Professional Documents
Culture Documents
The competition policy has two objectives in general. The first involves putting
in place a set of policies that enhance competition in local or national markets.
It may include a liberalised trade policy, relaxed foreign investments, ownership
requirements and economic deregulation.
The second objective is legislation or law makings to prevent anti-competitive
business practices and unnecessary governmental intervention. Hence an
effective competition policy promotes the creation of business environment
which improve static and dynamic efficiencies and leads to efficient resource
allocations, and in which the abuse of market power is prevented mainly
through competition. It also requires a creation of regulatory framework for
achieving all around efficiency. The policy also prevents artificial entry barriers
and facilitates market access and complements other competition promoting
activities. The trade liberalisation alone is not sufficient to promote competition
and there might be a need for a separate competition policy through the strong
implementation of competition law.
The economic consequences of the competition policy leads a positive approach
to resource allocation and industrial growth, productivity and efficiency,
competitiveness, inflexibility, minimum efficient scale, Industrial concentration
capacity utilisation, technology and research and development within a specific
market regime with the goal of consumer welfare.
What are the Advantages of Competition?
Stimulating innovation and efficiency.
Providing Consumer with a variety of alternatives, enhancing product
differentiation and better satisfaction of consumers.
It includes competitive products in Competitive prices. in giant sectors.
Bigger manufacturers tend to keep the market reserved for themselves and
try to subvert free competition by wing methods like
(a) Forcing a competing firm out of business by predation and other methods.
(b) Buying out competing firms by takeover or merger.
(c) Colluding with competing firms and fixing prices.
In order to stop the unfair trade practices, a free competition, regulation is
needed:
1. To prevent practices having adverse effect on competition.
2. To promote and sustain competition in markets.
(f)
New (i) Accountant
definition:
(ii) Auditor
(iii)
Professional (iv) Recognised Shareholders
manager
Association.
Meeting
special
1. Pressure increased during 1957 General Elections. Bombay and Calcutta High
Courts condemned the Act.
2. ParliamentSection 293A Companies (Amendment) Act, 1960.
3. Santhanam Committee call for total ban under Section 293A.
Part BState the Sachar Committee's Recommendation for MRTP Act,
1969?
Concept and Definition:
Title of Act should be changed to Monopolies and Trade Practices Act as it
includes Unfair Trade Practices also.
Commission should be read as MRTPC and therefore necessary changes
should be made in the definition.
The concept of calendar year and adoption of lowest figure for production
should be changed instead use of the term average annual production for 3
years preceding the calendar year should be made (in which dispute arise).
Amendment of definition of goods under Section 2(e) so as to bring it in
conformity with Sale of Goods Act so as to include shares and stocks.
No exemptions for Government/Government-controlled/owned under-takings
from the purview of the Act.
No exemption for newspapers also.
Concentration of Economic Production:
The role of MRTPC to be strengthened.
Section 30 of MRTP Actamendment.
In case of a merger/amalgamation approved by Central Government under
Section 396 of Companies Act, in public interest then no approval be required of
MRTPC under Section 20 or 23.
In case of acquisition if the result is control of 33.3% or more of voting power
or the cost of acquisition more than Rs. 3 crore matter compulsorily be
referred to MRTPC for final disposal.
The power to initiate action under Section 27 for division of an undertaking is
with the Central Government, who rarely exercises it. However in case a
reference is made to MRTPC, then MRTPC should hear the matter and pass final
orders.
LAW
ON
THE
RECOMMENDATIONS
OF
RAGHAVAN
Regulation of Combinations:
Combination between enterprises is also prohibited under the Act, if it causes
or is likely to cause adverse effect on competition within the relevant market in
India.
Such combinations can be achieved by acquisition of one or more enterprises
or by one or more persons;
Acquisition or control or merger or amalgamation of enterprises under certain
circumstances.
Establishment of Competition Commission of India:
For implementing the competition Law the Act provides for the establishment
of Competition Commission of India (CCI) with adequate powers for effective
enforcement of the law and with appropriate machinery for the implementation
of its decisions.
Though the Competition Commission took a shape in 2002 by the Competition
Act of 2002, it came to be operated from July 2009 though effective date
pertains to 14 October, 2003.
Structure of the Commission:
A multi-member body consisting a Chairperson and not less than two or not
more than 6 other members.
Qualified persons of ability, integrity and standing from the fields of judiciary,
economics, Law, international trade, Commerce and Industry.
Independent functioning, with independent investigative, prosecution and
adjudicative functions.
Penalties for Non-compliance of Orders:
Act contains provisions for punishing contravention of the orders of the
Commission, failure to comply with the directions of Director-General, making
false statements, or omissions to furnish material information.
If any person without reasonable cause, fails to comply with the orders or
directions of Commission, he shall have to be punished with fine which may
extend to Rs. 1,00,000 for each day during which such non-compliance occurs,
subject to a maximum of Rs. 10 crore.
Further if any person does not comply with the orders or directions issued, or
fails to pay the fine imposed, he shall without prejudice to any proceeding be
punishable with imprisonment for a term which may extend to three years or
with fine which may extend to Rs. 25 crore or with both.
Competition Appellate Tribunal:
The Competition (Amendment) Act of 2007 inserted the provision for
constituting and functioning of Competition Appellate Tribunal. Thereby an
appeal from the orders of the Competition Commission by the Central
Government or State Government or a local authority or an enterprise or any
aggrieved person, can lie either to Supreme Court or to the Competition
Appellate Tribunal. Every appeal is to be filed within a period of 60 days from
the date on which a copy of direction or decision or order made by the
Commission is received by the Central Government or the State Government or
a local authority or enterprise or any person aggrieved in the prescribed form
along with the fee required thereof. The disposal of appeal is to be made by the
Competition Appellate Tribunal within six months from the date of receipt of the
appeal.
Competition Advocacy:
The Competition Commission has a positive role in making Competition policy in
the country and advising the Government of India as and when required. The
Commission also takes suitable measures for promotion of competition policy
and advocacy, creating awareness and training.
Competition Fund:
The Act provides for constitution of a competition fund which will be for meeting
salaries and allowances and other expenses of the Commission.
RECOMMENDATIONS OF RAGHAVAN COMMITTEE
The recommendation includes both policy and Law of Competition.
Competition law should cover all consumers who purchase goods or services.
The state monopolies, government procurement and foreign companies
should be subject to Competitive Law.
All agreements (include horizontal and vertical) should be covered by
competition law if it is prejudicial to the competition.
Horizontal agreements with regard to prices, quantities, bids and market
shaving are anti-competitive.
Vertical agreements like, tie-in arrangements, exclusive supply distribution
agreements and refusal to deal are generally anti-competitive.
appellant to cease the aforesaid trade practice and also file an affidavit stating
that the appellant would desist from the same in future. Being aggrieved by the
aforesaid order passed by the MRTP Commission, the appeals were made in
Supreme Court.
Issue:Whether any deficiency in service could be said to amount to an unfair
trade practice as envisaged under the provisions of the MRTP Act, 1969.
Decision:Before it can be said that the act amounts to an unfair trade
practice the complainant is required to show that the trade practice was
employed for the purpose of promoting the sale, use or supply of any goods or
the provision of any services and also that the statement or advertisement is
the false representation of the kind specified under Section 36A of the MRTP Act,
1969. It was also held that there could be no finding by the MRTP Commission
that the appellant was guilty of unfair trade practice. Hence the order of
Commission was set aside by the Supreme Court.
THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999
INTRODUCTION
Several amendments were made in Foreign Exchange Regulation Act (FERA) as
part of the ongoing process of economic liberalisation relating to foreign
investments and foreign trade for closer interaction with the world economy. In
1993 FERA was reviewed in light of subsequent developments and economic
and financial experience in relation to foreign trade and investments. Hence it
was decided by the Central Government to enact a new law i.e., Foreign
Exchange Management Act, 1999 (FEMA) in consultation with Reserve Bank of
India. The main reason behind this law is the substantial development in our
foreign exchange reserves, growth in foreign trade, rationalisation of tariffs,
current account convertibility, liberalisation of Indian investments abroad,
increased access to external commercial borrowings by Indian corporates and
participation of foreign institutional investors in our stock markets.
Moreover, FEMA is dynamic law relating to foreign exchange with the objective
of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India. FEMA
though was enacted in 1999 came into force from 1st June, 2000.
IMPORTANT PROVISIONS IN FEMA
Capital Account Transaction:
Capital Account Transaction (CAT) means a transaction which alters the assets
and liabilities, including contingent liabilities, outside India of persons resident in
India or assets or liabilities in India of persons resident outside India including
permissible class of capital account transaction, and also admissible limit of
capital account transaction.
However where purpose of sale of foreign exchange is for travel abroad for
business etc., cash may be received by the Authorised Dealer from Applicant
upto Rs. 50,000.
Where the rupee equivalent for drawing foreign exchange exceeds Rs. 50,000
either for any single instalment or for more than one instalment reckoned
together for a single journey/visit it should be paid by the traveller by means of
a cross cheque/demand draft/pay order as stated above.
What is the status of Travell-ers Cheque neg-otiable only in India?
Rupee Travellers Cheque cannot be encashed outside India, if they are issued
solely for use within India. In such a case they cannot be taken or sent out of
India.
What is the mode of reim-bursement outside India?
Reimbursements should be strictly refused where such travellers cheques have
been encashed outside India.
Rupee Travellers Cheque, which are issued by authorised dealers, encashable
outside India, may be reimbursed by Authorised Dealers or by their selling
Agent.
How the Import of Foreign Curr-ency Notes takes place?
When the stock of foreign currency notes with Authorised Dealer is not
adequate for meeting their normal business requirement they can import
foreign currency notes from their overseas branches or correspondents.
Define mode of Reconversion of Indian Currency?
Foreign currency may be sold against Indian Rupees held by persons who are
not residents of India but are passing through or leaving India after a visit, at
the time of their departure from India.
For this purpose, a Bank or Encashment certificate issued by a Authorised
Dealer, exchange bureau or Authorised Money changer in form BCI, ECF or ECR,
is required to show that the rupee had been acquired by sale of Foreign
Exchange to an Authorised Dealer or money changer in India.
Such a certificate is valid for such reconversion, i.e., a period of three months
should not be over from the date of sale of the foreign currency by the traveller.
What is the Rates of Exchanges?
Authorised dealers and their Exchange bureau may buy from and sell to public
foreign currency notes and coins at rates of exchange determined by market
Sr.
No.
DIFFERENCES
FERA
FEMA
PROVISIONS
FEATURES
Presumption
of
negative
intention
(Mens Rea) and joining
hands
in
offence
These
presumption
s of Mens
Rea
and
existed in FERA
NEW
FEMA
TERMS
DEFINITION
AUTHORISED
PERSON
abetment
have
been
excluded in
FEMA
IN Terms
like
Capital
Account
Transaction,
Current
Account
Transaction,
person,
service etc., were not
defined in FERA.
Terms
like
Capital
Account
Transaction,
Current
Account
Transaction
person,
service
etc.,have
been
defined
in
detail
in
FEMA
OF Definition
of
Authorised Person in
FERA was a narrow
one [2(b)]
The
definition of
Authorised
person has
been
widened to
include
banks,
money
changes,
off-shore
banking
Units
etc.
[2(c)]
MEANING
OF There
was
a
big
RESIDENT
AS difference
in
the
COMPARED WITH definition
of
INCOME TAX ACT.
Resident,
under
FERA, and Income Tax
Act
The
provisions of
FEMA, are in
consistent
with Income
Tax Act, in
respect
of
the
definition of
term
Resident.
Now
the
criteria
of
In India for
182 days to
make
a
person
resident has
been
brought
under FEMA.
Therefore a
person who
qualifies to
be a nonresident
under
the
Income Tax
Act,
1961
will also be
considered a
non-resident
for
the
purposes of
application
of FEMA, but
a
person
who
is
considered
to be nonresident
under FEMA
may
not
necessarily
be a nonresident
under
the
Income Tax
Act.
For
instance
a
businessma
n
going
abroad and
staying
there for a
period
of
182 days or
more in a
financial
year
will
become
a
non-resident
under FEMA.
PUNISHMENT
QUANTUM
PENALTY
APPEAL
Any
offence
under
FERA, was a criminal
offence,
punishable
with imprison-ment as
per Code of Criminal
Procedure, 1973
Here,
the
offence
is
considered
to be a civil
offence only
punishable
with
some
amount
of
money as a
penalty.
Imprisonme
nt
is
prescribed
only
when
one fails to
pay
the
penalty.
Under FEMA
the
quantum of
penalty has
been
considerably
decreased
to
three
times
the
amount
involved.
RIGHT
OF
ASSISTANCE
DURING
LEGAL
PROCEEDINGS.
10
POWER
SEARCH
Foreign
Exchange
Regulation
Appellate
Board went before
High Court
under FEMA
is
the
Special
Director
Appeals.
Appeal
against the
order
of
Adjudicating
Autho-rities
and special
Director
(Appeals)
lies
before
Appellate
Tribunal for
Foreign
Exchange.
An
appeal
from
an
order
of
Appellate
Tribunal
would lie to
the
High
Court.
(Sections
17, 18, 35)
FEMA
expressly
recognises
the right of
appellant to
take
assistance
of
legal
practitioner
or chartered
accountant
(Section 32)
scope
power
seizure
of
search
and seizure
has
been
curtailed to
a
great
extent
The appeal shall be made in Form No. 2, along with three copies of the
impugned order and requisite fees.
The appeal shall be made within 45 days, from the date on which copy of the
impugned order is received.
A copy of the order and appeal shall be sent to the opposite party, i.e.
Director of Enforcement, and a date shall be fixed for hearing of the appeal.
The appellant shall have the right to present his case/appeal through a legal
practitioner or a chartered accountant.
On the fixed date of hearing, the Appellate Tribunal shall pass its order in
writing with the reasons.
How the appeal to High Court (S. 35) preferred?
An appeal from the decision of Appellate Tribunal lies before High Court.
The appeal shall be filed within 60 days from the date of communication of
the decision or order of the Appellate Tribunal to him on any question of law
arising from the impugned order.
What is the amount of penalty under FEMA?
Any contravention, under FEMA, may invite following kinds of penalties:
If the amount against the offence can be quantified, then penalty will be
THRICE the sum involved in contravention.
Where the amount cannot be quantified the penalty may be imposed upto two
lakh rupees.
If, the contravention is continuing everyday, then Rs. Five Thousand for every
day after the first day during which the contravention continues.
