13 See supra note 6.
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punishments which may have never been considered in the past. In other words it can be said that the Act changed the entire mechanism of sentencing. Some of the crimes added in the new criminal law were mail frauds, wire frauds, and false SEC fillings etc.14 Not even single, there were many faces from whom the veil was pierced and they were equally treated as natural persons for their criminal acts which have been committed in their authoritative capacity. Former CEO of the WorldCom, Mr. Bernie Ebbers is one of them. He was sentenced for imprisonment for 25 years and another big name in respect of this matter is Jeffrey Skilling, former CEO of Enron, he was sentenced for imprisonment for 24 years. Sanjay Kumar, Computer Associations and Walter Forbes, Cendant are the persons who sentenced for long term imprisonment while their companies didnt fail because of fraudulent activities.15 One more beginning came with the case Apprendi v. New Jersey16the Court restored the power to exercise a discretion especially when jury decides without giving clear reasoning with a view to guide the court to sentence the perpetrator. In another important case Gall v. United States17, the court made it clear the trial judge will also have power to exercise such discretion. The case of Gall may be a milestone in reducing the corporate crimes. CONTRIBUTION The author in this paper has tried to find out the background of the notion of the corporate criminal liability and laws relating to it, in India and the United States. The sole purpose of the laws is to protect the society from the evils. Law for the betterment of the society has put certain restrictions upon all the persons within the society itself. For those who dont abide law it has prescribed the punishments, the purpose of the punishment is threefold: reformation, restriction and retribution i.e. reformation of the offender so that he mat blend into the society and no longer remains a threat to the existing peace and tranquility within it, restriction upon the offender to make him/her realize the consequences of his/her actions and retribution for the victim and his/her family member. The three Rs as described above, form the very backbone of our
14
Peter J. Henning, The Changing Atmospherics of Corporate Crime Sentencing in the Post Sarbanes-Oxley Act Era < Corporate Criminal Liability: Some Insights, edited by P L Jayanthi Reddy, (1st edition, Amicus Books, Icfai University Press, 2008)>. 15 Id. 16 [2000] 530 US 466. 17 [2007] 128 S. Ct. 586 .
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criminal justice system. Another vital objective of punishment is to create deterrence or apprehension of such punishment in the mind of other corrupt elements in the society as well as the offender himself. As for the authors contribution author would like to propose some suggestions to deal with the problem of sentencing a corporate body. The suggestions are given below: 1. A corporation, an artificial person must be punished as same as a natural person in accordance with the penal laws of the land. 2. In lieu of death penalty, a corporation must be brought to the end. In this way, all the assets belong to the corporation must be forfeited by the Central or State Governments as the matter depend. 3. If the actual perpetrators are guilty of crimes like sexual assault, murder etc. must be punished separately from the entity for such offence according to the IPC, 1860. 4. A corporation, if found guilty, must be punished with excessive Corporate Social Responsibility (CSR) upto the extent of 3-4 times of the profit gained wrongfully by it. 5. The fine imposed upon the corporations must be about 3-4 times of the profit gained. 6. In sentencing all the above punishments the court must pierce the corporate veil and punish the actual perpetrator separately in accordance with the law for natural person. The punishment in this case would depend upon the gravity of the offence. 7. To support the victims in such cases certain compensation, according to the loss suffered, must be awarded. CONCLUSION The corporations are the artificial persons having no intention at all. They are run by the mind of the natural persons because they can think. If the corporations dont have guilty intention they cant be held liable, it was the presumption. But now this presumption is moving towards an end. The reason behind is alteration in law which is to promote justice rather than to follow the mechanism of the law technically. In this paper the author has tried to study the sentence pattern was being followed for a long time and the reasons because of which these laws are not capable of dealing with the business crimes in the modern times and includes some suggestions regarding to reforms the laws with a view to punish the corporate bodies for criminal purposes.
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A CRITICAL STUDY OF FUNDAMENTAL RIGHTS AVAILABLE TO CORPORATE BODIES WITH REFERENCE TO LEADING CASES
DEBMITA MONDAL AND APOORVI SHRIVASTAVA
INTRODUCTION Corporate bodies are separate legal persons capable of owning properties, entering into contracts, and suing or being sued.1 But these corporate bodies being artificial and not natural entities, pertinent questions often arise whether corporations are entitled to same fundamental rights guaranteed by the Constitution or other Convention as available to natural entities. Question also arises regarding the nature of corporate personality and the theories relating to the same. Generally, it may be seen certain rights are available to citizens only like in case of Article 15, article 16, Article 19 etc of the Constitution of India. So the concept of citizenship and nationality are also important for understanding why certain rights are not available to companies under the constitution of India. This research has been divided generally into four parts. Firstly, a study of the jurisprudential background of company in light of the predominant corporate personality theories is done to find the philosophical basis for fundamental rights for companies. Secondly, the internal division among the fundamental rights as guaranteed by the Constitution of India is noted based on the concept of citizenship in India. Thirdly, the judicial precedents set by the Indian Courts in interpreting the constitution and determining which fundamental rights are available to a company incorporated in India is discussed chronologically. Fourthly, a comparative study of the status of company in relation to availability of fundamental rights to them is done in respect of United States and Europe. This paper thus seeks to critically study the fundamental rights available to companies from a case study viewpoint.
A.K. Majumdar and Dr. G.K. Kapoor, Taxmanns Company Law and Practice, 12 Edition.
th
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I. JURISPRUDENCIAL BACKGROUND OF COMPANY AND JUSTIFICATION FOR FUNDAMENTAL RIGHTS With the growth of corporate form of business, the companies started yielding so much of political and economic power at the late nineteenth century and early twentieth century that legal theorists had to rethink corporate theory in context of the extent to which state would exercise authority over these bodies. It is in this context many theories were evolved. The grant theory or concession theory or artificial entity theory2 asserts that corporation is an artificial entity incorporated under a charter and thus its power is limited to the charter of incorporation. Thus a company legally owes its existence to the state that approves the charter for its incorporation. This theory has relevance in limit of companies like East India Company which was established under charter issued by the queen in Europe. It was also predominant in United States until late nineteenth century and was reflected in the judicial decision makings then. For example: Chief Justice Marshall held A corporation is an artificial being, indivisible, intangible and exists only in contemplation of law Being the mere creature of law, it possess only those properties which the charter of its creation confers upon it.3 But after 1850, the state started granting charters to many corporations and thus nature of incorporation of a company being a privilege ceased to exist.4 This led to the loss of significance of the grant theory under which companies were assumed to be artificial entity. Thus companies, in light of the free incorporation movement, were seen as real entity and pertinent questions were debated by the theorist then that if incorporation ceases to be a privilege whether state actually then has right to regulate companies. Thus the proponents of the real entity theory5 stated that as companies would be formed at will and they would conduct business as they wish and dissolve at their own will too, companies ceased to be the special creatures of state and they started claiming same privileges as all other individuals and groups.6 It is the legacy of real
Virginia Harper Ho, Theories of Corporate Group: Corporate Identity Reconceived , Seton Hall Law Review, Volume 42 [2012] Issue 3 Article 2. 3 Trustees of Dartmouth College v. Woodward 17 U.S. 518 (1819) 4 Dale Rubin, Corporate Personhood: How the courts have employed bogus jurisprudence to grant corporations constitutional rights intended for individuals, 28 QLR 523 2009-2010 5 The real entity theory is also known as natural entity theory . See Supra note 3. 6 Supra note 5
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entity theory that can be traced in modern corporate codes, judgements and common law doctrines. M. Hager in his article, argues that: the real entity theory might more easily account for the notion that corporations possessed natural rights, especially property rights, immune to regulation for deprivation at the hands of the state7 It is the rationale behind the real entity theory that paved way for companies who later claimed rights under the Bill of Rights and Fourteenth Amendment. It is also the reason real entity theorists around the globe ask for fundamental rights to be available to companies. There are other theories regarding corporate personality like aggregate theory which talks about company being a fictional character which actually represents the interests of shareholders, directors and other consisting natural entities.8 The theory was natural outgrowth of emphasis on freedom of contract and it championed the cause that economic activity being private activity, state should have minimal role and corporate forms should be left open to market forces 9. This theory is equivalent to the concept of lifting the veil and examining who actually constitute such a company and under this theory co-extension of fundamental rights to companies as those available to its members can be argued. Interestingly, John Dewey, a legal realist school philosopher argued in his article10 that all these theories relating to corporate personality are actually manipulable and the same theories has been used to limit as well as expand the scope of corporate power at different points of time.
II.
STATUS OF COMPANIES FROM CONSTITUTIONAL VIEW POINT
Part III of the Constitution of India talks about fundamental rights. There is a thin line of divide between the rights provided in Part III. While some of these rights are available only to citizens, others are available to persons. For example: Article 14 (Equality before law), Article 20 (Protection in respect of conviction of offences), Article 21 (Protection of life and personal
7
Mark M. Hager, Bodies Politics: The Progressive History of Organizational Real Entity Theory, 50 U. Pitt. L. Rev. 575 8 Supra note 3 9 Supra note 3 10 John Dewey, The Historical Background of Corporate Legal Personality , 35 Yale L.J. 655 1925-1926.
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liberty), Article 22 (Protection against arrest and detention in certain cases) , Article 25 ( Right to Freedom of Religion), Article 27 (Freedom as to payment of taxes for promotion of any religion), Article 28 (Freedom as to attendance at religious instruction in certain educational institutions), etc are the provisions which specifically talk about rights concerning person. In contrast the other articles like Article 15 (Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth), Article 16 (Equality of opportunity in matters of public employment), Article 19 (Right to freedom), Article 29 (Protection of interests of minority) and Article 30 (Rights of minority to establish and administer educational institutions) talks particularly about citizens. Thus when constitution confers a particular right to be enjoyed by citizen in contradiction to those enjoyed by all, the Constitution has used the word any citizen or all citizens. It is in this context that the difference between person and citizen becomes vital to determine which fundamental rights are available to companies in India. Part II of the Constitution of India which deals with Citizenship confers the right of citizenship to person born in India, or whose parents are born in India or who had resided for a period not less than 5 years before the commencement of the Constitution.11 It also talks of rights of citizenship of certain persons who had migrated to India from Pakistan12. Thus Part II talks only about natural persons who can be citizen of India and do not contemplate corporate bodies as citizen. The Citizenship Act 1955 basically talks about five types of citizenship i.e. citizenship by birth13, citizenship by descent14, citizenship by registration15 citizenship by naturalization16 and citizenship by incorporation of territory17. Interesting it is to note that this act has also excluded persons other than natural persons from the scope of citizenship. Thus Companies are not citizen in India. But the question regarding whether company still not be entitled to the fundamental rights available to citizens of India who may be shareholders in such company is a question which is to be determined only through the judicial approach taken in India.
11 12
Article 5 of The Constitution of India Article 6 of The Constitution of India 13 Section 3 of The Citizenship Act 1955 14 Section 4 of The Citizenship Act, 1955 15 Section 5 of The Citizenship Act,1955 16 Section 6 of The Citizenship Act,1955 17 Section 7 of The Citizenship Act,1955
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III.
JUDICIAL EVOLUTION OF FUNDAMENTAL RIGHTS OF COMPANY IN INDIA
The debate relating to nature of corporate bodies and the right they are entitled to arose in India no sooner India got its independence in 1947. It was as early as 1950 that we found Indian Courts delivering decision on the issue whether companies are entitled to fundamental rights. In the first Sholapur Spinning and Weaving Company case18, a shareholder of the Sholapur Spinning and Weaving Company challenged the Sholapur Spinning and Weaving Company (Emergency Provisions) Act, 1950 on the ground that the Act was not within the Legislative competence of the Parliament and infringed his fundamental rights guaranteed by Article 19 (1) (f), Article 31 and Article 14 of the Constitution and was consequently void. The court while giving the decision reiterated the long established principle of separate legal entity19 and said individual shareholders and company are separate entities. Therefore, a shareholder cannot claim infringement of fundamental rights on behalf of the company unless it infringes his own rights too. Justice Mukherjea and Das observed: Except in the matter writs in the nature of habeas corpus no one but those whose rights are directly affected by a law can raise the question of the constitutionality of a law and claim relief under Article 39.20 Acknowledging the difference between natural persons and juristic persons, the court held that companies can come to court for enforcement of their fundamental rights except where the language of the provision or the nature of the right, compels the inference that they are applicable only to natural persons. The Court restated the same opinion that only certain fundamental rights are available to companies in the Jupiter General Insurance Company v. Rajagopalan and Anothers21 case. The court dismissed the petition of Jupiter General Insurance Company, Ltd. along with other insurance companies like the Empire of India Life Assurance Company, Ltd. and the Tropical Insurance Company, Ltd and said a corporation is not a citizen and therefore it is not entitled to
18 19
Chitranjit Lal Chowduri v. The Union Of India And Others 1951 AIR 41 See Kondoli Tea Co. Ltd, Re ILR [1886] where Calcutta High Court observed, The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of property, as if the shareholders had been totally different persons. 20 Supra note 19 21 AIR 1952 P H 9
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raise questions that the impugned legislation has taken away or abridged the rights conferred by Article 19(1) (f) and (g), Constitution of India. When the second Sholapur Spinning and Weaving Company case22 came, the court allowed the representative petition filed by a preference shareholder on behalf of him and other such preference shareholders. The court reasoned that the impugned Ordinance in question does violate the fundamental right of the Company under Article 31(2) of the constitution but the petition is not allowed on that ground. The fact that deprivation of the property of the Company within the meaning of Article 31 without compensation actually lead to a situation where preference shareholders who were called upon to pay the moneys unpaid on their shares involves right on part on the shareholders to challenge the constitutionality of the Sholapur Spinning and Weaving Company (Emergency Provisions) Act, 1950. The evident difference in concept of person was referred in Article 31 and citizen as referred under Article 19 was highlighted by the court and court said a shareholder can come for enforcement of his rights under Article 19 while the company itself can come to court under Article 31 to challenge the impugned Act. Thus the scope of the two Articles covers different fields. However, the Bombay High court took a different stand and said when the nature of right is such that it cannot be merely confined it merely to natural persons, then court must come to the conclusion that a corporation is as much entitle to that right as an individual citizen.23 Thus the court allowed the petition of infringement of fundamental rights under Article 19 (1) (g) by the company R.M.D. Chamarbaugwalla holding such company to be a citizen of India who is entitled to carry trade and business in India. This decision of the Bombay High Court was a clear depart from the stand taken earlier by Indian Courts where company was held only to be a person and was entitled only to such fundamental rights as available to persons. The position kept varying as the Calcutta High Court in 1958 decided the case Everett Orient Line Incorporated v. Jasjit Singh and Others following the rationale in precedent laid down by Supreme Court in second Sholapur Spinning and Weaving Company case. The court dismissed the arguments by the company Everret Orient Line on confiscation of smuggled goods from its vessel which was not in knowledge of petitioner and fine as against Article 19. The court clearly
22 23
Dwarkadas Shrinivas Of Bombay v. The Sholapur Spinning & Weaving Company 1954 AIR 119 State of Bombay vs. R.M.D. Chamarbaugwalla 1957 AIR 699
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stated Article 19 protection is only for citizens and the company being incorporated outside India is not an Indian citizen. Therefore, it cannot seek protection of the same. However, whether the Calcutta High Court would have allowed the plea of protection under Article 19 if it was an Indian Company was not discussed in the case. In Reserve Bank of India v. Palai Central Bank Limited24 a completely different set of arguments cropped up where the Kerala High Court said that the intention of the framers of constitution was not to exclude corporate bodies from exercising all fundamental rights. The fact that Article 19 (1) (c) they gave all citizens the right to form associations and unions, and it could not have been their intention that the corporate bodies so formed by citizens, should be denied the rights guaranteed to the individual citizens, in particular that the agencies through which a substantial portion of their business is conducted by the citizens of this country and a considerable portion of their property held, should not have the protection of Clauses (f) and (g).25 Thus the court admitted the petition of Palai Central Bank which challenged the notice of winding up by Reserve Bank of India and questioned the constitutional validity of Section 38(3) (b) (iii) of the Banking Companies Act on grounds of offending Article 14 and Article 19 (1) (f) and (g). The case is important from the point that court adopted an entirely peculiar reasoning that denial of fundamental rights to companies which are available to citizen will virtually amounts to a denial of those fundamental rights to the citizens who (though, of course, different persons) really constitute those bodies.26 After these series of decisions given by different High Courts based on different reasoning, the issue was again discussed by Supreme Court of India in the State Trading Corporation of India Ltd & others v. The commercial tax officer, Visakhapatnam and others27. While deciding the writ was filed under Article 32 of the constitution by State trading Corporation, the court had to decide whether State Trading corporation which is incorporated under Companies Act, 1956 is a citizen within the meaning of Article 19 of the constitution and can ask for the enforcement of fundamental rights granted to the citizen under the said article. The Supreme Court explained clearly that corporate bodies are juristic persons and so they cannot be termed as citizens though
24 25
AIR 1961 Ker 268 Ibid 26 Ibid 27 1963 AIR 1811
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they may be of Indian nationality due to incorporation in India. Thus the court distinguished that corporate body being Indian national is entitled to civil rights accruing from international law but such corporate body is not a citizen. Hence it is not entitled to any particular right available only for citizen like that under Article 19. After the State Trading Corporation case, the courts have set a trend of denying corporate bodies the title of citizenship as well as denying the fundamental rights available to citizens even when claimed through shareholders or directors of such companies. For example: negating the judgement given in Reserve Bank case28 that companies should be entitled to fundamental rights available to citizens as ultimately it is the citizens who form such corporate bodies, the court in Tata Engineering And Locomotive Co. v. State Of Bihar and Others29 held that: Associations cannot lay claim to the fundamental rights guaranteed by that Article solely on the basis of their being an aggregation of citizens. Once a company or a corporation is formed, the business which is carried on by the said company or corporation is the business of the company or corporation and is not the business of the citizens who got the company or corporation formed or incorporated and the rights of the incorporated body must be judged on that footing and cannot be judged on the assumption that they are the right attributable to the business of individual citizens. The court discussed in this case how accepting the argument that corporations are nothing more than an aggregation of shareholders would actually allow companies to achieve by lifting the veil that which the constitution did not provide them with i.e, the rights exclusively to citizens. Subsequent cases like Jaipur Udhyog Ltd. v. Union Of India and others30 where writ petition had been filed under Article 226 of the Constitution of India challenging the constitutionality of the Cement Control Order 1967 and V. Rev. Mother Provincial v. State of Kerala and others31 where some provisions of Kerala University Act, 1969 were challenged to be violative Article 19 (1) (f), Article 31 (2) and Article 30 (1) of the Indian constitution, courts decided in line of the Tata
28 29
Supra note 25 1965 AIR 40 30 AIR 1975 SC 1056 31 1970 AIR 2079
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Engineering and Locomotive case32 that a company registered under the Companies Act 1956 not being a citizen is not entitled to claim enforcement of fundamental rights under Article 19. In 1969 when the Bank nationalization ordinance was passed by the then president V. V. Giri and later this ordinance was repealed by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, Rustom Cavasjee Cooper, a shareholder and director of one of the fourteen commercial banks which were nationalized, challenged the validity of the Ordinance and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969. One of the grounds for challenge was that: Provisions of the Act which transferred the Undertaking of, the named Banks and prohibited those Banks from carrying on business of Banking and practically prohibited them from carrying on non-banking business, impaired the freedoms guaranteed by Articles 19(1) (f) and (g).33 The court allowed the petition on the ground that petitioner claimed the Act and the Ordinance impaired the rights guaranteed to him (that is to the shareholder) under Articles 14, 19 and 31 of the Constitution. Thus maintainable of the petition was based on infringement of R. C. Rustams rights and not that of the company under Article 19. However, the court specifically mentioned that where the shareholders right has been infringed along with the companies, the court cannot deny itself action merely on the technical operation of the action. The Bennett Coleman and Company case34 is another important case in relation to determining whether a company can have freedom of speech and expression. In this case the Sub-clauses (3) and (3A) of Clause 3 of the Newsprint Control Order, 1962, passed by the Government of India under Section 3 of the Essential Commodities Act, 1955, and the provisions of the Newsprint Import Control Policy for 1972-73 were challenged on the ground that they are violative of their fundamental right under Article 14 and 19(1) (a) of the Constitution by the newspaper company. The Supreme Court held in this case the fundamental rights of shareholders as citizens are not lost when they associate to form a company. It can be said that the court to certain extent went
32 33
Supra note 30 Rustom Cavasjee Cooper v. Union Of India 1970 AIR 564 34 Bennett Coleman & Company & Others v. Union Of India and Others 1973 AIR 106
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few steps back and the court stated that because the individual rights of freedom of speech and expression of editors, Directors and Shareholders are all expressed through their newspapers, barring relief to a newspaper company who is not a citizen will actually lead to denial of relief to the shareholders of the company.35 In fact the Law Commission of India in its Hundred-First Report36 had actually taken up for consideration the idea whether the fundamental right of freedom of speech and expression should be made available to the companies and other artificial entities. The Law Commission Report took cognizance of the fact that incorporations being artificial characters cannot qualify for citizenship and hence the protection of Article 19 is not available to them. But the Law Commission also took recognition of the fact that there existed atleast four category of corporations which required freedom of speech and expression like companies owning newspaper, companies owning magazines, companies producing or distributing films and corporate like universities or institutions with status of university which conduct seminars and bring out publications.37 In 1983, the Supreme Court of India reiterated the reasoning for the judgement given Bank Nationalization case and held in Delhi Cotton Mills case38, where a rule regulating the deposits accepted by company was challenged, that though the law was in nebulous state but the rights of the shareholder and company are coextensive and therefore denial to one fundamental rights would amount to denial to other. Therefore, fundamental right was not denied to petitioner who was a shareholder even though the company was a co-petitioner. It is not only the rights relating to freedom of speech under Article 19 that were denied to companies by Indian courts for not being citizens. Other rights like protection of interests of minorities and their right to conserve their distinct language, script or culture as provided under Article 2939 of the Indian Constitution is also denied to corporate bodies as the right is specific to
35 36
Ibid See The Law Commission of India (Hundred and First Law Report) on Freedom of Speech and Expression under Article 19 of the Constitution: Recommendation to extend it to Indian Corporations, Available at : th www.lawcommissionofindia.nic.in/101-169/Report f (Accessed on: 10 September 2013) 37 Ibid 38 Delhi Cloth and General Mills v. Union of India AIR 1983 SC 937. 39 Article 29 of The Constitution of India: Protection of interests of minorities:
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citizens residing in India only. In recent case Dr. Naresh Agarwal v. Union of India and Others40 where Aligarh Muslim University claimed the 50% reservation in favour of Muslim candidates only as it claimed to be a minority University entitled to the benefit of Article 30 of the Constitution of India, the court looked into Section 3 of the Aligarh Muslim University Act, 1920 which specifically declared the constitution of a body corporate by the name of Aligarh Muslim University having perpetual seal and a right to sue and to be sued by that name . The court said the university thus has become a distinct corporate body with separate legal entity from its members who contributed to its incorporation. Therefore, Aligarh Muslim University was not entitled to the rights which citizens can claim under Article 30. Other recent cases like Star India Private Ltd. v. The Telecom Regulatory Authority of India41 and Others are also decided on similar rationale that companies are not citizen thus they cannot claim fundamental right that are specifically provided for citizens. So the present scenario is that a corporation cannot claim citizenship and cannot therefore claim any rights under Articles which are specifically dealing with citizens. Though the shareholders of a company can challenge the constitutional validity of a law on the ground of infringement of any article like Article 19, Article 16, Article 30 etc which protects citizens, if their own rights are infringed and in such cases the fact that companys right is also violated will not act as a hindrance or reason for dismissal of petition. COMPARATIVE SCENARIO IN EUROPE AND AMERICA a) European Scenario: The beginning of the 17th Century saw the emergence of chartered companies as modern corporation in Europe. The East Indian Company was perhaps the most developed and profit
(1) Any section of the citizens residing in the territory of India or any part thereof having a distinct language, script or culture of its own shall have the right to conserve the same (2) No citizen shall be denied admission into any educational institution maintained by the State or receiving aid out of State funds on grounds only of religion, race, caste, la nguage or any of them. 40 2005 (4) AWC 3745 41 146 (2008) DLT 455; The involved in this case was whether Star India Private Limited is entitled to protection under Article 19 of the Constitution of India and therefore whether it can file writ petition for quashing the proviso to Section 2 (1) (k) of the TRAI Act to be violative of Articles 14 and Article 19 (1) (a) and (g) and also of Articles 301 to 307 of the Constitution. The court dismissed the petition saying Star India Private Limited is a foreign company as well as companies are not entitled to benefits under Article 19 of Constitution of India.
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making company of that time. These companies were incorporated by Charters issued by the state. As there is no written constitution in Europe, the fundamental rights are enshrined in The Convention for the Protection of Human Rights and Fundamental Freedoms, better known as the European Convention on Human Rights. This Convention was signed in Rome (Italy) on 4 November 1950 by 12 member states of the Council of Europe and entered into force on 3 September 1953.42 Any individual, group of individuals, company or non-governmental organization can apply to the supranational court established under the Convention i.e. Strasbourg Court, provided that they have exhausted all domestic remedies for infringement of their rights.43 The OAO Neftyanaya Kompaniya Yukos v Russia44 is a classic example of a case where the European Court recognizes the fundamental rights of company under the European Convention on Human Rights. In this case, Yuko Oil Company filed complaint in European Court against the Russian state complaining that the Russian authorities had hit it with a series of hefty and unexpected tax claims from 2000-2003, prevented it from paying them and then purposefully dismantled it.45 The company alleged that the Russian authorities had violated Article 6 (the right to a fair trial), Article 14 (the general prohibition on discrimination), Article 18 (protection against a states when it misuses its power) of the European Convention on Human Rights and Article 1 of Protocol 1(the right to protection of property) of the European Convention on Human Rights.46 The European Court ruled that indeed the Russian State had violated the company's convention right to a fair trial provided in Article 6, and the right to protection of property, contained in Article 1 of Protocol 1. So we can conclude that due recognition is given to fundamental rights of companies though they are artificial entities because of their legal status. b) American Scenario:
42
See Official Website of The European Convention on Human Rights, available at: http://human-rightsth convention.org/the-texts/the-convention-in-1950/ (accessed on 6 September 2013) 43 Ibid 44 Application No. 14902/04 45 ECtHR rules Russia violated oil companys rights, http://www.thehumanrightsofcompanies.com/the-humanrights-of-compa/2011/09/ecthr-rules-russia-violated-oil-companys-rights.html (accessed on - 5th September 2013) 46 Ibid
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After the Civil War (1861-1865), the state control of corporations disintegrated and a competitive rush between states to attract businesses was seen. So there was a huge transformation in nature from protected democracy where state issued charter for incorporation of a company to evolution of corporate powers who claimed rights similar to that of individuals.47 It is at this time that the Equal Protection Clause48 came into effect in 1968. Section 1 of 14th Amendment to the Constitution of United States of America stated: All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges and immunities of citizens of the United States; nor shall any States deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws. With the Fourteenth Amendment in force, the judiciary in United States became proactive and several corporate constitutional rights were soon recognized and confirmed by the court. The cases Santra Clara County v. Southern Pacific Railroad49 were brought before United States Supreme Court where the court reported that Fourteenth Amendment equal protection clause granted constitutional protections to corporations as well as to natural persons. In a series of judgments of the United Supreme held companies are entitled to the due process guarantees of the 14th Amendment50, the Court in another case extended the Sixth Amendments right to a jury trial in a criminal case to corporations51, in yet another case the Court extended the free speech clause of the First Amendments to corporations.52 The Supreme Court in recent Citizens United v. Federal Election Commission53 rejected Bipartisan Campaign Reform Acts prohibitions against corporations and unions and held the act violated the First Amendment rights of candidates who raise private money. Thus the position is settled in America as companies are entitled to constitutional rights meant even for citizens under the Bill of Rights.
47
A Brief History of Corporate Personhood, http://coal-free-bellingham.org/a-brief-history-of-corporateth personhood/ (accessed on 17 September 2013) 48 The Fourteenth Amendment to the Constitution of United States of America. 49 118 U.S. 394 (1886) 50 Chicago, Milwaukee, and St. Paul Railway v. Minnesota 134 U.S. 418 (1890) 51 Armour Packing Company v. United States 200 U.S. 226 (1908) 52 First National Bank of Boston v. Bellotti 435 U.S. 765 (1978) 53 558 U.S. 310 (2010)
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CONCLUSION Corporate bodies are important for nations economy. They are not only important for industrial development but also provide employment purposes. Major part of our daily lives are influenced by some or the other corporate activity. So it is important to realize that if a corporate body when at fault for not performing its duties can be held guilty and punished under various laws like in tort, Indian Penal Code, the Companies Act, etc it is also important that such bodies has fundamental rights crucial for its own proper functioning. Like it had already been discussed above how the Hundred-First report of the Law Commission of India noted the importance of right of freedom of speech and expression to a newspaper company. If corporate bodies are expected to perform their duties according to the law for the interest of others then at the same time their rights and interest should also be protected. As we have seen that fundamental rights of the corporate bodies are protected in other nations like United States and countries in Europe, thus the same should be followed in India too. Preservation of Fundamental rights of corporate entities is essential for the growth of the society. These artificial persons therefore should be treated as a citizen so that they can avail such basic rights. Distinction between artificial and natural person cannot be removed completely but at least such basic rights which are essential for the progress and development of these corporate bodies should be granted to them. Earlier there was a huge clash regarding Article 19(f) and Article 31 as they were not provided to artificial entities, though now they are available to them in the form of constitutional right. In the same way either the Fundamental rights which are essential for corporate bodies should be made available to them, by considering these bodies as citizen or such rights should be made available to them as constitutional rights.
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Disinvestment for Better Governance: How Regulatory Bodies Reinforce PSUs in the Slump
JAYSHREE MISHRA AND SHAGUN SINGH
Abstract
Public Sector Units (PSU) are autonomous and semi-autonomous government owned and government operated agencies involved in commercial and industrial activities. Disinvestment in PSUs, also known as divestment or divestiture and referring to the action of an organization (or government) selling or liquidating an asset or subsidiary, has become essential for inculcating professionalism and sound managerial skills, and working from this base the paper strongly aims at contending how disinvestment can be used as an effective tool for better governance under the aegis of regulatory bodies. While disinvestment has provided concrete results so far as resource generation is concerned, the results in terms of efficiency are mixed. There is a need to revisit the subject and plug some of the remaining loopholes in the otherwise robust evolution of disinvestment policy in the country. Over 400 PSUs have been identified with plans in place to divest some of these PSUs, making funds available for social projects under the Planning Commission. In addition to the funds raised, it is also hoped that increased privatization of these undertakings can improve efficiency and productivity. The disinvestment policies, framed by the Department of disinvestment under the Ministry of Finance, provide guidelines and regulate the process of disinvestment in PSUs ensuring that these units working efficiently without any loss. Reserve Bank of India is another regulatory body from which approval for pricing has to be obtained at the time of investment and disinvestment so as to maintain economic stability and capitalistic framework of the economy. Lastly, SEBI plays an important role in providing the guidelines for setting up the stages for disinvestment and has framed critical provisions for the government to meet its disinvestment targets. These regulatory bodies facilitate the process of disinvestment so as to bring targeted PSUs come out of loss, raise the level of economic development and contribute towards social
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development by ensuring better governance with high efficiency and effectiveness. Hence, it is needless to add that the disinvestment process requires to be taken up more seriously by the government to pull PSUs out of crisis, aiming at a time bound program armed with transparency. Keywords Public Sector Undertakings, Regulatory Bodies, Governance, Disinvestment, Crisis,
Transparency
Introduction For the first four decades after Independence, the country has been pursuing a path of development in which the public sector is expected to be the engine of growth. However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilization and low efficiency due to over manning, low work ethics, over capitalization due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large interference in decision making process ,etc.
Hence, a decision was taken in 1991 to follow the path of Disinvestment. The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3, 038 crores. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. It submitted 13 reports covering recommendations on privatization of 57 PSUs. Dr R.H. Patil subsequently took up the chairmanship of this Commission in July 2001.However, the Disinvestment Commission ceased to exist in May 2004.
The Department of Disinvestment was set up as a separate department in December, 1999 and was later renamed as Ministry of Disinvestment from September, 2001. From May, 2004, the Department of Disinvestment became one of the Departments under the Ministry of Finance.1
Disinvestment- A Historical Perspective, available at: http://www.bsepsu.com/historical-disinvestment.asp (Visited on August 18, 2013)
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As the government mulls a step-up in the divestment programme, it may be appropriate to assess the results of the program in India to date whether it is just a revenue raising exercise or are there sustainable improvements in profitability, productivity, employment, and reduction in government interference in public sector undertakings (PSUs), which are important objectives generally associated with privatisation of PSUs.2 Divestment offers an opportunity for big investors to buy a big chunk of shares at one price. However, these stocks are relatively illiquid thus limiting the ability to exit. Except for the long only-funds, most of the other investors consider liquidity or ease of exit as a key parameter before making their investment and becoming party to the disinvestment procedure. The fact of the matter is few public sector companies are investment worthy. Most of the public sector companies have lost their charm, thanks to poor management, bad environment and a visible bias towards private and foreign players. What the government considers as its family silver has lost its value in the market. And the government is partly responsible for it.3 The public sector presence is predominant in public utilities and infrastructure. Railways, post & telegraph, ports, airports and power are dominated by CPSEs or department-owned enterprises. In the roads sector, while some roads are owned and maintained by the private sector, publicly owned and maintained roads dominate. Road freight capacity is almost entirely private, while road passenger traffic capacity is also significantly privately owned and managed. In telecom, the public sector continues to be dominant in the provision of fixed line telephone services, while private licensees are operating in some urban areas. Mobile services are predominantly private, particularly in urban areas, and inter-state and international linking services are significantly privately managed and owned. In the tradable goods sector, the public sector is dominant in coal; oil and gas exploration, development, extraction and transportation, though nearly one third of oil refining capacity is now owned by the private sector. The public sector is also a significant player in steel, fertilizer, aluminium and copper. In the engineering industry, the public sector has been losing market share except in electrical machinery, where BHEL is a significant player.
2 3
Kumar V. Pratap, Disinvestment Programme in India: A Look at the Returns, Financial Express, March 28, 2013 Shishir Asthana, PSU Disinvestment- Chidambaram has Enough Reason to be Worried, Business Standard, September 6, 2013
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In construction and project services, the public sector is a minor player. The bulk of the remaining tradable sector is privately owned and managed.4
The Government has constituted various committees to guide the process of disinvestment through public offer at different stages of the transaction. Such committees include the Core Group of Secretaries on Disinvestment (CGD) for taking decisions relating to the procedural issues and considering any deviations required from the present procedure for effective implementation of CCEA decisions; Inter Ministerial Group (IMG) for overseeing and guiding the process of divestment; and Committee of Officers for recommending to the Empowered Group of Ministers (EGoM) the price/price band/floor price of a public issue, Issue Price, inter se allocation of shares amongst different categories of investor and other related issues in case of pure offer for sale by the Government of India. The EGoM considers the recommendations of the Committee of Officers and decides the price/price band/floor price and other related issues before the public issue opens and after the closure of the Issue it decides the final issue price of the shares and the inter se allocation amongst the investor categories. In case the public offer involves issue of fresh equity and simultaneously Government is also disinvesting a part of its shareholding, an IPO/FPO committee is formed by the Board of Directors of the concerned CPSE for assisting the Book Running Lead Managers (BRLMs) and the Legal Advisors to the Issue, in the preparation of the offer document and carrying out such other tasks as may be required in relation to the public offer. Such transactions are generally referred to as piggy back transactions. The Committee could also be empowered to recommend to the Board of Directors. The work done by the Committee of Officers in the case of pure disinvestment refers to the above-mentioned. The recommendations of the Board of Directors on pricing and price related issues are sent to Department of Disinvestment for placing it before the EGoM for a final decision.5 The major thrust for Disinvestment Policy in India came through the Industrial Policy Statement 1991. The policy stated that the government would disinvest part of their equities in selected PSEs. However it did not stake any cap or limit on the extent of disinvestment. It also did not
4
White Paper on Disinvestment of Central Public Sector Enterprises, available at: http://www.divest.nic.in/white%20paper.pdf (Visited on August 29, 2013) 5 Handbook on Disinvestment through Public offering, available at: http://www.divest.nic.in/MoF_HandbookREVISED.pdf (Last visited on August 25, 2013)
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restrict disinvestment to any class of investors. The main objective was to improve overall performance of the PSEs.6 Industrial Policy statement in 1991 was framed after the crisis of 1991. After regulations of economic policy, disinvestment was also introduced as a measure. The Industrial Policy, 1991 reads as follows: Public Sector Portfolio of public sector investment will be reviewed with a view to focus the public sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being retained there would be no bar for areas of exclusivity to be opened up to the private sector selectively. Similarly the public sector will also be allowed entry in areas not reserved for it. Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose. A social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages. In order to raise resources and encourage wider public participation, a part of the government's shareholding in the public sector would be offered to mutual funds, financial institutions, general public and workers. Boards of public sector companies would be made more professional and given greater powers. There will be a greater thrust on performance improvement through the Memorandum of understanding (MoU) systems through which managements would be granted greater autonomy and will be held accountable. Technical expertise on the part of the Government would be upgraded to make the MoU negotiations and implementation more effective. To facilitate a fuller discussion on performance, the MoU signed between Government and the public enterprise would be placed in Parliament. While focusing on major management issues,
Vaibhav, Current Disinvestment Policy of Government of India, Jurisonline.in, March 21, 2013
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this would also help place matters on day-to-day operations of public enterprises in their correct perspective7. Disinvestment Policy of Government of India
The present disinvestment policy has been articulated in the recent Presidents addresses to Joint Sessions of Parliament and the Finance Ministers recent Parliament Budget Speeches. The salient features of the Policy are: (i) (ii) Citizens have every right to own part of the shares of Public Sector Undertakings Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of the people While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and management control of the Public Sector Undertakings8 National Investment Fund The Government of India constituted the National Investment Fund (NIF) on 3rd November, 2005, into which the proceeds from disinvestment of Central Public Sector Enterprises were to be channelized. The corpus of the fund was to be of permanent nature and the same was to be professionally managed in order to provide sustainable returns to the Government, without depleting the corpus. National Investment Fund was to be maintained outside the Consolidated Fund of India. The NIF was initialized with the disinvestment proceeds of two CPSEs namely PGCIL and REC, amounting to Rs 1814.45 crores.9 Role of Securities and Exchange Board of India (SEBI) in Disinvestment SEBI also guides the disinvestment process and procedures through Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997.
7 8
Chaitanya Kini, Disinvestment Policy of the Government: Pros and Cons, GIM Society of Finance, May 12, 2012 Disinvestment Policy, available at: http://www.divest.nic.in/Dis_Current.asp (Visited on August 20, 2013) 9 National Disinvestment Fund, available at: http://www.divest.nic.in/Nat_inves_fund.asp (Visited on August 25, 2013)
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Under Section 2(1) (c) (cc) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, disinvestment means the sale by the Central Government or by the State Government as the case may be, of its shares or voting rights and/or control, in a listed Public Sector Undertaking. Securities and Exchange Board of India designed Offer for Sale (OFS) and Institutional Placement Program (IPP) instruments for promoters to divest their holdings to meet the public shareholding norm. These also serve as tools for the divestment of government.10 The Government on 17th January, 2013 has approved restructuring of the National Investment Fund (NIF) and decided that the disinvestment proceeds with effect from the fiscal year 2013-14 will be credited to the existing Public Account under the head NIF and they would remain there until withdrawn/invested for the approved purpose. It was decided that the NIF would be utilized for the following purposes of subscribing to the shares being issued by the CPSE including PSBs and Public Sector Insurance Companies, on rights basis so as to ensure 51% ownership of the Government in those CPSEs/PSBs/Insurance Companies, is not diluted and preferential allotment of shares of the CPSE to promoters as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 so that Government shareholding does not go down below 51% in all cases where the CPSE is going to raise fresh equity to meet its Capex programme. The other purposes for which the NIF would be utilized are as follows: Recapitalization of public sector banks and public sector insurance companies; Investment by Government in RRBs/IIFCL/NABARD/Exim Bank; Equity infusion in various Metro projects; Investment in Bhartiya Nabhikiya Vidyut Nigam Limited and Uranium Corporation of India Ltd; and Investment in Indian Railways towards capital expenditure.
With a view to monitoring the investment through offshore derivatives issued against underlying Indian securities (collectively known as participatory notes), SEBI inserted Regulation 20A in the FII (Foreign Institutional Investors) Regulations , making it mandatory for the FIIs to report the issuance/renewal/cancellation/ redemption of such instruments. The FII regulations have
10
Ashwin Ramarathinam, All PSUs Meet SEBIs Public Shareholding Norms, Live Mint, August 12, 2013
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been further amended stating that FIIs can issue offshore derivatives against underlying securities listed or proposed to be listed on any stock exchange in India only in favour of regulated entities subject to compliance with know your client requirements. Further, FIIs or sub-accounts have to ensure that no downstream issue or transfer of such offshore derivative instrument will be made to any person other than a regulated entity. The FII Regulations have also been amended to allow FIIs to participate in delisting offers so as to extend the exit opportunity (provided to all other shareholders) to them. FIIs have also been allowed to participate in sponsored ADR/GDR programs as well as in disinvestment of securities by the Government of India.11 Under the FEMA Regulations, only NRIs and SEBI registered FIIs are permitted to purchase Government Securities/Treasury bills and corporate debt. The details are as under: A. A Non-resident Indian can purchase without limit, (1) on repatriation basis (i) Dated Government securities (other than bearer securities) or treasury bills or units of domestic mutual funds; (ii) Bonds issued by a public sector undertaking (PSU) in India; and (iii)Shares in Public Sector Enterprises being disinvested by the Government of India. (2) on non-repatriation basis (i) Dated Government securities (other than bearer securities) or treasury bills or units of domestic mutual funds; (ii) Units of Money Market Mutual Funds in India; and (iii)National Plan/Savings Certificates. B. A SEBI registered FII may purchase, on repatriation basis, dated Government securities/ treasury bills, listed non-convertible debentures/ bonds issued by an Indian company and units of domestic mutual funds either directly from the issuer of such securities or through a registered
11
Part One: Policies and Programmes, available at: http://www.sebi.gov.in/cms/sebi_data/commondocs/policies_p.pdf (Visited on August 10, 2013)
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stock broker on a recognised stock exchange in India.12 An Indian Party will have to comply with the following: (i) receive share certificates or any other documentary evidence of investment in the foreign entity as an evidence of investment and submit the same to the designated AD within 6 months; (ii) repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc.; (iii) submit to the Reserve Bank through the designated Authorized Dealer, every year, an Annual Performance Report in Part III of Form ODI in respect of each JV or WOS outside India set up or acquired by the Indian party; (iv) report the details of the decisions taken by a JV/WOS regarding diversification of its activities /setting up of step down subsidiaries/alteration in its share holding pattern within 30 days of the approval of those decisions by the competent authority concerned of such JV/WOS in terms of the local laws of the host country. These are also to be included in the relevant Annual Performance Report; and (v) in case of disinvestment, sale proceeds of shares/securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares /securities and documentary evidence to this effect shall be submitted to the Reserve Bank through the designated Authorized Dealer.13 A. Disinvestment by the Indian party from its JV/WOS abroad may be by way of transfer/ sale of equity shares to a non-resident / resident or by way of liquidation/merger/ amalgamation of the JV/WOS abroad.14 In case of disinvestment of stake in overseas JV/WOS, can an Indian party disinvest with write off of part of investment? A. Indian Party may disinvest without prior approval of the Reserve Bank, in the under noted cases, where the amount repatriated on disinvestment is less than the amount of the original investment: (i) in cases where the JV / WOS is listed in the overseas stock exchange;
12
Foreign Investments in India, available at: http://www.rbi.org.in/scripts/FAQView.aspx?Id=26 (Visited on August 29, 2013) 13 Overseas Direct Investment, available at: http://rbi.org.in/scripts/FAQView.aspx?Id=32 (Last Modified March 18, 2013) 14 ibid
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(ii) in cases where the Indian Party is listed on a stock exchange in India and has a net worth of not less than Rs.100 crores; (iii)where the Indian Party is an unlisted company and the investment in the overseas JV/WOS does not exceed USD 10 million and (iv) where the Indian Party is a listed company with net worth of less than Rs.100 crores but investment in an overseas JV/WOS does not exceed USD 10 million.15 As per regulation 10 of the SEBI (Acquisition of Shares) Regulation, 1997, no acquirer shall acquire shares or voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations. Hence SEBI's Takeover Code gets triggered when a person (Strategic Partner) acquires more than 15% of the Voting equity shares is required to make a public offer to purchase shares not less than 20% of the equity of the company. This provision has a great impact on the strategic sale transaction. For instance, in such case the Strategic Partner would be required to buy another 20% of the shares from public, which means SP, has to buy total 45% of the shares. Role of Reserve Bank of India (RBI) in Disinvestment After the completion of several successful disinvestments in PSUs by GOI, RBI has issued guidelines governing the provisions of bank finance for PSU disinvestments exempting the banks from the restrictions earlier imposed on lending against shares and lending for acquisition of corporate control. Now a days all PSU disinvestments are funded primarily by pledging of the shares acquired through the disinvestments with additional/third party security of varying degrees as appropriate from bidder to bidder. As a safety policy, the government insists that the successful bidder remains committed to not disturbing the status quo with the PSU for at least 3 years that means the shares initially purchased from government are subject to a contractual 'lock-in', requiring the winning bidder not to sell these shares. Even a financial pledge of these shares has to be approved by the Government and enforcement to the pledge requires government approval. RBI guidelines impose a condition that the bank
15
ibid
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finance may be extended only for acquiring shares from the government and under open offer prescribed under the SEBI Takeover Code. Subsequent acquisition can't be funded and hence put and call options will not enjoy bank funding. RBI guidelines permit bank finance only for disinvestments approved by the government and therefore, bidders for state levels PSUs are excluded from access to bank finance. RBI has also directed to banks not to lend unless the bidder has an excellent track of record of servicing the loans from the banking systems.16
Reasons for Disinvestment: What is the Need?
There are mainly two reasons in support of disinvestments. One is to provide fiscal support and the other is to improve the efficiency of the enterprises. The argument for fiscal support emphasis that the resources raised through disinvestments must be utilized for retiring past debts and there by bringing down the interest burden of the Government. The second argument in support, to improve the efficiency of the public enterprises through disinvestments, is the contribution that it can make to improve the efficiency of the working of them. The following are the main objectives of disinvestments policy of the Government. To reduce the financial burden on Government. To improve public finances. To introduce, competition and market discipline. To find growth. To encourage wider share of ownership. Help them upgrades their technology to become competitive. Build competence and strengthen their R&D. Rationalize and retain their work force.
16
L. Rajarajeshwari, Disinvestment an Overview, available at: http://www.indianmba.com/Faculty_Column/FC1466/fc1466.html (Visited on August 26, 2013)
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Initiate diversification and expansion programmes17.
As part of the economic reforms, the public sector reforms are also initiated to improve their efficiency and productivity. In this direction disinvestments and privatization are steps to improve the performance and working of public sector undertakings. The new industrial policy provides that "in order to raise resources and encourage wide public participation, a part of the Government shareholding in the public sector, would be offered to mutual funds, financial institutes, and general public and employees". The goals of disinvestments are clearly identified and classified into short term and long term. Disinvestment may be undertaken to reduce or mitigate fiscal deficit, bring about a measure of economic stabilization or to improve efficiency in public enterprises through structural adjustments. It is in this context the PSUs have been demanding that a part of the disinvestments proceeds should be allowed to be retained by PSUs in order to be use to further their research and development, build and enhance their workforce and step into the shoes of diversification of activities. In other words, the objectives of disinvestment vary from improving efficiency of public sector undertakings to transforming society. Disinvestment as a means results into the end of privatization. The touchstone for privatization is the concept that private ownership leads to better use of resources and therefore more efficient allocation. Throughout the world, the preference for market economy received a boost after it was realized that the State could no longer meet the growing demands of the economy and the State shareholding inevitably had to come down. The State in business argument thus lost out and also the presumption that direct and comprehensive control over the economic life of citizens from the Central government can deliver results better than those of a more liberal system that directly responds according to the market driven forces was rejected. Another reason for adoption of privatization policies around the globe has been the inability of the Governments to raise high taxes, pursue deficit inflationary financing and the development of money markets and private entrepreneurship18. Further, technology and W.T.O. commitments have made the world a global village. Unless industries, including public industries do not quickly restructure, they would not be able to
17 18
Shyamal Banerjee, A Good Reason for Disinvestment, Live Mint, April 2, 2013 ibid
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survive. Public enterprises, because of the nature of their ownership, can restructure only slowly and hence the logic, of privatization gets stronger. Besides, techniques are now available to control public monopolies like Power and Telecom, where consumer interests can be better protected, by regulation / competition, and investment of public money to ensure protection of consumer interests is no longer a convincing argument. The problem associated with our public enterprises is not the quality of their assets or manpower, but the overall decision-making environment. Under private management, these enterprises would realize their true potential, thus realizing the ultimate goal of the disinvestments programme, i.e., optimal utilization of the investment locked-up in the PSUs. The successful privatization of non-critical PSUs would pave way for better governance and improve the overall work environment. Another gain of privatization has been the stock market discovery of the latent worth of public sector enterprises. The market capitalization of PSUs zoomed up to Rs. 1, 66,000 Crores in May 2002- a raise of almost 76%. Disinvestment of loss-making PSUs would entail the infusion of fresh capital by the Strategic Partner and these would be under excellent management control with specific accountability and ability to take quick decisions. Methods of Disinvestment: The Step by Step Breakdown of the Disinvestment Process The disinvestments process is related to the procedure adopted by the Government. The procedure involves the valuation of shares and modalities to be adopted for sale of such shares. There are three broad methods, which are used for valuation of shares, namely, Net Asset Value Method: This will indicate the net assets of the enterprises as shown in the books of accounts. If shows the historical values of assets. It is cost price less depreciation provided so far on assets. It does not reflect position of profitability. Profit Earning Capacity Value Method: The profit earning capacity is generally based on the profits actually earned or anticipated. It is excess of earnings over expenditure. It does not really indicate the intrinsic value of the enterprises. The Discounted Cash Flow Method: This technique is popularly used to evaluate viability of an investment proposal. In this method the future incremental cash flows are forecasted and discounted into present value by applying cost of capital rate. This method
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indicates the intrinsic value of the enterprises. This method is a far more comprehensive and complicated method of reflecting the expected income flows to the investors. Out of these three methods the discounted cash flow method is of greatest relevance though it is the most difficult to conduct. The step by step process of disinvestment is as follows: Proposals for disposal of any PSU (Public Sector undertaking), based on recommendations of DC (Disinvestment Commission) or CCD (Cabinet Committee on Disinvestment). After CCD clears, selection of Advisor through competitive bidding process. The Advisor assists GOI (Government) in the preparation and issue of EOI (Expression of Interest) in newspapers. After receipt of EOI from interested parties, prospective bidders are short-listed. Due diligence (DD) by concerned PSU. Based on Due Diligence by PSU, the Advisor prepares Information Memorandum for giving it to the short-listed bidders who has entered into a Confidentially Agreement. Advisor, with the help of Legal Advisor, prepares Share Purchase Agreement. Discussions among Advisors, Govt. & representatives of PSU. Valuation of the PSU in accordance with the standard national practice. The share Purchase Agreement (SPA) is finalized based on the reactions received from the prospective bidders. These Agreements are then vetted by the Minister of Law and are approved by Govt. Thereafter these are sent to prospective bidders for inviting final bidding bids. The bids received are examined, analyzed and evaluated by the IMG (Inter Ministerial Group) and placed before the CCD for final approval of bids. After the transaction is completed, all papers and documents relating to it are too turned to the C&AG (Controller and Auditor general of India, to enable C&AG to undertake an
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evaluation of the disinvestments, for placing it in parliament and releasing it to the public19. In the disinvestments process explained, the DOD (Department of Disinvestment) is assisted at each stage by an IMG (Inter Ministerial Group) comprising, Officers from the Ministry of Finance, Department of Public Enterprises, and the administrative Ministry, Department of controlling PSUs (Dep't. of (HI&PE) and Officers of Department of disinvestments & Advisors.
Positive Co-Relation between Disinvestment and Corporate Governance A new trend of global integration began to emerge and countries all over the world, whether developed or developing, capitalist or socialist, started undergoing vast economic changes, witnessed by the decline in the role of the State in commercial activities and increasing privatisation of state owned enterprises. In 1980s, privatisation had started in real earnest in several parts of the world. This was facilitated by the gradual integration of the world economies, which ensured that capital and goods flowed more freely to countries suffering from lack of resources. Foreign capital became freely available to finance large infrastructure projects, for want of which the domestic private parties were hitherto unable to come forward, and State support was necessary. Acceptance of the W.T.O regime by most of the countries has since led to gradual abolition of quantitative restrictions and reduction in duties and removal of restrictions on inter country trade. As a result, the relevance of the State in providing resources for various commercial activities and protecting the interests of consumers has considerably reduced.20 In the evolution of modern capitalism, with separation of ownership from control as firms grow in size and complexity, agency problem arises: how to ensure that the managers (promoter in Indian parlance) work to maximise return on shareholders capital. Given the information asymmetry, managers could pursue their private goal disregarding the shareholders interests. This is at the heart of the problem of modern literature on corporate governance. Various
19
Process of Disinvestment of Public Sector Undertakings, available at: http://saiindia.gov.in/english/home/Our_Products/Audit_report/Government_Wise/union_audit/recent_reports/ union_performance/2005_2006/Civil_%20Performance_Audits/Report_no_17/introduction.pdf (Visited on August 16, 2013) 20 Disinvestment Manual- February 2003, available at: http://www.divest.nic.in/chap2.asp (Visited on August 15, 2013)
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institutional and contractual mechanisms have evolved in the last century to grapple with this problem. In the context of efficiency of resource use in a socialist economy, economist Oskar Lange sought to solve the problem of how to ensure that managers of public firms maximized efficiency consistent with the goals set by the central planners. However, looking at the microeconomics of firms in a socialist economy, economist Jonas Kornai argued that they were unlikely to be efficient because of the soft budget constraint: that is, firms do not go bankrupt or managers do not lose their jobs for their poor performance. Firms can always renegotiate their contracts with the planners to hide their inefficiency. In India public sector firms are often face with multiple objectives, and multiple owners or monitors central government, state governments, legislators, public auditors and so on. Managers may not necessarily maximise profits as they could always highlight a particular achievement to suit their convenience. Managers may be risk averse as they face constitutionally mandated procedural audit by the Comptroller and Audit General if an enterprise is majority government owned. Managers efficiency objectives may come in conflict with dysfunctional political interference in operational matters (at the expense of policy issues) to meet narrow political goals. However, at the same time, poor performance by managers does not involve any punishment as they can re-negotiate the output prices, budgetary support, or have access to soft and/or government guaranteed loans; in other words they do not face a hard budget constraint. Thus, the agency problem is endemic to all economic systems. Moreover, problem of soft budget constraint is not restricted to socialist economies but evident in market economies as well when the firm is question is large and considered of strategic importance for the economy, though perhaps to much lesser extent. Rescue of Chrysler Corporation the third largest automotive firm in the US in the late 1970s and United Airlines after 9/11 in the US are clear instances of state support for failing companies. Such support is more common in financial sector, where failure of firms can have significant systemic risk.21
21
R. Nagaraj, Disinvestment in India: Assessment and Options, available at :http://saiindia.gov.in/english/Members_Area/Public_Financial/Courseware%20Session%20Wise/SEssion%2016%2 0Disinvestment/Disinvestment%20and%20Privatisation%20in%20India%20Assessment%20and%20Options.pdf (Visited on August 31, 2013)
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The Government announced on 24th July 1991 the Statement on Industrial Policy which interalia included Statement on Public Sector Policy, put forth the decision that portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being retained, there would be no bar for area of exclusivity to be opened up to the private sector selectively. Similarly, the public sector will also be allowed entry in areas not reserved for it. Public enterprises which are chronically sick and which are unlikely to be turned around will, for the formulation of revival/rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high level institutions created for the purpose. Social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages. In order to raise resources and encourage wider public participation, a part of the governments shareholding in the public sector would be offered to mutual funds, financial institutions, general public and workers. Boards of public sector companies would be made more professional and given greater powers. There will be a greater thrust on performance improvement through the Memorandum of Understanding (MOU) System through which managements would be granted greater autonomy and will be held accountable. Technical expertise on the part of the Government would be upgraded to make the MOU negotiations and implementation more effective. To facilitate a fuller discussion on performance, the MOU signed between Government and the public enterprises would be placed in Parliament. While focusing on major management issues, this would also help place matters on day-to-day operations of public enterprises in their correct perspective. In accordance with the decision announced in the aforesaid statement on industrial policy on public sector and also as per budget speech of July 1991, in order to encourage wider participation and promote greater accountability, the Government equity in selected CPSEs (Central Public Sector Enterprises) was offered to mutual funds, financial institutions, workers and the general public.
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In the subsequent years, there have been constant policy changes. While on one hand, disinvestment as a policy has been much debated, there have also been changes and disagreements in terms of the different approaches that can be taken for disinvestment to happen and ensure good governance22 Conclusion Disinvestment Ensuring Better Corporate Governance Corporate governance serves as a mechanism for shareholders to discipline managers and control overinvestment. Strongly governed firms deviate less from the optimal investment policies and have a higher value of growth options and higher value of disinvestment options than weakly governed firms. Growth options are riskier and disinvestment options are less risky than assetsin-place. A higher value of growth options, therefore, leads to higher stock returns and a higher value of disinvestment options leads to lower stock returns. The net effect of corporate governance on cross-sectional stock returns depends on the relative importance of growth options and disinvestment options to firm value. Because the value of growth options is larger than the value of disinvestment options during expansion and vice versa during contraction, the model predicts a procyclical relation between corporate governance and stock returns23 By releasing the voluntary guidelines on corporate governance, the government has expressed a strong desire to improve the corporate governance standards in Corporate India. As the governments disinvestment strategy gathers momentum, there is a genuine need to improve the levels of transparency, and accountability within PSUs. As a first step towards achieving that, the corporate governance norms for Central Public Sector Enterprises (CPSEs) introduced in 2007 have now been made mandatory for all unlisted PSUs. However, there continues to be concerns around effective implementation of these norms. Autonomy of PSUs, functioning of the PSU boards, failure on the part of many listed PSUs (Navratnas and Miniratnas) to comply with Clause 49 of the SEBI Listing Agreement and the vast differences that exist between the
22
Policy on Public Sector and Disinvestment, available at: http://www.bsepsu.com/policy-disinvestment.asp (Visited on August 23, 2013) 23 Erica Li, Does Corporate Governance Affect the Cost of Equity Capital, available http://webuser.bus.umich.edu/xuenanli/gov.pdf (Visited on August 28, 2013)
at:
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governance standards prevalent in central and state PSUs are some of the key issues that need to be tackled on a war footing.24 It is the ability of the government to overrule boards and regulators sometime through legislations that is hampering any progress of PSUs in corporate governance. It is easy to understand that the government is able to extract preferential treatment, and then, what is the incentive of the management of the Public Sector Undertakings to comply? Government ownership is widely seen as an obstacle to good governance. Managers lack incentives, decision-making is slow. But in at least two respects, PSUs have advantages over private firms. One, given the elaborate checks and balances in the public sector, there is less scope for manipulation of accounts. The Satyam type of disaster is less likely in PSUs.25 Disinvestment is often a cheaper and cleaner alternative than closure of loss making public sector unit. However, it is very important to calculate the financial effect of divestment before any final decision is made. Also it must be ensured that proceeds of disinvestment are utilized for the betterment of research, workforce and governance of public sector undertakings.
24
Corporate Governance in the Public SectorThe Road Ahead, available at: http://www.kpmg.com/IN/en/IssuesAndInsights/ThoughtLeadership/C_G_Public.pdf (Visited on August 18, 2013) 25 TT Ram Mohan, Disinvestment for Better Governance, Economic Times, November 19, 2012
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THE VODAFONE CONTROVERSY: THE IMPLICATION ON COMPANIES ACT