Further in addition to the penalty, any currency, security or other money or
property involved in the contravention may also be confiscated.
CASE LAWS
Union of India v. Venkateshan S., MANU/SC/0355/2002 : AIR 2002 SC
1890
Facts:By order dated 8 February, 2000 the Joint Secretary, Ministry of
Finance, Government of India made a detention order under Section 3(1) of the
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act
(COFEPOSA) directing that one B. Shankar be detained and kept in custody with
the Tribunal or before it and, therefore, there was no scope of interference with
the order of the Tribunal. However the time permitting the deposit was
extended.
Issue:Whether the interim order of stay can be passed. And whether any
reduction of the amounts to be deposited as directed by the Tribunal is called
for.
Decision:Undisputably the appellant had deposited the amount which was
directed to be deposited. However for the balance amount demanded with a
view to safeguard the realisation of penalty the appellant shall furnish such
security as may be stipulated by the Tribunal. On that being done, the appeal
shall be heard without requiring further deposit if the appeal is otherwise free
from defect. The appeal was disposed of by Supreme Court accordingly.
THE FOREIGN CONTRIBUTION (REGULATION) ACT, 1976
Give introduction to FCRA, 1976?
The FCRA,1976 came into existence at a time when some of the foreign
countries had stalled funding and extending hospitality to individuals,
associations, political parties, candidates, editors and owners of newspapers.
This Act came into effect from 5th August, 1976 to regulate the acceptance and
utilization of foreign contribution by certain individuals or associations with an
objective of ensuring that Parliamentary institution!". Political associations,
academic and other voluntary 4:1;.,anizations. haying an influence on national
interest, :function in a manner consistent with values of a sovereign democratic
republic.
What are the applications of FCRA?
The FCRA applies to all citizens of India, :n India or outside India. it also applies
to associates, branches or subsidiaries outside India of companies registered or
incorporated in India.
What are the restrictions to FCRA?
The FCRA puts a restriction on elected candidates, newspersons like
correspondents, columnists, editors or even publishers, judges, government
servants of corporations owned and controlled by the government, members of
legislature, members and office bearers of any political party from taking any
foreign contribution, whether direct or indirect. The Act also imposes a
restriction on acceptance of foreign hospitality (e.g., cost of travelling, boarding,
lodging , transport) by these people. A foreign contribution may be a donation,
delivery or transfer by any foreign source in form of currency, foreign securities
or articles It does not include articles worth less than Rs. 1000 in Indian markets
given as gifts for personal use.
information provided in Form FC-1 in Schedule of the Act and violation thereof
whether constitutes a contravention of the provision of Act and Rules,
Decision:If a society is registered under Section ti of the Foreign Contribution
(Regulation) Act, 1976 for receiving foreign contribution only through a
particular branch of a bank, but the society deposits the contribution received
by it from a foreign organization in another bank without intimating Central
Government about receipt of contribution, would amount to violation of Section
6(11(h) and attract the penal provisions under Section 23 of the Act.
The sick Industrial Companies (Special Provisions) Act, 1985
When the erosion of net worth is of the order of 50% the Board of Directors of
the sick unit are required to bring this fast to the notice of the Board of
Industrial and Financial Reconstruction and also to the shareholders within 60
days.
The Board of Industrial and financial Re-construction was set up in 1987 for
providing speedy mechanism for amalgamation, merger etc., in large and
medium sector.
The Board consists of a Chairman and not less than two and not more than 14
other members to be appointed by the Central Government.
The Chairman and members shall be persons who are qualified to be High
Court Judges, or persons of ability, integrity and those who have special
knowledge and professional experience, of not less than 15 years in Science,
technology, economics, banking industry, law, labour matters, etc.
Consisting of Chairman and not more than three other members.
The chairman shall be a person who is or has been a Judge of the Supreme
Court or who has been a Judge of High Court for not less than five years.
A member shall be a person who has been Judge of a High Court or an officer
not below the rank of a Secretary to the Government of India.
The Board or the Appellate Authority shall, for the purpose of inquiry have the
powers as vested in the Civil Court in the case of:(a) Summoning and enforcing the attendance of any witness;
(b) Discovery and production of document or material object;
(c) Reception of evidence on affidavit;
(d) The requisition of any public record;
(e) Issuing of any Commission.
4. Discuss briefly the Board for Industrial and Financial Reconstruction
1. When the company has become a sick industrial company the Board of
Directors of the Company shall, within 60 days from the date of audited
accounts in the financial year, make a reference to the Board for determination
of the measure which shall be adopted with respect to the company.
2. If Central Government, RBI, or a State Government or a public financial
institution or a State level institution has sufficient reason to believe that any
company has become sick, it can make a reference to the Board.
Provided:
1. All or any of the industrial undertakings under such company is situated in
such State.
2. Such financial institutions have an interest in the company.
Sec. 15. Discuss briefly reference to Board
Section 15 makes it mandatory for the Board of Directors of a sick industrial
company to make a reference to the Board. But it is not mandatory for any
other agency as specified is Section 15(2) to make a reference to the Board.
The BIFR may make such inquiries for determining whether a company has
become a sick unit upon receipt of a reference under section 15 or upon
information received with regard to such company or upon its own knowledge.
The BIFR can appoint any operating agency such as public financial
institutions, state level institution, scheduled Bank or any other person for such
inquiry and report within 60 days from the commencement of the inquiry.
Sec. 16. Explain
Company?
briefly
enquiry
into
working
of
the
Industrial
Section 16(4) -The Board may appoint one or more persons to be special
directors for safeguarding the financial and other interests of the company.
Where a reference has been made to the Board for considering a company as
sick industrial company under Section 3(1)(O) the creditors have the right to
intervene in the inquiry stage where they dispute such claim and have
material to show that industrial sickness is a devise to defeat claims as held in
the case of Sponge from India Ltd. v. Neelima Steels Ltd., (1990) 68 Comp Cas
201.
After the inquiry under section 16 the Board may make an order for the
improvement and revamping of the company and may give such time for the
purpose as it deems fit.
After passing an order under Section 17 the operating agency specified shall
prepare within a period of 90 days from the date of such order a scheme with
regard to:(a) Financial re-construction.
(b) Any change in management.
(c) Amalgamation or take over by any company.
(d) The sale or lease of any part or whole of any industrial undertaking of the
sick industrial company.
(e) Any such, preventive, ameliorative and remedial measurers.
Sec. 18. Explain briefly pre-paration of schemes
All such schemes shall be laid before the General Body by its shareholders.
The Scheme can induce transfer of controlling shares or substantial
shareholder's interest as held in the case of Bennett Coleman & Co. Ltd. v.
Appellate Authority for Industrial and Financial Reconstruction, 1995 (3) AD (Del)
432 (DB).
The Terms, revival or rehabilitation would cover the selling off of assets and
starting a fresh industrial undertaking at a different place as held in the case of
Upper India Couper Paper Mills Co. Ltd. v. AAIFR, (1992) 75 Comp Cas 653 (Del).
Sec. 19. Explain briefly rehabilitation by Financial Assistance?
The rehabilitation package may contain the provision of additional financial
assistance for either the modernization or expansion of the plant.
Under Section 19(3A) the banks and financial institutions will adopt a
consortium approach and designate a bank or financial institution for the
disbursement of loans provided in the Scheme.
Section 19A provides for interim relief for sick companies during the pendency
of an enquiry under Section 16. The Board is empowered to make an order
within 60 days from the receipt of an application.
Sec. 20. Explain briefly winding-up of Sick Industrial Company?
The Board is free to accept or reject an application.
Where the Board after making an inquiry under Section 16 and considering all
the facts and after hearing all the parties concerned is of the opinion that it is
not feasible to revive or rehabilitate the sick industrial undertaking can
recommend to the High Court the
winding-up of the Company as held in the case of Lakshmi Porcelains Ltd. v.
Union of India, 1995 (35) DRJ 182.
Sec. 21 The Board can direct any operating agency to prepare an inventory of
all assets and liabilities.
Sec. 23. Explain briefly proce-dure in the case of loss of 50% net work
by Industrial Companies?
A fair treatment to the secured creditors, labourers and all other interested
parties.
What is the mode of Final BIFR Order/Scheme?
After being satisfied about various aspects, the BIFR can order the publishing of
the draft scheme for the rehabilitation of the sick company. After a period
specified by the BIFR, the BIFR hears objections and suggestions, if any, from
the various concerned parties on the draft scheme. After suitably modifying the
draft scheme, a final scheme is ordered by the BIFR. If an appeal is made before
the BIFR, then the fate of the scheme will depend on the outcome of the BIFR
order.
What are the advantages in BIFR scheme?
How does the reduction of Share Capital takes place?
Features of BIFR
a. CAPITAL RESTRUCTURING
After erosion of the net worth, the share capital appearing in the
balance-sheet is only notional and it may be worthwhile to bring the existing
share capital of the company in line with reality. It is possible to reduce the
share capital of the company without going to the court under Section 100 of
___________
1. BIFR stood dissolved by the Sick Industrial Companies (Special Provisions)
Repeal Act, 2003 (1 of 2004).
2. Operating agency means any public financial institution state level
institutions, Scheduled Bank or any other specified by BIFR.
the Companies Act, 1956 by incorporating the capital restructuring features in
the BIFR scheme itself. This is fair to the new promoter, as any further
share capital that it will bring in will be in line with the actual worth of the
shares.
b. SETTLEMENT OF CREDITORS
Discuss briefly Shares at Discount in one-time settlement to creditors?
A One-Time Settlement (OTS) proposal may be made to the secured creditors
(banks, financial institutions, etc.) involving concessions and sacrifices by
repayment of the entire dues over a short period of two or three years.
Alternatively, the scheme may provide for restructuring of the liabilities and
repayments over the rehabilitation period.
Reliefs and concessions within the RBI parametres are generally easily agreed
upon, but relief beyond that may require some convincing and adequate
justifications. Generally, banks and financial institutions are extremely hesitant
to waive any portion of the principal amount of loans. However, the OTS and/or
the restructuring of liabilities depends entirely upon the way the matter is
presented and discussed/negotiated with the secured creditors.
What is the Right to Re-compens-ation?
Many times the banks/financial institutions insist that they shall have a right to
re-compensation in respect of the amounts waived and sacrifices made by
them, if the sick company is revived. This, in effect, means that if the sick
company revives, then the amounts waived/sacrifices made by them shall be
made good by the company. Though, there may be a justification for including
such a term in an existing promoter's scheme of rehabilitation, there is no
justification for including such a term in the new promoter's scheme. This issue
should be considered while finalizing the OTS or restructuring of liabilities.
What is the Leveraged Buy Out?
Under a BIFR scheme if a suitable package is worked out with the secured
creditors, then the acquirer can, in effect, acquire the sick company by way of a
leveraged buy out wherein he gets an opportunity to pay a part of the total
consideration, that is, dues of the secured creditors, over a period of time. In a
non-BIFR situation the acquirer would not easily be able to achieve such a
financing pattern.
It is important to note that a scheme can be sanctioned by the BIFR only if
consented to by the concerned Government, banks, public financial institutions,
State level institutions or any institution or authority required by the scheme to
provide financial assistance, reliefs, concessions or sacrifices. Therefore, for any
scheme to go through, the consent of the above persons is a must. The consent
of the other creditors is, strictly speaking, not necessary for the scheme to go
through, even if the scheme involves extinguishments or reduction of their
rights. However, the BIFR will normally hear all the parties concerned before
sanctioning the scheme.
c. ISSUE OF QUASI-EQUITY INSTRUMENTS
One of the features, which can be gainfully incorporated in a BIFR scheme, is
the issue of optionally convertible instruments to the secured creditors as a part
of the OTS/restructuring of the liabilities. If the company does not revive during
the conversion option period, then to that extent the secured creditors are not
adversely affected as the nature of the instrument continues to be a debt.
However, if the company revives and the stock prices of the company start
looking up (if listed) then it works out to be a win-win situation. The company
gains by way of conversion of loans into shares, which may be at a premium
and the creditor gains by being able to recover its money faster through the
sale of the shares as also a possible recovery of a higher amount by way of
appreciation in the value of the shares.
One can also consider offering the shares of one of acquirer group's healthy
listed company at a fair price to the secured creditors as repayment of their
dues.
d. INCOME-TAX ISSUES
The present position in law is that the consent of the CBDT (Central Board of
Direct Taxes) is necessary before a scheme containing reliefs and concession
under the Income-tax Act, 1961 is approved. Even then, it is better to include
tax concession and litigious tax issues in the scheme.
One important point that can be incorporated in the scheme is relating to the
set-off of the carried forward business loses and depreciation against the capital
gains that may be made by the sick company from the sale of its surplus assets.
Presently, the issue is not fully settled under the income tax law and, therefore,
there is a scope for litigation in regular income tax assessment. It may also be
advisable to ask for exemption under Section 41(1) of the Income-tax
Act, 1961 regarding the non-taxability of the interest waived, etc.
e. USE OF EXISTING PRODUCTION FACILITIES PENDING THE FINAL BIFR
ORDER
To take advantage of the time gap before the company is acquired; it may be
advisable to propose an arrangement for using the production facilities of the
sick company on a job-work basis or a short-term lease. The advantages to the
acquirer are that it gets a hands-on experience of the production facilities and it
starts exploiting the business potential of the production facilities. At the same
time, for the sick company it would ensure capacity utilization, which at the very
least, will keep the production facilities and the workers working and will
generate revenue.
f. REQUEST FOR SUSPENSION OF CONTRACTS, AGREEMENTS, ETC
It may be advantageous to request the BIFR, as a part of scheme, to suspend
operation of those contracts, agreements, awards, settlements, etc. which are
likely to adversely affect the quick and smooth implementation of the scheme.
The BIFR is empowered to do so for an initial period of two years which may be
extended by one year at a time, such that the total suspension period cannot
exceed seven years in the aggregate.
SYMPTOMS OF SICKNESS
(Report of Tiwari Committee)
Continuous irregularity in cash-credit accounts.
Low capacity utilization.
Profit fluctuations, downward trends in sales and stagnation or fall in profit
followed by contraction in the share of the market.
Higher rate of rejection of goods manufactured.
Reduction in credit summations whenever the companies are in financial
difficulty, they open a separate account with another bank and deposit all
collections therein.
Failure to pay statutory liabilities.
Larger and longer outstanding in the bill accounts.
Longer period of credit allowed on sale documents negotiated through the
bank and frequent returns by customers of the same.