KARAN DHALL
CHAPTER I INTRODUCTION The Supreme Court of India, on 20 January 2012, put an end to one the countrys most high profile litigations, and in the process delivered a judgment that will go a long way in changing perceptions of India as a global commercial destination. Vodafone B.V. International (Vodafone), a company incorporated in the Netherlands, had a long-standing tiff with the Indian Tax Authorities regarding the acquisition of shares in CGP Investments, a wholly owned subsidiary of Hutchison Telecommunications International Limited (HTIL). In February 2007, Vodafone acquired a 100% stake in CGP Investment, a company incorporated in the Cayman Islands, from Hutchison. The Income Tax Authorities argued that apart from the transfer of shares, certain rights and entitlements, were also transferred and were an intrinsic part of the transaction. CGP Investments held shares totalling 67% in Hutchison Essar Ltd. in India, through various companies incorporated in Mauritius and India. The Income Tax Authorities sought to tax the capital transfer of shares of Hutchison Essar, supposedly situated in India, worth US$11 billion. The Income Tax Authorities contended that Vodafone ought to have withheld US$2 billion under Section 195 of the Income Tax Act in respect of the this transaction. In September 2007, the Income Tax Department issued a show cause notice to Vodafone under Section 201 of the act, seeking to treat Vodafone as an assessee in default for not deducting tax at source in terms of Section 195 of the act. In October 2007 Vodafone filed a writ petition before the Bombay High Court challenging the jurisdiction of the department to issue the notice.
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In December 2008, the Bombay High Court held that the transaction was prima facie liable to tax in India. Vodafone then filed a special leave petition before the Supreme Court challenging the high courts ruling. In January 2009, the Supreme Court directed that the jurisdictional issues in relation to the power to tax the transaction first be determined by department. The court also mentioned that Vodafone was entitled, if necessary, to challenge the departments order before the High Court. In May 2010, the department passed an order under Section 201 of the act claiming jurisdiction to tax the transaction and treating the transaction as chargeable to tax in India. Vodafone was therefore treated as an assessee in default. In June 2010 Vodafone filed a writ petition before the High Court challenging the departments order. In September 2010 the high court ruled that: Section 9 of the act was wide enough to cover the transaction; Income is chargeable to tax in India; and The department had jurisdiction under the act to pass an order in relation to the
transaction. Vodafone again challenged the order of the high court before the Supreme Court, through a special leave petition. The hearings began on August 3 2011 and concluded on October 19 2011, after 28 days of arguments. A careful legal analysis of the aforesaid judgment will show that the Supreme Court in deciding the case in favour of Vodafone considered the following important issues.
CHAPTER II ANALYSIS OF THE VERDICT The Supreme Court, in reversing the Bombay High Courts decision, displayed the robustness of the Indian judicial system. Settling a matter of such magnitude in a span of 5 years is commendable considering how ponderous and hesitant the Courts and Legislature have been in the past while addressing issues of national importance. The judgment in itself is very lucid and,
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most importantly, plugs many loopholes that have been confusing both industry and income tax authorities for many years. The Court did not succumb to the pressure of the numbers involved but rather upheld the Rule of Law. The judgment addresses a number of issues: lifting of the corporate veil, situs of assets, controlling interest and extinguishment, jurisdiction over indirect transfers, tax avoidance and tax planning, and finally, substance versus form. It is, therefore, imperative to deconstruct the judgment into its constituent parts and assess the issues dealing with corporate law in depth. 2.1 SEPARATE ENTITY PRINCIPLE The Supreme Court observed that the corporate and tax laws treat a company as a separate person. A parent company and its subsidiary are totally distinct taxpayers and tax treaties also give the same treatment to parent and subsidiary. The fact that the parent company exercises shareholders influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. However, the separate entity principle can be disregarded by the tax authorities when there is no reasonable business purpose in creating corporate structures and these structures are used for tax avoidance or avoidance of withholding tax
2.2 ACQUISITION OF SHARES V. ACQUISITION OF SHARES ALONG WITH OTHER RIGHTS AND ENTITLEMENTS The Bombay High Court concluded that Vodafone acquired share of CGP along with other rights and entitlements including options, right to non-compete, control premium, customer base, brand, licenses, etc., and these other rights and entitlements are capital assets within the purview of provisions of Income-tax Act. The Supreme Court held that High Court should have applied look at test and examined the transaction holistically. The Supreme Court observed that payment by Vodafone to HTIL was for the entire package and both the parties never agreed upon a separate price for the CGPs share and other rights and entitlements. Accordingly, it was not open to the income-tax authorities to split the payment and consider a part against individual items. The Supreme Court was of the
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view that the transaction between HTIL and Vodafone was a contract of outright sale of CGPs share for a lump sum consideration. 2.3 SECTION 195 - APPLICABLE ONLY WHEN A TRANSACTION IS TAXABLE IN INDIA Section 195 requires the payer to deduct tax at source from payments made to non-residents which are chargeable to tax in India. It was held by the Supreme Court that shareholding in CGP is a property situated outside India and the transfer of the share by HTIL to Vodafone (an offshore transaction) did not give rise to any taxable income (capital gains) in India. In the absence of any taxable income, the question of deduction of tax at source under section 195 would not arise. 2.4 CORPORATE VEIL AND THE VODAFONE JUDGMENT Vodafone challenged the tax levied in the Bombay High Court, which ruled against it and in favour of the income tax authorities (the Revenue), holding that the essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. Vodafone appealed to the Supreme Court, which overturned the judgment of the Bombay High Court and ruled that Vodafone was not liable to pay income tax on the transaction. Other than in the context of tax planning and assessment, this decision of the Supreme Court has important implications in the context of the legal principle of the corporate veil and when it may be lifted, particularly in the context of tax avoidance. Indian law recognizes that upon incorporation, a company acquires a distinct legal identity, different from that of its shareholders, members or directors. This separate corporate existence enables the company to contract with its shareholders and third parties, to acquire and hold property in its own name, to sue and be sued in its own name, and shareholders of a company are not personally liable for the acts or liabilities of the company. It has perpetual succession, its life is not dependent on that of its shareholders and remains in existence, however often its members change, until it is dissolved.
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The earliest legal case that recognized that a company is a separate legal entity, distinct from its members, is often traced back to Salomon v. Salomon , and a number of other decisions following it, have firmly established this principle. In certain circumstances, courts may ignore the independent personality of the company, and lift the corporate veil to go behind the corporate personality, to the individual members or to the economic entity constituted by a group of associated companies. This enables a court to lift the corporate veil of the company in order to determine the persons responsible for controlling / carrying on the functions of the company. The principle was summarised by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. when it stated: the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected, etc.. In this case, the corporate veil was proposed to be lifted to ascertain the real investing entities, when investments were made through a number of intermediary companies. Insofar as parent / subsidiary companies are concerned, the principle of the corporate veil demands that they also be treated as separate legal entities, unless they are in actuality and function as, a single economic entity. Hence, where the subsidiary, though having a distinct legal personality, does not in fact act autonomously and essentially carries out the instructions given to it by the parent, it is possible to say that the subsidiary and the parent are really one and the same. The Court has to examine whether the two companies are truly separate and independent, and among the factors it will consider are whether the persons conducting the business were guided by the same head and brain and whether the parent decided what the subsidiary should do. Courts have also lifted the corporate veil if it is found that a subsidiary company has been constituted with the sole intention of concealing the true facts, to act as a faade and thereby
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perpetrate a fraud, or to look at the realities of the situation and to know the real state of affairs. Courts have the power to lift the corporate veil and disregard the independence of the corporate entity if it is used for tax evasion or to circumvent tax obligations, or to ascertain the residential status of the company for the purpose of tax incidence, or where the principle of corporate personality is too flagrantly opposed to justice, convenience or in the interest of revenue. In the Vodafone case, the Supreme Court dealt with the principle of the corporate veil and when it can be lifted, primarily in the context of taxation in India, at Paragraphs 66 to 68 of the judgment of the Chief Justice, and Paragraphs 43 to 46, 56 to 61 and 75 to 76, of Justice Radhakrishnans judgment. The Chief Justice first recognizes the principle of the corporate veil by noting that [t]he approach of both the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on the abovementioned separate entity principle, i.e., treat a company as a separate person. The Indian Income Tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies and other entities subject to income-tax. On this basis, he further notes in the context of parent / subsidiary relationships, that it is generally accepted that the group parent company would give guidance to group subsidiaries, but that by itself would not justify lifting the corporate veil or imply that the subsidiaries are to be deemed residents of the State in which the parent company resides, and that a subsidiary and its parent are totally distinct tax payers. The Chief Justice then clarifies that it is only in a situation where the subsidiary is fully controlled or subordinate to the parent company, and / or the actual controlling parent company makes an indirect transfer through abuse of organization form/legal form and without reasonable business purpose which results in tax avoidance, that the separate legal entities may be ignored and the subsidiarys place of residence may be linked with that of its parent company, and tax imposed on the actual controlling parent company.
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Thus, whether a transaction is used principally as a colorable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. While dealing with the aspect of tax liability in India and indirect transfers / holding company and subsidiary company relationships, the Chief Justice notes that it is common for foreign investors to invest in Indian companies indirectly, through an interposed foreign holding or operating company, such as Cayman Islands or Mauritius based company, for both tax and business purposes. The GAAR (General Anti Avoidance Rules), adopted by India and its judicial anti-avoidance rule, permit the Revenue to invoke the substance over form principle or piercing the corporate veil, if it is able to establish that the transaction in which the corporate entity is used is a sham or tax avoidant. As an example, if the Revenue finds that in an investment transaction / acquisition, an entity which has no commercial/business substance has been interposed only to avoid tax, then in such cases the Revenue would be entitled to ignore the separate legal identity or interposition of that entity, to look at the holding company as having directly made the investment / acquisition. The Chief Justice then lists out six factors that may be considered in order to determine whether the transaction is a sham and whether in a specific case, the corporate veil may be lifted, i.e. the concept of participation in investment; the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. Justice Radhakrishnan judgment also recognises the principle of the corporate veil and that a company / subsidiary company, is a separate entity which will be held to be so except in very limited circumstances. In the context of tax liability, he repeatedly observes that the veil can be lifted only if the Revenue establishes that the transaction / corporation has been effected to achieve a fraudulent or dishonest purpose, so as to defeat the law, or where it is fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also tax evasion. As such, merely because there is a holding / subsidiary relationship in which the holding company controls the subsidiary or that they are a single
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economic unit, would not justify a lifting of the corporate veil, unless it is for the purposes of tax evasion. In the final analysis, the Supreme Court in Vodafone, decided against lifting the corporate veil as the tax authorities failed to establish, that the Vodafone transaction was a sham or tax evasion scheme. The Chief Justice noted, There is a conceptual difference between preordained
transaction which is created for tax avoidance purposes, on the one hand, and a transaction which evidences investment to participate in India and that in order to ascertain into which bracket the transaction fell, one should take into account the six factors mentioned above. In this regard the Chief Justice observed that the Hutchison structure (i.e. the parent company in Hong Kong, the intermediate subsidiary in the Cayman Islands, and the final subsidiary in India etc.), had existed for a considerable length of time generating taxable revenues right from 1994, that the Share Purchase Agreement envisaged continuity of the telecom business, and that accordingly the Hutchison structure was not created or used as a sham or tax avoidance scheme. In the circumstances, where the court is satisfied that the transaction satisfies all the parameters of participation in investment the Court need not go into the questions such as de facto control vs. legal control, legal rights vs. practical rights, etc., and accordingly, there was no need to lift the corporate veil of the Hutchison or Vodafone entities. 2.5 SITUS OF ASSETS The fundamental issue addressed by the Supreme Court is that the Indian Tax Authority does not have any territorial jurisdiction to tax the overseas transaction between Vodafone and HTIL. The Tax Department put forward the point that Section 9 of the Income Tax Act, 1961 contained a look through provision which allowed taxation of indirect transfers. It must be kept in mind that shares of a Cayman Islands company which were owned by another Cayman Islands company were transferred to a Netherlands company. Kapadia, C.J. pointed shed some light on the applicability of the charging section, i.e. Section 9 of the Act in the wake of arguments of the Tax Department. For a transaction to be chargeable under Section 9, it must satisfy three conditions, namely, existence of a capital asset, transfer of such asset, and the situation of such asset in India. All three elements must exist together in order to attract Section 9 . Radhakrishnan, J. further elaborated on this point. He points out that Section
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9 has no look through provision and such a provision cannot be brought through construction or interpretation of a word through in the section. As a result, indirect transfers cannot be taxed in India. Arguendo, assuming, that Section 9 contained a look through provision, even then such a provision will not affect the situs of an asset from one country to another. Shifting of situs may be done only by express legislation. Although both Kapadia, C.J. and Radhakrishnan, J. held that the situs of the CGP Investments shares is the place of incorporation/register of shares, they appear to have adopted different approaches. The Chief Justice has applied the Companies Act, 1956 while Justice Radhakrishnan has adopted the conflict of laws rules on situs of shares. Under the Companies Act, the situs of shares is always where the company is corporated and where its shares can be transferred. In the present case, CGP Investments Register of Members was maintained in the Cayman Islands and the transfer of shares from HTIL to Vodafone was also recorded in the Cayman Islands. Moreover, these facts were not disputed by the Tax Department. The conflict of laws approach provides that the situs of a companys shares shall be the place where the company was incorporated. Moreover, Cayman Islands law does not recognise multiplicity of registers and as a result the situs of shares of CGP Investments is held to be the Cayman Islands. 2.6CONTROLLING INTEREST, RIGHTS AND ENTITLEMENTS One of the most important questions involved in this case is whether Vodafone acquired a controlling interest in Hutchison Essar. If there was no controlling interest transferred, then the question of a connection with India would not arise. In order to understand what the Supreme Court held with respect to controlling interest, it is important to revisit the facts of the case. Vodafone paid HTIL a sum of US$11.5 billion for a 52% stake in Hutchison Essar, via 100% acquisition of CGP Investments, to HTIL. However, also included in the arrangement, was 15% worth of call options in Hutchison Essar held by HTIL but which would now vest in Vodafone. So, potentially, Vodafone acquired 67% stake in Hutchison Essar. This, the Tax Department believes, is an acquisition of a controlling interest in Hutchison Essar. There is also the question of the Term Sheet agreement entered into by HTIL with Essar in 2003. This agreement granted the former a Right of First Refusal over any sale of shares in Hutchison
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Essar by Essar and it also granted Essar Tag Along Rights in respect of Essars shareholding in HEL. This Term Sheet agreement was given effect to in the Share Purchase Agreement entered into by HTIL with Vodafone as it gave Essar the right to Tag Along with HTIL and exit from Hutchison Essar and this suggests that Term Sheet agreement was a legally binding contract. Another point to be noted is that before the Share Purchase Agreement, the board of directors of Hutchison Essar were appointed in the following ratios: 6 appointed by HTIL, 4 appointed by Essar and 2 appointed by TII, a company which indirectly held 19.5% in Hutchison Essar. TII was one of the intermediate subsidiaries of HTIL. The Term Sheet agreement contained a provision that the practice of appointing the directors in the above ratio would continue. As a result, post-acquisition, Vodafone would now appoint 8 directors (6+2) and Essar would continue to appoint 4 directors. On this point, the Supreme Court has held that mere nomination of directors is different from a right or power to control and manage the affairs of the company. Controlling interest is not an independent capital asset and Vodafone did not acquire such controlling interest in the form of 67%. The 15% options are, at best, analogous to potential share and until such rights are exercised, no voting rights or managerial control exists. Furthermore, continuing the practice of appointing directors cannot be equated with controlling interest. As a general rule, sale of shares cannot be broken up into separate individual components and such components are not distinct capital assets. As per the Kapadia, C.J., control and management is a facet of the holding of shares and applying the principles governing shares and the rights of the shareholders to the facts of the Vodafone case suggest that the transaction indeed was a straightforward share sale. Controlling interest is not a separate capital asset; instead, control is a mixed question of law and fact. Ownership of shares may, in certain situations, result in the assumption of an interest that has the character of a controlling interest in the management of the company. A controlling interest is therefore a not an identifiable or distinct capital asset independent of holding shares. The control of a company resides in the voting power of its shareholders. Shares represent an interest of a shareholder, which is made up of various rights contained in the contract embedded in the articles of association. The right of a shareholder may assume the character of a
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controlling interest where the extent of the shareholding enables the shareholder to control the management. Shares and the rights that emanate from them cannot be dissected. Further, the judges seem to have missed out on one important question. They judges have not discussed adequately, whether the rule that ownership of shares cannot be automatically equated with controlling interest, is applicable in all circumstances. There is doubt whether the said rule will hold good in a situation where the transaction between the parties is explicitly for acquisition of controlling interest in a subsidiary company and the same is given effect to by transferring shares of an overseas parent company. This, in our view, does not seem to have been addressed in the judgment.
CHAPTER III VODAFONES CONFLICTING SIGNALS 3.1 BUSINESS WILL BE ATTRACTED TO A COUNTRY ONLY WHEN THERE IS CERTAINTY Just as the study of economics can have conflicting schools of belief for each given situation, in law, too, situations do arise where two schools of thought can apply to a particular judgment, as it has in the case of Vodafone. It is, however, rare in modern jurisprudence for any particular judgment to attract so much mileage for such a long period of time, covering diverse aspects of the law. This position is similar to a 20:20 match in which the situation is periodically in flux. It makes one believe that the Vodafone case is not a mere taxation issue. It is a well-known fact that the Companies Act, 1956, does not equate ownership of shares with ownership of assets. If the logic that a sale of shares amounts to sale of assets is considered veracious or accurate, does that mean that, for example, shares in a real estate company that are transferred by shareholders will amount to the sale of a derivative (that is, the land bank of the company since land is the underlying asset)? This logic does not sound rational because assets are the property of the company and not of the shareholders. The Bombay High Court in a milestone verdict, however, held that a change in controlling interest attracts tax. The verdict was given on the basis of an evaluation of agreements entered
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into by the parties and various disclosures made by the parties for ascertaining the subject-matter of the transaction and the business understanding of the parties to the transaction. The Supreme Court commented that the principals laid down in the judgments of McDowell and Azadi Bachao Andolan could be invoked only when the taxpayer chooses to use an artificial and colourable device devoid of any commercial objective and one cannot read McDowells case in a manner to characterize all tax planning as illegitimate. The proper course in construing revenue acts is to give a fair and reasonable construction to their language without leaning to one side or the other, but keeping in mind that no tax can be imposed without words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible. A person cannot be guided by a law that did not exist at the time when the action occurred. It is fundamentally unfair to hold a person to be in contravention of the law when that law did not exist when the alleged contravention occurred. The Union Budget tabled in Parliament for the ensuing fiscal year has, by way of a clarificatory amendment, endeavoured to tax transactions covered with retrospective effect from 1 April, 1962, meaning several foreign investments will now be open to taxation, especially those completed in the last five to six years. It is undisputed that the legislature does have the power to legislate with retrospective effect, but in doing so it must ensure two conditions: 1) a legislature can by a retrospective amendment in law validate such law that has been declared by court to be invalid, provided the infirmities and vitiating factors noticed in the declaratoryjudgment are removed or cured; 2) if by such a validating and curative exercise made by the legislature, the earlier judgment becomes irrelevant and unenforceable, that cannot be called an impermissible legislative overruling of the judicial decision. Whatever the arguments for or against Vodafone, it is pertinent to note that business will be attracted to a country only when there is certainty and fair play. The lessons to be learnt from here are that business should be more careful when it comes to dealing with government because, as the saying goes, whether the knife falls on the watermelon or the watermelon falls on the knife, it is the watermelon that gets cut.
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3.2 SHARES AND ASSETS The demand for tax in the Vodafone case was a result of failing to understand the difference between the sale of shares in a company and the sale of assets of that company. It is an elementary principle of company law that ownership of shares in a company does not mean ownership of the assets of the company. Thus, an individual who owns 45 per cent or 85 per cent of the share capital does not own 45 per cent or 85 per cent of that companys assets. Th e assets belong to that company which is a separate legal entity. In the Vodafone case, 51 per cent of Hutchison Essar Ltd. (HEL) was directly owned by the Hutchison group of Hong Kong through a multiple layer of companies and ultimately by a company incorporated in the Cayman Islands. This was not the result of any devious tax planning scheme but the consequences of the growth of Hutchison Essar Ltd. by acquiring several telecom companies over the years. Hutchison International decided to exit its Indian operations and a public announcement was made to this effect. Vodafone was the successful buyer of the share of the Cayman Island company for $11-billion. Consequently, by purchasing one share of the Cayman Island company, Vodafone came to own 51 per cent of share capital of HEL. The transfer of shares of one non-resident company (Hutchison) to another non-resident company (Vodafone) did not result in the transfer of any asset of HEL in India. All the telecom licences and assets continued to belong to HEL or its subsidiaries. The absurdity of the demand in the Vodafone case can be explained by two simple illustrations. Hyundai Motors India Ltd. is a wholly owned subsidiary of the parent Hyundai company in Korea. The Indian subsidiary has a large factory near Chennai and perhaps owns several other assets. If, for example, Samsung purchases 65 per cent of the share capital of the parent Korean company in Seoul can it be argued that Samsung has automatically purchased 67 per cent of the factory at Chennai? Consequently, can it be said that the sale of shares in Korea resulted in a capital gain in India which requires Samsung to deduct tax at source under the Indian Income Tax Act, 1961? Under Section 9(1)(i) of our Act, there is liability to tax only if there is a transfer of a capital asset in India. In this illustration, the capital asset that is transferred was the share in Korea and there is no transfer of assets in India. The Indian subsidiary continues to exist and continues to own the factory as well as other assets.
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The absurdity can also be seen by a domestic illustration. Tata Motors Ltd. has its headquarters at Mumbai and factories at Jamshedpur and Pune. If another Indian group purchases 67 per cent of the shares of Tata Motors Ltd., the transfer of shares takes place in Mumbai which is the registered office of that company. Can anyone say that there is a corresponding transfer of 67 per cent of its factory, lands and buildings at Pune and Jamshedpur as well? Can the local stamp authorities in Jharkhand and Maharastra demand stamp duty on the ground that there is also a transfer of underlying assets? It is elementary that what has been sold is only 67 per cent of the paid-up share capital of Tata Motors Ltd. The assets of that company remain with that company and do not get transferred. The sale of the shares of Tata Motors cannot and does not result in the transfer of its underlying assets. This is exactly what happened in Vodafone. The shares owned by Hutchison were sold to Vodafone indirectly purchasing 51 per cent of the share capital of Hutchison Essar Ltd., a company registered in Mumbai. Not a single asset of this Mumbai based company was transferred either in India or abroad. Indeed, there would be no transfer of any asset in India. This is also exactly how several international transactions are concluded. Vodafone was not the first case where transfer of shares between non-resident overseas company resulted in a change in control of an Indian company. But controlling interest is not a capital asset; it is the consequence of the transfer of shares. The demand made by the Income Tax Department in the Vodafone case was thus contrary to elementary principles of company and tax law.
CHAPTER IV IMPACT OF THE RULING The Vodafone case is a landmark judgment which clarifies many tax concepts. The judgment has received applause from various parts of the industry and this ruling has seemingly raised Indias profile as a top investment destination. India will now no longer be an intimidating prospect for foreign investors. A great boost in Foreign Direct Investment is expected following this judgment. Indirect transfers will no longer be taxed and this should convince investors that there exists a safe route to invest in India.
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4.1 IMPACT ON SIMILAR BUSINESS DEALS The judgment delivered the Supreme Court would immensely benefit the companies who have concluded business deals involving similar issues. These deals besides the one of Vodafone were on the list of income tax department. The judgment would save the companies involved in other deals from litigation. 4.2 IMPACT ON INVESTMENTS ROUTED THROUGH TAX HEAVEN JURISDICTIONS The judgment would also help the genuine transactions of investments routed through tax heaven jurisdictions. The scrutiny by income-tax authorities is expected to go down in case big ticket business deals representing a genuine Foreign Direct Investment (FDI) in India. As of today, a considerable chunk of FDI in India is routed through tax heaven jurisdictions including Mauritius. It may also be a scenario that a company from a jurisdiction (other than tax heaven jurisdictions) invests in Mauritian company which in turn invests in an Indian company. In such a scenario, the income tax authorities many a times contend that the ultimate beneficial owner of the shares (subject-matter of transfer) is a company which is a resident of non-tax heaven jurisdiction. Accordingly, the exemption from capital gains tax (in India) extended by Double Taxation Avoidance Agreement (DTAA) between India and the country (tax heaven jurisdiction) is disputed. In the concurring part of the judgment, it was noted by Justice K.S. Radhakrishnan that to say that the Indo-Mauritian Treaty will recognize FDI and FII only if it originates from Mauritius, not the investor from third countries who have incorporated company in Mauritius, is pitching it too high. In other words, benefits of DTAA cannot be denied to Mauritian company in case investment in its share capital flows from a third country provided the investment in India through Mauritian company is not a sham transaction or a colourable device to evade taxes. 4.3 IMPACT ON PENDING LITIGATION India is considered as one of the few emerging countries that slap retrospective tax on deals done outside the country by foreign companies. The Vodafone verdict assumes importance as it could have major repercussions on other purchases of Indian assets by foreign companies. The
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judgment settled a prolonged litigation which had created a lot of uncertainty for multinationals having similar structures and/or who had entered into similar transactions. This should provide much needed respite to other litigants in other cases where the Vodafone controversy had been initiated by the revenue authorities and is currently pending at various stages of litigation across the country. The following are the beneficiaries which could benefit from the Supreme Courts verdict: SABMiller is involved in a clash with the Indian tax authorities who demanded payment
of US$39.5 million in tax on the brewery groups 2006 acquisition of Indian assets from Fosters Group, the Australian brewer The company received a demand for payment of tax on the US$120 million deal. The matter is pending before the Bombay High Court. Genpact India was recently served with a show cause notice by the Tax Department. The
US company General Electric sold nearly 60% interest in Genpact India to two private equity players General Atlantic and Oak Hill Partners for about US$500 million in 2004. The deal was structured through Luxembourg entities. The Delhi High Court held that Genpact India is not a representative of General Electric USA and is not liable to pay capital gains tax. Japanese firm, Mitsui, in April 2007 sold 51% stake in Indian iron ore miner Sesa Goa to
Vedanta Group for US$981 million. The deal was routed via Finsider International, a company incorporated in the UK, which held the Sesa Goa shares. Vedanta had purchased 100% in Finsider. In 2005, AT&T and Aditya Birla Nuvo signed a US$150 million under which the former
sold 16% in Idea Cellular India to Aditya Birla Nuvo through its holding company AT&T Mauritius. New Cingular Wireless was the holding company of AT&T Mauritius. Later, Tata Industries acquired AT&Ts remaining 17% stake in Idea Cellular India from AT&T Mauritius. The Tata Group later exited Idea Cellular. The case is pending before the Supreme Court. French drug-maker Sanofi Aventis bought a majority stake in Indian vaccine company
Shantha Biotech in 2009 for around US$770 million. The deal was through an SPV created by Merieux Alliance that held 90% in the Indian company. The Authority for Advance Rulings (AAR) ruled that the French company that sold its controlling interest in Shantha Biotech to
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another French company will have to pay capital gains tax to the Indian government, even though the deal was cut outside India. CHAPTER V OBSERVATIONS THE ramifications of the Supreme Court verdict in the Vodafone case could be much wider than what is obvious at first sight, with implications not just for taxation but for the much broader issue of corporate regulation in general. In order to appreciate this, it is necessary to set the premises used by the court to arrive at the conclusion that the demand imposed by the tax authorities on Vodafone was illegitimate against some of the realities of the Indian corporate sector. These premises are not necessarily crystal clear in the judgment, but that only makes it more amenable to interpretations of the kind that are highlighted here. The substantive facts of the Vodafone-Hutch transaction that even though it was an offshore transaction, its ultimate purpose as well as result was the transfer of control over a company, now called Vodafone Essar Limited (VEL), which was registered in India, which owned capital assets located in India and whose business was in India are well known and the parties concerned never made a secret of it. The Supreme Court judgment, too, does not dispute these substantive facts. By denying the legal significance of some crucial facts, however, the court has concluded that the provisions of the Income Tax Act, according to which income arising from the transfer of capital assets located in India would be deemed to be income originating in India and be subject to capital gains tax, were not applicable to the Vodafone-Hutch transaction. To arrive at this conclusion the judgment appears to have relied on not one but two different premises, though both have a common underlying basis. Either of these, if correct, would be sufficient for the courts conclusion to be valid. It is their correctness, however, that needs to be scrutinised with reference to their larger implications and not only in relation to the particular case at hand. The first premise was that the transaction between Vodafone and Hutch was a share transfer (sale) rather than a transfer of capital assets and that the ownership of the capital assets remained
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vested in the Indian company. The judgment took recourse to the legal distinction between a company and its shareholders and the fact that the de facto controlling right enjoyed by those holding a large block of shares in a company is not in the nature of a legally enforceable right. The judgment, however, carries these to the point where it ended up ignoring the real distinction between a shareholding that constituted a controlling interest and that which was a pure financial investment. It is entirely immaterial here that the share(s) actually transferred were not of the company located in India but of offshore companies that ultimately controlled the shares that constituted the controlling interest in the Indian company. Even if the shares were of the company located in India, in the courts view it would not constitute a transfer of capital assets. Once it is accepted that the shareholders of a company have a distinct legal identity from the company, no matter what the proportion of shares that they hold is, it follows that two companies would have distinct identities even if one held a controlling share in the other. The Supreme Court judgment makes it a point to emphasise that even a subsidiary has an identity distinct from its parent holding company. Stretched so far, this argument must mean that the law be blind to the essential connection linking the offshore transaction between Vodafone and Hutch and the company located in India. This connection existed because what was sold to Vodafone was the company at the apex of a structure of holding and subsidiary companies located abroad, through which more than half the shareholding of the company in India was ultimately controlled. The denial of any legal significance of this chain of holdings underlies the second premise of the Supreme Courts verdict, namely that nothing located in India changed hands as a result of the Hutch-Vodafone transaction. In the courts view, since the asset (share) actually transferred had a foreign location it was outside the jurisdiction of Indian tax authorities. To arrive at the judgment, the Supreme Court had to find a way around the 1985 judgment of the same court in the McDowell case, which upheld the principle of going behind the corporate veil to thwart illegitimate tax avoidance. The way in which the Vodafone judgment achieves this appears in effect to be a case of applying a particular logic only in order to deny its applicability in the same breath.
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What the judgment argues is that such going behind the corporate veil or looking through would be legitimate only in cases where it can be established that there is a deliberate intention of evading taxes. In the Supreme Courts view no such conclusion was warranted in this case if the steps that led to the creation of the complex holding structure of VEL and the eventual Vodafone-Hutch transaction were seen in their proper context. The paradoxical result of this reasoning is the following once the legality of the structure has been established, its existence cannot be recognized. The conclusion that counts, according to the Supreme Court, is that the structuring of the transfer of control from Hutch to Vodafone was not done in a particular way with the intention of avoiding taxes. Since, therefore, the corporate veil cannot be pierced, the fact that there was a transfer of control from Hutch to Vodafone must be ignored. An additional implication would be that as long as it can be established that a mechanism was not originally created with the intention of avoiding taxes, it does not matter if it eventually has such a result. The Supreme Court judgment in the Vodafone case has thus upheld the principles of maintaining a very sharp separation between companies and their shareholders and laid down very stringent standards for determining when these fine legal distinctions can be overlooked in favour of a more realistic approach. It is this that makes the judgment, given the realities of the Indian corporate sector, amenable to be used for undermining the much-needed regulation of that sector. It is not surprising, therefore, that it has been welcomed so heartily in corporate circles. Lack of enforcement has long been a feature of corporate regulation in India, and tax evasion is only one expression of this larger phenomenon. Apart from undertaking actions that are purely illegal, finding and using legal loopholes to circumvent or manipulate regulations and defeat their purpose has been an entrenched feature of corporate culture in India. Aiding in the subversion of regulation has been a second important feature of the Indian corporate sector, which also has a long history. This is the prevalence of multi-company structures whereby a common control is exercised over a number of legally separate companies, often taking advantage of the right of these companies to own each others shares. The deliberate creation of such structures and undertaking business activities through them rather than single companies, sometimes precisely to bypass regulations, has been the pattern in India. Multi-company structures and corporate malpractices have gone together in many different ways other than in the case of tax evasion. For instance, in an earlier era, Indian business groups used
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multiple companies to try and corner licences in individual industries. Indian and foreign firms also used separate companies controlled by them to get around the reservation of some sectors for small-scale industries. The diversion of funds raised from financial institutions or capital markets through one company with a particular activity to other group companies with different activities has been quite regularly practised in the Indian corporate sector. Insider trading or share-price rigging through companies legally independent of the companies whose shares were being transacted is also known to have happened. Such examples can be multiplied. The ones cited are, however, sufficient to establish that for proper regulatory enforcement the legal recognition of the common identity binding legally independent companies, derived from the fact that they are controlled by the same actors, is crucial. This has never been easy the explicit provisions for such recognition that once existed in the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, were themselves circumvented in ingenious ways by business firms in India. The Supreme Court judgment in the Vodafone case makes it even more difficult. Even before the Vodafone verdict, the liberalisation measures since the early 1990s have contributed to weakening corporate regulation. Liberalisation has not meant the end of all regulation. The emphasis on creating a corporate-friendly climate has, however, resulted in a more permissive environment, further eroding the states capacity to discipline private capital. At the same time, restrictions on the use of multi-company structures that flowed from the earlier anti-monopoly laws have been withdrawn. These have happened alongside the opening up of the economy and increasing cross-border transactions. One consequence is that multi-company structures have increasingly come to include within themselves offshore corporate entities, many registered in tax havens. Indian affiliates of foreign multinational firms, of course, always had cross-border connections with corporate entities registered elsewhere, but these have now become common even in the case of Indian firms. In other words, the scope for using multi-company structures spread across many jurisdictions to get around regulations in India has increased. If the Vodafone verdict is seen in such a context, then the need to invalidate its serious implications becomes even more pressing.
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Whether the undoing of the major repercussions of the Vodafone verdict will result through the Income Tax Departments successfully appealing for a review of the judgment remains to be seen. If it does not, and perhaps even if it does, an appropriate legislative response may be necessary. It is not, however, sufficient for legislation to merely explicitly provide for taxing capital gains arising from transactions of the Hutch-Vodafone kind. What is required is the opening up of the web of connections between myriad corporate entities spread across a variety of jurisdictions to legal scrutiny and recognition of the purposes for which they exist. CHAPTER VI CONCLUSION The Supreme Court judgment in the Vodafone case will put to bed several controversies in taxation. Our judicial system normally takes several years to close a case beyond final appeal. The fact that Vodafone got their judgment in about five years and in a manner that upholds several international principles in law reposes faith in Indias judiciary. Vodafone was, as described by the revenue department, a test case where Revenue wanted to stretch interpretation of the Income-Tax Act to hold overseas transfers with an underlying value in India liable to tax in India, if the intent of the transacting parties was transfer of the underlying value. Revenue contended that the transaction sought to avoid tax and that Vodafone ought to have withheld tax on the consideration it paid Hutch. On the other hand, it was Vodafones contention that the true legal effect of the transaction was to transfer the shares of an overseas company. The fact that there were statements made commercially to say that the sale/acquisition was of an Indian telecom business was not relevant. The Supreme Court has upheld that the legal implications of a transaction cannot be disregarded and in this case, the legal effect was to transfer the shares of an overseas company. One could not look through and pierce the corporate veil of a legitimate holding company that was used as an investment vehicle and thereby try and tax the underlying value of the subsidiaries. The observations of the Chief Justice of India that foreign direct investment flows towards locations with a strong governance infrastructure - good laws, efficacious enforcement of laws
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by the legal system - and that certainty is integral to the rule of law is remarkable and noteworthy. Hopefully, they will set the tone for the future. The judgment has several long-term implications. First, and foremost, it provides a basis for interpretation, namely, that one has to look at a transaction rather than look through a transaction unless one is concerned about fraud or a similar situation. The tax authorities cannot dissect a transaction and treat a transaction as a sum of its constituents instead of the way the transaction has been entered into by the parties. This principle is indeed critical. The Supreme Court has built caveats to cover artificial devices and frauds, but barring that, the form of the transaction would prevail. Second, the issue of tax avoidance versus tax evasion gets clarity. The Supreme Court has held that tax avoidance within the legal parameters continues to prevail and the principle laid down in this regard in the case of Azadi Bachao Andolan continues to hold fort. Importantly, the Supreme Court has held that one cannot impose form over substance in statute or impose limitation of benefits in a tax treaty. Third, the international principles of jurisprudence of respecting holding company structures, particularly those that have been in place for a length of time and have not been created merely for the purposes of exit, have been blessed. This, again, is very welcome and will do away, with significant certainty, with the Revenue authorities desire to pierce the corporate veil and look at the substance of the transaction in several cases. Rather than view the judgment as a defeat for Revenue, one should view it as a victory for the Indian judicial system. This will promote inflow of foreign funds to India and ultimately benefit revenue much more than the immediate loss to the exchequer. The stakes involved matter more than Vodafone.
BIBLIOGRAPHY BOOKS AND ARTICLES
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i. C. S. Rishikesh, Vodafones Conflicting Signals, Business Standard, 22 April, 2012, available at http://www.business-standard.com/india/news/c-s-rishikesh-gagan-vyas-vodafones-
conflicting-signals-/469561/ ii. ENS Economic Bureau, About 300 overseas deals get a breather, THE INDIAN EXPRESS, 21 January, 2012. iii. Gyana Ranjan Swain, Vodafone Tax Case: A Landmark Verdict, VOICE & DATA, 8 February 2012, available at http://voicendata.ciol.com/content/news/112020801.asp. iv. Mukesh Butani, Vodafone verdict: The day after, BUSINESS TODAY, 22 January, 2012 available at http://businesstoday.intoday.in/story/mukesh-butani-on-vodafone-tax-
verdict/1/22074.html. v. Prachi Srivastava, Analysis: Tax lawyers mull law, jurisprudence and world post-Vodafone, http://www.legallyindia.com/201201242515/Tax/analysis-tax-lawyers-mull-lawjurisprudence-a-implications-post-vodafone. vi. Rajendra Nayak, Implication Beyond Borders, THE HINDU, 22 January, 2012 available at http://www.thehindu.com/business/article2823501.ece. vii. S. Niranjan, An analysis of the Supreme Courts decision in the Vodafone case Part I, INDIAN CORPORATE LAW available at http://indiacorplaw.blogspot.in/2012/01/analysisof-supreme-courts-judgment-in.html viii. Somasekhar Sundaresan, An Analysis of the Supreme Courts judgment in Vodafone case Part II, INDIAN CORPORATE LAW, available at http://indiacorplaw.blogspot.in/2012/01/ part-ii-analysis-of-supreme-courts.html. ix. Suraj Chandra, A Technical Analysis of the Supreme Court Ruling in the Vodafone case, MONEYCONTROL, available at http://www.moneycontrol.com/news_html_
files/news_attachment/2012/Analysis%20of%20SC%20order%20_2_.pdf. x. Surajit Mazumdar, Curious Conclusion, FRONTLINE, Vol. 29, Issue 05, 23 March, 2012, available at http://www.flonnet.com/fl2905/stories/20120323290501400.htm
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WEB RESOURCES i. ii. iii. iv. http://indiacorplaw.blogspot.in/2011/04/lifting-corporate-veil-for-tax-purposes.html http://indiacorplaw.blogspot.in/2012/01/analysis-of-supreme-courts-judgment-in.html http://indiacorplaw.blogspot.in/search?q=Vodafone http://www.hlbi.com/index.php?option=com_content&view=article&id=668:indiavodafone-tax-ruling-a-legal-analysis-of-the-triumph&catid=162:tax-updates v. http://www.moneycontrol.com/news_html_files/news_attachment/2012/Analysis%20of%20 SC%20order%20_2_.pdf vi. vii. http://www.thehindu.com/opinion/op-ed/article2951103.ece http://www.its2012india.com/topics/Regulation/TaxationofCrossBordersMergersAcquisition sVodafoneHutchDeal.pdf
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CORPORATE GOVERNANCE APPROACH FAVOURABLE TO INDIAN CORPORATE REALITY: (Chalking the Path to a Globally Integrated Approach)
SHAGUN SINGH
With rules, one asks, how far are they complied with? With principles, the right question is How are they applied in practice? -Hampel Committee Report1 Introduction: Indian Hybrid Approach and its Evolution Corporate Governance can be defined as the system of rules, practices and processes by which a company is directed and controlled, essentially involving balance of the interests of the stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure2. The approach to corporate governance varies across jurisdiction. While the U.K and other Commonwealth countries adopt a principle or norm based approach for the enforcement of the provisions of corporate governance codes, in the US, provisions of Sarbanes Oxley and other statutes follow a rule based approach3. The merits and demerits of both these extremes have been highly debated. Taking a wiser decision, India seems to have adopted a middle path,
1
Hampel Committee, Final Report (January 1998), available at: th http://www.ecgi.org/codes/documents/hampel_index.htm, (Visited on 20 September 2013). 2 Definition of Corporate Governance, available at: th http://www.investopedia.com/terms/c/corporategovernance.asp, (Visited on 19 September 2013). 3 SEBI Consultative Paper on Review of Corporate Governance Norms in India 2009, p. 2-15, available at: th http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf, (Visited on 19 September 2013).
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encompassing the merits of both the extremes, better known as the hybrid approach wherein those requirements which can be enforced are classified as mandatory and others, which are desirable, are classified as non-mandatory. The evolution of Corporate Governance spans from the enactment of Companies Act 1956 which provides for certain checks and balances over the powers of Board by way of provisions such as loan to directors or relatives or associated entities under Sec 295, interested contract needs Board resolution and to be entered in register as given in Sec 297, interested directors not to participate or vote according to Sec 300, appointment of director or relatives for office or place of profit needs approval by shareholders if the remuneration exceeds prescribed limit, CG approval required as per Sec 314, mandatory Audit Committee for public companies having paid-up capital of Rs. 5 Crores according to Sec 292A and shareholders holding 10% can appeal to Court in case of oppression or mismanagement under Sec 397 and 398. Besides these every listed company needs to comply with the provisions of the listing agreement as per Section 21 of Securities Contract Regulations Act, 1956 and non-compliance with the same, would lead to delisting under Section 22A or monetary penalties under Section 23 E of the said Act. With the emergence of best code practices as prescribed by Cadbury and Greensbury Reports, the Kumar Mangalam Committee and subsequently the constitution of Narayana Swamy Committee, to uplift the level of corporate governance, led to the recommendation of Clause 49 of the Listing Agreement which contains both mandatory and non-mandatory requirements. At this stage we see a divergence from the strict rule based approach of the Companies Act 1956 to a flexible norm based approach adopted by way of Clause 49 of the Listing Agreement, ensuring that companies get a free hand in formulating policies and putting in place adoption of best practices. Indian Corporate Governance framework has been in consonance with the revised principles of Corporate Governance (2002) of the OECD which has been hailed as the benchmark for policy makers, investors and stakeholders worldwide4. The insights gained from the debacle of Satyam resulted in SEBI taking further policy steps- such as mandatory disclosure of pledged shares held by promoters in listed entities promoted by them, peer review of working papers of auditors of certain listed companies, disclosure of agreement between media houses and listed companies, maintenance of website containing basic information of the companies, compulsory
ibid
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dematerialization of Promoters holdings to increase transparency, peer review of auditors by process of ICAI, approval of appointment of CFO by Audit Committee to ensure sound financial expertise, disclosure of voting results and enabling shareholders to electronically cast their vote to ensure wider participation and a mechanism to process annual audit reports of listed companies- to ensure public dissemination and furtherance of the ends of corporate governance. The Voluntary Guidelines on Corporate Governance 2009 for Indian listed companies specified by the Ministry of Corporate Affairs and constitution of the Adi Godrej Committee in 2012 which enunciated seventeen guiding principles on corporate governance has reflected pursuance of the norm-based approach. Now with the enactment of the Companies Act 2013, the approach has again converged to core governance principles being provided for in the act itself, reflecting the prominence of the rule based approach in Indian corporate reality. The provisions of the Act of 2013 regarding governance are as follows: Requirement to constitute Remuneration and nomination committee and Stakeholders Grievances Committee and new committees of Board of Directors (Sec 178) Granting more power to the Audit Committee (Sec 177) Mode of appointment of Independent Directors and their tenure (Sec 149, 150) Code of Conduct of Independent Directors (Schedule IV). Requirement to spend on Corporate Social Responsibility (Sec 135). Constitution of National Financial Reporting Authority, an independent body to take action against the Auditors in case of professional misconduct (Sec 132). Specific clause pertaining to duties of directors (Sec 166). Rotation of Auditors and restriction on Auditor's for providing non-audit services (Sec 139 and 144, respectively). Enhancement of liability of Auditors (Sec 143). Disclosure and approval of Related Part Transactions (Sec 188).
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Enabling Shareholders Associations/Group of Shareholders for taking class action suits and reimbursement of the expenses out of Investor Education and Protection Fund (Sec 245)5.
Through legislations which provide for governance and constitution of committees which submit dynamic reports on emerging principles of good corporate governance, and a healthy combination of voluntary practices and mandatory requirements, the Indian corporate reality seems to have chalked a hybrid, middle-path or balancing approach which has consolidated on both the extremes- the norm based as well as the rule based approach. Governance Approach of Varying Jurisdictions In the global securities marketplace and companies, restoring faith in governance by investors has become a time-sensitive, crucial initiative to ensure capital still flows into the trading arena; that stock prices are buttressed; and that investors will be able to accurately assess the value and potential of companies and/or funds. The approaches followed by varying jurisdictions are as follows: In the USA, the Sarbanes-Oxley Act was introduced into legislation by The House of Representatives and then the Senate who were concerned about the fact that CEOs, CFOs and Boards must be expressly accountable for the Financial Statements and Management Estimates published by their companies. This act is a specific rule based approach and a requirement by all corporations operating in the USA. It confers special responsibility and expectations on Public Accounting Firms and Auditors, the Securities Exchange Commission, and State Legislatures to police the Act. Recently the US Securities and Exchange Commission (SEC) approved new Governance rules outlined by the NYSE and NASDAQ, for companies listed on their exchanges. Those who fail to comply by November 2004, risk being de-listed. In Canada, the TSE refused to enunciate hard and fast rules, preferring instead to outline Guidelines, then rely on shareholders to hold their Boards accountable for operating in relation to the guidelines. The Ontario Securities Commission published its proposals for
5
Aish M. Ghrana, Corporate Governance: Regulatory Frameworks Under Consideration, available at: http://aishmghrana.me/2013/01/11/corporate-governance-regulatory-frameworks-under-consideration/, (Visited th on 19 September 2013).
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best practices in governance, and requiring all Issuers to make regular disclosure about their practices against such best practices. The OSC has thus moved towards a quasi-rules based environment. In the UK, the Cadbury Commission of the London Stock Exchange released their Combined Code of Governance Principles and Best Practices. The suggestion being that companies self-report to the investment community against these standards as their approach to restoring trust in their market. The Hong Kong Laws regarding good governance were published as a Code of Best Practices. These explicitly state that they are not intended as rules to be rigidly adhered to, but should rather serve as guidelines that companies should aim for. The German Panel on Corporate Governance essentially embraced the OECDs Principles of Governance and recommended transparency approaches to information and disclosure practices by German listed companies6. Most jurisdictions around the world favour the use of principles and norms and extend a belief and trust in their organizations to subscribe to such principles. Such faith also leaves the vigilance of good practice to the larger community, and leaves unclear the specific consequences. However, one assumes that public exposure of practices not in keeping with the principles will result in significant loss of face and credibility. In the US, there is a tendency not to extend such trust, and instead to develop and insist on compliance to a specific set of rules. In such a system the consequences of non-compliance are clear, and supposedly swift, yet restricted to the jurisdiction of the regulatory body.
Rule based Approach and Norm based Approach: Merits and Challenges Rule based approach requires companies to exhibit minimum standards of practice. In order to gain approval by a majority of members, the standards have to be essentially the minimally acceptable practices. Hence, the rule based approach ensures that companies at least adhere to a
6
Banff Executive Leadership Inc, , Improving Governance Performance Rule Based vs. Principle Based Approach, available at: http://www.banffexeclead.com/AcumenPDF/Governance%20Articles/Leadership%20Acumen%2016%20V10%20G th overnance%20Principles%20vs%20Rules.pdf, (Visited on 18 September 2013).
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minimum standard of corporate governance. The implication of this approach is that it can set the bar of corporate governance quite low, resulting in less than excellent standards. Companies in such a case will never aspire to set the benchmark of corporate governance by revising their policies till it improves to near perfection. Instead companies shall be given a pass ticket for complying only with the minimum standards which will never lead to formulation of better policies. Also, the rigidity offered by the rule based approach can cause inconvenience to companies, not giving them a free and flexible hand to manage their own affairs. It can lead to unnecessary expenses and wastage of precious time7. However, looking over the challenges, the merits of this approach are obvious. Rules such as those in the Sarbanes-Oxley Act have significantly improved corporate governance and executive staff reporting to the Board. It has also significantly eliminated any suspected collusion between auditors, bankers, and corporate officers as that which is under investigation in the Enron case. The Companies Act 1956 and the mandatory requirements of Clause 49 of the Listing Agreement have ensured that the basic concepts and principles of corporate governance are compulsorily adhered to, to set a minimum standard of good governance and weed out frauds and scams. The governance provisions of Companies Act 2013 shall now further the standards of good governance in Indian companies. Unfortunately, a rules-based approach also tends to encourage those to play games with the rules, to find loopholes in the rules, and to find ways around the rules. During trying times of financial crisis, the temptation to deviate is stronger and according to industrialist Adi Godrej the need of the hour is concentration on principle-based rather than rule-based corporate governance. Principle-based corporate governance offers corporates the much-needed competitive advantage in markets, easy availability of capital, enhanced employee morale and stakeholder confidence; and long-term sustainability8. This view discusses that importance should not be given to
7 8
ibid Umakanth Varottil, Indias Corporate Governance Voluntary Guidelines: Rhetoric or Reality, available at: http://www.manupatra.co.in/newsline/articles/Upload/01DB3BD0-E7A8-4EF4-9807-FDF0D29C3B9E.pdf, (Visited th on 16 September 2013).
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formulation of new rules but effective enforcement of the existing ones and enhanced attention to principles of corporate governance9. However, dismissing the rule based approach would be a hasty and unwise step. The rules-based approach can help snap the members of a certain community into action in a very short period of time, and hope to ensure a minimum new standard of practice, that will rapidly increase trust in their system. Speaking of the merits of the principles or norm based approach; principles essentially have no minimum standard of practice and can rise over time. Principles work to influence a broad set of practices conforming to a level of expectation by the stakeholders. The implication being, that if any of the stakeholders believes the practices of a company to be skirting the issue, or nongenuine, then the problem of confidence in the actions of the company occurs. This then should leverage companies to a high standard of practice, as minimal compliance will not really be tolerated by most onlookers. Principles also encourage organizations to start right away at moving their current practices in-line with the principles, leaving room for continuous improvement over time. At the same time, companies are given a free hand over the conduct of their affairs and flexibility to manage their affairs in tandem with high standards of governance. Unfortunately, principles do not explicitly require certain practices to be mandatorily followed. So while giving a chance to companies to aspire for higher standards of governances, principles fail to keep a check on adherence to basic necessary standards. As such, it is hard for principles to get everyone moving into new practices in a particular timeframe. By leaving the onus on investors, or donors, or community members (in other words stakeholders), to measure adherence to principles, it also leaves to these parties the responsibility to demand public reporting/ communication. This then eventually plays out by giving the media or special interest groups the responsibility to police the practices of companies, which can be manipulated by companies10. In India, the adherence to the non-mandatory requirements of Clause 49 of the
Corporate Bureau, India Inc told to go by Principles, not the Rulebook, on Governance, The Financial Express, th 19 December 2008. 10 Banff Executive Leadership Inc, Improving Governance Performance Rule Based vs. Principle Based Approach, available at: http://www.banffexeclead.com/AcumenPDF/Governance%20Articles/Leadership%20Acumen%2016%20V10%20G th overnance%20Principles%20vs%20Rules.pdf, (Visited on 18 September 2013).
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Listing Agreement and recommendations of various Committees (Godrej, Mangalam, and Swamy) is in question. This non adherence can cause major problems such as incompetent nonexecutive directors, victimization of whistleblowers in absence of a whistle blowing policy, manipulations regarding remuneration of executive directors in absence of remuneration committee and outdated knowledge and skill of directors in absence of training programs to upgrade their knowledge pool, which will all in turn harm the performance and efficient running of the company. While some companies may follow it, most leave it out of their corporate governance policies to save expenses, time and effort, resulting in challenges in the face of the norm based approach. By not ensuring a basic (minimum) standard, i.e. a solid foundation, the norm based approach fails to take off on its wings to higher standards of corporate governance.
Hybrid Approach: Why it is Favourable in the Indian Scenario? To ensure good governance a balance between the two warring approaches- rule based and norm based- needs to be struck in order to churn out the merits of both. Any code of Corporate Governance must be dynamic, evolving and should change with changing context and times. It is felt that rule based approach alone may not serve the purpose of improving the Corporate Governance of listed companies. A hybrid approach, wherein the broad principles are laid down to give broad direction to the companies on Corporate Governance and what is expected of them followed by rules to mandate compliance with specific aspects of Corporate Governance would be considered as the most effective mechanism for improving Corporate Governance in the Indian scenario according to SEBI11. In consonance with this view, the present hybrid or middle path approach followed in India is suitable for the present corporate context, because India is at a cross roads of development. While a few companies have grown in colossal proportions, most companies remain small/medium entities with limited capital. To balance the interests of both, the hybrid approach is befitting, as both shall be able to aspire for higher standards of governance, while the mandatory minimum standards are complied with to ensure that no inconvenience is caused to small companies in terms of expenses, time and effort, while the aspirations of small, medium and larger companies to set a benchmark of corporate governance
11
SEBI Consultative Paper on Review of Corporate Governance Norms in India 2009, p. 9, available at: th http://www.sebi.gov.in/cms/sebi_data/attachdocs/1357290354602.pdf, (Visited on 19 September 2013).
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are not clipped. The hybrid approach also provides the requisites of rigidity and flexibility to companies, thereby ensuring that companies are given a free hand in managing their affairs and formulating policies suitable to their business model while not being overly free to completely ignore important aspects of corporate governance. This delicate balancing act is enabled by the governance provisions of the Companies Act 1956, to be furthered by the governance provisions of Companies Act 2013 and mandatory requirements of Clause 49 of the Listing agreement (as explained in the introductory part of the article) which need to be compulsorily complied with by companies and the non-mandatory requirements of Clause 49 of the Listing Agreement, the Voluntary Guidelines on Corporate Governance 2009 and the recommendations of the Mangalam, Swamy and Godrej Committee which provide a platform for setting higher standards of corporate governance. While the approach befitting the Indian corporate reality has been discussed, attention needs to be given to the model of corporate governance followed by Malaysia which is in similar lines to that of India. The Malaysian Institute of Corporate Governance (MICG) has introduced the Malaysian Code on Corporate Governance (revised in 2007) approved by the Finance Committee on Corporate Governance of the Government of Malaysia12. The Code aims to set out principles and best practices on structures and processes that companies may use in their operations towards achieving optimal governance framework. There are three broad approaches to the issue of corporate governance now in practice around the world: Prescriptive (desirable standard practices are specified, compliance disclosed) Non-prescriptive (disclosure on actual practices, no specified standard) and Hybrid approach (blend of the above two, with mutual accommodation)13.
The Malaysian Code on Corporate Governance adopted a hybrid approach. This suggests that the company must have some indigenous standards and practices depending on its nature of business and needs and non-specific standards in which the company may have a free hand to formulate policies and implement change in order to aspire for higher standards of governance.
12
Malaysian Code on Corporate Governance (Revised 2007), available at: th http://www.sc.com.my/eng/html/cg/cg2007.pdf, (Visited on 20 September 2013). 13 ibid
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The hybrid approach allows for a more constructive and flexible response to raise standards in corporate governance as opposed to the more black and white response engendered by statute or regulation. It is in recognition of the fact that there are aspects of corporate governance where statutory regulation is necessary and others where self-regulation complemented by market regulation is more appropriate. The hybrid approach followed by both India and Malaysia is in consonance with the Hampel Committee Report14. This is the approach preferred by the Hampel Committee. The Committee considered that there is a need for broad principles and that all concerned should then apply these flexibly and with common sense to the varying circumstances of individual companies. Good corporate governance is not just a matter of prescribing particular corporate structures and complying with a number of hard and fast rules. The need for a hybrid approach also results from economic forces and the need to reinvent the corporate enterprise, so as to efficiently meet emerging global competition. The worlds economies are tending towards market orientation. In market-oriented economies, companies are less protected by traditional and prescriptive legal rules and regulations15. Malaysia and India which are developing countries expecting to face tough economic and industrial competition are no exceptions. Hence there is the need for companies of developing countries to be more efficient and well-managed than ever before to meet existing and anticipated world-wide competition. The hybrid approach favours the Indian corporate reality due to the following reasons: The balance of both rules and principles of corporate governance. To go to the extreme of merely requiring disclosure of existing corporate governance practices of Indian companies is not sufficient. Each company should have the flexibility to develop its own approach to corporate governance and not compelled to adhere to the principles strictly. Companies are given a free hand to develop alternatives that may be just as sound as voluntary principles of corporate governance. The rules and regulations set the standard that companies must measure up to at all cost. The principles are accompanied by rules requiring disclosure of the extent to which listed companies have complied with the principles and where they have not, the reasons why.
14
Hampel Committee, Final Report (January 1998), available at: th http://www.ecgi.org/codes/documents/hampel_index.htm, (Visited on 20 September 2013). 15 ibid
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The merits of the both the extremes- rule based and norm based, are amalgamated. Prevent a ticking boxes approach so that companies (directors) concentrate on exercising their judgement rather than on mere form with respect to what corporate governance practices are best for their business model, ensuring diligent pursuance of corporate governance objectives than merely indicating that the rules have been complied with (box ticking is neither fair to companies, nor likely to be efficient in preventing abuse).
Prevent possibility of the next disaster like Satyam to emerge in a company which, on paper, has a 100% record of compliance. Further the true safeguard for good corporate governance, which lies in the application of informed and independent judgement by experienced and qualified individuals executive and non-executive directors, shareholders and auditors.
Augment competition in the international market. The hybrid approach offers the right amount of rules and norms to companies of developing countries to be able to circumvent frauds and scams and emerge above par with respect to companies of developed countries in terms of corporate governance and performance.
Secure sufficient disclosure by way of rules and norms so that investors and others can assess the companys performance and governance practices, and can respond in an informed way.
In light of the discussion and descriptions enunciated in this article as well as the explanation as to why the hybrid approach is best for companies of developing countries, especially how the hybrid approach favours the Indian corporate reality, it is safe to assume that the need of the hour in India is to continue with the current hybrid approach with special focus on effective enforcement of the rules and regulations in place (the provisions of Companies Act 1956, the provisions of Companies Act 2013 and the mandatory provisions of Clause 49 of the Listing Agreement16) and enhancement of the dynamism of voluntary guidelines and norms keeping pace with changing economic times.
16
Ms. Hiral Mehta, Class Lectures for Semester VII (Company Law II), NUSRL, Ranchi
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Globally Integrated Approach for MNCs: Organizational Social Responsibility Model and Globally Integrated Enterprises Model Good Governance practice has been further augmented in the recent years by rise in importance of Corporate Social Responsibility. This is based on an understanding of the expectations that our communities have regarding the social contract that companies enter into with their stakeholders. This may include public reporting, openness to input, access points for complaints about services or tips regarding illegal actions of employees. It may also include the concept of an Ombudsman to address community and/or employee and/or contractor issues with regard to the functioning of a company. Being, and being seen to be, a good corporate citizen by members and stakeholders now lifts the standards of governance into a whole different realm. No longer can Governors or Board members be content to live by rules, or adapt processes to exemplify principled practices. Instead the companys senior leaders must commit to be in tune with, proactively communicating, listening to, and actively accessible/accountable towards their community of citizens and stakeholders. This is a philosophy that transcends an inside view, and instead recognizes the bigger Stewardship role companies have. Providing a vehicle for open access, suggestions and tips is one such mechanism companies can use to advance towards this Social Responsibility role17. This approach however, looking at current corporate reality is too heavy handed and abstract to effectively prove to be the best approach for a globally integrated model. Also, it screams of a lack of effective enforcement and fails to offer checks on companies. This approach can be summoned at a later stage when financial turbulence and scandals are dealt with appropriately and investors trust has been regained to a greater extent. More realistically, the approach followed by IBM (an MNC), to address economic changes of the 1990s, seems to have made an impact on the governance of MNCs. In the twentieth century, especially after the Second World War, a business model evolved. In this model, global companies often replicated their operations in each country where they did business. This was the multinational model, where each country organization had its own management, its own
17
Banff Executive Leadership Inc, Improving Governance Performance Rule Based vs. Principle Based Approach, available at: http://www.banffexeclead.com/AcumenPDF/Governance%20Articles/Leadership%20Acumen%2016%20V10%20G th overnance%20Principles%20vs%20Rules.pdf, (Visited on 18 September 2013).
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sales and service teams, its own product line, its own supply chain and often its own manufacturing and research and development and therefore, its own set of corporate governance aspects which were a healthy mix of rules and norms in accordance with the national laws of the country where business was conducted and adherence to the voluntary norms prescribed in such countries18. But this model has been deemed redundant because of globalization, redundant because no company can afford to duplicate the very same business processes in each country, when it would be much more effective in a connected world to put every process in one or two or three locations, and serve the entire globe from those locations. And uncompetitive because with the world linked as it is, if companies do not draw on the skills available at competitive prices wherever that expertise exists, then some other companies/entities will do it, and put the companies out of business19. To solve this predicament IBM has come up with a globally integrated enterprises (GIE) model, a term coined by IBM CEO and President Sam Palmisano20. As business operations become more globally integrated, managing accountability requirements becomes more complex. On the one hand governments remain the most signicant point of accountability, inuencing business success through legal, regulatory, scal and social policy frameworks that are country based. Alongside these national requirements, other stakeholders including customers, NGOs and communities are increasingly global, and frame accountability around global standards. In the globally integrated enterprise model accountability is managed by globally integrated support functions with specialists in the various interest areas. Resources are deployed where they are needed. This model enables the company to develop standards that reect global interests, and to operate systems across the entire company. This is important for building trust. The focus is on establishing sustained relationships with key stakeholders to understand and inuence their requirements. In the GIE model, the country General Manager remains pivotal to key relationships. But alongside them we see an increasing need for a wider group of leaders to
18
Hans Ulrich Maerki, The Globally Integrated Approach and its Role in Global Governance, available at: th http://www.eabis.org/uploads/media/Maerki_global-integrated-enterprise.pdf, (Visited on 15 September 2013) 19 Douglas Gregory, Trade, Innovation and The Globally Integrated Enterprise, available at: th http://www.oecd.org/site/tadtig/39519771.pdf, (Visited on 20 September 2013). 20 IBM Icon of Progress, The Globally Integrated Enterprise, available at: http://wwwth 03.ibm.com/ibm/history/ibm100/us/en/icons/globalbiz/transform/, (Visited on 20 September 2013).
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engage with external institutions and organizations and integrate their perspectives into doing business. Starting with the international level rst, as the globally integrated enterprise is by denition focused on its environment from a global perspective, companies (leaders) have no option but to engage in governance issues in a global way. They can no longer fall back on the sense of national citizenship and national issue management that they had when companies operated primarily as multinationals. Business success on a global stage now depends on how well a company can anticipate and engage those governance issues, not only as a demonstration of citizenship or philanthropy, but as a fundamental means of creating long term economic value21. This model can be implemented in reality, based on agreements signed between multinational companies (MNCs) and unions or organizations of countries under the jurisdiction of which these MNCs operate. Hence, MNCs with centralized locations in Asian Countries can enter into a corporate governance agreement with SAARC/ ASEAN (South Asian Association of Regional Corporation/ Association of Southeast Asian Nations) which shall implicate that
SAARC/ASEAN will enforce rules and regulations of corporate governance with respect to such MNCs, while making recommendations and revisions from time to time to keep pace with changing business environment. Similarly, MNCs with centralized locations in European countries can enter into corporate governance agreements with the European Union, which would implement and enforce important aspects of governance in such MNCs. The MNCs with centralized locations in the US can enter into agreements with the WTO (World Trade Organization) which would oversee corporate governance issues regarding such MNCs. This kind of a globally integrated approach can ensure that companies are kept a check on at the international level, resulting in increased transparency of affairs and transactions and quick detection of any wrongdoing. Such agreements will also ensure that MNCs when brought at a common platform emulate the best practices followed by each other according to their business model and compete in a healthy manner for setting high the benchmark of good governance. It can also help reduce protectionist trends of countries during times of economic crisis as MNCs require access to global markets for growth, making them inter-dependent which will ensure that MNCs keep a check on governance practices of each other, in turn ensuring that their
21
ibid
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counterparts dont go bust or fail. Moreover, this approach can bring more foreign investment, establishment of governance institutions, etc, in developing countries as self-interested MNCs try to tap the growing potential of these markets. Collaboration (think tanks and global outlook discussions) among MNCs can also help solve the problem of ageing workforce (in European countries) and surplus young workforce (in Asian countries) by appropriate exchange programs for workforce. Governance as far as it affects the relationship between an MNC and its own employees; it is believed the globally integrated enterprise model calls for a re-denition of the relationship between a company and its employees. An example of this is when IBM introduced in July 2007 a major initiative called the global citizenship portfolio, to give employees more tools to maintain their own competitiveness, and direct their own lives, in a globalized world22. For the globally integrated model to flourish, the key important point is trust. Trust is the foundation for all the issues of governance whether it be self regulation or following of norms/principles or leadership education or multi-stakeholder partnerships. Trust between employees and the company they work for, trust between companies and national governments, trust amongst every stakeholder and the company will encourage the economic life of the planet. For the future of enhanced business, MNCs need to collaborate with each other, national governments and world bodies, which should be initiated by the MNCs on their own (as effectiveness of legal action against MNCs has been hindered by limitations in international law and the lack of a binding international legal framework to govern the behaviour of transnational corporations makes prosecuting MNCs become a question of jurisdiction) by drafting corporate governance agreements, setting up think tanks and governance outlook discussions with scholars, business leaders and politicians, in a more open manner that will regain the trust needed for good global governance.
22
Jeanette Horan and Dusty Rhodes, IBMs Transformation to a Globally Integrated Enterprise, available at: http://www.sap.com/community/webcast/2008_05_SAPPHIRE_US/2008_05_SAPPHIRE_US_OR4273.pdf, (Visited th on 20 September 2013).
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DIRECTORS LIABILITY IN INDIA: AN ANALYTICAL NOTE MAKING A BRIEF COMPARISON WITH THE ENGLISH LAW
SUMIT LALCHANDANI & VIKRAM SHAH
ABSTRACT
The position of directors has changed in the era of Corporate Governance to the extent that the directors have to protect the interest of not only the shareholders but also other stakeholders. Authors by way of this paper seeks to highlight the discussion of Directorial Roles, duties and Liabilities and tries to make a comparison of Indian Laws with that of the laws prevailing in England. To establish this, the authors talk about the importance of director in company management which cover roles and power of the director in a company management. Authors also make a comparative analysis of the different liabilities of the directorsin both the States and tries to establish a stage of the comparison among the two countries.This paper seeks to highlight the discussion of Directorial Roles, duties and Liabilities in its proper context, namely, within the company organization. As it is a known fact that most of the Indian Statutes and Laws owe their origin to the English Law. So, the author in this piece of work tries to make a comparison with the Directors liabilities as enshrined under the English Law with that of Indian Law. This paper tries to summarize key liabilities in various circumstances as provided under the laws of both the Countries. Lastly, the paper addresses what types of action are to be taken against errant directors by the laws of both the countries. INTRODUCTION A corporation is an artificial being existing only in contemplation of law. It has neither the mind nor the body of its own so in order to out its operations, certain skilled individual are required. The individuals are known as directors. Section 2(13) of the Companies Act defines a director as including any person occupying the position of a director by whatever name called.
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Shareholders own a Limited Company but they dont run them, that job is given to the Directors. Thus it is not the name by which a person is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a director or not. As was stated in the case of In Re, Forest of Dean Coal Mining Co. that function is everything; name is nothing. To summarize their need in the corporation it wont be wrong to say that the Directors are the custodians of the interest of the stakeholders. There exists a relationship of trustee and trust between the directors and the shareholders of the company. They are the trustees for the assets and properties of the Company, apart from this they are also the agents of the company as it is the directors who collectively act as Board, on behalf of Company on almost all the matters except those where the company is specifically required to act which in a way suggests the need for clarifying the responsibilities of Directors. This paper seeks to highlight the discussion of Directorial Roles, duties and Liabilities in its proper context, namely, within the company organization. As it is a known fact that most of the Indian Statutes and Laws owe their origin to the English Law. So, the author in this piece of work tries to make a comparison with the Directors liabilities as enshrined under the English Law with that of Indian Law. This paper tries to summarize key liabilities in various circumstances as provided under the laws of both the Countries. Lastly, the paper addresses what types of action are to be taken against errant directors by the laws of both the countries. LIABILITIES OF DIRECTORS The liabilities of the directors vary according to the status of the Company i.e. whether the Company is private or public. Liability of a Director can be joint and several for commission or omission of an act which is prejudicial to the interests of the company and violates any of the duties to be discharged by them. But, as we know that Directors and the Company are two separate legal entities, so the Director has no personal liability on behalf of the Company. However, there are certain exceptions to it and a Director can be held liable in certain circumstances. It can be categorized in two ways. First form of categorization can be described as under:
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Liability to the Company - Breach of Fiduciary Duty: It is the duty of trust that is embodied on a Director. In a case where a director acts dishonestly to the interest of the Company, he will be held liable for breach of fiduciary duty. - Ultra Vires Act: As per the regulations specified under the Companies Act, 1956, Directors are required to act within the parameters of the provisions of the Companies Act, Memorandum and Articles of Association. Similar provision is also available under the Companies Act, 2006 of U.K which under its section 171 suggests that the Directors shall act in accordance with the Constitution of the Company and exercise only those powers which have been conferred upon them. But after the corporate laws amendment act, 2006 came into picture, this situation changed. Section 36 provides that no act of a company shall be void by reason only of the fact that the company was without capacity or power so to act or because the directors had no authority to perform that act on behalf of the company by reason only of the said fact.The important thing that is to be noted here is that it is the act of the company and not the specific act of the director. - Negligence: Directors hold the highest position i.e. the decision making position in a company so they are expected to act with reasonable skill and care as expected of them as prudent businessman. But in the case where they fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted negligently and shall be held personally liable for the damage arising therefrom. But Section 248 of the Companies Act, 2006 of provides for a bit of relief to directors in UK. This section states that if it appears to the Court that the person concerned is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that, having regard to all the circumstances of the case he ought fairly to be excused. -Mala-fide Acts: Directors are the trustees of the assets of a Company including money, property and also exercise power over them. So if in such a situation they exercise this power dishonestly or act in a malafide manner (irrespective of the fact whether it results in their personal benefits or not), they shall be held personally liable for breach of trust. Also, a Director can be made responsible for any secret profit that he might have made while acting on behalf of the Company.
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Liability to third parties -Prospectus: Section 56 and Schedule II of the Companies Act 1956, provides that a Director shall be held personally liable in case he fails to fulfill the requirements mentioned under it such as misstatement of facts in prospectus. Also section 62 of the Act provides that a Director shall be held personally liable to compensate any loss/damage that any person might have incurred by subscribing for shares/debenture on the faith of the prospectus. - Share allotment: Section 69 of the Companies Act provides for personal liability of Directors in case of irregular allotment. Likewise section 70 talks about such a liability in case of without filing a copy of the statement in case of lieu of prospectus. Further in case if any director of a company knowingly contravenes or willfully authorizes or permits the contravention of any of the provisions of section 69 or 70 with respect to allotment, He shall be held personally liable to compensate the Company and the allottee as per the provisions mentioned under section 71(3) of the Act. For failure to repay application monies in case of minimum subscription having not been received within 120 days of the opening of the issue, which has been discussed under section 69(5) read with SEBI guidelines, in case where minimum subscription is not received within 120 days of the opening of issue, then money is to be repaid to all the applicants who have subscribed for shares within 130 days from the date of the issue of the prospectus Directors are required to repay the money with an interest rate of 6% per annum prior to 130 th day provided that the default in repayment of money was due to any misconduct or negligence on his part. - Liability for Tax: Income Tax, 1961 provides that a person shall be jointly and severally liable where any tax due from a private company in respect of any income of any previous year cannot be recovered from such private company provided that the non-recovery of such tax is attributed to gross-neglect, misfeasance or breach of duty. Also Central Sales Tax Act and certain State Tax laws provides for similar Liabilities. -Liability to pay for Qualification shares: If the Director has not acquired his or her qualification shares within the prescribed time period and the company goes into liquidation the day after this period expires, he shall be made personally liable to pay for the shares he or she was supposed to have purchased. -Fraudulent Trading: Directors may also be made personally liable for the debts orliabilities of a company by an order of the court under section 542. Further Section 542(1), in this regard,
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provides that if in the course of the winding up of a company, it appears that any business of the company has been carried on, within tent to defraud creditors of the company or any other person, or for any fraudulent purpose, the court, on the application of the Official Liquidator, or the liquidator or any creditor or contributory of the company may if it thinks it proper so to do, declare that any persons who were knowingly parties to the carrying on business in the manner aforesaid shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company. Further, section 542(3) provides that every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both. - Unlimited Liability: Directors will also be held personally liable to the third parties where their liability is made unlimited in pursuance of section 322 which provides that the directors, manager and the member who proposes a person for appointment as director or manager must add to the proposal for appointment as a statement that the liability of the person holding the office will be unlimited. This can also be done by section 323 wherein a limited liability company can if authorized by the Articles, by passing resolution alter its Memorandum so as to render the liability of its directors or of any director or manager unlimited. But the alteration making the liability of director or directors or manager unlimited will be effective only if the concerned officer consents to his liability being made unlimited. Apart from all these liabilities, UK Laws also requires that a Director shall not accept any benefits from the third parties. Section 176 of the Companies Act, 2006 requires that a director must not accept a benefit from a third party for his doing or not doing something anything as director. No such provisions have been mentioned expressly under the Indian Statute. But if we carefully analyze the statute, declaration of interest of a director in any transaction also refers to the similar clause. -Liability for breach of Statutory Duties: As discussed above, The Companies Act, 1956 provides for various statutory duties on the Directors which attract penal consequences due to non-compliance. Also when director fails to perform these statutory duties under the Companies Act, 1956, they bring themselves within the mischief of the penal provisions of law. The Act defines the term Officer-in default under section 5 of the Companies Act, 1956.
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- Liability of Directors in relation of torts: The orthodox position is that separate legal entity of a limited company means that a director is not liable for the torts of the company of which he is a director. However his does not mean that there are no circumstances in which the director could find himself liable for torts committed whilst a director of the Company. To make a person liable for a tort, e.g. for negligence, trespass, nuisance or defamation it must be shown that he was himself the wrongdoer or that he was the principal of the wrongdoer that it was under his instructions and guidance the act is been committed in relation to the act complained of as was laid down in the case of Panorama Developments (Guildford) Limited v Fidelis Furnishing Fabrics Limited. Second form of categorization can be described as: Civil Liability: Such as the liability for negligence, breach of trust, misfeasance, acting ultravires to the memorandum of the company, all of which have already been explained. Criminal Liability: Criminal Liability of a Director can be defined as the liability of a person who was so authorized by the company, and the liability is such that the provisions of Indian Penal Code can be actually applied for the illegal act he committed. These provisions of criminal liability have always been in conflict because of the view that since the Company is an artificial person so how could it be punished to a term of imprisonment? But the case of Standard Chartered Bank v. Directorate of Enforcement solved this problem wherein the Supreme Court said that prosecution can be initiated and fine can be imposed against a company even when imprisonment is given as mandatory punishment with fine. Some of the provisions of the Companies Act, which make directors criminally liable, can be illustrated as: - Misrepresenting General public: Under the clause 4 of section 44 of the Act of 1956, if any untrue information is mentioned in a prospectus or statement in lieu of prospectus and in case it being filed by a private company on ceasing to be private company, it shall be a criminal offence and the directors shall be held responsible for it. Also section 63 of the Act, imposes criminal liability on any and every person who authorizes the issue of prospectus containing any untrue statement in it. - Default in repay of deposits: As per S.58A of the Act, Deposits for the subscription of shares can be invited by issuing an advertisement. But as per clause 5 of the said section, such deposits shall be made as per certain rules and if any deposit is accepted or renewed in contravention of
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such rules, the company shall repay it within thirty days failing which shall impose criminal liability. Also clause 6 of the same section, talks about the situation regarding the accepting or inviting deposits in excess to the prescribed limits which have been set up in consultation with the Reserve Bank of India. - Fraudulently inducing people to invest money: As per section 68 of the Companies Act, 1956 it is a punishable offence to fraudulently (and intentionally) induce people in investing money in your companies. - Failure to repay excess application money: Whenever the issue of shares is over-subscribed, the over subscription portion of money must be sent back to the applicants within a margin of eight days as has been provided under section 73 of the Companies Act, 1956. Failing which shall make the Director criminally liable. - Concealing/misrepresenting the debts of any creditor: Section 105 of the Companies Act, 1956 makes it a punishable offence on the part of any officer of the company to conceal (knowingly) the name of any creditor or misrepresents the amount of the debts. This section even punishes any kind of abetment that the officer might do in concealment or misrepresentation. - Liability of Undercharged insolvent when acting as Director: Such a person is disqualified from being appointed at a managerial office. But in case if any such person discharges the duties of a director, Section 202(2) imposes criminal liability on him. - Liability for Default in dividend distribution: Section 207 of the Companies Act requires that when a dividend has been declared it should be paid within thirty days from the date of the declaration failing which will attract criminal liability. - Non- Cooperating in the inspection of books of accounts: Under Section 209(A) of the Act, a Director is required to provide the book of accounts and other books and papers to inspection by the Registrar or by any such officer as may be authorized by the Central Government. Non- cooperation by the Director shall make him criminally liable.
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- Failure to disclose the books of accounts at the annual general meeting: As required by the Companies Act, 1956 it is the duty of the Board of Director, to lie at every annual general meeting the documents like balance sheet, profit and loss Account, etc. Clause 5 of Section 210 lays down the punishment which shall be rendered in case of failure in complying with the requirement as mentioned above. Also Section 211 mentions the format according to which the books of accounts shall be recorded failing which shall also attract punishment for the Board of Directors. - Honoring the conditions/directions imposed by the Company Law Board: There are certain restrictions imposed by the Company Law Board upon shares and debentures and Section 250(9) of the Act mentions that in case of failure to honor these restrictions, a Director shall be held liable for a criminal offence. Also, Section 407(2) of the Act requires that if the Company Law Board has terminated the services of a Director, he shall honor such direction and shall not act for five years thereafter without the leave of the CLB. - Duty to disclose interest: It is the duty of the Director to disclose his interest in any contract that he makes with the Company. Such a condition is mentioned under Section 299(4) which suggests that failure in fulfilling such a duty shall attract criminal liability. In the case of M/s. Raj Cylinders &Containers v. Hindustan General Industries Ltd, Delhi High Court observed that where the directors are personally interested in the deal, the contract is to the detriment of the company. - Duty to disclose the true financial status of the Company: If the director intentionally makes the false declarations regarding the ability of the Company to pay its debts within the specified period, then he shall be criminally liable as under Section 488(3) of the Companies Act, 1956. - Failure to fulfill other duties: As mentioned under Section 217(5), a report made by the Board of Directors is to be attached mandatorily with the Balance sheet failing which shall attract punishment. Also under section 221(4), it is the duty of the Director to disclose to the company the particulars of any matter pertaining to them which is required to be reflected in accounts. Violation for such a duty shall also render the Director liable for criminal offence.Even for granting of loan to the Director, consent of Central Government is necessary. Under Section 295(4), it is mentioned that if such approval is not taken then the Board of Directors shall attract
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penalties. Another difference between the laws of both the companies comes into picture over here, as under the English law, members approval is required for granting of loans to the directors. Section 17 of the Companies Act, 2006 suggests that a Company may make a loan to Director of the Company if the transaction has been approved by the resolution of the members of the company. Companies Act of U.K. under section 201 also requires that any credit transaction by a company(i.e. public company or a company associated with the public company) in which the company acts as a creditor for the benefit of the director of the Company requires the approval by a resolution of the members of the Company. PROVISIONS HAVING DISTINCT MENTIONING UNDER THE ENGLISH LAW While making a comparison between both the laws, it is important to mention the distinct provisions available under the English laws but did not find their in the Indian statute. Such provisions can be listed as: - Under Section 232 of the Companies Act, 2006, Legislature has declared all the provisions as void which tries to exempt a director of a company (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company. - A Director of a company is bound to be held responsible under section 37 of the Act, if a subsidiary company makes any loan of money or other property to, or provides any security or gives any guarantee in respect of any obligation of, its holding company or a fellow subsidiary, but not a subsidiary of itself, and the director has failed to show the particulars of that loan or security in its annual financial statements for every year during which such loan, security or guarantee exists. The amendment act, 2006 terms it as a punishable offence. - Section 50(3) makes it an offence for any director to issue or authorize the issue of any notice or other official publication of the company, or to sign or authorize to be signed on behalf of the company, any bill of exchange, promissory note, etc., wherein the companys name is not mentioned in legible characters. Strict liability applies (i.e. actual knowledge of the offender is not an element of this offence) in such situations. - Another section that is available under the UK laws but misses its place under the Indian Act is Section 266 which states that if a director has committed any wrong, breach of trust or breach of
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faith and, as a result, the company has suffered damages or loss or has been deprived of any benefit, and the company has not initiated proceedings against the director, then any shareholder under section 266 may serve written notice on the company calling upon it to institute such proceedings. - Section 299 of the Act of 2006 specifically requires for a directors report. It states that every company which is not a wholly owned subsidiary is obliged, as part of its annual financial statements, to lay before the AGM a report by the directors with respect to the state of affairs, business and the profit or loss of the company and its subsidiaries (if any).T he section goes on to say that if any director fails to take all reasonable steps to ensure compliance with the provisions of S299, the director shall be criminally liable for fine or imprisonment not exceeding six months or both. CONCLUSION Accountability is the most important aspect in any business, because until and unless the person is made accountable to his act he may do the act in pursuance of his own interest. So there should be some mechanism for evaluating the performance of the directors. The extent of liability of a director would depend on the nature of his directorship. And as it is a known fact that most of the Indian Statutes and Laws owe their origin to the English Law, So there is a need of making a comparison of Directors Liabilities as enshrined in the English Law with that of Indian Law acquires great significance. After analyzing all the things discussed in the paper and making a comparison of the laws of both the countries, author would be critically analyzing the complete scenario. It is evident that the laws of both the countries hold the Directors for criminal as well as civil wrongs. For the time being, the author would just like to say that, although Directors have multifarious liabilities but if they exercise their powers for the good of the Company keeping in mind the benefit of the stakeholders and without any ill, they wont be made liable and neither they should be made liable for the act they have not done and merely on the basis of their position.
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BIBLIOGRAPHY: BOOKS: A Ramaiya, Guide to the Companies Act, Lexis NexisButterwoths Wadhwa,16th Ed, 2008 Mortimore, Company Directors duties Liabilities & Remedies, Oxford University Press, 2009 LVV Iyer, Guide to Company Directors, Lexis NexisButterworthsWadha, 3rdEdn., 2011 Encyclopaedia of Orders, Company Law Board, 1989-2008 Palgrave, Company Law, 6thEdn., 2008 Pennington, Company Law, Oxford University Press, 8thEdn., 2006 Mayson, French, Ryan, Company Law, Oxford University Press, 27th Edn.,2011 Nicholas Bourne, Bourne on Company Law, 4thEdn, 2008 Martha Bruce, Rights & Duties of Directors, 10thEdn., 2010 H.K. Saharay, Company Law, Delhi: Universal Law Publishing Company, 5thEdn., 2008 Sealy & Worthington, Cases & Materials in Company Law, Oxford University Preess, 9thEdn., 2010 MajumdarA.K.,andKapoor G.K. Company Law and Practice , Edn. 15th , 2010 Singh Avtar, Company Law, Edn 15th, 2010 BOWMAN GILFILLAN, Duties and Liabilities of Directors and the Corporate Laws Amendment Act, 2006. EDWARD SMERDEN, Directors Liability and Indemnification, (2007).
STATUTES Companies Act, 1956 (India) Companies Act, 2006 (England)
ARTICLES Gordon N, The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder Value and Stock Market Prices, 59, Stanford Law Review, 2007
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Sunday Times, What is my liability as a Company Director, December 11, 2007
OTHER AUTHORITIES Standing Report Committee, Companies Bill 2009, Presented to LokSabha on 31st August 2010 Sawchuk Russell, Director's Responsibilities and Liabilities http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Act_1956_Part_1.pdf http://www.financialexpress.com/news/directors-personal-liability-for-tort/35053/ http://business.timesonline.co.uk/tol/business/law/article3025472.ece http://www.scribd.com/doc/15253291/duties-and-liabilities-of-director-in-india http://www.narasappa.com/resources/Roles%20liabilities%20and%20responsibilities%20 of%20Directors%20in%20India.pdf http://www.lawyersclubindia.com/forum/files/34_34_liabilities_of_directors.pdf http://volunteer.ca/files/LiabilityEng.pdf http://legalservicesindia.com/article/article/directors-&-their-liabilities-577-1.html http://www.narasappa.com/resources/Roles%20liabilities%20and%20responsibilities%20 of%20Directors%20in%20India.pdf http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf http://www.indiajuris.com/pdf/Directors.pdf http://www.chadbourne.com/files/upload/DandOLiability.pdf http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073870537 http://libcat.icaew.co.uk/uhtbin/cgisirsi.exe/x/SIRSI/0/5?searchdata1=%27directors%27 %20responsibilit$%27%7B690%7D&pubyear=%3E2005&sort_by=PBYR&user_id=WEBSERVER
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INSIDER TRADING- ITS ILLEGALITY AND LEGALITY

SAYONI CHAUDHARI
ABSTRACT Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of nonpublic information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material information is still nonpublic--trading while having special knowledge is unfair to other investors who don't have access to such knowledge. Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors. The SEC, however, still requires all insiders to report all their transactions. So, as insiders have an insight into the workings of their company, it may be wise for an investor to look at these reports to see how insiders are legally trading their stock. In the contemporary scenario securities markets around the world are competing for the fixed pool of capital. Investors will surely prefer markets where the regulatory agencies are most effective. Protecting the investors, enforcing securities laws and creating confidence in the system by ensuring the fairness and integrity of the market should therefore be a priority. Investor confidence is extremely fragile and should be maintained with care. The securities
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markets should therefore be treated like Caesars wife; they must not only be above suspicion but must also be perceived to be so.
Introduction The Company is a legal entity with perpetual succession and a common seal. The BOD and its staffs and employees are the main hands of the company which makes the Company works and helps it to attain its objectives. The Board of Directors, its staffs and its employees as being the left and right hands of the Company are under a duty to not to get involved in any activities which to harm the company and in case they case involved in any fraudulent activities they are solely responsible for the loss suffered by the Company.
Insider trading is one of the activities which is a form of corporate crime where any insider get involved in illegal stuffs thus violating the principle of utmost good faith thus affecting the Company to the huge extent. Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information.
However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material information is still nonpublic--trading while having special knowledge is unfair to other investors who don't have access to such knowledge.
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Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors. The primary focus of this article is on the insider trading regulations which are applicable to the offending transaction. An attempt has been made to analyze the Indian insider dealing provisions as they stand. The paper includes a comparative study between the Indian laws and the various other prevailing laws in other countries. The purpose of such a comparison is to point out the international trends and standards in connection with the control of this pernicious practice. The paper also deals with the legality or illegality of the insider trading.
Meaning of Insider & Insider Trading as Defined: Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, does not directly define the term insider trading. But defines the terms: Insider According to the Regulations "insider" means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information. Connected person The Regulation defines that a "connected person" means any person whoinsider" or who is an "insider; Who is a "connected person. What is "price sensitive information".
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(i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956) of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act or (ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company; Price Sensitive Information means any information, which relates directly or indirectly to a company and which if published, is likely to materially affect the price of securities of company. Insider Trading"Insider" means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connected, to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information . Insider definition as amended by SEBI vides its Notification No. LAD -
NRO/GN/2008/29/44801 dated 19-11-2008 means any person, who (i) Is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or (ii) Has received or has had access to such unpublished price sensitive information There are several "do's" and "don'ts" with reference to these "insiders". The effect of the regulatory measure adopted by SEBI to prevent the insider trading in the shares of the company to earn an unjustified benefit for himself and to the disadvantage of the bona fide common shareholders Insider trading is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. Insider trading takes place legally every day, when corporate insiders officers, directors or employees buy or sell stock in their own companies within the
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confines of company policy and the regulations governing this trading. In simple terms insider trading buying or selling a security, in breach of a fiduciary duty or other relationship of trust, and confidence, while in possession of material, non public information about the security. The misuse of confidential information is frowned upon for several reasons as: It involves taking a secret, unfair advantage. It gives rise to a potential conflict of interests in which the company's best
interest may wrongfully take second place to the insider's self interest, and confidence. Public confidence in directors and others closely associated with companies requires that such people do not use inside information to further their own interests. Furthermore, if they were to do so, they would frequently be in breach of their obligations to the companies, and could be held to be taking an unfair advantage of the people with whom they are dealing. It brings the market into disrepute and may be a disincentive to investment. It is unethical as it amounts to breach of fiduciary position of trust and
The nature of the offense is such that no piece of legislation, however carefully drafted, can hope to cover and thereby suppress this practice in its entirety. Even if legislation is not entirely successful in suppressing improper transactions, a high standard of conduct should be maintained, and it should generally be realized that a speculative profit made as a result of special knowledge not available to the general body of shareholders in a company is improperly made. Examples of Insider TradingCorporate officers, directors and employees who traded the companys securiti es after learning of significant, confidentiality corporate developments Employees of law, banking , brokerage and printing firms- who were given such information to provide services to corporation whose
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securities they traded; Government employees who learned of such information because of their employment by the government. Therefore, preventing such transactions is an important obligation for any capital market regulatory system, because insider trading undermines investor confidence in the fairness and integrity of the securities markets. The first country to tackle insider trading effectively however was the United States. In the USA, the Securities and Exchange Commission is empowered under the Insider Trading Sanctions Act, 1984 to impose civil penalties in addition to criminal proceedings. Most countries have in place suitable legislation to curb the menace of insider trading. In India, SEBI (Insider Trading) Regulations 1992, framed under Section 11 of the SEBI Act, 1992, are intended to prevent and curb the menace of insider trading in Securities. Now SEBI has with effect from 20th February 2002 amended these Regulations and rechristened them as SEBI Prohibition of Insider Trading Regulation, 1992. These Regulations have been further amended in November 2002. Insider trading leads to loose of confidence of investors in securities market as they feel that market is rigged and only the few, who have inside information get benefit and make profits from their investments. Thus, process of insider trading corrupts the level playing field Hence the practice of insider trading is intended to be prohibited in order to sustain the investors confidence in the integrity of the security market. In Samir C Arora Vs SEBI it was observed that activities like insider trading fraudulent trade practices and professional misconduct are absolutely detrimental to the interests of ordinary investors and are strongly deprecated under the SEBI Act, 1992 and the Regulations made there under. No punishment is too severe for those indulging such activities. Various Laws Prevailing in Different Countries in Regard to Insider Trading
1.
Protection Under General Law
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Insider dealing under the general law the general law has proved ineffective in controlling insider dealing. The protections available under general law may be summarized as follows:
a.
Where a trader makes an affirmative misrepresentation about the security to
his counter party, he may be liable for misrepresentation under normal rules. b. Where a trader omits to disclose a material factor about a security, he may in
exceptional circumstances are liable for non-disclosure. Generally, however, there is no liability for non-disclosure. 2. American insider trading law
The United States has been the leading country in prohibiting insider trading and the first country to tackle insider trading effectively. Thus it is important to discuss insider trading in American perspective. While Congress gave us the mandate to protect investors and keep our markets free from fraud, it has been our jurists, albeit at the urging of the Commission and the United States Department of Justice, who have played the largest role in defining the law of insider trading. The market crash in 1929 due to prolonged lack of investors confidence in the securities market followed by Great Depression of US Economy , led to the enactment of Securities Act of 1933 in which Section 17 of the contained prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities Exchange Act of 1934The 1934 Act addressed insider trading directly through Section 16(b) and indirectly through Section 10(b).Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six month period) made by corporate directors, officers, or stockholders owning more than 10% of a firms shares. Under Section 10(b) of the 1934 Act, SEC Rule 10(b) prohibits fraud related to securities trading. Further the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the profit gained or the loss avoided from the illegal trading. In United States v. Carpenter (1986) the U.S. Supreme Court cited an earlier ruling while unanimously upholding mail and wire fraud convictions for a defendant who received his
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information from a journalist rather than from the company itself. The journalist R. Foster Winans was also convicted. "It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principle for any profits derived there from." However, in upholding the securities fraud (insider trading) convictions, the justices were evenly split. In 1997 the U.S. Supreme Court adopted the misappropriation theory of insider trading in United States v. O'Hagan, O'Hagan was a partner in a law firm representing Grand Met, while it was considering a tender offer for Pillsbury Co. O'Hagan used this inside information by buying call options on Pillsbury stock, resulting in profits of over $4 million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that he did not commit fraud by purchasing Pillsbury options. The Court rejected O'Hagan's arguments and upheld his conviction. The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction, and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information.
The Court specifically recognized that a corporations information is its property: "A company's confidential information...qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a
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fiduciary duty...constitutes fraud akin to embezzlement the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another." In 2000, the SEC enacted Rule 10b, which defined trading "on the basis of" inside information as any time a person trades while aware of material non public information so that it is no defence for one to say that she would have made the trade anyway. This rule also created an affirmative defence for pre-planned trades. In May of 2007, representatives Brian Baird and Louise Slaughter introduced a bill entitled the "Stop Trading on Congressional Knowledge Act, or STOCK Act." that would hold congressional and federal employees liable for stock trades they made using information they gained through their jobs. The bill would also seek to regulate so called "Political Intelligence" firms that research government activities and sell the information to financial managers. 3. The law in UK
In the UK insider dealing was made a specific criminal offense in 1980 and was incorporated in the Company Securities Insider Dealing Act 1985 which was re enacted in 1993 and is contained in Part V of the Criminal Justice Act of 1993 (CJA). Under the UK regulation inside information means information which relates to particular securities or the issuer of particular securities and is specific or precise and has not been made public and if it were made public would have a significant effect on the price of any securities.
Interestingly, under the law as it exists in the UK only individuals can be held liable. In India individuals as well as corporations can be guilty of the offense. In this regard the law in India is similar to the law in the US where corporate liability is recognized under certain circumstances.
UK regulations state that information can be said to have been made public if: It is published in accordance with the rules of a regulated market for the
purpose of informing investors and their professional advisors;
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It is contained in records which by virtue of any enactment are open to
inspection by the public; information relates (b) or an issuer to which the information relates; or It is derived from information which has been made public. It can be readily acquired by those likely to deal in securities (a) to which
Indian regulations are silent on when and how information is considered to be public. Unlike the Indian regulations, the UK enactment also provides for defences available to an individual against action for insider trading. An individual is not guilty of insider dealing if he shows: He did not at the time of dealing expect the deal to result in profit attributable
to the fact that the information in question was price sensitive information in relation to the securities. That he believed on reasonable ground that information had been disclosed
widely enough to ensure that none of those taking part in the dealing would be prejudiced by not having information. That he would have done what he did even if he did not have the information.
Defences on the same lines are available to persons who are considered guilty of encouraging other persons to deal in securities or disclosing price sensitive information to others.
In the UK insider trading is considered a criminal offense and hence, the standard of proof required for conviction is high. Knowledge is an essential ingredient to be proved in an insider trading case, which under criminal law must mean more than constructive knowledge. The mens rea or the intent therefore assumes significance. Indian laws do not seem to take the intent of the offender into account.
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As a result, there has been a broadening of the scope of the regulations and a visible shift in the burden of proof from the prosecutors to the defendants. This trend is in tune with the changes observed internationally.
4.
Laws in India.
In India Regulation 3 of the SEBI Regulations seeks to prohibit dealing, communication and counselling on matters relating to, insider trading. Regulation 3 provides that no insider shall either on his own behalf of any other person deal in securities of a company when in possession of any unpublished price sensitive information on communicate, counsel or procure, directly or indirectly any unpublished price sensitive information to any person, who while in possession of such unpublished price sensitive information shall not deal in securities. However, these restrictions are not applicable to any communication required ordinary, course of business or profession or employment or any law. Further 3A prohibits any company from dealing in the securities of another company or
associate of that other company while in possession of any unpublished price sensitive information. Insider Trading Regulations have been tightened by SEBI during February 2002. New rules cover 'temporary insiders' like lawyers, accountants, investment bankers etc. Directors and substantial shareholders have to disclose their holding to the company periodically. The New Regulations have added relatives of connected persons, as well as, the companies, firms, trust, etc .in which relatives of connected persons, bankers of the company and of persons deemed to be connected persons hold more than 10% . The definition of relative under the New regulations is in line with that of the Companies Act, 1956, which ranges from parents and siblings to spouses of siblings and grandchildren. The term connected person is defined to mean either i) a director or deemed to be a director,
ii) occupies the position as an officer or an employee or having professional or business relationship whether temporary or permanent, with the company. Thus, there are two categories of insiders:
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Primary insiders, who are directly connected with the company and secondary insiders who are deemed to be connected with the company since they are expected to have access to unpublished price sensitive information. The jurisprudential basis for the 'person-connected' approach seems to be founded in the equitable notions of fiduciary duty. The secondary insider, who would have traded with an unfair informational advantage, may escape from being caught simply because there can be no trace of how he derived this information in the first place. insider by reason of his connection with the company. In reality, much of the flow of the price-sensitive information often does not operate by way of such established networks of relational links between individuals. Very often, such price-sensitive information is communicated and spread out through very loosely connected and informal networks of brokers, clients and even between friends and through electronic networks etc. or an elaborate nexus of company official, brokers, traders. These individuals are very often privy to strategic policy decisions or developments that may influence the valuation of a companys scrip on the bourses. Duties/ Obligations of the Company: Every listed company has the following obligations under the SEBI
(Prohibition of Insider trading) Regulations, 1992. To appoint a senior level employee generally the Company Secretary , as the
Compliance Officers; To set up an appropriate mechanism and to frame and enforce a code of
conduct for internal procedures, To abide by the Code of Corporate Disclosure practices as specified in
Schedule ii to the SEBI (Prohibition of Insider Trading)Regulations , 1992 To initiate the information received under the initial and continual disclosures
to the Stock Exchange within 5 days of their receipts; To specify the close period; To identify the Price Sensitive Information
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computer; To prescribe the procedure for the pre- clearance of trade and entrusted the To ensure adequate data security of confidential information stored on the
Compliance Officers with the responsibility of strict adherence of the same. Penalties Following penalties /punishments can be imposed in case of violation of SEBI (Prohibition of Insider Trading) Regulations, 1992 SEBI may impose a penalty of not Rs 25 Crores or three times the amount of
profit made out of insider trading; whichever is higher. SEBI may initiate criminal prosecution. SEBI may issue orders declaring transactions in securities based on
unpublished price sensitive information. SEBI may issue orders prohibiting an insider or refraining an insider from
dealing in the securities of the company. Thus, the new 2002 regulations in India have further fortified the 1992 regulations and have increased the list of persons that are deemed to be connected to Insiders. Listed companies and other entities are now required to frame internal policies and guidelines to preclude insider trading by directors, employees, partners, etc. In the past, it has been observed that insider trading legislation is ineffective and difficult to enforce and has little impact on securities markets. Low enforcement rates and few convictions against insiders have been cited as evidence of this ineffectiveness. Irrespective of whether or not the SEBI was bestowed with wide ranging powers, it has been a clear failure when it came to the task of administering the law. The importance of policing insider trading has also assumed international significance as overseas regulators attempt to boost the confidence of domestic investors and attract the international investment community. So, SEBI now should take the role of a regulator only. Special Courts could be set up for faster and efficacious disposal of cases.
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The Legal Aspect of Insider Trading Legal trades by insiders are common, as employees of publicly traded corporations often have stock or stock options. These trades are made public in the United States through Securities and Exchange Commission filings, mainly Form 4. Prior to 2001, U.S. law restricted trading such that insiders mainly traded during windows when their inside information was public, such as soon after earnings releases. SEC Rule 10b (5-1) clarified that the prohibition against insider trading does not require proof that an insider actually used material non public information when conducting a trade; possession of such information alone is sufficient to violate the provision, and the SEC would infer that an insider in possession of material non public information used this information when conducting a trade. However, SEC Rule 10b(5-1) also created for insiders an affirmative defence if the insider can demonstrate that the trades conducted on behalf of the insider were conducted as part of a preexisting contract or written binding plan for trading in the future. For example, if an insider expects to retire after a specific period of time and, as part of his or her retirement planning, the insider has adopted a written binding plan to sell a specific amount of the company's stock every month for two years and later comes into possession of material non public information about the company, trades based on the original plan might not constitute prohibited insider trading. Some economists and legal scholars argue that laws making insider trading illegal should be revoked. They claim that insider trading based on material non public information benefits investors, in general, by more quickly introducing new information into the market. Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market. Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller agree to trade property which the seller rightfully owns; with no prior contract (according to this
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view) having been made between the parties to refrain from trading if there is asymmetric information. The Atlantic has described the process as "arguably the closest thing that modern finance has to a victimless crime". Legalization advocates also question why "trading" where one party has more information than the other is legal in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith of the geological data. Nevertheless, circumstances can occur when the geologist would be committing fraud if, because he owes a duty to the farmer, he did not disclose the information; e.g., if he had been hired by Farmer Smith to assess the geology of the farm. Advocates of legalization make free speech arguments. Punishment for communicating about a development pertinent to the next day's stock price might seem to be an act of censorship. If the information being conveyed is proprietary information and the corporate insider has contracted to not expose it, he has no more right to communicate it than he would to tell others about the company's confidential new product designs, formulas, or bank account passwords. These are a few arguments placed on behalf of legality of insider trading. Conclusion In nutshell , insider trading is the buying , selling or dealing in securities of a listed company by a director , member of management , employee of the company , or by any other person such as internal auditor , advisor , consultant , analyst etc, who has knowledge of material inside information which is not available to general public.
Insider dealing is seen as an abuse of an insiders position of trust and confidence and as harmful to the securities markets because outsiders can be cheated by insiders who are not able to deal on equal terms: as a result the ordinary investor loses confidence in the market. The rules are more important in relation to equities where prices are more sensitive to financial conditions. But the principles could impact upon bonds and of course upon convertibles or other bonds with an equity element.
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Essentially insider trading involves the deliberate exploitation of unpublished price sensitive information obtained through or from a privileged relationship to make profit or avoid loss by dealing in securities of a company when the price of securities would be materially altered if the information was disclosed.
In other words, insider dealing is understood broadly to cover situations where a person buys or sells securities when he, but not the other party to the transaction, is in possession of confidential information because of some connection and such information would affect the value of those securities. Furthermore, the confidential information in question will generally be in his possession because of some connection which he has with the company whose securities are being dealt in or are to be dealt in by him (e.g. he may be a director, employee or professional adviser of that company) or because someone in such a position has provided him, directly or indirectly, with the information.
The rationale behind the prohibition of insider trading is "the obvious need and understandable concern about the damage to public confidence which insider dealing is likely to cause and the clear intention to prevent, so far as possible, what amounts to cheating when those with inside knowledge use that knowledge to make a profit in their dealings with others.
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THE CHANGING ROLE OF THE COMPANY SECRETARY - A FOCUS ON GOVERNANCE