Constant utilization of cash credit facilities to the maximum and failure to pay
timely instalment of principal and interest on term loans and instalment credits.
Non-submission of periodical financial data/stock statements, etc. in time.
Financial capital expenditure out of funds provided for working capital
purposes.
Decrease in working capital on account of Increase in debtors and particularly dues from selling agents.
Increase in debtors.
Increase in inventories which may include large number of slow or non-moving
items.
Increase in inventories which may include large number of slow or non-moving
items.
A general decline in that particular industry combined with many failures.
Rapid turnover of key personnel.
briefly
power
to
prohibit
strikes
in
certain
Any person who commences or takes part in any such illegal strike shall be
punishable with imprisonment for a term of six months or with fine which may
extend to Rs. 2000 or with both.
Explain Sec. 6. Penalty for instigation?
Any person who instigates other persons to take part in such an illegal strike
shall be punishable with imprisonment for a term of one year imprisonment, or
with fine which may extend to Rs 2000 or with both.
If the Central Government is satisfied, in the public interest, it may by general
or special order, prohibit lockouts in any establishment catering to essential
service.
An order under Section 8(1) shall be in force for six months only. But the
Central Government can extend it if in the public interest, is necessary to do so.
Explain Sec. 8. Power to prohibit Lock-outs?
Section 8(4)(a).-No employer in relation to an establishment to which an order
applies shall declare any lock-out.
(b) Any such lock-out declared before or after the issuance of such order shall
be illegal.
What are the Consequences of Sec. 8 of ESMA?
Section 8(5).-Any such contravention shall be punishable with imprisonment for
a term which may extend to six months or fine up toRs. 1000 or with both.
Explain Sec. 9. Power to prohibit lay-off?
Section 9(1).-If the Central Government is satisfied it may prohibit lay-off, on
any ground other than shortage of power or national calamity, of any workman
whose name is on the master rolls of any such establishment in public interest.
Explain Sec. 10. Power to arrest without warrant?
Any police officer may arrest without warrant any person who is reasonably
suspected of having committed any offence under this Act.
The offences under this section shall be tried summarily by under this Act and
Sections 262 to 265 of Cr.P.C, 1973 shall apply to such trials.
cannot exceed
25%
of
broker's
total
90-day limit for carry-forward and squaring off allowed only till the 75th day
(or the end of the fifth settlement).
daily margins to rise progressively from 20% in the first settlement to 50% in
the fifth.
In accordance with the amendment in 1995 an adjudicating mechanism was
created within SEBI and any appeal against this adjudicating authority is to be
made to a separate Securities Appellate Tribunal. These appeals are heard only
in the High Courts.
The main features of the amendment in 1995 to the Securities Contract
(Regulation) Act, 1956 pertaining to SEBI's functioning are:
The ban on the system of options in trading has been lifted.
The time limit of six months, by which stock exchanges could amend their
bye-laws, has been reduced to two months.
Additional trading floors on the stock exchanges can be established only with
prior permission from SEBI.
Any company seeking listing in stock exchanges would have to comply with
the listing agreements of stock exchanges, and the failure to comply with these,
or their violation, is punishable.
SEBI is vested with powers to take action against these practices relating to
securities market manipulation and misleading statements to induce
sale/purchase of securities.
SEBI has the powers of Civil Court in respect of discovery and production of
books, documents, records, accounts, summoning and enforcing attendance of
company/person and examining them under oath. SEBI can levy fines for
violations relating to failure to submit information to SEBI/to enter into
agreements with clients/to redress investor grievances, violations by mutual
funds/stock brokers and violations related to insider trading and takeovers.
Important provisions under SEBI Act, 1992
Collective Investment Scheme
Any scheme or arrangement offered by any company under which:
(a) the contributions or payment made by the investors are pooled and utilised
from such scheme.
(b) the contributions and payments are made to such scheme or arrangement
by the investors with a view to receive profits, income and property whether
movable or immovable from such scheme.
(c) the property, contribution or investment forming part of scheme, the
investors do not have day-to-day control over the management and operation of
the scheme.
Prohibition of Manipulative and Deceptive Services, Insider Trading and
Substantial Acquisition of Securities or Control
whichever is less.
Penalty for failure to enter into Rs. 1 lakh for each day during
agreement with clients which such failure continues or
Rs. 1 crore whichever is less.
Penalty for failure to redress Rs. 1 lakh for each day during
Investor's Grievance which such failure continues or Rs. 1 crore whichever is
less.
Penalty for failure to observe Rs. 1 lakh for each day during
Rules and Regulations by an which such failure continues or
asset management company Rs. 1 crore whichever is less.
Penalty for insider trading Rs. 25 crore or three times of amount of profits made
of insider trading whichever is higher.
Penalty for non-discloser of Rs. 25 crore or three times the amount acquisition of
shares and take-overs of profit made out of such failure
whichever is higher.
Penalty for fraudulent Rs. 25 crore or three times the amounts
and unfair Trade Practices of profit made out of such practices
whichever is higher.
Clariant International Ltd. v. Securities and
MANU/SC/0694/2004 : (2004) 8 SCC 524 Facts:-
Exchange
Board
of
India,
The Colour Chem Ltd. was the target company. Its shares were listed on BSE and
NSE. An agreement was entered into by and between one Hoechest and one
Clariant pursuant whereto and in furtherance whereof the German speciality
chemicals business of the target company was transferred to Clariant by
transferring about 6 lakh equity shares of Rs. 100 each of the target company.
On or about 21-11-1997, with a view to give effect to the said agreement,
Clariant sought for an exemption from compliance with the requirements of
making an open offer to the shareholders of the target company in terms of the
provisions of the SFBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997. Such exemption however, was not granted. Hoechest in the
aforementioned situation decided to sell off the shares held by it in the target
company to Ebito, a company which was floated on 19-5-2000 as a special
purpose vehicle. The actual transfer took place on 13-10-2000. Ebito by reason
of the aforementioned transfer became 100% subsidiary of Clariant.
A complaint was received by SEBI to the effect that as by reason of the
aforementioned arrangement a transfer of 50.1 per cent shares/voting rights
and control in the target company had been made without any public
announcement, the provisions of regulations had been violated. Upon an
enquiry made in this behalf, the board came to the conclusion that the acquirer
had actually acquired the control over the target company on 21-11-1997. By
reason of an order SEBI on 16-10-2002 issued certain directions.
An appeal was preferred against the said order of SEBI by the acquirer wherein
the primary question raised was the rate of interest for the delay involved in
making payment to shareholders who had tendered the shares in the public
offer required to be made in terms of Regulations.
Issue:The rate of interest was on the higher side, the dividends having been paid in
the meantime, the same should be set off from the amount of payable interest
and the interest was payable only to those shareholders who held shares on the
targeting date.
Decision:The interest can be awarded in terms of an agreement or statutory provisions. It
can also be awarded by reason of usage or trade having the force of law or an
equitable considerations. The interest cannot be awarded by way of damages
except in cases where money due is wrongfully withheld and these are equitable
grounds therefor for which a written demand is mandatory.
Technip SA v. SMS Holding (P) Ltd., MANU/SC/0385/2005 : (2005) 5 SCC 465
Facts:Technip and Coflexip were both registered in France and takeover of Coflexip by
Technip also took place in France, the applicable law was of France. In terms of
French law, according to Technip there was no control of Coflexip by Technip in
April 2000 and as such there was no change in control of SEAMEC on that date
but in July, 2001. It is further submitted that in any event the SEBI Regulation
did not apply to the take-over because SEAMEC was not the target company and
that while taking over Coflexip, Technip neither had the common objective nor
was there any agreement between Technip and Coflexip with regard to SEAMAC.
The rate of interest had also been challenged. Although there was no challenge
to the rate which was fixed by SEBI, if the Tribunal's order is upheld, then the
impact of interest would be much greater. It was submitted that in any event,
the dividend paid must be adjusted against the interest claimed. It was the Final
Submission of Technip that if April, 2000 is to be taken as the date of control,
Unbelievable! When we compare this statement with the following one made by
an international magazine covering clearing and settlement in the worlds'
securities markets not very long ago.
"India's financial markets, unlike the country itself, have long conjured up
images of interminable delays, infuriating obstructions and an infrastructure
that belongs more to the 19th than the 20th century. The country has long been
a safekeeping and settlement nightmare; the country's sub-custodians
struggling gamely-if ultimately pretty ineffectively-to deliver a consistent level
of service to clients. Bogged down by lack of liquidity, entry restrictions on
foreign participants, heavy transaction costs and frankly painful registration
processes, any talk of the markets' supposed liberalization back in early nineties
rings decidedly hollow."
When we look at the above two statements, the first being the recent reference,
one realizes that things have changed dramatically in the securities market for
better, as far as India is concerned. No longer we have the taboo of bad
deliveries, payment delays, paper movement and slower settlement. The two
entities, which can among others claim, a major credit for improving the market
efficiency of the Indian Securities market are National Securities Depositories
Ltd. (NSDL) and the Central Depository Services Ltd. (CDSL), both established in
Mumbai.
In 1996, the Indian Government passed the Depositories Act allowing the
establishment of securities depositories in India. The principle function of a
depository in the Indian context is to dematerialize securities and enable their
transaction in book-entry form. In simple terms, the depository has the following
functions:
Corporation:
It is the succession of a recognised stock exchange, being a body of individuals
or a society registered under the Societies Registration
Act, 1860, by another stock exchange, being a company incorporated for the
purpose of assisting, regulating or controlling the business of buying, selling or
dealing in securities carried on by such individuals or society.
Dematerialization:
It is the process of converting securities in physical form into holdings in bookentry form.
Demutualisation:
It is the seggregation of ownership and management from the trading rights of
the members of a recognised stock exchange in accordance with a scheme
approved by the Securities and Exchange Board of India.
Rematerialization:
It is the process of converting securities in electronic form into holdings in
physical form, for those investors who opt to move out of the depository
system.
Account Transfer:
The securities are transferred by debiting the transferer's depository account
and crediting the transferee's depository account.
Pledge and Hypothecation:
Depositories allow the securities placed with them to be used as collateral to
secure loans and other credits. The securities pledged/hypothecated are
transferred to a segregated or collateral account through book entries in the
records of the depository.
Linkages with the Clearing System:
The clearing system performs the functions of ascertaining the pay-in (sell) or
payout (buy) of brokers who have traded in the stock exchange. Actual delivery
of securities to the clearing system from the selling brokers and delivery of
securities to the buying broker is done electronically by the depository. To
achieve this, the depositories and clearing system are electronically linked.
Corporate Actions:
The depository may handle corporate actions in two ways. In the first case, it
merely provides information to the issuer about the persons entitled to receive
corporate benefits. In the other case, depository itself takes the responsibility of
distribution of corporate benefits.
Mumbai, being the financial capital of India and hub of stock market activities,
was the natural choice for establishment of depositories. NSDL was registered
as a depository on June 7, 1996. The depository commenced operations on
November 8, 1996 by implementing a state-of-the-art technology system in
record time. NSDL operates as a profit institution and is owned primarily by the
IDBI, UTI, NSEIL, SBI with several other Indian and Foreign Banks having a small
shareholding.
Bombay Stock Exchange (BSE) established the CDSL, in 1998,
commenced operations on March 22, 1999.CDSL is a public company for
and is owned by the BSE, Bank of India, Bank of Baroda, SBI, HDFC
Centurion Bank, and Standard Chartered Bank, Bank of Maharashtra,
Bank of India, Calcutta Stock Exchange and other depository participants.
which
profit,
Bank,
Union
The changes in the last five years, thanks to the two major infrastructures, NSDL
and CDSL, have altered the face of the Indian capital market. Gone are the days
of paper deliveries and the related issues of bad deliveries. The settlements
through book entry transfer of securities have removed the major problem of
bad deliveries, delay in settlement and the related cost in the settlement.
International norms of rolling settlements have been introduced and well
adapted to the Indian markets conditions. With effect from April 2002, the
system of settlement in the Indian capital market has moved to T+3
settlements. Both the depositories have faced the challenges of T+3, effectively
and efficiently. With these changes, the settlement system in India has been
completely overhauled. The move from an Account period settlement in "Paper
form only" to a T+3 settlement in pure electronic form has been achieved in a
record span of under five years, whereas it took anywhere between 10-20 years
in most of developed countries.
Today, Indian settlement infrastructures have been built to meet the
requirements of the 21st century. Everybody will envy the settlement
infrastructure, wherein 99 per cent of the settlement in the country takes place
in the dematerialized way. Even the developed capital markets are struggling to
achieve this. Improvements that have taken place in the Indian capital market
have been the model for others to emulate.
As on August 2002, the statistics of NSDL is impressive:
4,464
4,510
4,767
619
213
1,718
3,797
6170
478,845
Mumbai, being the financial capital of India has its own share in the success of
depositories. The number of investors account from Maharashtra (no doubt
major portion of this is from Mumbai) alone is more than 30 per cent. The
impressive growth in the number of investor accounts in NSDL is reflected in the
graph below:
Not far behind is the CDSL, which too has equal number of companies whose
shares are available for Demat. CDSL also has 1710 debt instruments available
for Demat. CDSL services investors through its network of 176 Depository
Participants.
This impressive result is a reflection of a campaign that involved:
Strong government, regulatory and stock exchange support the Minister of
Finance, Securities Exchange Board of India (SEBI), and Reserve Bank of
India(RBI) openly promoted the depository and provided supportive regulatory
changes(e.g., SEBI's introduction of compulsory dematerialized settlement only
in a growing number of securities starting in 1999 and RBI's increase in
permitted lending limits against dematerialized securities pledged).
Depository Participant (DP) supports as DPs was not only the benefits of reduced
paper, but also new clients and the ability to cross-sell a growing number of
products/services to them.
An aggressive investor communications programme (publications, seminars,
website, videos, TV "infomercials" and credible spokespeople from across a
spectrum of backgrounds-academics, business writers, government/regulatory
officials) and provision of an active grievance redressal mechanism.
Both the depositories have successfully deployed technology for the full benefit
of the ultimate stakeholder i.e., the Indian investor. Today, making use of
Internet, these depositories provide user-friendly features, which provide
complete control to the investor in the settlement process.
In line with global trends, further steps are being taken to implement the world's
best practices. The planned implementation of an Electronic Contract Note
System is the first step towards "Straight Through Processing", which is aimed
at enabling a move from T+3 to T+2 settlement. Additionally the
implementation of RTGS (Real Time Gross Settlement) system, planned for
implementation in the near future, will improve the payment side of settlement.