SKANDH NATHAM
As the importance of effective corporate governance continues to be critical in todays environment, not least due to the global financial crisis, there has been increased focus on the role of the company secretary in Ireland. Most notably, the Companies Bill 2012 recently retained the need for a company secretary in both private and public companies. The responsibilities of the modern day company secretary have evolved from that of a note taker at board meetings or administrative servant of the Board to one which encompasses a much broader role of acting as Board advisor and having responsibility for the organisations corporate governance. The Board, particularly the chairman, relies on the company secretary to advise them not only on directors statutory duties under the law, disclosure obligations and listing rule requirements but also in respect of corporate governance requirements and practices and effective board processes. This specialized role of the modern company secretary has emerged to position them as one of the key governance professionals within the organisation. Statutory Responsibilities The Companies Bill 2012, which was published last December and is expected to be enacted at the earliest in 2014, retains the requirement for a company secretary unlike the UK legislation which eliminated this requirement for private companies in 2006. The retention of this
requirement demonstrates the importance of the role of the company secretary in the eyes of the legislature and in fact the proposals go a step further by placing the responsibility on the Board of directors to ensure that the secretary has the requisite knowledge and experience to discharge the functions of secretary of the company and to maintain the records as required by the Bill. Furthermore, the company secretary will be required to sign a declaration acknowledging the existence of the secretarys duties on appointment.
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If one were to examine the role and duties of the company secretary as currently outlined in Irish legislation it would appear to be quite restrictive and mainly administrative in nature. Principally, the company secretary ensures the company complies with company law, maintains certain statutory registers and makes the necessary filings with the Registrar of Companies such as annual returns, financial statements and certain forms with respect to changes to share capital etc. Corporate Governance In practice, the role of the company secretary has developed into much more than the basic statutory requirements outlined above. Most notably, the responsibility for developing and implementing processes to promote and sustain good corporate governance has fallen largely within the remit of the company secretary. This is recognized in both the UK Code of Corporate Governance (which has been adopted by the Irish Stock Exchange through the Irish Annex) and the FRC Guidance on Board Effectiveness. Both have served to focus companies on Board effectiveness and in turn how they can be assisted by the company secretary. Although this guidance applies to listed companies, it is seen as best practice and these standards of corporate governance should be adopted by other companies in so far as they are considered appropriate to the nature and scale of the organization. The dynamics of the boardroom are changing and chairmen and directors are realizing that they need specialist skills and technical knowledge in this area and they are looking to company secretaries to provide this expertise. There are a number of responsibilities, some of which have been explicitly referenced to in the above guidance, where the company secretary can assist and add value: Organizational Governance It is important that robust governance arrangements are in place, are clearly documented and communicated to the organization. The position of the company secretary enables them to have a holistic view of the governance framework and as a result they are generally tasked with the responsibility of ensuring that this framework and any supporting policies and procedures are clearly documented. This should include ensuring that the formal documentation required under
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the UK Code of Corporate Governance, such as schedule of matters reserved for the Board, is in place. Supporting the Chairman The company secretary has a duty to advise the Board, through the chairman, on all governance matters. Together they should periodically review whether the Board and the companys other governance processes are fit for purpose, and consider any improvements or initiatives that could strengthen the governance of the company. The relationship between the company secretary and the chairman is central to creating an efficient Board. Board and Committee Processes The company secretary plays a leading role in good governance by helping the Board and its committees function effectively and in accordance with their terms of reference and best practice. Providing support goes beyond scheduling meetings to proactively managing the agenda and ensuring the presentation of high quality up-to-date information in advance of meetings. This should enable directors to contribute fully in board discussions and debate and to enhance the capability of the Board for good decision making. Following meetings the company secretary should pursue and manage follow up actions and report on matters arising. Board development All directors should have access to the advice and services of the company secretary. The company secretary should build effective working relationships with all board members, offering impartial advice and acting in the best interests of the company. In promoting board development the company secretary should assist the chairman with all development processes including board evaluation, induction and training. This should involve implementing a rigorous annual Board, committee and individual director assessment and ensuring actions arising from the reviews are completed. Further, the company secretary should take the lead in developing tailored induction plans for new directors and devising a training plan for individual directors and the Board. Although these tasks are ultimately the responsibility of the chairman, the company secretary can add value by fulfilling, or procuring the fulfilment of, these best practice governance requirements on behalf of the chairman.
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Communication with stakeholders The company secretary is a unique interface between the Board and management and as such they act as an important link between the Board and the business. Through effective communication they can coach management to understanding the expectations of, and value brought by the Board. The company secretary also has an important role in communicating with external stakeholders, such as investors, and is often the first point of contact for queries. The company secretary should work closely with the chairman and the Board to ensure that effective shareholder relations are maintained. Disclosure and reporting In recent years there has been increased emphasis in the quality of corporate governance reporting and calls for increased transparency. The company secretary usually has responsibility for drafting the governance section of the companys annual report and ensuring that all reports are made available to shareholders according to the relevant regulatory or listing requirements. Increasing burden of regulation In the light of economic developments in recent years stakeholders of companies, particularly in the financial services sector, are increasingly concerned with the conduct of the affairs of the company and therefore it is essential that best practice is adhered to at all times and evidence is available to demonstrate same. The requirement for higher standards in this sector can be
further evidenced by the introduction by the Central Bank of a series of corporate governance codes including fitness and probity standards for certain pre-approval controlled functions or persons who perform controlled functions. Controlled functions include ensuring, controlling or monitoring compliance by a regulated financial service provider with its relevant obligations. While the monitoring of compliance in the financial services sector has traditionally been outsourced with the introduction of these new standards there is more caution in the provision of such services which are more likely in the future to be laid at the feet of the company secretary.
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It is true to say that the role of the company secretary also includes keeping the Board informed of new legislation and how it applies to them. With this increased focus on corporate governance, the role of the company secretary has been extended such that the secretary is now seen as the guardian of the companys compliance with legislative requirements and best practice. Conclusion The focus of the company secretarys responsibilities will differ depending on the type of company, whether it is public or private, and also depending on the industry. No matter what the organization however, the role has expanded beyond simply ensuring statutory compliance to become a pivotal one where the skills of the company secretary can have a direct impact on the effectiveness of the Board and organization. Company secretaries can add real value to their role and increase their impact by bringing commercial acumen, strategic understanding and softer people skills in addition to their already much soug
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INTRODUCTION TO INDIRECT TAX

ANANDITA SAHU
INTRODUCTION Indirect Tax is a tax collected by an individual by indirect means1 in a pecuniary term on his sale and purchase by the authority of law under Indian constitution2. Indirect tax is one of the branch of tax laws and another is direct tax. Indirect tax is also known as consumption tax because they are based on the ability to pay principle which means a tax which is not levied directly on the incomes of earner or consumer. Collection of indirect was custom earlier then afterwards it becomes a law under which state obliges us to pay the tax. For this collection of tax (whether direct or indirect tax) is collected either by government3
4
which is authority of law
under constitution of India. All these collected tax is utilized for the development of country as a whole by its distribution based on need of that central, state or local authoritys laws to carry on all his activities. Indirect tax is also known as consumption tax because they are based on the ability to pay principle which means a tax which is not levied directly on the incomes of earner or consumer. Collection of indirect was custom earlier then afterwards it becomes a law under which state obliges us to pay the tax.
Indirect Tax and Direct Tax In case of direct tax, tax is to be collected in pecuniary term by an individual directly out of income they have earned. But in case of indirect tax, tax is paid indirectly by the consumer out of rest of amount of income earned. In case of direct tax, assesses is bound to pay the tax whether his willingness is there or nor but in case of indirect tax, consumer pays the tax
1
Suppose A recharged his reliance mobile with recharge voucher worth Rs 20. He will pay Rs 2.20 as service tax, Rs 2 as processing fee and Rs 15.80 will be his talk time value, out of that Rs 20. 2 Under Article 265 no tax shall be levied or collected by the authority of law.
3
central government, state government or any local authority (which includes local councils and municipalities) 4 (which includes local councils and municipalities)
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voluntarily. Assessee can only be a person who earns his income under income tax act whereas, in case of indirect tax, a 5 year old child can also be the consumer who pays the tax indirectly. In case of direct tax, assesses pays the tax @ x at income earned and he may not pay the tax if he is exempted from paying tax in that financial year under tax slabs whereas in case of indirect tax no exemption if provided by the authority of law and consumer has to pay the tax separately from the amount of actual cost of the product which makes the product more costlier. Paid tax can be claimed back or adjusted in income tax where as normally it is not always possible in all indirect tax cases. In direct tax, assesses assess his tax to be paid at the end of financial year whereas in case of indirect tax, consumer pays the tax at the time of purchase or sell or rendering of services. As assess directly pays the pays the tax, there is no question of shifting of burden of tax in future but in case of indirect tax , if the goods are transferred from one consumer to the another, the burden of tax is shifted to the subsequent consumer. Indirect tax is a wider concept with regard to direct tax. Indirect tax affects only an individual which does not affect the price or demand of goods directly whereas in case of indirect tax it affects the whole country as well as global market and if the price of goods is increased, the demand of that good may fall down which will indirectly hinder the healthy development of country. Tax evasion is more in direct tax whereas it is comparatively very low in indirect taxation.
Extent of Taxation under Constitution of India: Under Article 246, the authority can levy tax on various subject matter enumerated under Schedule VII of the constitution Central Government under three list that is union list, state list and concurrent list. Union5 has right to levy tax on Income Tax (Except on Agricultural Income), Excise (Except on Alcohol and Tobacco) and customs. State Government shall levy tax revenue from sales tax, excise from alcoholic and liquor drinks, and tax on agricultural income. The local self government levy tax from entry tax and house property tax. When union list is inconsistent with the state list, union list will prevail. Under Article 249, parliament can make laws on state list either when 2/3rd member of Rajya Sabha gives its consent or in case of emergency. Even doctrine of eclipse is also applicable in taxation case,
Under Article 83 and 84 tax and custom duty can be imposed on any goods and services by union except alcohol, tobacco etc respectively.
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which states that all those British law which were prevailing before independence are not illegal. Only those provisions which are inconsistent with our constitution will be struck down for the time being and other will be applicable in same manner. Under Article 255, when there is a controversy between international law and municipal law, international law will prevail in India. Constitutional Amendment empowers the Panchayat to levy tax6. A State may by law be able to authorise a Panchayat to levy, collect and appropriate taxes, duties, tolls etc. Similarly, municipalities are also empowered to levy the taxes7.
Types of Indirect Tax We all knew that Tax law is divided into two parts that is direct and indirect tax. This direct and indirect tax are further classified as Direct tax includes Income Tax Act and Wealth Act, where as Indirect tax is classified as Central Excise duty, Customs duty, Service tax, Central sales tax, Value added tax, and miscellaneous. Almost each and every branch of law is classified into different sub-heads, likewise taxation is classified as follows in form of this chart:Taxation
Direct Tax
Indirect Tax
Income Tax Act
Wealth Tax
rd
th
Provisions have been made by 73 Constitutional Amendment which was enforced from 24 April, 1993 to levy tax by Panchayat.
7 th st
Provisions have been made by 74 Constitutional Amendment which was enforced from 1 June, 1993 to levy tax by municipalities.
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Central Excise duty
Customs Duty
Service Act
Value Added Tax (VAT)
Security Transaction Tax
Central Sales Tax
Expenditure tax
Stamp duties
Branches of Indirect Tax: Central Excise Duty It is an indirect tax levied and collected on the excisable goods manufactured or produced in India (excluding alcohol and tobacco) which has its marketability and which is known to the market or which already exists in the market. Central excise duty is also being levied to ores and minerals which are extracted from the earth. Manufacturer of marketable goods is liable to pay the excise duty to the government on the day when the goods are taken out the door of manufacturing unit8. He is bound to pay to pay duty on all goods manufactured or produced in India unless and until it is exempted by the law. Exemption is given to develop the country is that; manufacturer is not bound to pay the excise duty on the goods exported out of India provided that specified quantum of quality and quantity is too maintained. This was done to increase the exportation in India. The duty of Central Excise is levied if the following conditions are satisfied: (1) The duty is on goods. (2) The goods must be excisable. (3) The goods must be manufactured or produced. (4) Such manufacture or production must be in India.
www.tharunraj.com/Chennai/ Maruti Suzuki India Ltd. v. CCE 2010 (Tri. LB)
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Unless and until these above conditions are not satisfied, excise duty cannot be levied upon excisable goods. Manufacture is liable to pay the duty and for this he need not necessarily be an Owner of raw material9. Law related to central excise Act: 1. Central Excise Act, 1944(CEA): The basic Act which provides the constitutional power for charging of duty, valuation etc. 2. Central Excise Tariff Act, 1985 (CETA): This classifies the goods under 96 chapters with specific codes assigned. 3. Central Excise Rules, 2002: It deals with the procedural aspects of excise duty. The rules given under rules are implemented or come into force after issue of notification. 4. Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: This rule deals with the provisions of valuation of excisable goods. 5. Cenvat Credit Rules, 2004: This rule deals with provisions relating to Cenvat Credit and its utilization. The Central Excise Tariff Act 1985 defines the term "excisable goods" which means the goods which are specified in the First Schedule and the Second Schedule. It is mandatory to pay Excise duty on the goods manufactured, unless and until exempted by law10. Other exemptions are also notified by the Government from the payment of duty by the manufacturers. The following persons shall be liable to pay excise duty: a. A person, who produces or manufactures any excisable goods, b. A person, who stores excisable goods in a warehouse, c. In case of molasses, the person who procures such molasses, d. In case goods are produced or manufactured on job work, i. The person on whose account goods are produced or manufactured by the job work, or ii. The job worker, where such person authorizes the job worker to pay the duty leviable on such goods. Service Tax
Hindustan General Industries v. CCE 2003 (155) ELT 65 (CEGAT), also refer CCE v. Mahindra & Mahindra 2001(132) ELT 632 (CEGAT). 10 E.g; duty is not payable on the goods exported out of India.
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The interesting thing about Service Tax in India is that the Government depends heavily on the voluntary compliance of the service providers for collecting Service Tax in India 11. When it was introduced initially there were three services which were liable but over the years various other services have been added and today more than a hundred services are liable under service tax. One of the main reasons for the services to be taxed is the fact that the manufacturing sector can be taxed only to a certain extent and if we want to maintain the healthy completion and growth, all the activities are to be taxed which is also important for justice and equity.12The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax under the provisions given in Chapter V and VA of the Finance Act of 1994 for the time being. Service Tax Act enacted on 199413. Under this Act, service tax is levied on gross or aggregate amount of service on receiver by the service provider14. Under rule 6, tax is to be paid on the value received and central government can also grant exemptions15 long with making rules16 under this rule17 with the span of time for the time being. The service tax act is not applicable to the state of Jammu and Kashmir. This act has defined service provider as well as service receiver. This tax can only be levied if the service transaction takes place between these two defined service provider and service receiver and not in another case. The concept of service receiver has been widened to cover all kinds of service receivers in last couple of years as many service providers has been emerged in this global market and now it is a matter of academic interest. The service provider is bound to pay the tax on the service provided by him to the service receiver, when he collects value of service from service receiver18. Value Added Tax
11 12
www.tharunraj.com / Chennai / CST v. Lincoln Helios (India) Ltd. 2011 (Kar.) http://www.legalservicesindia.com/article/ Goods And Services Tax- Feasibility In India 13 Service Tax came into effect on 1st July, 1994 14 Under Section 67 of this Act, the Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver. 15 The Central Government has also been empowered to grant exemptions from Service Tax u/s 93. 16 The Central Government has also been empowered to make rules to carry out the provisions of this Chapter, through section 94 17 Service Tax Rules, 1994 18 The service provider providing taxable services shall be required to pay service tax. However, the service provider does not have to pay service tax until he collects the value of service, from the service receiver towards the taxable services provided by virtue of Rule 6 of Service Tax Rules 1994.
OCTOBER 2013