With all this sophistication and modernization that is taking place in the
securities market, related to exchanges, clearing and settlement, Depository
Participants, brokers, etc. the day is not too far when the Indian securities
market will be recognised as one of the well developed markets in the world.
TATA Consultancy Services (TCS), which was entrusted with the responsibility of
implementing the NSDL, depository solution, based on its earlier state-of-art
solution implementation at SIS, SegaInterSettle, Switzerland, is working closely
with NSDL in constantly bringing the benefits of its global securities experience
to the Indian securities market.
Who is the Issuer/Registrar and Transfer Agent Guided Tour under
NSDL?
India set up its first depository (NSDL) under the Depositories Act passed by the
Parliament in August, 1996. NSDL was set up with an initial capital of INR one
billion (USD 28 million), promoted by Industrial Development Bank of India
(IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Ltd. (NSEIL).
Subsequently, State Bank of India, Global Trust Bank Limited, Citibank NA,
Standard Chartered Bank, HDFC Bank Limited, The Hongkong and Shanghai
Banking Corporation Limited, Deutsche Bank, Dena Bank and Canara Bank have
become a shareholder of NSDL.
Stated in simple terms, the depository system comprises of Depository
Participants (DPs), through whom the investors and brokers use depository
facilities, the Companies or their share registrar and transfer agents (R&T
agents), who agree to have their shares and securities admitted into the
system, and the clearing corporations/houses of the stock exchanges, who sign
up with the depository to facilitate trading and settlement of demat securities.
In order to clear and settle trades that have been done for dematerialised
securities, clearing members have to open Clearing Member Accounts with the
DPs. Similarly, investors have to open Depository Accounts with DPs in order to
use the facilities of the depository system. These investors offer their share
certificates and scrips to the latter for dematerialisation i.e., credit to their
electronically maintained accounts. For transfer or transmission of these shares
or for further purchases, the investors operate these accounts almost like any
other running account in banks.
NSDL itself functions as the central accounting and record keeping office and
clearing house in respect of these shares and securities through electronic
operations. As all these are electronically linked, speed, accuracy and safety are
assured. Risks attendant on handling physical scrips are eliminated.
Depository helps eliminating the following problems:
At the time of issue of securities, processing, printing and posting of physical
securities increases the issue cost. In addition, very high load at the time of a
public issue, both with the registrar and the postal system, results in inefficient
distribution of securities leading to investor dissatisfaction.
The increase in trading in secondry market increases the cost to the company
for effecting transfers and also increases time taken for transfer causing
inconvenience to the investor.
The reconciliation of the securities in the hand of the various investors and
market intermediaries is at best achieved once in a year in the physical form,
which increases the possibility of proliferation of bad paper.
The system of handling market deliveries also increases the unchecked growth
of bad paper. In addition, the issuing company is unable to monitor, in a regular
fashion, the change in holding pattern of securities.
The load on the registrar and the postal system also increases at the time of
book closure and record date for distribution of corporate benefits, which results
in higher cost and delay in processing these.
NSDL provides an efficient solution to the ills associated with paper and offers
numerous benefits to various market participants and reduces transaction cost.
Advantages specific to you as an issuing company/registrar and transfer agent
are:
The electronic holding reduces paperwork and thereby reduces direct costs of
record keeping, physical handling, movement and safekeeping of certificates.
Corporate actions such as public offers, rights, conversions, bonus,
mergers/amalgamations, sub-divisions & consolidations will be carried out
without the movement of papers, saving both cost and time.
Information of beneficiary owners is readily available. The issuer gets
information changes in shareholding pattern on a regular basis, which would
enable the issuer to efficiently monitor the changes in share holdings.
Instances of loss/theft/mutilation/forgery, etc. of certificates will be completely
eliminated.
The company acquires a progressive , investor friendly image.
Company can save substantial time of the secretarial department spent on
transfer of shares, followup with registrars, etc.
An issuer of securities can join NSDL directly by establishing electronic
connectivity with NSDL (TYPE-I) or by utilising the services of a registrar and
transfer agent who is connected to NSDL (TYPE-II). In the latter case, the
company may hire a registrar to obtain electronic connectivity to handle demat
shares, while keeping the share registery work with itself or it may outsource
the share transfer work as well. NSDL does not charge any fees for making the
securities available in the dematerialised form.
TYPE-I
Steps involved in joining NSDL when the issuer company decides to go in for a
in-house route are:
Issuer sends a letter of intent (LOI) to join NSDL.
The issuer enters into an bipartite agreement with NSDL. The agreement has a
standard format (part of NSDL Bye Laws and hence, SEBI approved) and is the
same for all issuers.
After signing the agreement, the issuer has to get the VSAT installed.
The issuer has to install the required IT hardware. The hardware shall be
strictly in accordance with the specifications given. The hardware is to be used
exclusively for NSDL operations.
The application software for depository operations (DPM-SHR) will be provided
by NSDL.
The issuer/R&T agent has to nominate a System Administrator.
NSDL conducts training programme for representatives of the issuer/R&T
Agent. This is done to familiarise the staff with the depository system.
Once the hardware and software are installed, there will be a test run (for
about four days) after which dematerialisation of securities can start.
It is observed that the whole procedure of establishing connectivity takes
about eight to ten week's time.
TYPE-II
The steps involved in joining the depository through a registrar are:
Issuer sends a letter of intent (LOI) to join NSDL.
A Tripartite Agreement has to be entered into between NSDL, the issuer and
the registrar.
If the registrar is already connected electronically
dematerialisation of securities can start immediately.
to
NSDL,
then
If the registrar has yet to attain connectivity, then it may take about 8-10
weeks to commence dematerialisation. The registrar will take all the steps
stated in Type-I.
OF
SECURITIES
CONTRACTS
Government Security:It means a security created and issued, whether before or after the
commencement of this Act, by the Central Government or a State Government
for the purpose of raising a public loan and having one of forms specified in
Clause (2) of Section 2 of the Public Debt Act, 1944.
Option of Securities:It means a contract for the purchase or sale of a right to buy or sell securities in
future, and includes a teji, mandi, a teji a mandi, a galli a put, a call or a put and
call in securities.
Derivatives:It includes security derived from debt instrument, share, loan, whether secured
or unsecured, risk instrument or contract for difference or any other form of
security.
Securities:It include shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate and derivatives and also units.
Spot Delivery Contract:It means a contract which provides for actual delivery of securities and the
payment of a price therefor either on the same day as the date of the contract
or on the next day, the actual profits taken for the despatch of the securities or
the remittance of money therefor through the post being excluded from the
computation of the period aforesaid if the parties to the contract do not reside in
the same locality and also the transfer of securities by the depository from the
account of a beneficial owner to the account of another beneficial owner when
such securities are dealt with by a depository.
Clearing Corporation:A recognised stock exchange may, with the prior approval of the Securities and
Exchange Board of India, transfer the duties and functions of a clearing house to
a clearing corporation, being a company incorporated for the purpose of
periodical settlement of contracts and differences, the delivery of, and payment
for securities.
Every clearing corporation shall for the purpose of transfer of the duties and
functions of a clearing house to a clearing corporation make bye-laws and
submit the buy-laws to SEBI for its approval.
Listing of Securities:Where the securities are listed on the application of any person in any
recognised stock exchange, such person shall comply with the conditions of the
listing agreement with that stock exchange.
Delisting of Securities:A recognised stock exchange may delist the securities, after recording the
reasons, from any recognised stock exchange.
A listed company or an aggrieved investor may file an appeal before the
Securities Appellate Tribunal against the decision of the recognised
stockexchange delisting the securities.
SECURITY CONTRACTS
Explain the concept of Illegal Contracts?
Briefly explain Void Contracts?
Discuss briefly the exceptions to the Securities Contracts (Regulation)
Act, 1956?
If the Central Government is satisfied that it is necessary to do so, it may
declare this provision of the Act to apply to that area. Consequently, every
contract in such state or area otherwise than between members of a recognized
stock exchange in such state or through or with such member shall be illegal.
The Central Government may declare that no person, except with permission of
Central Government, can enter into a contract for sale or purchase of a security.
Any contract in contravention of this provision is also illegal.
Any contract entered into in any state or area specified in the above provision
which is in contravention with any bye-laws specified on that behalf shall be
void as resect to the rights of any member of the recognised stock exchange
and other persons who knowingly participate in such transaction
Any person except with the permission of the Central Government, cannot
assist, organise or be a member of any stock exchange not recognized for
entering into a contract in securities.
This Act does not apply to the Government, Reserve Bank of India, any local
authority or any corporation set up by a special law or any agent thereof. The
Act is also not applicable in cases of convertible bond or share warrant in so far
as it entitles the person to obtain at his option from the company or other body
corporate issuing the same from any of its share holders or agents' shares of the
company whether by conversion of the bond or the warrant.
The Central Government may exempt any class of contracts from application of
this Act in the interests of trade and commerce or overall economic
development of the country.
CASE LAWS
Canara Bank v. Standard Chartered Bank, MANU/SC/0730/2001 : AIR 2002 SC
132 Facts:The securities were purchased by the appellant. The respondent filed the suit for
recovery of sale consideration. The plea was done for squaring up of transaction
taken by appellant in written statement. The permission to raise plea was that
the transaction was opposed to public policy. The Appellant did not file any
application for amendment of the written statement before the special court.
Issue:Permission to such a plea to be raised whether would be contrary to the plea
already taken in the written statement and whether the amendment to written
statement can be allowed at the stage of appeal.
Decision:No plea was that the transactions were fictitious. The prices fixed under the
transaction did not allege to derived prices. The allegation was that there was
an understanding between the seller and notified person to the effect that the
notified person would ensure a return of 15% in turn and purchase and sale of
securities would take place under the instruction of notified person would not
make the transaction. Contrary to the circulars of RBI or opposed to public
policy the amendment could not be allowed at the stage of appeal in Supreme
Court.
Part II
Corporate Finance institutions
Financial Institutions
The Industrial Finance Corporation (IFCI)
Give salient provisions of the legislation in respect of Financial
Institutions?
IFCI was set up by Industrial Finance Corporation Act, 1948 as a statutory
corporation.
industry. IFCI, the State Finance Corporation, ICICI, NIDC and the Refinance
Corporation of India have been functioning for several years with the object of
providing direct plans, subscribing to shares and bonds and guaranteeing of
loans and deferred payments. The volume of long-term finance provided by
these institutions has been substantial and steadily increasing too, but it was
found inadequate to meet the requirements of new and growing industrial
enterprises. On one side, the needs of rapid industrialization necessitated the
establishment of a new institution with large financial resources. On the other
side, there was the need for co-ordination of activities of all agencies, which are
conceded, with the provision of finance for industrial development. It was to
fulfil this two-fold objective that the Government decided to establish the
Industrial Development Bank of India which formally came into existence in July,
1964.
The Industrial Development Bank of India which is now the apex institution
providing term finance was a wholly-owned subsidiary of the Reserve Bank of
India till 1976. The general direction, management and superintendence of the
Industrial Development Bank were vested in a Board of Directors, which was the
same as the Central Board of Directors of the Reserve Bank of India. The
Governor and Deputy-Governor of the Reserve Bank were the Chairman and
Vice-Chairman of the Development Bank. In 1976, IDBI was delinked from the
Reserve Bank of India and was taken over by the Government of India.
The main function of the Industrial Development Bank, as its name suggests, is
to finance industrial enterprises such as manufacturing, mining, processing,
shipping, and other transport industries and hotel industry.
(i) Direct Assistance.
The Development Bank grants direct assistance by way of project loans,
underwriting of and direct subscription to industrial securities, soft loans,
technical refund loans and equipment finance loans. It subscribes to purchase
and underwrites the issue of stocks, shares and bonds or debentures. The loans
and advances, which the Industrial Development Bank makes to any industrial
concern, may be converted into equity stocks and shares at the option of the
Development Bank. The Bank is also empowered to guarantee loans raised by
industrial concerns in the open market from scheduled banks, the State
Cooperative Banks, IFCI, and other "notified" financial institutions. The Bank can
also accept, discount or re-discount bona fide commercial bills or promissory
notes of industrial concerns and in direct lending the Bank resembles IFCI and
ICICI.
(ii) Indirect Assistance.
The Industrial Development Bank can assist industrial concerns in an indirect
manner also, that is, through other institutions. First of all, it can refinance term
loans to industrial concerns, repayable within 3 to 25 years given by the I.F.C.I.,
the State Financial Corporation and other financial institutions. Secondly, it can
refinance term loans repayable between 3 and 10 years given by scheduled
banks or State co-operative banks. Thirdly, it can refinance export credit given
by the scheduled banks and State co-operative banks. Thus, the Development
Bank finances those banks and financial institutions, which are lending to
industrial concerns. Further, the Bank can subscribe to stocks, shares bonds, or
debentures of the IFCI, the State Financial Corporations or any other "notified"
financial institutions and thus increase their financial resources and enable them
to provide larger assistance to industry.
(iii) Special Assistance.
The Industrial Development Bank of India Act, 1964, has provided for the
creation of a special fund known as the Development Assistance Fund. This fund
is to be used by the Development Bank to assist those industrial concerns,
which are not able to secure funds in the normal course because of low rate of
return.
(iv) Foreign Currency requirements.
IDBI raises foreign funds from international money markets and funding
organization and makes them available to those industrial units, which need
them.
It is interesting to note that unlike the other existing statutory financial
corporations, the Development Bank has no restrictions imposed regarding the
nature and type of security, which it should accept.
Define Soft Loan Scheme?
IDBI introduced in 1976 the soft loan scheme to provide financial assistance to
productive units in selected industries, viz., cement, cotton textiles, jute, sugar
and certain engineering industries on concessional terms to enable them to
overcome the backlog in modernization, replacement and renovation of their
plant and equipment so as to achieve higher and more economic levels of
production. The scheme is administered by IDBI with financial participation by
IFCI and ICICI. The basic criterion for assistance under the scheme is the
weakness of the units on account of obsolescence of machinery. The rate of
interest is 7.5 per cent and the period of loan is 15 years. The pace of
disbursement was very slow till 1978. The soft loan scheme was not attractive
to the private sector units because of the convertibility clause.
From January, 1984, the soft loan scheme was modified-now called Soft Loan
Scheme for Modernization-so as to cover deserving units in all industries. Under
this scheme, assistance is available to production units for financing
modernization, primarily aimed at upgradation of process, technology and
product, export orientation, import substitution, energy saving, prevention of
It mobilises the savings of the Community and invests them in various types
of Securities like shares and debentures of various Companies.