VAT is kind of indirect tax. It is paid at each state of sale on the value added to a product. Value Added Tax Act is enacted to levy VAT. For an instance, A extracted iron ore, so a will pay tax on quantum of iron ore sold to B. this iron ore becomes raw material for B and if B manufactures steel sheets, then a new product it invented with new purpose and if b sells this sheet to C and c manufactures steel good then again a new product with new use is invented. In this case B and C both have to pay VAT at different rates as their final product is different. Thus, it can said that VAT is imposed if a new goods is invented which has different purpose, different name and different characteristics. If any of these essential elements is not fulfilled then, VAT cannot be imposed. Thus, it is multi point levy of VAT on supply chain upon each entity.VAT rates vary from state to state on petrol, tobacco, alcohol etc. VAT rates are administered by state governments and it is similar to sales tax. VAT is levied or charged as soon as some value is added to the raw material. The value addition in the hands of each of the entities is subject to tax. VAT can be computed by using any of the three methods: 1. Subtraction method: Difference between the value of output and the cost of input is taken out and tax is applied on that difference. 2. The Addition method: All the payments that is payable to the factors of production19 are added and thud value added is computed. 3. Tax credit method: This entails set-off of the tax paid on input20.
VAT helps in avoiding problem of double taxation of goods and services. There is no incidence of cascading effect in VAT as it is imposed on value added at every stage. Thus, final consumer pays tax only on the value added which tend to make this tax system simple with absolute transparency. Central sales Tax Central sales tax is levied upon a dealer on sale of all goods during their transaction in inter-state trade or commerce or in outside state trade transaction. This transaction can be interstate sale even if the seller and buyer are from same state but goods are transferred from one state to another under contract of sale during their transition by transfer of documents. The state from
19 20
(viz., wages, salaries, interest payments etc) From tax collected on sales.
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where the goods are moved out, tax will be levied on that sate based on that state sales rate. Sales tax cannot be levied upon the sale or purchase of good outside that state and import and export of any goods outside the India. If sale is made to reseller and tax exempted institutions are two conditions where this Central Sales Tax is exempted21. Sales Tax are of two kinds- Central Sales Tax22 which is to be levied on inter-state sale and purchase of goods by the parliament and another is Sales Tax23 which is to be levied on commerce trade sales at various rates under Sales Tax Act by the State government who can also impose additional tax charge as purchase tax, turnover tax etc. Thus, Sales Tax helps in generating major revenue for different State governments. In India, most of states have supplemented their Sales Tax with VAT24. There are some instances wherein the goods are moved out of the selling state and yet they are not considered interstate sales:a. Intra-state sales b. Stock transfer from head office to branch & vice versa c. Import and Export sales or purchases d. Sale through commission agent / on account sales e. Delivery of Goods for executing works contract Customs duty In India, Custom duty is one of the most important branch of Indirect Tax. Customs Act25 and Foreign Trade Order26 are two main acts under Custom duty. This Act was enacted to prevented illegal imports and exports of the goods27. It is also subjected to secure Indian Currency exchange rate by minimizing imports in India and to secure indigenous industries28.
21
Sales Tax is exempted in two conditions that if the sales are made to resellers such as wholesalers and retailers that have a valid state resale certificate or if the sales are made to tax-exempt institutions such as schools or charities. 22 Enacted by Central Government legislation 23 Act enacted by State Government legisla 24 From 10th April, 2005, most of the States in India have supplemented sales tax with a new Value Added Tax (VAT). Not all dispatches of goods from one state to another result in interstate sales rather the movement must be on account of a covenant or incident of the contract of sales. 25 Customs Act, 1962 26 Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993 27 The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. 28 Reliance Industries Ltd. v. Designated Authority 2006 (202) ELT 23 (SC), it was held that all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency.
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The rate at which this custom duty is to be levied upon imported or exported goods from India are specified under Custom Tariff Act29. Under the custom laws, the various types of duties are leviable. 1. Basic Duty: 2. Additional Duty (Countervailing Duty) (CVD) 3. Additional Duty to compensate duty on inputs used by Indian manufacturers 4. Anti-dumping Duty 5. Protective Duty 6. Duty on Bounty Fed Articles 7. Export Duty 8. Cess on Export 9. National Calamity Contingent Duty 10. Education Cess 11. Secondary and Higher Education Cess 12. Road Cess 13. Surcharge on Motor Spirit Central Government has power to issue any notification regarding import and export in port and airports in India by deciding the routed of goods to be imported or exported inside or outside India respectively. Central Board of Excise Customs (CBEC) has issued Indian Customs Tariff Guide where Custom duty goods have been classified and various tariff rulings are included. It also includes imported and manufactured goods of warehousing. If a person brings any baggage from abroad, he has to pay tax on that baggage. Expenditure Tax Expenditure tax is levied to hotels having room charges of more than Rs 1,200 per day per person under Expenditure Tax Act, 1987 and not below that. It is collected at the rate of 10 percent towards food, room, beverages and other services from customers and the collected amount is deposited by owner to the central government. Stamp Duties
29
Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force.
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Stamp duties are paid on rates basis. This rates are mainly prescribed by central government legislation under The Indian Stamp Act 1899, and some documents rates are revised by state government legislation. This duty is levied on documents (promissory notes, insurance policies, bill of exchange etc.), contracts affecting both transfer of shares and transfer of immovable property. Purchaser normally pays stamp duties contracts affecting transfer of shares and transfer of immovable property. Securities Transaction Tax (STT) STT is the stock exchange transaction based tax. It is applied in case of purchase and sell of equity (equity shares, equity oriented funds and equity oriented mutual funds) and derivatives. Person has to pay the STT only in one condition, whereby he becomes investor. He only has to pay the STT @10 % flat on gain by selling his shares before 12 months which is short term capital gain. If he sells his shares after 12 month, then it is long term capital and he is not required to pay the tax. However, these gains are treated as business or trading tax and it can be claimed back or can be adjusted in tax to be paid.
Conclusion At last I would like conclude this article by stating that taxation is a branch of law which is connected with our day to day life. Taxation law is branch of law which changes every year with introduction of new finance budget. Tax revenue collected by authority of law is deposited into government fund which if used for maintenance of law and order, defense, social/ health services, administration etc. Taxation is not only the source of government fund indeed it is the main source. Justice Holmes of US Supreme Court had said that tax is the price which we pay for a civilized society. The Central Excise Department (CED) levy and collects tax from both direct as well as indirect taxation. These officers have all power for enforcement of law30. Although taxation have many branches and sub- branches, but in all kinds of indirect tax, tax levy and collection procedure are almost similar.
30
Section 14 of Central Excise Act which makes provisions in respect of summons has been made applicable to service tax. Provisions relating to search and seizure (of documents or books or things) have been made applicable to service tax vide Section 82 of Finance Act, 1994. However, provisions relating to seizure of goods and provisions relating to arrest are not applicable to service tax.
OCTOBER 2013
Corporate Governance A Much Factor in the PresentWorld Economic Scenario