To pool the savings, the Unit Trust sells to the Public Units.
By buying units, people can invest their money stately and derive professional
management of their funds.
The risk of investment is always with the UTI and not on the investor.
Its object is to afford the small investor means of acquiring a share with
minimum risk and a reasonable return.
By mobilising resources and channelling into investment it increases the
overall productivity of capital and facilitates growth of the economy.
It was started with an initial capital of Rs. 5 crore.
The management and business of the Trust is invested in the Board of
Trustees. The Board consist of a Chairman appointed by RBI from amongst
persons of special knowledge and experience in commerce, industry, banking,
Finance or investment. One trustee is nominated by the LIC.
UTI Act provides for significant tax concessions to the Trust and unit holders,
under Section 80L of Income tax Act, if it does not exceed
Rs. 1000.
What are the various guide-lines for Private Sector Banks given by
RBI?
In January, 2001 RBI issued Guidelines for licensing of new banks in the
Private Sector.
Under the Guidelines the Non-Banking Finance Companies (nbfcs) will be
allowed to convert themselves into banks, subject to following regulations.
Minimum net is Rs. 200 crore.
Capital adequacy has been raised to Rs. 300 crore in 3 years.
The new Bank can have head office any where in India.
Corporates have been allowed to invest up to a maximum of 10%.
Promoters will have to dilute their holdings above 40% within one year.
Preference would be given to promoters in financing priority and financing of
rural and agro-based industries.
under
Section
21
of
Banking
Regulation
Individual cashiers were established in England but did not work successfully
as they used to misappropriate the money.
Goldsmiths earlier used to charge fees for deposits but later on started giving
interest.
Dutch banks were giving interest on money deposited-1672-Charles II also
took all the money deposited in the Goldsmiths institutions.
Mr. Patterson suggested a new banking institution to be established and
passed the Tonnage Act. [Mention 1708 Act]
1749, 1759-Issue of cheque books for the first time.
Peel's Act, 1844-This act gave monopoly to bank started by
Mr. Patterson's bank.
1920 Bank of England came into being and got nationalised in 1947.
Give Introduction to Banking?
Before 1936, there were no special provisions of law, except the Reserve Bank
of India Act which itself was passed in 1934 and consequently the Reserve Bank
of India was established on April 1, 1935, in respect of banking companies which
used to be governed by Indian Companies Act, 1930. In 1936, some new
provisions were introduced in the Indian Companies Act, 1913 relating to
banking companies; but these provisions proved inadequate and necessity to
bring a new legislation for banking companies was felt. Abuse of powers by
persons controlling some banks, absence of measures for safeguarding the
interests of depositors and economic interest of the country were some of the
causes to bring a new legislation which ultimately came into force on 16th
March, 1949 in the form of the Banking Companies Act, 1949. The Act was
passed to consolidate and amend the law relating to banking. The Act was later
amended in 1965 and a new name "The Banking Regulation Act, 1949" was
given to it. The Act extends to the whole of India. The provisions of the Act are
in addition to and not, except as provided in the Act, in derogation of the
Companies Act, 1956 and any other law for the time being in force. The Act does
not apply to a primary agricultural credit society, a co-operative land mortgagee
bank and any other co-operative society, except in the manner and to the
extent specified in Part V of the Act. Section 4 of the Act gives powers to the
Central Government and the Reserve Bank of India to suspend the operation of
all or any of the provisions of the Act, either generally or in relation to any
specified banking company for a specified period mentioned in the section.
Banking Regulation Act, 1949
Banking Regulation Act, 1949 was passed to consolidate and amend the law
relating to banking Companies.
It come into force from 16th March, 1949 and applies to the whole of India.
What is the purpose behind enactment of BRA, 1949?
1. Abuse of powers by persons controlling the banks.
2. Absence of measures of safeguarding
(a) the interests of depositors of banking costs.
(b) economic interests of the country.
Discuss the aim of the Act?
1. To consolidate and amend the law relating to banking costs.
2. It does not codify the laws of banking, merely regulates the functioning of
banking companies.
Provisions of Act are "in addition to, and not, same as expressly provided in
derogation of the Companies Act, 1956 and any other law for the time being in
force".
Amendment Act-w.e.f. 1-2-1969.
How the Social Control is imposed by the Amending Act?
It was imposed by Amending Act.
State Preamble of Amending Act
An Act further to amend the Banking Regulation Act, so as to provide for the
extension of social control over the banks.
1. To determine priorities for lending and investment.
2. To evolve appropriate guidelines for management.
3. To promote re-orientation for decision-making machinery of banks.
4. To leave no opportunity in hand of bank managers and directors to
mismanage.
Ist Step
1. Finance Minister-Chairman
2. Governer RBI-Vice-Chairman.
3. Deputy Chairman, Planning Commission.
4. The Secretary (Ministry of Finance)
5. Chairman Agriculture Refinance Corporation.
Remaining 20-Appointed by Government to secure adequate representation
from sectors like commercial banks, co-operative sector, large and medium
scale industries, agriculture and other professional groups, e.g., economists and
experts.
After nationalization in 1969-NCC dissolved.
Additional controls and restrictions were imposed.
IInd Step
1. Constitution of board of directors of a banking company.
2. Management of affairs of banking company by a whole time Chairman.
3. Restrictions on loans and advances by banking company to its directors or to
a company or firm in which he is interested.
4. Additional powers confered on the RBI.
5. Punishments for(a) obstructing any person from lawfully entering or leaving a bank.
(b) holding demonstration within a bank.
(c) acting to undermine depositors' confidence in a bank.
6. Special powers of Central Government to acquire undertakings of banking
company if committing defaults.
Nationalisation of 14 major banks-w.e.f. 19-7-1969.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
14 major banks were nationalised-whole of the undertakings taken over
-became vested in 14 new corporate bodies-these new banks function as public
sector banks.
Rs. 1,00,000
Rs. 10,000
Rs. 50,000
[Subject to a min. of
Rs. 5,00,000].
[max. 10,00,000]
issued before July 1, 1944. Section 12(2) provides that the voting rights of any
one shareholder on poll shall not exceed ten per cent. of the total voting rights
of all the shareholders.
Explain Sec. 13 Restriction on Commission etc. on sale of shares?
Section 13 provides that no banking company can payout directly or indirectly
by way of commission, brokerage, discount or remuneration in any form in
respect of any shares issued by it, any amount exceeding in the aggregate of
two and one half per cent of paid-up value of the said shares.
Explain Sec. 15 Restriction on Payment of Dividend?
Section 15 provides that a banking company cannot pay any dividend on its
shares until all its capitalised expenses have been completely written off.
Restrictions as to payment of divindend: Special provisions have been made by
this section for the payment of dividends to the share holders of the banking
companies the provisions of Companies Act, 1956 relating to payments of
deividends to the share holders don't apply to the banking companies. These
special provisions have been made to safeguard the depositors interest and to
ensure that the financial position of the banking companies may remain sound.
Explain Sec. 16 Prohibition of common directors?
This section imposes restrictions on the directors of a banking company under
the Companies Act, 1956. A director can be director in 20 public companies but
under this section, a director of a banking company cannot hold the office of a
director in another banking company. Similarly, if a person has a share holding
in a company or companies which hold 20% of the share capital of the banking
company, such person cannot be appointed as a director of such company.
However the restrictions on the directorship of the banking company are not
applicable to the directors appointed by the Reserve bank.
Write a short note on Sec. 17 Reserve Fund?
Section 17(1) provides that a banking company must maintain a reserve fund
and transfer thereto at least 20% of its net profit each year. The company may
be exempted from this requirement by the Central Government on the
recommendation of the Reserve Bank of India, provided at the time it is made,
the amount in the reserve fund together with the amount in the share premium
account is not less than the paid up capital of the banking company.
Section 17(2) provides that where a banking company appropriates any sum or
sums from the reserve fund or the share premium account, it must
communicate this fact, explaining the circumstances relating to such an
appropriation to the Reserve Bank of India, within 21 days from the date of
appropriation. The Reserve Bank may in any particular case, extend the said
period of 21 days by such period as it thinks fit or condone any delay in the
making of such report.
Write a short note on Sec. 18 Cash Reserve?
Section 18 provides that every banking company other than a scheduled bank
must maintain in India a cash reserve with itself or in current account with
Reserve Bank or the State Bank of India or any other bank notified by the
Central Government in this behalf, or partly in cash and partly in such account
or accounts, a sum equivalent to at least three per cent of the total of its time
and demand liabilities in India. The section further provides that the banking
company must also submit to the Reserve Bank before the 15th day of every
month a return showing the amount so held on Friday of each week of the
preceding month with particulars of its time and demand liabilities in India on
each such Friday or, if any such Friday is a public holiday under the Negotiable
Instruments Act, at the close of business on the preceding working day.
Write a short note on Sec. 20 Restrictions on loans and advances?
This section prohibits any banking company from entering into any commitment
for granting any loan or advance to any of the directors or any firm in which any
of its director is a partner or manager etc. or company or its subsidiary in which
any director of the banking is interested or to any individual for whom a director
is a guaranter or with whom a director is a partner or director. The restrictions
on loans and advances do not apply to the loans and advances granted by the
banking company to its subsidiary company or to a company incorporated
under Section 25 of the Companies Act. The directors of a banking company
delegating their powers are under a duty to see that the delegate is kept within
the limits of the powers delegated & function of property and effectively. If the
directors fail to discharge such duty of supervision & effective control over the
deligate they will be liable.
Section 20(1) provides that no banking company shall(a) grant any loans or advances on the security of its own shares or;
(b) enter into any commitment for granting any loan or advance to on behalf of(i) any of its directors,
(ii) any firm in which any of its directors is interested as partner, manager,
employee or guarantor, or,
(iii) any company (except a subsidiary of the banking company or a company
registered under Section 25 of the Companies Act, 1956 or a Government
Company) of which or the subsidiary or the holding company of which any of the
directors of the banking company is a director, managing agent, manager,
employee or guarantor or in which he holds substantial interest or,
the books of the company or otherwise that the conditions specified in subsection (3) are fulfilled and that the carrying on of banking business by such
company in India will be in the public interest and that the Government or law of
the country in which it is incorporated does not discriminate in any way against
banking companies registered in India and that the company complies with all
the provisions of this Act applicable to banking companies incorporated outside
India.
(4) The Reserve Bank may cancel a licence granted to a banking company
under this section(i) if the company ceases to carry on banking business in India; or
(ii) if the company at any time fails to comply with any of the conditions
imposed upon it under sub-section (1); or
(iii) if at any time, any of the conditions referred to in sub-section (3) and subsection (3A) is not fulfilled:
Provided that before cancelling a licence under Clause (ii) or Clause (iii) of this
sub-section on the ground that the banking company has failed to comply with
or has failed to fulfil any of the conditions referred to therein, the Reserve Bank,
unless it is of opinion that the delay will be prejudicial to the interests of the
company's depositors or the public, shall grant to the company on such terms
as it may specify, an opportunity of taking the necessary steps for complying
with or fulfilling such condition.
(5) Any banking company aggrieved by the decision of the Reserve Bank
cancelling a licence under this section may, within thirty days from the date on
which such decision is communicated to it, appeal to the Central Government.
(6) The decision of the Central Government where an appeal has been preferred
to it under sub-section (5) or of the Reserve Bank where no such appeal has
been preferred shall be final."
What are the restrictions on Opening of New, and Transfer of Existing
Place of Business?
Section 23 empowers the Reserve Bank to control the opening of new place of
business and transfer of existing place of business. These restrictions do not
apply to the opening for a period not exceeding one month of a temporary place
of business for the purpose of affording banking facilities to the public on the
occasion of an exhibition, a conference or a mela or any other like occasion
within a town, city or village or in the environs thereof within which the banking
company already has a place of business.
Before granting any permission under this section, the Reserve Bank may be
required to be satisfied by an inspection under Section 35 or otherwise, as to
the financial condition and history of the company, the general character of its
management, the adequacy of its capital structure and earning prospects and
that public interest will be served by the opening or, as the case may be,
change of location, of the place of business.
Explain the powers of the Reserve Bank to give directions?
Section 35A empowers the Reserve Bank to give directions to banking
companies generally or to a particular banking company. The section is
reproduced below:
"(1) Where the Reserve Bank is satisfied that(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in a manner
detrimental to the interests of the depositors, or in a manner prejudicial to the
interests of the banking company; or
(c) to secure the proper management of any banking company generally;
it is necessary to issue directions to banking companies generally or to any
banking company in particular, it may, from time to time, issue such directions
as it deems fit, and the banking companies or the banking company, as the
case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may, on representation made to it or on its own motion,
modify or cancel any direction issued under sub-section (1), and so modifying or
cancelling any direction may impose such conditions as it thinks fit, subject to
which the modification or cancellation shall have effect."
Section 36 gives further powers and functions of Reserve Bank which is also
reproduced below:"The Reserve Bank may(a) caution or prohibit banking companies generally or any banking company in
particular against entering into any particular transaction or class of
transactions, and generally give advice to any banking company.
(b) on a request by the companies concerned and subject to the provision of
Section 44A, assist, as intermediary or otherwise, in proposals for the
amalgamation of such banking companies;
It is the apex banking institution controlling the banking and credit system
through its position as banker's bank.
As Banker's Bank it holds cash balances of the commercial banks.
(4) Controller of credit:
Its function is to provide enough assistance in regulating the credit creating
activities of commercial banks.
(5) Banks rate:
Section 49 of the Reserve Bank of India Act empowers the bank to publish the
bank rate from time to time and it defines bank rate as "standard rate at which
it is prepared to buy or re-discount bills of exchange or other commercial papers
eligible for purchase under this Act."
(6) Cash Reserve Ratio (C.R.R.):
It is another weapon at the disposal of the Reserve Bank to control credit.
According to the Reserve Bank of India Act, 1934, every scheduled bank has to
keep certain minimum cash reserves with the RBI. The present CRR remains at
10%, effective from Jan 18, 1997.
(7) S.L.R.:
Statutory Liquidity Ratio (SLR) is another method of influencing the lending
policies of commercial banks. All commercial banks have to maintain liquid
assets in the form of cash, gold and unencumbered approved securities equal to
not less than 25% of their total demand and time deposit liabilities.
(8) Open Market Operation:
In India open market operation refers to the purchase and sale of government
securities by the Reserve Bank from/to the public and banks on its own account.
(9) Maintenance of internal as well as external value of the currency:
Ensues effective co-ordination and control over credit. Organizes sound and
healthy commercial banking system(i) Development of rural banking
(ii) Promotion of financial institutions
(iii) Development of money and capital market in India.
(10) Promotional measures taken by RBI :
Demand deposits
(c) Saving Deposits
(a) Generally maintained by firms/business organizations.
(b) No interest rather than fee is charged by bank.
(c) No restriction on the number of transactions a day.
(d) No duty of the customer to notify the banks of any items which not
authorised by him.
Discuss the mode of Opening of New Account?
What is Recurring Deposit Accounts and Special Accounts?
Before opening a new account a banker should take certain precautions i.e. the
applicant who wants to open an account with a bank must be properly
introduced to the banker. If the banker opens account without proper
introduction or shows carelessness in this regard, the chance of fraud or
misrepresentation may occur.
By opening an account with the banker, a customer enters into relationship with
a banker. The banker-customer relationship imposes several obligations on the
banker e.g., honouring of cheques drawn by the customer, maintenance of
customer is opened. The customer's name and address will also be written
there.
7. Mandate for the operation of the account: The banker should get from his
customer a mandate if the latter intends operations on his account by another
person. His power to draw and endorse cheques does not give him powers to
accept bills or overdraw the account. Specimen signature of the persons
authorized to operate on the account should be given in the mandate. A banker
should supply to the customer free of cost a cheque book, pass book and a payin slip book.
Discuss the risks in opening Accounts without proper Introduction?
If the banker opens an account without introduction the banker runs certain
risks which are as follows:
(i) The banker cannot avail of the statutory protection: Section 131 of the Indian
Negotibale Instruments Act provides statutory protection to the banker, if he
collects bills or cheque etc., on behalf of a customer in case the latter has no
title, or defective title thereto. This means the banker should have collected the
cheque or bill on behalf of a "customer" i.e., who has been allowed to open the
account with proper introduction.
(ii) Risk in case of overdrafts: If a customer who is not properly introduced is
granted an overdraft even by mistake or negligence, the banker may not be
able to recover the amount under such circumstances of granting overdraft by
mistake. The bank can recover the amount only if the customer is a respectable
party.
(iii) Risk in case of undischarged insolvent: The deposits received by a banker
from an undischarged insolvent without proper introduction carries the risk of
attachment.
(iv) Issue of bogus cheques: A customer who is not properly introduced, obtains
possession of cheque books and may issue cheques without sufficient balance.
As a result of the failure to make necessary enquiries, the banker may enable a
dishonest person to obtain for fraudulent purposes, the possession of a cheque
book and if such a person happens to be an undischarged insolvent the bank
might be placed in a difficult position by unknowingly allowing such a person to
operate on his account with the bank.
(v) As per the directives of RBI, bank should immediately obtain introduction for
all deposit accounts. Introduction is necessary for all types of accounts except
that of a limited company. Also introduction is not required in case of opening a
fixed deposit account because a cheque book is not issued under such an
account.
Special Type of Banker's Customers
1. In case of a boy or unmarried girl father is the Guardian, if father is not alive
then mother.
2. In case of illegitimate boy or illegitimate unmarried girl mother is the natural
guardian if not alive then father.
3. Minor married girl-husband.
4. If both father and mother are not alive a person appointed by competent
court.
5. Father and mother as above do not include step father and step mother.
6. Parsis/Christians same as above.
7. In case of Muslims father is the natural Guardian.
On death of father the sequence being(a) Executor appointed by father's Will
(b) Father's father
(c) Executor appointed by Will of father's father.
8. Mother as guardian for opening of Account: As per the guidelines of R.B.I.,
Banks can open Savings Bank and term-deposit accounts in the names of Minors
with mother as guardian while father is alive.
9. Testamentary guardian for Hindu Minor: A Hindu father by Will can appoint a
guardian in respect of minor's property. Such a testamentary guardian will act
as guardian only after the death of father and mother.
Discuss Minor as Agent?
If the minor customer dies, the balance in the account will revert to and in
favour of the Guardian. But if the Guardian dies, the balance will be available to
the minor only on attaining Majority of course it is open to the court to appoint
any person as a guardian instead of deceased.
Since the minor can effectively function as agent he can over draw his principal
account. The latter is bound by the same. The banker should see that the minor
acts within the authority granted to him by his principal-Even if an advance is
granted to a minor on the guarantee of a third party in as much as the contract
between the creditor and the minor. The banker cannot in any event recover the
money even from his customer. If the minor acts without authority or exceeds
his authority, the agent will be personally liable and the agent being a minor,
the banker cannot proceed against.
(8) A minor can be admitted to the benefit of partner with the consent of all the
partners but he will not be liable for the losses or debts of the firm within six
months.
Married Women
What are the precautionary measures in lieu of account of a married
woman?
A married woman can enter into a contract in her own name. Such a contract
will bind any property which she has acquired either as Stridhan or otherwise.
Hindu married women are governed by the Hindu Succession Act, 1956. The
status of married women of other religions is governed by the Indian Succession
Act, 1925 and by the Married Women's Property Act, 1874.
According to Indian Contract Act, a married woman has the right to enter into
contract to acquire and sell property, to lend and borrow money etc. In other
words she has all the rights which a man has. A Current Account may be opened
in the name of a married woman. A married woman has power to draw cheques
and give sufficient discharge. Even if she has separate property the property
may be so settled upon her that she is entitled to the income as it falls due but
may not touch the corpus or the anticipated income. A married woman cannot
make her husband liable except for the necessities of life.
Married women are competent to enter into contracts. A banker may open an
Account in the name of a married woman and she can enter into contracts and
bind her separate estate.
A married woman can open a Joint Account with her husband. In such a case a
banker should obtain clear instructions as to who is entitled to operate the
Account and to whom the amount is payable in the event of the death of any
one of them. In the absence of clear instructions, the banker should not pay the
amount standing in the Joint Account to the widow on the death of the husband,
because the question of inheritance is involved in all such cases.
A banker should be very careful in granting an overdraft to a married woman. If
she has property, it must have been endowed in such a way that she can enjoy
the income of the property but has no right to sell property.
A married woman cannot make her husband responsible for the debts incurred
by her except in some cases. If she is authorized to act as an agent of her
husband, then her husband can be made liable for the debts.
Her husband can be made liable for the debts of a married woman in following
cases:(1) If the loan is taken with his consent or authority
(2) If the debt is taken for the supply of necessities of life to the wife in case the
husband defaults in supplying the same to her.
Banker does not have any risk in dealing with a married woman so long as the
Account shows a credit balance. But if an overdraft is granted to her, he may
find it difficult to recover the amount.
(1) The husband of a married woman is not liable for debts contracted by her
except insofar as they are for necessities or for house hold purposes. So the
banker should not lend money to a married woman simply because her husband
has sufficient property.
(2) If she does not have separate property, there will not be sufficient security
for overdrafts granted to her. It may be difficult to recover money from her.
(3) If she has separate property the banker must find out the nature of her right
to that property, although she may enjoy the income thereform.
(4) If there is a Joint Account in the names of husband and wife and if there is
clause to the effect that in the event of the death of one party, the balance
should vest in the survivor, the banker's position will be safe.
Illiterate Person
The banker can open a Account in the name of an illiterate person who cannot
sign but banker can take his thumb impression as a substitute for signature. The
banker should also take his recent photograph attested by a first class
magistrate for the purpose of identification. While drawing cash from the bank,
such persons should come to the bank and get cash in the presence of a witness
in the office of the Bank Manager.
Illiterate persons cannot sign their names but affix their thumb impression. In
such cases the bank may permit the opening of a Savings Bank Account or fixed
deposit Account by an illiterate person by taking thumb impression instead of
his signature. The bank should also insist on a copy of the photograph affixed on
the account-opening form. Withdrawals from his Account will be allowed only if
he comes personally to the bank and puts its thumb impression in the presence
of some responsible officer of the bank.
Trustees
What are the precautionary measures in lieu of account of the
trustees?
Section 3 of the Indian Trustees Act, 1882 defines a trust as "it is a relationship
which arises where a person holds a property for the benefit of certain other
persons or for some objects allowed by law." The real benefit accrues not to the
trustees but only to the beneficiary or the objects for which the trust is created.
The person, who has settled the property, is the authority of the trust and is
known as a "setter". A trustee is a person entrusted with the responsibility of
managing an estate for the benefit of a person or persons according to the trust
deed or Will. Person in whom the property is vested is the trustee. He is so
called because of trust or confidence reposed in him. The document through
which the trust is created is called "trust deed".
While opening an account the names of persons in the capacity as trustee, the
banker should take the following precautions:1. The banker should thoroughly examine the trust deed, appointing the person
as a trustee.
2. He must also inspect the official probate or letter of administration.
3. He must acquaint himself with the names of the trustees, their powers and
functions.
4. The banker should obtain specimen signature of person or persons authorized
to operate on the Account.
5. A trust is an office of confidence. They cannot delegate their power. They
must act personally.
6. The banker must see that the trust funds are not misapplied.
7. He should not allow transfer of trust funds to the personal Account of the
trustee.
8. The banker should not lend to a trustee as he does not have general power to
borrow.
The banker should take all possible precautions to safeguard the interest of the
beneficiaries of the trust, failing which he shall be liable to compensate the
latter for any fraud on the part of the trustee.
Customer's Attorney
What are the precautionary measures in lieu of accounts maintained by
customers attorney?
A customer may appoint an attorney to deal with his bank account. The power
of attorney may be either special or general. In the case of special power of
attorney, the person so authorized gets power only for some limited purpose
mentioned e.g., sale or purchase of property etc. In the case of general power of
attorney, the grantor of powers authorizes the other person to act on his behalf
in all matters concerning his business.
While opening an Account in the name of an attorney for a person the bank
should take the following precautions:1. The banker should get a copy of the registered document attested by a
notary public and keep it for his own record.
2. The banker should take note of all the terms of the power of attorney which
are likely to be of concern to him at any time.
3. It must be seen that specific power is granted for opening and operating a
bank Account by the attorney himself.
4. The banker should note down the name and address of the person who has
granted the power of attorney.
5. The Account opening form should be signed by the principal and the
signature of the attorney must be attested by him.
6. The banker should not accept any conditional power of attorney.
7. The banker should note that the death, insolvency or insanity of the principal
revolves the authority vested in the agent and the latter ceases to act as agent
of the principal.
Drunken persons
One of the conditions of a valid contract is that it must be entered into between
persons who are of sound mind. A person is said to be of sound mind for the
purpose of making a contract if at the time he makes it he is capable of
understanding it and of forming a rational judgment as to its effect upon his
interests.
If a person alleges that as a result of intoxication, he was incapable of
under standing the nature and terms of the contract, which fact was known to
the other party, he may invoke the protection of a court of law in setting aside
the contract. The onus will be on the party who sets up the plea of disability to
prove that it existed at the time of the contract. It should, however, be known
that if a negotiable instrument in the meantime has been transferred to a holder
who takes it in good faith and for value, the drunken person cannot deprive the
holder in due course of his right under the instrument. It follows that banks have
to be careful in getting documents executed by persons while they are in a state
of intoxication.
A drunkard is a person who is under the influence of alcoholic drinks or drugs
and stands on the same footing as a lunatic. An agreement made during
drunkenness is void. The bank should not honour cheques of a person who has
issued them under the influence of liquor. However, it is very difficult to judge
benefit of the estate the payments of debts incurred for family business or other
necessary purpose constitute a legal necessity.
2. The burden of proving legal necessity to support alienation is upon the
alienee.
3. The alienee can succeed in proving legal necessity not only on proof of legal
necessity but also on the proof that the alience made reasonable enquiries and
was satisfied as to the existence of legal necessity. In case of dispute on this
point the burden of proof, that the bank was satisfied before granting a loan
that the loan was sought for the benefit of the family business lies on the banker
himself. He should, therefore, be very careful in ascertaining the purpose of the
loan sanctioned on the security of joint family assets.
4. If there is a minor coparcener in a joint family, his guardian must sign the
documents on his behalf. When the minor coparcener attains majority he should
also sign the documents to give his assent to the undertaking given by major
coparceners.
Clubs, Societies and Charitable Institutions
What are the precautionary measures in lieu of account of Clubs,
Societies and Charitable Institutions?
Clubs, societies, charitable and religious institutions, libraries, schools etc. are
not engaged in trading activities but their object is to render service to the
public. These associations may be registered under the Societies Registration
Act or the Indian Companies Act.
Before opening an Account for it the Bank should observe the following points:1. Incorporation : A society gets the legal recognition as an entity separate from
its members only after its incorporation. Thereafter it is empowered to enter
into valid contracts and to sue or be sued. The unregistered society cannot be
sued in law.
These institutions may be registered or incorporated according to the Indian
Companies Act or the Co-operative Societies Act or the Societies Registration
Act. It will have no right to contract with the outside parties.
2. Constitutions : A registered society is governed by the provisions of the Act
under which it has been registered. It may have its own constitution charter or
Memorandum of Association and rules and by laws etc. to carry on its activities.
Every organization should have a constitution of its own in the name of byelaws
or rules or Memorandum of Association and Articles of Association. This will help
the banker to deal with such organization properly.
in
accounts
maintained
by
Executors and administrators are persons who are appointed to conduct the
affairs of a person after his death. The executor is appointed by the testator
(person making a Will) to execute his Will after his death, but whereas an
administrator is appointed by a court for the execution of a Will if the executor is
not named in the Will.
If the testator has executed a Will and appointed persons to look after his affairs
after his death, the appointees are known as executors. But if there is no such
mention in the Will or if the person dies intestate, the court may appoint a
person to administer the estate of the deceased. They are known as
administrators.
In the case of executors their powers and duties are mentioned in the Will. The
only thing is that the Will should be probated, that is certified by competent
Court as a bona fide document.
In the case of administrators, who are appointed by courts, their powers, duties
and responsibilities will be defined by the letters of administration issued by
Courts.
On the death of a customer his account is automatically frozen and the banker
should not allow further operations. The executor can be allowed to operate the
same on production of probate obtained from the court. In the case of
administrator the banker should insist upon the letters of administration issued
by the Court of competent jurisdiction. In earlier case the Account of the
deceased must be closed and a new Account should be opened, indicating the
trust character of the Account of the deceased that is as executors or
administrators of the estate of the deceased.
When the appointees are more than one person they shall have a joint interest
in the estates of the deceased. The Banker may allow operation of the Account
by one or more upon authority in writing by all the executors or administrators.
But this authority is revocable and in case of revocation all the executors and
administrators should operate the accounts jointly.