SHAYAMVAR DEB AND MADHURJYA JYOTI GOGOI
Abstract
In the present century of emerging corporate sectors in the emerging economies and the rise of market economy has paved the way of corporate governance and thereby we can no longer stand going beyond globalisation. The further approach in order to carry on with a pace in the world of modern business progress as with the globalisation, the need of a proper model and practise of corporate governance round the corner and in the present scenario the interests of the board of directors, business partners, shareholders, employees, and the alike personnel cannot be ignored in the name of organisational value. Such ignorance may lead to internal conflicts among the business societies which may create a downfall in the present world economic progress and in the individual minds related to the business activities. Turmoil may occur where a negative activity may prevail instead of cooperation in the groups who are going to achieve their earnest goals as their achievements and to create a prosperous globalisation and market economy thereon. In order to maintain a lively responsibility among the personnel in a society from the very top level to the lower level with a very my-dear relationship and in order to achieve the prosperity which is the birds eye at any viewpoint, a better managerial activity is very necessary and which can only be adopted through a proper practise of a corporate governance model. Hereby we are going to make a comparative study regarding the corporate governance in the present global scenario an analyzing it through various viewpoints in order to give it a proper sense that how can it be adapted and applied in the present economic culture broadly where the corporate sectors are showing the dawn to the modern economic times. However philosophy cannot provide us the better solution of the burning issue, till we give an effect to its proper utilisation.
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Introduction:
Corporate governance is, the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account. Owen, J.; HIH Royal Commission.1
Corporate governance is a dynamic force that keeps evolving. Eric Mayne, Chair, ASX Corporate Governance Council.2
Corporate governance describes the structure of rights and responsibilities among the parties that have a stake in a firm. Aguilera, R.V. & Jackson, G.3
Corporate governance may be termed as to the system which effects the direction and control of the corporations. The corporate governance brings a harmonious relationship in the structure of a corporation regarding the rights and the responsibilities among the different personnel in a corporation and specifies the rules and procedures that how the managers of the different levels, the board of directors, shareholders, creditors, auditors, regulators, and other stakeholders shall make decisions and help themselves to cooperate in the following corporate affairs. At the
Justice Owen in the HIH Royal Commission, The Failure of HIH Insurance, Volume 1: A Corporate Collapse
and Its Lessons, Commonwealth of Australia, April 2003 at page xxxiii and Justice Owen, Corporate GovernanceLevel upon Layer, Speech to the 13th Commonwealth Law Conference 2003, Melbourne 13-17 April 2003 at page 2.
Eric Mayne, Chair, ASX Corporate Governance Council, August 2007, Corporate Governance Principles and
Recommendations With 2010 Amendments, 2nd Edition, 2007, ASX Corporate Governance Council, Australian Securities Exchange, ISBN 1-875-26242-3, All Rights Reserved,
http://www.asxgroup.com.au/media/PDFs/cg_principles_recommendations_with_2010_amendments.pdf.
Aguilera, R. V. & Jackson, G. (2003), The cross-national diversity of corporate governance: Dimensions and
determinants, Academy of Management Review, 28(3), 447465.
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certain levels, it seeks the structure in which the power and the responsibilities should be distributed among the different personnel. In the modern times the term governance is used which is describing the concept of action taken in what way and various factors of decision and control can be balanced so that the organisation can implement the meaning of capital in the most forthcoming event which is used as the main motive and the most common goal in the present scenario of business entity in order to make a progress and keep a pace in the modern market economy in the market of globalisation in the twenty-first century. The present managerial activities as concerned with an entity are a very much factor to maintain the harmony in order to maintain the level in the modern business environment and to cope up with the other competitive authorities in the system of the corporate sectors.4 5 Corporate governance provides the rules and regulations and appropriate control mechanism through which creates a systematic obligation to maintain the propositions in the entities and supervise the total materialistic issues from one level to another hand to hand within a modern scope of business environment which helps in the initiation and development of the activities, building a social scope, and modelling of the entities according to the modern systems which provide a lot of market development in the developing nations with a sustainable development and a continuous involvement in restructuring the main branches of the economy or social sector reforms.6 The traditional market system hence belonged to a traditional family oriented basic structure of the business whereby the total concept of the entity was determined by the owner of the business and thereby the owner of the family; thus the autocratic leadership in so many ways used to fluctuate the mind of the employees of the different levels and a sudden breakage to the sociocultural pattern in the existing firm due to excessive need of proper managerial activities which
4
"OECD Principles of Corporate Governance, 2004", OECD; Retrieved 2013-05-18.
Tricker, Adrian, Essentials for Board Directors: An AZ Guide, Bloomberg Press, New York, 2009, ISBN 978-1-
57660-354-3.
Rezaee, Zabihollah, Financial Statement Fraud, John Wiley & Sons, (2002), ISBN 0-471-09216-9.
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needs proper managers and determination of a proper leadership. Thus the modern system evolved which is providing an enthusiasm to build a proper relationship among the human society in order to achieve the ultimate goal with a very positive effect in every stream of leadership and to develop a proper model of corporate governance and to utilise it with a very effective practise. Corporate governance has also been defined as a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby mitigating agency risks which may stem from the misdeeds of corporate officers.7 The term corporate governance denotes the entire process by which corporations are managed and controlled. J. Wolfensohn, president of the World Bank has opined that corporate governance is about promoting corporate fairness, transparency and accountability.8 The main motive of corporate governance lies with the motion that to strengthen the economic efficiency through a strong emphasis on the stakeholders welfare and thereby one of its importance arises out is the nature and extent of corporate accountability. Most of the interest in corporate governance is concerned with that of the mitigation of the conflicts arising out of the interests between the stakeholders.
Evolution:
The history of corporate governance arrangements, understood as the constitutive processes shaping the relationship between ownership and management of enterprises, is a relatively new field of inquiry for business historians. A few decades ago, the term corporate governance was not common to us in the practical stage of business operation; but in the present situation, it is
7
Sifuna, Anazett Pacy (2012), Disclose or Abstain: The Prohibition of Insider Trading on Trial, Journal of
International Banking Law and Regulation 27 (9).
J. Wolfensohn, Corporate Governance, FINANCIAL TIMES (London), June 21, 1999.
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just like a climate change and private equity, corporate governance is a staple of everyday business language and capital markets are better for it. Among the black days of the World War Period, the world saw the crash of the Wall Street on 1929 and the pass away of many business tycoons at the same time as many of the legal scholars namely Adolf Augustus Berle, Edwin Dodd and Gardiner C. pondered on the basic change of the of the modern corporation of the-then system in the US and the role that has been taken into action in order to cope up with the certain policies and regulations to pass a good meaning in the world of business.9 After the end of the World War II, the expansion in the US superpower, the emergence of the capitalist society also encouraged with a boom through the emergence of multinational corporations which did a lot for the establishment of the managerial class in the modern business society. In the 1980s, Eugene Fama and Michael Jensen established the principal-agent problem as the way how to understand corporate governance very efficiently along with a series of contracts. Over the past three decades, corporate directors duties in the U.S. have expanded beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareholders.10 In the first half of the 1990s the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals e.g.: IBM, Kodak, Honeywell by their boards. The California Public Employees' Retirement System (CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cosy relationships between the CEO and the board of directors e.g., by the unrestrained issuance of stock options, not infrequently back dated. Then the 1990s paved the way for the 1991, a historic year in the calendar of the business and economic world which saw the liberalisation, globalisation and privatisation of different sectors and the booming of the large corporate sectors in the world from
9
Berle and Means', The Modern Corporation and Private Property, (1932, Macmillan).
10
Crawford, Curtis J. (2007), The Reform of Corporate Governance: Major Trends in the U.S. Corporate 19771997, doctoral dissertation, Capella University, [2],
Boardroom,
http://xceo.net/about_us/crawford_dissertation.cfm, http://disexpress.umi.com/dxweb#search.
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the developing countries to the highly developed countries. Moreover the period of 1989-1991 saw the downfall of the socialistic and the communistic pattern of economy in many of the 29 communist states of the world including the major superpower USSR and though the Cold War between the US and the USSR also terminated with the victory of the capitalist society and the existing communist states wherever as less as 4 in number somehow adopted the mixed economy system to survive in the modern world of competition and capital based economy. The period also faced a severe economic crisis which was duly managed by the globalisation in the period among different nations as they adopted such in order to survive their economic models and the total system repair. Many of the nations adopted mixed economic system; especially the developing nations and the highly developed countries remained capitalistic in nature after the 1991. Thus the booms in the corporate sectors find a very easy way in the modern market economy to go through and thereby captured the modern economic system with a very high demand. We can take example of many of the Asian countries where socialistic pattern prevailed before the 1990s but the post 1991 saw the mixed economic system in those nations which thereby gave a high rise in the growth of the corporate sectors, such as India; one of the very burning example; such resulted many of the scams, scandals and alike nature of prospective in the corporate sectors and the rise of the such also paved the way in such mal activities in many of the developing nations which along with paved the way for the corporate governance very easily. In 1997, the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South Korea, Malaysia, and the Philippines through the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. In the early 2000s, the massive bankruptcies and criminal malfeasance of Enron and Worldcom, as well as lesser corporate scandals, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, led to increased political interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002. Other triggers for continued interest in the corporate governance of organizations included the financial crisis of 2008-09 and the level of CEO pay.11
11
Steven N. Kaplan, Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and
Challenges, Chicago Booth Paper No. 12-42, Fama-Miller Center for Research in Finance, Chicago, July 2012.
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Principles:12 13
The 1990 report regarding the three documents along with the discussions of refers to principles of corporate governance which are the Cadbury Report, 1992 of UK; OECD Principles of Corporate Governance 1998 and revised on 2004 of OECD; and the Sarbanes-Oxley Act, 2002, of US. The Cadbury and OECD reports gives the general principles regarding which businesses are expected to operate and assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several principles recommended in the Cadbury and OECD reports. Rights and equitable treatment of shareholders: Hereby the organisations are compelled to respect the rights of the shareholders and help them to exercise their rights and the entities are responsible thereon to help the shareholders in exercising their rights by openly an effectively communication and basic information and by encouraging them to participate in the general meetings.14 Interests of other shareholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.15 Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.
12
Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance , Gee, London,
December 1992, Sections 3 and 4.
13
Sarbanes-Oxley Act of 2002, US Congress, Title VIII.
14
"OECD Principles of Corporate Governance, 2004, Articles II and III", OECD, Retrieved 2011-07-24. "OECD Principles of Corporate Governance, 2004, Preamble and Article IV", OECD, Retrieved 2011-07-24.
15
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Integrity and ethical behaviour: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.16 17
Disclosure and transparency: Hereby accountability is a major factor which is a major mode to be abided in any form of entity according to the rules and regulations. Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.18 19
Rules and Regulations:

The total corporate governance is regulated through certain factors as there has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 2001 2002, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. formerly WorldCom. Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australian companies of HIH
16
Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London,
December, 1992, Sections 3.2, 3.3, 4.33, 4.51 and 7.4.
17
Sarbanes-Oxley Act of 2002, US Congress, Title I, 101(c)(1), Title VIII, and Title IX, 406.
18 19
"OECD Principals of Corporate Governance, 2004, Articles I and V", OECD, Retrieved 2011-07-24. Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance , Gee, London,
December, 1992, Section 3.2.
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and OneTel are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest e.g., Parmalat in Italy. In September 2008 the World Council for Corporate Governance honoured the now-beleaguered Indian outsourcer Satyam with a Golden Peacock Award for global excellence in corporate governance. Satyam computers in January culminating into the historic confession letter of former chairman B. Ramalinga Raju, admitting a fraud of Rs 78 billion has caused the regulators and the investors everywhere to re-examine corporate governance standards. The scandal occurred in December 2008 and January 2009 provides two such clean and major corporate governance events, with effects on firms across the board in India. So these events clearly can be viewed as corporate governance events.20 So in order to get rid from such increasing scams and scandals in the worlds major corporate sectors day by day, it has been taken into action that there should prevail the following regulations which has a legal background and are prevailed from legal acts and procedures. Thereby the following major regulations are taken into the scene as these are the highest point among the strictness and the point of view in the regulatory process. Legal provisions: Corporations are regarded as the juristic persons and thereby coming under the purview of legal persons according to the laws and regulations of a particular jurisdiction and it comes within the fundamental purview of any nation may it vary from one State to another but the status of a corporation remains the same and it comes within the purview of legal person in any of the jurisdiction of the world and it is conferred by statute. This bears a right towards any of the entities regarding corporations to hold properties in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation which is the general case or from a statute to create a specific corporation, which was the only method prior to the 19th century.
20
Rajesh Chakrabarti & Subrata Sarkar, CORPORATE GOVERNANCE IN AN EMERGING MARKET WHAT DOES THE MARKET TRUST; http://papers.ssrn.com/sol3/papers.cfm, abstract_id=1615960.
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Corporations being the parties to statutory laws are often coming within the jurisdiction of common laws in many of the countries of common law and also among various laws and regulations which affect business practises. In most jurisdictions, a corporation also consists of a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the Memorandum and Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially. The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent modifications. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery.21 The UK has also passed the Bribery Act in 2010. This law made it illegal to bribe either government or private citizens or make facilitating payments i.e., payment to a government official to perform their routine duties more quickly. It also required corporations to establish controls to prevent bribery.
Sarbanes-Oxley Act, 2002:22 The Sarbanes-Oxley Act of 2002 was enacted in the wake
of a series of high profile corporate scandals. It established a series of requirements that affect corporate governance in the U.S. and influenced similar laws in many other countries. The law required, along with many other elements are as follows The Public Company Accounting Oversight Board (PCAOB) be established to regulate the auditing profession, which had been self-regulated prior to the law. Auditors are responsible for reviewing the financial statements of corporations and issuing an opinion as to their reliability.
21
DOJ Website Foreign Corrupt Practices Act Guidance May 2013.
22
Sarbanes-Oxley Act, 2002; http://www.nbg.gr/wps/wcm/connect/cc7c454f-d71a-4481-b4d2 3e0da37e0ce3/Sarbanes_Oxley_Act_GR.pdf?MOD=AJPERES.
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The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements. Prior to the law, CEO's had claimed in court they hadn't reviewed the information as part of their defence. Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why no such expert is on the audit committee. External audit firms not provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior management roles worked for the auditor in the past year. Prior to the law, there was the real or perceived conflict of interest between providing an independent opinion on the accuracy and reliability of financial statements when the same firm was also providing lucrative consulting services.23
Models:24
If we go through the models of the corporate governance, we can find three proper kinds of models which derive from different parts of the world and being used by different nation in order to bring corporate governance in their respective systems. If India is taken into account it is found that the SEBI Committee on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between
23
Text of the Sarbanes-Oxley Act of 2002; http://www.gpo.gov/fdsys/pkg/PLAW-107publ204/pdf/PLAW-
107publ204.pdf.
24
Three
Models
of
Corporate
Governance
from
Developed
Capital
Markets,
http://www.emergingmarketsesg.net/esg/wp-content/uploads/2011/01/Three-Models-of-Corporate-GovernanceJanuary-2009.pdf.
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personal & corporate funds in the management of a company.25 It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions. Thereby it is very easy matter to understand that there is a very much relationship with the Anglo-American corporate governance model with that of the Indian system. In certain cases we find that different nations follow different models where there is a prevalent dominance of any of the one model we are going to discuss and these models are taken as the main and major models of corporate governance in the modern economic system which is followed or conceptualized by different States. (1) Anglo-Saxon Model: This is the model which is characterised by the dominance in the company of independent persons and individual shareholders and which is based upon entrepreneurship and private property. It relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders; which is also known as the unitary system.26
27
Hereby, the manager is responsible to the Board of
Directors and shareholders, the latter being especially interested in profitable activities and received dividends. It ensures the mobility of investments and their placement from the inefficient to the developed areas, but it however feels a lack of strategic development. However, the United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm,
25
"Report of the SEBI Committee on Corporate Governance, February 2003", SEBI, Committee on Corporate
Governance, Retrieved 2011-07-20.
26
Mallin, Christine A., Corporate Governance Developments in the UK in Mallin, Christine A (ed), Handbook on International Corporate Governance: Country Analyses, Second Edition , Edward Elgar Publishing, 2011, ISBN 978-1-84980-123-2.
27
Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance , Gee, London,
December, 1992.
OCTOBER 2013

despite major misgivings regarding the impact on corporate governance. In the U.S., financial markets activities dominate the allocation of ownership and control rights into organizations. Legislation always appeared hostile to concentration, especially in the banking industry, but in the recent years there have been notice new regulations development, more forced by the new economic trends: the increasing influence of boards, investors are increasingly demanding and cautious and managers give more importance to key business issues. The governance model takes place in organizations at three levels: - shareholders-directors-managers, since managers authority derives from the administrators. Legislation limits the rights of shareholders to intervene on the current activities of the entity, for example they can only decide the elected members of the Board. However, they can influence changes in the managers attitude and manner of leading; they may decide to liquidate holdings or refuse to increase its capital contribution of the entity, thus stopping the funding. Financial support of shareholders is the most important weapon they have in front of managers. In the United States, corporations are directly governed by state laws, while the exchange regarding offering and trading of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly traded corporations.28 The Securities and Exchange Commission (SEC) has reduced its strict rules on collective activities of shareholders, proposing various regulations to encourage investment relationship that allows managers and owners to discuss possible advantages and disadvantages of business strategy. Institutional investors play an ever important in Anglo-Saxon systems as they are already in a dominant position regarding the UK structure, which is holding even two-thirds of the equity of the companies. As to this, the investment relationship a feature of the UK governance system is gaining more of the grounds in the US relating the relations between the company management and the institutional investors.
28
Bebchuck LA., (2004), The Case for Increasing Shareholder Power, Harvard Law Review.
OCTOBER 2013