The banker should take the following precautions while dealing with executors
and administrators:1. On the death of a customer, the banker must stop payments from his
account. The executor should be permitted to operate the account of the
deceased after he has obtained the probate from the court. The administrator is
authorized to do so after securing the letter of administration. The banker
should examine these documents before the appointed person is permitted to
operate the account.
2. When two or more persons are appointed as executors or administrators, they
shall have joint interest in the estate of the deceased and this interest is not
capable of division. Then they should open a joint Account with the bank. In
such cases, the bank should obtain clear instructions regarding the operation of
the Account.
3. The banker should be very cautious in conducting the Account of
executors/administrators so as to prevent them from misappropriating the funds
of the deceased.
4. The banker cannot exercise his right of set-off against the credit balance in
the executors personal Account in respect of a debit balance in the account of
the deceased.
5. The banker should not permit transfer of funds from the estate Account to the
personal Account of the executor.
precautionary
measures
of
Joint
Stock
Companies
When a loan is applied for on the security of fixed assets of the company, the
banker should see whether such securities are registered under Section 125 of
the Indian Companies Act. The securities obtained by the banker must be
registered according to the provisions of that section. Companies cannot lend or
borrow on the security of their own shares. A company may borrow by issuing
debentures.
According to Section 292 of the Companies Act, loans secured otherwise than by
the issue of debentures must be supported by a resolution of the Board of
Directors. The amount of the loan is indicated in that resolution. According to
Section 293 loans exceeding the paid up capital and reserves must be approved
by the shareholders in General meeting. These restrictions do not apply to
temporary loans obtained for business purposes.
What are the precautionary measures regarding cheques in favour of
the company?
Cheques drawn in favour of a company may be asked to be credited to the
personal accounts of directors or the employees of the companies. In such cases
the banker should act with extreme care as otherwise he may be held guilty of
negligence, and lose the protection given to the collecting banker under
Section 131 of Negotiable Instruments Act.
Discuss the precautions to be taken by a banker when a sole trader
concern or a partnership is converted into a private limited company?
Sometimes a sole trader may convert his concern into a private company and
ask for loan on the security of the company's assets. If the debts of the previous
sole trader concern have not been completely paid off, one of the creditors may
bring an action against the trader. It is an act of insolvency for a trader to
transfer all the assets of the business to a company. The banker should
therefore ascertain whether all the debts of the previous concern have been
completely liquidated.
The banker must satisfy himself about the following while opening an account in
the name of the company.
Examination of Documents
As a company is an artificial person, its constitutional powers and objectives,
rules and regulations etc. are contained in the following important documents.
The banker should thoroughly and carefully examine those documents.
(i) Certificate of incorporation and certificate of commencement of business.
The certificates issued by the Registrar of companies, provide a conclusive proof
that the company is a duly incorporated body and all the necessary formalities
regarding its formation have been fulfilled by the promoters.
(ii) The banker should examine the Memorandum specially to note the
objectives for which the company is incorporated because any contract entered
into by a company which serves an object other than the objects mentioned in
the Memorandum is unenforceable at law and ultra vires.
(iii) The Articles of Association contain the rules and regulations of a company
regarding its internal management. It contains in detail all matters which are
concerned with the conduct of day-to-day business of the company.
The banker should scrutinize these doicuments very carefully.
Copy of the Board's Resolution
Alongwith the application to open an account in the company's name, the
banker should obtain a certified copy of the resolution passed by the Board of
Directors of the company.
The Borrowing Power of the Company
What are the precautions to be taken by the banker in its transaction?
All joint stock companies engaged in trade or industry have the implied powers
to borrow money for the purpose of carrying on their business. The borrowing
power of the company may be restricted by its Memorandum of Association. The
banker should be very careful in ensuring that the total borrowing of the
company does not exceed the limit.
(i) The banker should ascertain that the company borrows only for the purpose
mentioned in its Memorandum of Association and within the limits if any,
specified therein
(ii) A certified copy of the resolution of the Board of Directors should be obtained
by the banker for his own record.
(iii) The Board of Directors should also pass a resolution certifying that the
company's borrowing including the proposed borrowings are within the limit
specified by the Companies Act or the limit sanctioned by the shareholders at
their general meeting
Directors Personal Accounts
The banker of a company having personal accounts of the directors of the
company must handle the latter with care. If a director, deposits cheques drawn
in favour of the company to be credited to his personal account the banker
should first enquire the purpose for which such cheques are intended to be
credited to his personal account and on being satisfied about the genuine
reason, credit them in his account.
Partnership
Discuss the precautionary measures in a Partnership Account?
According to Section 4 of the Indian Partnership Act, a partnership is a relation
between persons who have agreed to share the profits of a business, carried on
by all or any of them acting for all. There are no legal formality for starting a
partnership firm. Registration is not compulsory. It may be oral or written.
Opening of a bank account : Since each partner has an implied right to act on
behalf of the firm, any partner has the right to open a bank account, unless
otherwise stated in the partnership agreement. If there are any provisions
regarding the bank account in the partnership deed, bank transactions must
take place accordingly. The Account must be opened in the name of the
partnership firm, but not in the name of the partner himself. A partner has no
implied right to open the firm's bank account in this own name. This has been
decided in Alliance Bank v. Kearsley. Section 19(2)(b) of the Indian Partnership
Act says that unless there is a custom to the contrary, no partner has the
implied right to open a bank account in his own name.
Death of a partner : When a partner dies the partnership comes to an end. The
legal heir of the deceased partner does not automatically become the partner of
the firm. The legal heir has only the right to recover the money due to him from
the partnership firm. The banker may continue the bank account if by the date
of the death of the partner there is a credit balance in the account. The banker
thus will secure for himself the right to recover the amount from the estate of
the deceased partner also.
Bankruptcy of a partner : The partnership also comes to an end when one of the
partners becomes bankrupt. The banker should not honour cheques drawn by
the bankrupt partner, unless it bears the signatures of the other partner as well.
Insanity of a partner : A partnership is not dissolved when one of the partners
becomes insane, but it becomes a sufficient reason for the dissolution of the
firm. The relations of the insane partner may file a petition in the court for
ordering the dissolution of the firm.
Retirement of a partner : When a partner retires from the partnership firm, he
must notify the same to the banker. Otherwise, he also becomes liable for the
debts incurred by the firm. After the receipt of retirement notice, if the
partnership is indebted to the bank, the bank must stop the account and start a
fresh account. In this case, the retiring partner also will be liable for the debt
owed by the partnership firm at the date of retirement.
Advances to Partnership Firm
When a trading partnership firm applies for a loan, the banker should call for the
balance sheets of the firm of the preceding two or three years. The banker will
be able to form an idea of the creditworthiness of the firm, and he will be able to
know the other partners in the firm and other relevant information.
The partnership deed contains the details of the agreement reached between
the partners. A banker should take the following precautions while operating an
account in the name of a partnership firm.
1. Number of Partners : The banker should very carefully examine the
partnership deed which is the charter of the firm.
2. Title of the firm's Account : A firm's account should always be opened in the
name of the firm and not in the name of the individual.
3. Opening of an account : An account in the name of a firm may be opened by
a banker on receipt of an application from one or more of the partners. Banker
however insists that all the partners should join to pen the firm's account.
Specimen signatures of all the partners is derived to open an account in the
firm's name and this fact is within the knowledge of the banker.
4. The partnership letter of mandate : The banker should take a letter signed by
all the partners stating :(i) The name and addresses of the partners.
(ii) The nature of the business undertaken by the firm; and
(iii) The name/names of the partner/partners who will operate the account on
behalf of the firm and will have the authority to draw and accept bills etc. and to
sell and mortgage the property of the firm.
5. Revocation of authority to operate the account : The authorities given in
favour of a particular partner/partners to operate the firm's account may be
withdrawn by any of them by giving a notice to the banker. A partner can also
stop the payment of a cheque issued by any other partner on the firm's
account.
Joint Account
Explain the mode of operation of a Joint account?
Discuss the precautionary measures in Joint account?
When an account is opened in the names of two or more persons, who are not
partners in a firm or who are not joint trustees, it is called a Joint account. When
a Joint account is opened the banker should obtain a comprehensive mandate.
The mandate should cover all points because the right to draw cheques
conferred upon a person does not automatically confer upon him the right to
deal in securities. If one of the Joint account holders obtains an overdraft, the
other does not have any liability.
1. Issuing of cheques : It should be clearly specified as to who is authorized to
draw cheques. All the Joint customers must sign the cheques. The right to draw
cheques may be conferred on one or more of the parties and any one of the
Joint account holders can countermand a cheque. In case, the right to sign the
cheques conferred on one of the parties is deemed to be temporarily withdrawn.
2. Death of a Joint Account Holder : If one of the Joint account holder dies,
according to the English Law, the survivors can continue to transact the
business relating to the Joint account.
3. Joint debts : The right to draw cheques given to a Joint customer is limited to
the credit balance available in the bank account. If cheques are drawn in excess
of the amount, all the joint customers become indebted to the bank. But the
right to draw cheques does not extend to contract debts. So, the banker must
ascertain whether the person who has the right to draw cheques has also the
power to overdraw the account.
4. Joint and several liabilities : According to Indian Law, Joint liability means joint
and several liabilities. If one of the Joint customer dies and the account is
overdraw, by that time, the banker must stop that account and open a fresh
account in order to make the estate of the deceased customer liable for the
debt.
5. Safe custody deposits : If Joint account holders deposit valuables for safe
custody with the bank, no one of them can take delivery of them. The banker
should return the securities only on the requisition of all the joint customers.
Similarly, one of the joint customer cannot stand surely on behalf of all the joint
customers. No single joint customer can pledge the fixed property of the joint
parties without a power of attorney granted to him.
6. Death, insanity or bankruptcy of a joint customer : When the bank is duly
informed of the death of one of the joint customers, the banker should not,
thereafter, honour cheques presented for payment. Similarly, when a notice is
given to him of the insanity or bankruptcy of one of the joint customers the
banker should not honour cheques subsequently presented.
7. Garnishee order : If the banker receives a garnishee order in respect of one of
the Joint account holders asking him not to make any payment out of the Joint
account, he should inform the court that it is a Joint account and request the
court to withdraw the garnishee order.
8. Trust accounts : If the Joint account relates to a trust, but the banker is not
informed of the same, the banker need not take cognizance of the fact. After he
comes to know that it is a trust account, he should be careful to see that it is not
overdrawn at any time.
9. Joint account of husband and wife : A Joint account may be opened in the
names of husband and wife. If the account is in the name of the husband and he
predeceases his wife, the balance will devolve on his legal heirs but not on his
wife. To avoid legal formalities, a husband usually opens a joint account with his
wife with the term "either or survivor". In this case on the death of one of the
parties, the survivor can draw the amount.
10. Others : The banker should take the following precautions in opening and
dealing with a Joint account.
1. The application for opening a Joint account must be signed by all the persons
intending to open a Joint account.
2. The banker should obtain clear instructions in writing signed by all the Joint
account holders regarding the operation of the account. The Joint account may
be operated in any of the following ways:(a) by all the depositors jointly
(b) by either or survivor of them
(c) by former or survivor of them.
3. Any Joint account holder can stop payment of a cheque issued on a joint
account. Banker must honour such order even if an agent or attorney has been
appointed to operate the account.
4. The banker should be given clear instructions regarding the withdrawal of
securities in the Joint account and the power conferred upon the person
operating the account to lodge the securities.
5. The full name of the account holders must be given in the entire document
furnished to the banker, even if the account is to be operated upon by one or a
few of Joint account holders.
6. The banker should also take a mandate to ascertain whether the persons
operating the Joint account are also authorized to overdraw the account.
7. The authority to operate the account can be revoked by any of the persons
giving such authority.
In times of death of a Joint account holder, the balance in the Joint account shall
be payable to all the Joint account holders together if there is no instruction. If a
survivor condition is included, the balance is payable to the survivor or
survivors.
Life Insurance
Fire Insurance
Marine
Insurance
Contract
indemnity
of
Contract of
indemnity
For
particular
period
particular
voyage.
a
or
Insurance
Q. Write a detailed History on Insurance?
After independence we were given a separate status i.e. status of dominion
India.
Swadeshi movement gave a new life.
In 1934, Mr. S.C. Sen was appointed as special officer. A Committee was
appointed in 1936 under the Chairmanship of Mr. N.N Sircar to examine reports
submitted by S.C. Sen.
In 1937, whatever suggestions made by this Committee Bill of Insurance was
passed in 1937, which in 1938 became first Indian Insurance Act.
Both Indian as well as foreign companies were governed by this Act. As a
result, foreign companies ran away.
From 1938 to 1950, in a period of stability and consolidation, small industries
merge with the big.
Therefore in 1938 Act amendments were made in the Act and it was
modified.
In 1939 there started a IInd World War. Again Swadeshi movement was on
rise.
After IInd World War, officers invested Capital of Insurance into wrong projects
i.e., malpractices were started.
In 1945, one committee was appointed to review all this under the
chairmanship of Cowasji Jehangir. He condemned the malpractices which were
going under.
Government made certain amendments to tighten the shortcomings.
After 1947, partition took place. After that another Committee was made
under chairmanship of S. R. Ranganathan in 1949.
Therefore in 1950 we got Insurance Amendment Act.
Certain suggestions and changes were made for making:
1. insurance institutions more useful.
2. appointing one Controller of Insurance.
3. two councils (i) Life Insurance Council, (ii) General Insurance Council.
4. Appointment of investigators and administrators for ill-managed and sick
companies.
5. As a result, we have to make efforts to see that the foreign exchange should
not drain out.
After 1950-till date, we call it as a period of boom and nationalism.
one
which
provide
insurance
Insurance -
Contract
Offer---Insurer
Acceptance---Insured
undertaking
to
Consideration---Premium
Definition-Maclean :
Insurance is a method spread over a large number of persons. A possible
financial loss too serious to be borne conveniently by an individual, is covered
by it.
Marine Insurance came first as most of the trade was done by English traders
during colonial times.
Then came fire insurance due to the great fire in London in 1666.
Bubbles Act, 1720-it gave authority to only two companies to carry on
insurance business. Small companies were abolished and these Companies were
given entire control.
Amicable Society was established for Fire Insurance.
In 1807 a new charter was made and added to Bubbles Act in which modern
techniques were adopted.
Mortality tables calculate life expectancy of a person to determine how much
premium has to be taken from each person.
After this the Insurance business got converted into gambling as no principle
were laid down properly (no settled principles).