One of the most important characteristics of the Anglo-Saxon countries is that the emergence of financial markets and strong banking restrictions, especially regarding the holding of shares in companies outside the banking sector. Great Britain can be perceived as a special presence in Europe, having recognized the importance of the financial market in London, where many national companies are listed. The banking system does not have a central role in governance structures, banks being considered merely credit providers. In the economic entities, capital structure is dispersed and shareholder power is stable compared with that of managers. Here, the Governance model is dominated by the influence of external capital markets, through merger and acquisitions, but also through the control exercised over securities trading. Regulatory institutions act to protect investors by implementing specific policies and practices of corporate governance system. Such a system requires an independent Board, responsible for monitoring and control of management, to improve its organizational performance and recovery. Not only in UK, but also in other Anglo-Saxon countries, where market economy has significantly developed through sustained economic growth, there is a high degree of dispersion of capital and shareholder structure. Population can directly intervene to the economic development through holding shares, making of its own availabilities investment on capital market. (2) Continental-European Model: The Continental European Model is highly concentrated upon shareholders common interests with that of the organisation and participation in its management and control.29 In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent
29
Tricker, Bob, Essentials for Board Directors: An AZ Guide, Second Edition, Bloomberg Press, New York,
2009, ISBN 978-1-57660-354-3.
OCTOBER 2013

shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions.30 Hereby, a two tiered board of directors is required in case of improving the corporate governance which is in the countries like German and Netherlands. Here, the enterprise is seen as the combination of various interest groups aimed to coordinate the national interest objectives. If we go to the history, we find that the German banks played a vital and important role in the corporate decisions where only one among four companies in an average can create public transaction, whereby most of the companies have to take financial assistance from the banks. And a great importance has been provided regarding the protection of creditors, even to the point where a bank might dominate a firm. Unlike the U.S., German banks may hold only actions of their own clients. This ensures the depositary voting rights to control the decisions and votes in a company. In Germany, the corporate governance system is a dual one, aiming at the same time a national policy to provide employees access to information and participation in various activities of the enterprise and industrial democracy. The Italian corporatism showed two levels: - the Catholic and the Fascist. Catholic inspired corporatism appeared in 1891 and has grown to early-twentieth century represented by Giuseppe Toniolo, economist and sociologist, who has always promoted solidarity, rejecting individualism and liberal doctrines. Later on Fascist corporatism developed during the black days of the Wars in the world which was between the period of 1920-1940, and its general principles were set out in the Charter of Labour in 1927 and were institutionalized with the advent of new corporations, bringing together different categories of entrepreneurs and workers. 1939 was the crucial step by establishing Chamber Fascia which was thereby abolished and the procedure was duly removed. Later during the 1980s a new approach arose which came through a debated attention and was named as neo-corporatism. Currently, market and companies management regulation
30
Hopt, Klaus J., The German Two-Tier Board (Aufsichtsrat), A German View on Corporate Governance in
Hopt, Klaus J. and Wymeersch, Eddy (eds), Comparative Corporate Governance: Essays and Materials, de Gruyter, Berlin & New York, ISBN 3-11-015765-9.
OCTOBER 2013

is prevalent public in a less receptive environment and exposed to adverse conditions. Socio-economic reality generated some different structures of distribution and control management, each specific to the reference market and with special characteristics. Ownership and control of listed companies are significantly concentrated, shareholders having the opportunity of intervention in the management process. France can be compared in many ways regarding the greatest contrast with the US and British cases, due to the strong role of the state. During the nineteenth and early twentieth century, there were very few large corporations in France. In large part, these firms financed investment from earnings and engaged with banks only for short-term loans. Relational banking in the sense of banks holding equity stakes in firms was rare. Like the British, French banks maintained a specialized divide between commercial and investment functions. Similarly, the securities market was used, particularly in the 1920s, but it was not a significant factor in corporate finance.31 The most distinctive feature in France was that it gave an extra power towards encouraging the development of national champions in industrial sectors after the World Wars since 1945; thereby especially channelling capital to firms and acting as their major customers. It was again a very important matter of view that after the Second World War France started to nationalise the banking sectors and various business firms where public influence was exercised both directly and indirectly on the composition of boards and corporate investment strategies. In this context, however, the number of public corporate enterprises proliferated and states prominent influence came into the outlook where corporate managers directed their enterprises towards stakeholder rather than stockholder interests. Despite the proliferation of large corporations in the postWorld War period, ownership remained concentrated, not only because of the importance of public enterprises, but also because managers engaged in significant crossshareholding. Since the mid-1980s, following important financial system reforms, the downfall of USSR and thereby the end of communist and socialist rule in the lions part of the world; the rise of the new superpower US; a series of major self-dealing scandals involving
31
Fridenson 1997, Levy-Leboyer 1978, Fohlen 1978, Murphy 2004.
OCTOBER 2013

prominent managers and state officials, and pressures from the European Union to reduce the economic role of the state, French corporations have become more exposed to market pressures and since then, size and role of the stock market has increased and shareholding has gradually become more dispersed.32
(3) Japanese Model: This model brings a specification regarding an oriented control over governance system which designates industrial groups consisting of companies with common interests and similar strategies. Here managers responsibility manifests itself in relations with shareholders and keiretsu which is a network of loyal suppliers and customers. Keiretsu represents a complex pattern of cooperation and also competition relationships, characterized by the adoption of defensive tactics in hostile takeovers, reducing the degree of opportunism of parties involved and keeping long term business relationships. Most Japanese companies are affiliated with this group of trading partners. The governance pattern is dominated by two types of legal relationships; one of codetermination between shareholders and unions, customers, suppliers, creditors, government and the other is regarding ratio between administrators and those stakeholders, including managers. The necessity of the model results from the fact that the activity of a company should not be upset by the relations between all these people, relationships that generate risks. Management decisions pursue improving the income and power of an enterprise, in particular by specific corporate governance practices, although sometimes the shareholders control on the management can be hampered. Therefore, the Japanese model often called similar to the German model is based on internal control; it does not focus on the influence of strong capital markets, but on the existence of those strategic shareholders such as banks. As in Germany, major shareholders are actively involved in the management process, to stimulate economic efficiency and to penalize its absence. It also aims in harmonising the interests of social partners and employees of the entity and also facilitates the monitoring and flexible financing of enterprises, effective communication between them and the banks, as the main source of financing consists in bank loans. Moreover the Central Bank and Ministry
32
Hancke 2002, MacClean 1999, Fanto 1995, OSullivan 2003.
OCTOBER 2013

of Finance are monitoring the supervision and control within the company, in its relations with its strategic partners. Government structures have created an informal negotiation system to implement certain policies and corporate strategies also known as gyosei shido. In the 1980s, the governmental influence manifested itself indirectly through appointments to the board of directors and managers of some functionaries out of system also called amakudari. Corporate governance oriented to control is easily achieved in Japan due to a concentrated shareholder structures, unlike the United States. Banks and other institutional investors have usually a minor role in terms of corporate governance discipline. Their main responsibility is to provide debt financing, the existence of equity and bank directors should occupy top management positions because the main motive is that if an entity is profitable, the banks shall be limited to monitor and protect the interests of foreign investors.
Guidelines:33
There are several rules and guidelines following the corporate governance principles and codes which have been developed from different countries and issued from stock exchanges, corporations, institutional investors, or associations of directors and managers along with the government and international organisation supports. Of which the following two are the main major and most important guidelines followed by the corporate sectors that are running on the track of the modern corporate business economies also known as the modern corporate principles. (1) OECD Principles:34
35
OECD also known as Organisation for Economic Cooperation
and Development is one of the most influential guidelines which has been published in
33
Guidelines on Corporate Governance, http://www.ecgi.org/codes/documents/cg_guidelines_en.pdf.
OCTOBER 2013

1999 and revised in 2004 and are often referenced as the developing local codes or guidelines used by different countries.36 To carry on the motives of OECD in a proper way and to achieve the oriented goals, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting also known as ISAR to produce their Guidance on Good Practices in Corporate Governance Disclosure.37 This internationally agreed38 benchmark consists of more than fifty distinct disclosure items across five broad categories:39
34
The Board of Directors Responsibility of Board Members Senior Management Board Structure and Operations Size of Board The Organisational Structure of the Board Board Meetings Auditing Committee Governance of Affiliates
CORPORATE GOVERNANCE GUIDELINE: 2006:02, Bank Supervision Department, CENTRAL BANK OF BARBADOS; OCTOBER 2006, www.ecseonline.com, http://www.centralbank.org.bb/Financial/corp_govern_guide.pdf.
35
Corporate
Governance
Guideline,
Central
Bank
of
Trinidad
and
Tobago,
May
2006(Final);
http://www.ecgi.org/codes/documents/trinidad_may2006.pdf.
36
"OECD Principles of Corporate Governance, 2004", OECD; Retrieved 2013-05-18.
37
Guidance on Good Practices in Corporate Governance Disclosure.
38
TD/B/COM.2/ISAR/31.
39
"International Standards of Accounting and Reporting, Corporate Governance Disclosure", United Nations
Conference on Trade and Development, Retrieved 2008-11-09.
OCTOBER 2013

Corporate Responsibility and Compliance Financial Transparency and Information Disclosure Ownership Structure and Control Rights Exercise
(2) Stock Exchange Listing Standards:40 Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements: Independent directors: Listed companies must have a majority of independent directors. Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest Section 303A.01. An independent director is not part of management and has no material financial relationship with the company. Board meetings that exclude management: To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management Section 303A.03. Boards organize their members into committees with specific responsibilities per defined charters. Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. This committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations Section 303A.04 and others.
40
"New York Stock Exchange Listing Manual", NYSE Listing Manual, Retrieved 2013-05-18.
OCTOBER 2013

Systematic Problems:41
Demand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient, which suggests that the small shareholder will free ride on the judgments of larger professional investors. Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process.
Conclusion:42 43 44
The subject of corporate governance has attracted increasing attention in recent years for good reasons. Every country wants the firms that operate within its borders to flourish and grow in such a way as to provide employment, wealth and satisfaction, not only to improve standards of living materially but also to enhance social cohesion. These aspirations cannot be met unless
41
Current Trends in Management, 6.9.
42
Mihaela Ungureanu, Alexandru Ioan Cuza University of Iai, Romania; myhaella5@gmail.com, MODELS AND PRACTICES OF CORPORATE GOVERNANCE WORLDWIDE; http://ceswp.uaic.ro/articles/CESWP2012_IV3a_UNG.pdf.
43
Dr. Asyraf Wajdi Dusuki, CORPORATE GOVERNANCE AND STAKEHOLDER MANAGEMENT: AN ISLAMIC PERSPECTIVE, http://www.asyrafwajdi.com/v25/index.php/article?download=9:corporate-governanceand-stakeholder-management-of-islamic-financial-institutions.
44
Neelima
Sawarkar,
The
critical
study
of
corporate
governance
provisions
in
India,
http://www.siu.edu.in/Research/pdf/Neelima_Sawakar.pdf.
OCTOBER 2013

those firms are competitive internationally in a sustained way, and it is this medium and long term perspective that makes good corporate governance so vital. Corporate Governance is looked upon with utmost importance by the legal systems and company regulatory regimes all around the world. India is not an exception to it. In India too, various committees set up by the industry, SEBI and the Ministry of Corporate Affairs have made reports and recommendations covering every subject of importance to corporate governance. The government has also introduced a comprehensive bill45 in the Parliament for amending the various provisions of the companies Act 1956 and the related provisions contained in other Acts. Corporate governance is still in an evolving situation in India and that substantial work still remains to be done for finalizing a comprehensive code of corporate governance in India. In India, less than 10% of the companies are listed. That means, if we strictly follow SEBI guidelines, 90% of corporate India doesnt need to adhere to corporate governance requirements. Since the structure of companies and groups are layered with listed, unlisted and private limited companies, it becomes difficult to assess the actual level of corporate governance in any of the groups. An important step to ensure that the business community is trustworthy is to improve practices in relations between shareholders, boards of directors and managing directors. During the summer of 2003 Iceland Chamber of Commerce started work on a set of recommendations regarding good corporate governance, the purpose of which was to clarify the role and work of the board of directors and managers of Icelandic enterprises and thus make it easier for them to fulfil their duties. The goal was to assemble guidelines for corporate governance working methods, hereafter named guidelines for good corporate governance. In the autumn of 2003 the Iceland Stock Exchange joined the work of the Chamber as did The Confederation of Icelandic Employers at years end. The reason for this co-operation was to create a broad front on good corporate governance.
45
Companies
Bill,
2008
was
introduced
in
the
Lok
Sabha
on
23rd
of
October
2008, http://www.companyliquidator.gov.in/.
OCTOBER 2013

It is still a very difficult foreclosure to build or make an outcome for good governance; organizations carrying out such assessments need more representative criteria so that entities must notify their management processes in an efficient manner. It turned out that no model of governance is perfect and even better, their existence over time showing that each one is effective in its own way, and corporate governance structure specific to a country is difficult to transfer to another country. The implemented model essentially depends on the firms theory of voluntary or mandatory approach, but also on the boundaries between markets, entrepreneurs and civil society. The literature and philosophy in the modern times will fail to provide a general method regarding which a base would be prepared for a comparative study because the measurement techniques of social responsibility performance are not rigorously founded.
OCTOBER 2013
INTERFACE BETWEEN ANTIDUMPING AND COMPETITION LAW: A CRITICAL ANALYSIS

MIRZA JUNED BEG AND SACHIN SHARMA
Introduction While competition and antidumping laws come from the same family tree, the two diverge widely. The laws relating to antidumping and competition protection has a common origin but they diverge into two entirely different category of legal structures. They have common origin in the sense that they both aims to protect market from unfair trade practices which hampers competition in the market however they both proceeds on different philosophical tracks. Antidumping concerns only with trade and commerce on international level and proceeds on the objective to protect the interest of the domestic producers against the predatory practices of the foreign producers. Whereas competition laws are mostly incorporated under domestic jurisprudence and aims to protect interest of the general public by strengthening healthy competition in the market which has the potential to bring best quality products to consumers at cheaper prise. Antidumping and competition law diverges on both legal and economic grounds. On the point of law antidumping allows such practises which are prohibited under competition laws such as price undertakings and quantitative trade restrictions. And on the same time punishes certain kinds of price differentiation that are justifiable under the competition laws. Nevertheless, they also share some commonality. As it has been said that competition law and antidumping law comes from the same family tree, the two diverge widely. In the modern era, while competition law concentrated on the pursuit of economic efficiency, addressing problems associated with concentrated economic power, antidumping law was intended to create a politically popular form of contingent protection that bears little, if any, connection to the
VOLUME 1 | ISSUE 1 | OCTOBER 2013

prevention of monopoly. The political constituency for antidumping law is not an antimonopoly constituency, but one for the protection of industries facing weak markets or long term decline. This paper shall attempt to discuss area of divergence and convergence between anti dumping and competition law on conceptual, legal and economic view points. Interface between Antidumping and Competition Law The interface between antidumping and competition laws in the context of globalisation of markets can be contested on two levels i.e. on the philosophical or conceptual level and secondly on empirical level. The study of the interface between antidumping and competition law on the face of globalized market raises many issues which includes political, economic, legal and institutional issues at the both domestic and international level. Different opinions are still being expressed about the exact ramification of the debate relating to interface between antidumping and competition law and feasibility of substituting anticompetition law by international competition law. However, the issue is highly politicised and therefore it comes as no surprise that government in many countries, while recognising the long term benefits of competition policy enforcement are still reluctant to agree to a uniform international competition law. At Conceptual Level Basis and Purpose The demand for effective competition law has not come from the armchair economist and policy maker but from the consumers themselves. The competition law has been framed from taking in view wider consumer welfare. And by further buttressing the age old saying that consumer is the king of market. Its the consumer around which market revolves rather than around entrepreneur.

The competition law under domestic jurisprudence has been included primarily for bringing more competition in the market so that market growth can be properly ensured and anticompetitive actions can be effectively tackled. If we take the example of India, competition law was the result of effective policy changes on the part of the government which realised that MRTP Act is no more viable in the present day economy and its need major revamping. The common minimum programme of Government of India provides, It will not support the emergence any monopoly that only restrict competition. All regulatory institutions will be strengthened to ensure that competition is free and fair. These institutions will be run professionally .
Interface between antidumping and competition laws in the area of objective can be understood as follows. The objective with which antidumping laws are incorporated varies from country to country however if we take the examples of antidumping regulations at international or WTO level than it would be crystal clear that antidumping laws are incorporated under multilateral trade negotiation to remedy the situation of injury to the domestic industry due to dumping across all the subject countries. Thus antidumping laws primarily aim at remedying the injury to the domestic industry due to dumping and to address predatory practises. However, they are indifferent to the question of public welfare or consumer welfare. And in regard to objectives of competition law, they also vary from country to country depending upon the domestic jurisprudence. As has been observed: Even within a particular national system, the goals of competition law may evolve and transmogrify, often depending on the state of industrialization of the economy, the strength of the political democracy, the power of the judiciary and of bureaucrats, and the exposure of domestic firms to global competition Nonetheless, a generalised standard of objective which is omnipresent in all domestic jurisprudence can be looked into. The objective with which competition law is incorporated is protection and promotion of competition in the market and consumer welfare.

On the same line the Indian Competition Act, 2002 aims at preventing practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade. Similarly, competition legislation in other countries like USA and South Africa specifically mention economic efficiency as an objective of their respective competition related laws. Also, countries like the EC, Australia and South Africa have tried to address the issue of public welfare through their competition laws by specifically mentioning promotion of welfare of employees or producers or both as one of the objectives. The EC law on competition seeks to achieve an additional objective of economic integration, which is absent in rest other countries. Economic efficiency argument On the argument of economic efficacy antidumping and competition law deeply varies from each other. Antidumping laws are indifferent to the question of economic efficacy whereas, competition law aims at promoting economic efficiency by sustaining competition in the market. The major goal of competition law is to allow firms to take advantage of business opportunities and to make sure that through the competition process the actual working of decentralised markets will foster static and dynamic economic efficiency to the fullest possible extent given the regulatory environment of these markets. On the other hand the basis of antidumping law lies in the protection of domestic producers and it is less concerned with economic efficiency. The reduce role of economic efficiency in anti dumping is illustrated by economist taking in to account two fundamental form of dumping i.e. dumping by international prise discrimination and dumping by pricing below cost. . However, it is ironical to note that this economic justification for antidumping law is not supported by empirical evidence. There are few, if any, documented examples of successful predatory dumping. Accordingly, as there is no practical justification of predatory practices which is the foundation for anti-dumping argument there is no justification for the antidumping law and question of it economic efficiency for the domestic market. Economic Efficiency and Competition law

Unlike antidumping laws, competition law aims at promoting and sustaining competition in the market rather than protecting domestic producers. Competition law is viewed as the prime mechanism for promoting economic efficiency. For understanding how competition law promotes competition in the market it would be necessary to looks in to neoclassical microeconomic theory in relation to competition . Concept of market and competition in the market under neoclassical microeconomic theory is based on following premises which tells about the role of competition in promoting market efficiency in the market. These are: The resources available in the economy are scare and scanty. Further, market allocates
these scare resources between competing end users through series of transactions to those who value those most. Since these resources are scare is it required that there should be optimum utilisation of
available resources. And such optimum utilisation of the available resources will lead to economic efficiency. Market power is anathema to competition processes. Concentration of market power
hinders competition in the market. Competition law regulates market power in order to promote competition, thereby
enhances economic efficiency and increasing social welfare. Competition law by controlling market power works as a statutory mechanism to preserve and promote market competition and prevent the excessive aggregation of market control in few hands. Accordingly because of competitive market structure there are end numbers of market players and through the inter play of market forces following effects happens: Market apply scare resources to such producers which use the least resources i.e. those
producers who can use resources at optimum level, and It allocates consumption to those consumers that value the product the most.

Optimum utilization of scare resources by both consumer and producers in competitive market leads to economic efficiency. Thus, competition law by protecting competition in the market helps in promoting economic efficiency unlike anti-dumping laws which are indifferent to economic efficiency arguments and sometime even works against it. Distributive Justice and fairness. The anti-dumping law justify the prohibition of dumping on a wide variety of grounds which are both economic and social in nature. In area of social justification of anti-dumping laws comes the question of distributional justice. Distributive justice concerns the nature of a socially just allocation of rewards in a society. A society in which incidental inequalities in outcome do not arise would be considered a society guided by the principles of distributive justice. This distributional justice objective of anti-dumping law is usually associated with the international power imbalances between the firms of different nations. These power imbalances are relevant to trade law as when a firm takes advantage of these power imbalances, trade imbalances, trade-distorting effects may arise. Anti-dumping law is therefore justified as offsetting such trade-distorting effects by enabling government to impose anti-dumping duties. However, in the area of distributional justice anti-dumping law badly fails, if empirical evidences are taken into account. Originally antidumping laws were incorporated under international regime with the aim of bringing distributional justice and to do away with the market imbalances amongst nations. The purpose was to save domestic industries of developing and under developed countries from the predatory practices of the foreign firms of highly industrialised nations of the world. But ironically, antidumping law has been most frequently applied by the most advanced industrialized nations and often to protect some of the worlds most powerful firms. Thus, it shows that though antidumping laws were incorporated under GATT with the intention of safeguarding the interest of the weaker member countries of WTO and for securing distribution justice between developed and under developed countries but it has been more often

than not used by giant industrial economies. And accordingly it fails on distributional justice argument. A limitation of the competition law is its lack of emphasis on distribution justice of wealth in the society. Competition law has little, if anything to say about distribution of economic power. At Empirical Level Conflicts & Over lapses: Objective As has been discussed earlier, the prime area of difference which exist between antidumping and competition law is in term of the goal which respective law seeks to achieve. Antidumping law concern only with the protection of domestic producers against the predatory practices of the foreign industrialist. Whereas, the main purpose of competition law is to protect the interest of general public by protecting healthy competition in the market and prohibiting any action which hampers competition. More specifically competition law prohibits such price discrimination which adversely affects competition in markets; even if that implies that some competitors may be harmed in the process. On the other hand antidumping law while addressing price discrimination does not take into account competition concerns and its stated goal is to protect domestic industry and in fact ends up as an instrument to protect competitors. Thus it seems to be in direct conflict with Competition Law. As Commissioner of International Trade Commission (ITC) Janet Nuzum and David Rohr comments on of the ITC studies on adverse impact of antidumping laws on US economy, It must be remembered that the purpose of the ant idumping and countervailing duty laws is not to protect consumers, but rather to protect producers. Inevitably, some cost is associated with this purpose. However, unlike the antitrust laws, which are designed to protect consumer interests, the function of the AD/CVD laws is, indeed, to protect firms and workers engaged in production activities in the United States. So it should not come as a surprise that the

economic benefits of the remedies accrue to producers, and the economic costs accrue to consumers. (ITC, 1995, pp. VIII-IX) In a communication to the World Trade Organization (WTO), the U.S. Government presented the same argument under a more sophisticated format: "Contrary to the assumptions of some economists, the antidumping rules are not intended as a remedy for the predatory pricing practices of firms or as a remedy for any other private anti-competitive practices typically condemned by competition laws. Rather, the antidumping rules are a trade remedy which WTO Members have agreed is necessary to the maintenance of the multilateral trading system. Without this and other trade remedies, there could have been no agreement on broader GATT and later WTO packages of market-opening agreements, especially given imperfections which remain in the multilateral trading system." (U.S. Government, 1998, p. 2) Thus, antidumping in international trade arena is seen as the necessary evil for the maintenance of an open trading system among nations. And it is indifferent from any consideration as to competition in the market. Price discrimination Unlike anti dumping law, prise discrimination is not per se illegal under competition law. Only that prise discrimination which has appreciable adverse impact on competition in the market is prohibited. Under competition law such price discrimination is usually referred to as unfair or discriminatory pricing and a particular instance of price discrimination does not (per se) attract sanctions if it can be shown that it is adopted to meet competition and does not affect the conditions of competition in an adverse manner. However, under anti dumping law prise discrimination in form of lowing prise of the good below is normal prise is illegal per se and it could entail anti dumping duties. 3. International Competition Law as a substitute of Antidumping Laws Critique of Antidumping laws The provisions relating to Anti- dumping laws are conceder as the most ironical provision of WTO which are legally permitted but it have significant adverse effects on international trade

and healthy competition. Michael Fingers view that antidumping is a trouble -making diplomacy, stupid economics and unprincipled law Anti dumping has become an area which has led to more disputes and actions under the DSB than any other. Since 1995 average of about 100 cases are filed annually with the Dispute settlement Body of WTO. More than 3,500 anti-dumping investigations have been launched since WTO came into being in 1995. Anti-dumping initiations rose from 157 in 1995 to 366 in 2001, then after a period of substantial decline rose to 208 in 2008 from 163 in 2007. Although anti-dumping was traditionally used primarily by developed countries, developing countries such as India, South Africa, Argentina and China now account for the majority of anti-dumping actions. Political tension stems from debate over the recent rise in anti-dumping suits. The WTO saw a record high of 328 suits in 2001, sparking concern that while negotiations dismantle transparent and stable tariff barriers, members are substituting discriminatory, unpredictable antidumping suits. The framework of anti dumping law has been provided under Article VI of GATT, 1947 which provides: The contracting parties recognize that dumping, by which products of one country are introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry... On the basis of Article VI of GATT, 1947 only the whole international legal regime relating to Anti dumping has been formulated. Need for International Competition Law under WTO framework The need for substitution of antidumping laws by international competition law primarily arises because of two reasons: Firstly, because of the flaws with which antidumping laws suffers. And the advantages which competition law have over anti-dumping laws. As has been discussed earlier competition

laws shifts the focus from protection of the domestic firms to the protection of the consumer and producer welfare. It aims at creating market efficiency in the market so as to crate healthy competition in the market. Given the perceived advantage of competition law over anti-dumping law, policy makers in some nations have advocated the reform of anti-dumping law and its abolition and replacement with the international competition law. Second, reason is the globalisation of the international economy. Globalization has posed multiple challenges to antidumping laws which are seen as the neo-protectionist barrier. It strife to challenge the status quo of anti dumping rules which are not at all in consonance with the wider mandate of WTO though it has been expressly provided under it. Thus globalisation as
an obligation under WTO mandates the member nations to be more open to market forces and must allow free play of competition in the market from both domestic and foreign players. Accordingly, its more in consonance with spirit of WTO/GATT to incorporate competition law as a substitute to antidumping law. Conclusion It may be concluded that antidumping law and competition law both has its common origin and comes from the same family tree but they diverge widely into two different streams of legislative structure. Antidumping laws are based on the premises of economic nationalism which subscribe to the policy that domestic entrepreneur has to be safeguarded against foreign players. However, competition law is in complete contrast to antidumping and it aims not at safeguarding any group of entrepreneurs but it aims at perpetuating healthy competition in the market by prohibiting any action which has an appreciable adverse impact on competition in the market. Further, as we have seen in the discussion above, on comparative analysis of competition law and antidumping it is apparent that antidumping law fails badly on both the counts of economic efficiency and distributional justice. And thus competition law has an upper hand in relation to antidumping.

Finally, because of the established flaws of the antidumping law and the perceived advantage of competition law over it, international competition law could well be a substitute of antidumping legislation. Moreover, because of the WTO obligations it is also politically expedient to replace antidumping with international competition law.

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Research Journal On Consentia On Law

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JOURNAL

JOURNAL ON CONSENTIA ON LAW

Inaugural issue: October 2013

MR. ASHISH MITTAL

ADV. ANIL DSOUZA

ADV. PADMAKAR TRIPATHI

MS. NAYANA DAS

MR. BHUBNESHWAR RAI

MR. AKASH KUMAR

2013. All Rights Reserved Researchers Club

JOURNAL ON CONSENTIA ON LAW

MESSAGE FROM THE EDITORIAL BOARD

The Editorial Board

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW

Mechanics of American depository Receipts (ADR)

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

NASDAQ stands for National Association of Securities Dealers Automated Quotations.

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

The Art of Giving-Corporate Social Responsibility in India

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

CARTELS AND COMPETITION: ANTI ETHICAL RELATIONSHIP

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW

A quick Guide to Cartels, Competition Commission of India.

JOURNAL ON CONSENTIA ON LAW RESEARCHERS CLUB

JOURNAL ON CONSENTIA ON LAW