To reaffirm people's faith in insurance a new concept of Insurable interest was
introduced.
Q. Give in detail Indian History of Insurance?
Bombay Mutual
1871
only
two
insurance
companies
Oriental Bank
doing
Controller
General
Council
Insurance
(iv) for appointing investigations and administration for ill-managed and sick
Companies.
(v) For reducing drain of Foreign Exchange.
1950-till date-period of Boom and Nationalization
1956-Nationalization of Insurance
INSURANCE
WAGER
earn
5. It is legally enforceable.
6. It is based on scientific to
actual calculations of risks.
5. It is void as it is against
public policy.
6. It is a mere gamble.
Insurer can avoid the contract (as held in the case of Mithoolal Nayak v. LIC of
India).
If assured has knowledge of all the facts which insurer doesn't know then the
assured should not hide those facts and/or tell wrong facts (as held in the case
of V. Srinivasa Pillai v. LIC of India).
E.g. a man insures his life from a life insurance company for Rs. 50,000 &
truthfully gives answers to the company. After a few days, but before
acceptance of proposal by the insurance Co., he suffered from pneumonia and
Company, know about the pneumonia for the first time. Therefore Court held
Co. not liable to pay. (As held in the case of Looker v. Law Union and Rock
Insurance).
2. Indemnity:
This means that the assured, in case of loss against which the policy has been
issued, shall be paid the actual amount of loss not exceeding the amount of the
policy.
Porter says:
Indemnity is the controller price of insurance law and it is by the reference to
this principle that all problems in insurance can be solved.
A contract of Life Insurance is not a contract of indemnity. Therefore, sum is
already mentioned in the Policy which is to be paid on such incidence.
Exception (Life, personal accident and sickness insurance).
3. Insurable interest:
Assured must have insurable interest in the subject-matter of the insurance.
In life insurance:
Insurable interest must be present at time when insurance is affected.
In fire:
Must be present both at the time of insurance and at the time of loss of subjectmatter.
In Marine:
Must be present at the time of loss of subject-matter.
4. Cause proxima:
Assured can recover loss only if it is proximately caused by any of perils insured
against, e.g. ship having cargo or cargoes collided with another. Cargo was
destroyed.
Held:
Damage to cargo was not direct result of collusion but of delay and mishandling.
Assured could not recover the loss. (as held in the case of Pink v. Fleming, 1899
25 QBD 396).
5. Risk must attach:
Insurer is premium of risk involved. If no risk is involved then it is to be returned.
For, example if the subject-matter had already been destroyed or the ship had
already returned safely but both the parties were ignorant about it, the risk does
not attach and the contract is thus void ab-initio.
6. Mitigation of loss:
Assured to step in so that there is minimum of losses. An insured is bound to do
his best under the circumstances, but he is not bound to do at his own peril.
7. Contribution:
Means if there is more than one insurer, then loss is to be paid by them in
contribution of the actual amount of loses.
Either one of the Insurer pays and the second will take afterwards from him.
E.g. A insures his house against fire for Rs. 10,000 with X and Rs. 20,000 with Y.
A loss of Rs. 12,000 occurs. Here X is liable to pay Rs. 4,000 and Y Rs. 8,000 or,
X will pay the whole amount and afterwards take from Y Rs. 8,000.
Formula is: Sum insured with X or Y x loss
Total sum insured For X = 10,000 x 12,000 = Rs. 4,000
30,000
Similarly from Y = Rs. 8,000
8. Subrogation:
According to it, insurer, on making good the loss, is entitled to be put into the
place of the assured.
E.g. A insures his goods with B for Rs. 100. Goods were damaged by fire by C. A
recovers loss from B and subsequently he recovers loss from C also.
In it, premium is payable throughout the life-time of the life assured, payable
only on the death.
4. Limited Payment Life Policy:
Premiums are payable for a selected period of years or until death if it occurs
within this period.
5. Joint Use Policy:
Sum assured is payable at the end of endowment terms or on its death of any of
the lives assured. Partnership firms in such policies.
6. Convertible Whole-Life Policy:
Policy is to meet the need of young person who are on threshold of their carrier
and hence prospects of increase in income is there after some years.
Earlier premium are payable at lower rates, but afterwards assured get the
option to convert it into endowment policy. If option not exercised, the policy
continues as whole-life policy, the premium ceasing at certain age.
7. Anticipated policy:
It provides for payment of sum assured at the end of specified intervals; say
20% at the end of first 5 years, 20% at the end of next 5 years, and the balance
at the end of the term of the policy. If death occurs, full amount is payable.
8. Annuity Policy:
If amount payable by insurer is not in lump-sum, but by monthly, quarterly, half
yearly or annually after assured attain certain age.
9. Sinking Fund Policy:
It is useful for companies for redeeming their determines or paying off the loans.
A fixed amount is paid annually.
10. Janta Policy:
It concerns risk of death by accident for 1 year only. At death fixed amount is
payable.
Q. What is Surrender Value?
It is the amount which the insurer is prepared to pay to the assured in case he
does not continue a policy for agreed period of time and surrenders his title and
interest under the policy of insurer. Before policy acquires any surrender value,
it should have undergone for few number of years.
Surrender Value increases as more and more premium is paid.
Q. What are the characteristics of Fire Insurance?
1. It is a contract of indemnity which means whatever is the loss, will be only
recovered.
2. It is a contract of UBERIMAE FIDEI i.e. assured and insurer have to disclose
everything, which is in their knowledge.
3. Assured must have insurable interest in subject-matter both at time of
insurance and at time of loss.
4. Risk concerned by it is loss resulting from the fire.
5. It is subject to principles of subrogation and contribution.
6. It is a contract from year to year.
Sum to be recovered = Value of policy x Actual loss/Full value of subject-matter
Q. Explain types of Policies of Fire Insurance?
1. Specific Policy:
It covers the loss of assured up to a specific amount which is less then the real
value of the policy.
2. Comprehensive policy:
It covers losses against risks like fire, theft, burglary, third party risk etc. Such
policy is also known as "All-in-one policy."
3. Valued Policy:
Amount payable in case of loss is fixed in it.
4. Floating policy:
It covers the property which is placed at different places, e.g., 2 warehouses at
different places having goods.
5. Replacement or reinstalment policy:
It says assured can do any type of fraud so, that he can get the policy money.
Therefore, it is stated in the policy that insurer can re-instate new property
instead of that damaged property.
Q. What is Marine Insurance?
Marine Insurance is an insurance whereby an insurer undertakes to indemnify
the assured against marine losses.
Policy must contain the following:1. Name of assured.
2. Voyage or period of time or both concerned by the insurance.
3. Subject-matter insured and risk insured against.
4. Sum insured.
5. Name or names of insurer or insurers.
Types of policies of marine insurance are:1. Voyage Policy:
It is to insure subject-matter from one place to another, e.g., Bombay to New
York.
2. Time Policy:
Subject-matter for a definite period of time.
3. Mixed Policy:
Combination of voyage in time policies.
4. Valued:
Agreed value of subject-matter insured.
5. Open or unvalued:
Does not specify value of subject-matter insured.
6. Floating policy:
It describes insurer in general terms. Only amount is mention in it.
7. Wagering policy:
Every such contract is void.
THE INSURANCE ACT, 1938
Q. Describe the aims of Insurance Act?
(1) To prevent the mushroom growth of companies.
(2) To enforce working on sound principles.
(3) To prevent misappropriation of funds and protection of assets.
Q. What are the special features of the Act?
(i) Well balanced (ii) Wide
Ist comprehensive piece of insurance legislation in this country.
Q. Describe the salient features of the Act?
1. Wide Scope
(a) Application
(b) Prohibition
(a) It applies to all types of insurance business-life, fire, marine etc. done by
companies incorporated in India. It also governs:
Provident companies
Co-operative societies
Mutual Offices
(b) Section 2(c) prohibits transaction of insurance business by certain persons.
(1) No person shall carry unless he is:
(a) a public company
(b) A registered society
(c) A body corporate incorporated by the law of any country outside India not
brief of nature of a private company.
(d) Every notification issued of sub-section (1) shall be laid before Parliament as
soon as it is issued.
3. Deposits:
To prevent the growth of insurers of small financial resources or speculative
concerns, the Act provided for registration of all insurers with a substantial
deposit with the Reserve Bank.
4. Registration :
Section 3(1)
Section 3(2) : Every application for registration shall be accompanied by:(a) A certified copy of the MOA and AOA
(b) Name, Address & occupation of directors.
(c) A statement of the class or classes of insurance business done or to be done.
(d) Principal place of business or domicile outside India, a statement verified by
an affidavit made by the principal officer of the insurer.
(e) A certified copy of the published prospectus.
(f) The receipt showing payment in the prescribed manner not exceeding Rs.
50,000.
Q. Explain Insurance against third party risks?
Contract of Insurance are based on principle indeminity: Goverened by Motor
Vehicles Act, 1939.
Q. Define Motor Vehicles Act?
Now it is 1988 Act. Changes were also made i.e. amendments in 1994 by which
maximum limit of compensation was fixed.
Q. Define Indemnity?
Motor Vehicles Act, 1939 amended in 1988. Also amended in 1994. Maximum
limit of compensation was fixed.
Q. What is the object behind this policy?
To safeguard a person known as insured.
-When a vehicle is propelled mechanically it is known as a MOTOR VEHICLE.
Case :
Lawrence v. Hemllete, (1952) 2 QBD 74
A propelled engine was attached in Bicycle but Piston was removed though
petrol was there. It was held that engine was not functional. Therefore, not
motor vehicle.
Case :
Floyd v. Bush, (1953) 1 QBD 265
Bicycle with engine but using pedals for running. It was held as motor vehicle.
Case :
Saumitra Auto Rickshaw Sahakari Sangh v. Director of Transport Bombay, AIR
1957 Bom 402
Auto was held as maxi cab thus a motor vehicle.
Q. Discuss vicarious liability with caselaws?
Case :
Mangilal v. Paras Ram, MANU/MP/0002/1971 : AIR 1971 MP 5
For plying a motor vehicle at public place, insurance is necessary.
Section 147 and Section 2(34) of Motor Vehicles Act, 1988.
Q. Define public place?
The right of access may be permissive, limited or restricted or regulated by oral
or written permission or on payment of fee. It is necessary that the place of
payment of fee, must be accessible to members of public and be available for
their use, enjoyment etc.
Case :
Pandurang v. New India Life Insurance Co., MANU/MH/0014/1988 : AIR 1988 Bom
248
It was a private factory and inside it certain vehicles were plying and some
accident occurred and above definition was needed.
Q. Motor Vehicle ?
It includes:
(1) Chasis, (2) Trailer
It does not include:
(1) Anything moving on railway tracks.
Motor Vehicles
Insurance
of
Motor
Act, 1988Vehicles against IIIrd party
risks.
-Certificate
Insurance
of
Policy should be
in force
-Liability
-Policy
Insurance
More Premium
has to be paid
-Property
-Reciprocating
Country
Less
Premium
has to be paid
Insurance
more
is
Case :
New India Assurance Co. Ltd. v. B. Saraswati Ammal, (1991) ACC 512
The owner of the goods who accompanies his goods in the lorry transporting
them can't be said to be person employed by the person insured by the policy
and that either the injury or death arose out of and in the course of his
employment. Insurance company is not liable.
This case has been overruled by 1994 amendment. Owner of goods is also part
of policy, now.
Case :
National Insurance Co. v. Jugal Kishore, 1988 ACJ 270 (SC)
Comprehensive insurance of the vehicle and payment of higher premium do not
mean that the limit of the liability covering third party risks becomes unlimited
or higher than the statutory liability fixed under Section 147(2) of the Act. For
this purpose a specific arrangement has to be arrived between owner and
Insurance Company and separate premium has to be paid on the amount of the
liability undertaken by the insurance company in this behalf. Likewise if risk of
any other nature for driver or passengers in excess of statutory liability is
sought to be covered, it has to be clearly specified in the policy.
Case :
United India Insurance Co. v. K. Subramanium, (1991) ACC 520
Insurance company can't be made liable to pay compensation, if the offending
vehicle was being driven by a person not holding a valid driving licence at the
time of accident.
Health Insurance
Q. What is Health Insurance?
Health insurance is a safeguard against rising medical costs. A health insurance
policy is a contract between an insurer and an individual or group in which the
insurer agrees to provide specified health insurance at an agreed-upon price
(the premium). Depending on your policy, your premium may be payable either
in a lump sum or in instalments. Health insurance usually provides either direct
payment or reimbursement for expenses associated with illness and injuries.
The cost and range of protection provided by your health insurance will depend
on your insurance provider and the particular policy you purchase. These days,
most companies give the benefit of health insurance to its employees. However,
in case your employer does not offer a health insurance plan, it is advisable to
opt for a health insurance scheme.
Jeevan Asha. The Jeevan Asha policy is the other health care product offered
by LIC.
The other medical insurance products are those that are channelised from the
two insurers, but mainly the GIC's Mediclaim. These institutions include the UTI
with its senior citizens unit plan, Unit linked insurance plans, credit cards
offering medical insurance and new service providers like Medicare, Paramount
and Sedgwick Parekh which provide additional services around the basic
insurance plans being offered by GIC.
Q. Explain the concept of Social Insurance?
Social Insurance programs mitigate risks by providing income support in the
event of illness, disability, work injury, maternity, unemployment, old age, and
death.
Programs include.
Unemployment insurance to deal with frictional or structural unemployment
Work injury insurance to compensate workers for work-related injuries or
diseases.
Disability and invalidity insurance, linked to old age pensions, to cover full or
partial disability.
Sickness and health insurance to protect workers from diseases
Maternity insurance to provide benefits to mothers during pregnancy and
post-delivery.
Old-age insurance to provide income support after retirement
Life and survivor insurance to ensure that dependents are compensated for
the loss of the breadwinner.
Q. What are the Social Security Legislations?
It states the security which society furnishes through appropriate organisation
against certain risks to which its members are exposed. The individual of small
means are exposed to risks which are essentially contingencies against the
means which cannot be effectively provided by his own ability or even in private
combination with his colleagues.
A system of social assistance scheme can only be assured through security of
employment, security of income and security against health. It is also
committed to assure and implement such assistance to its citizen through a
welfare state.
and
International
Labour
In the 19th century the ill consequences of the Industrial revolution in the
western world compelled by the governments of those countries to introduce a
spate of welfare measures and social assistance schemes. The role of the
International Labour Organisation was to provide social security measures not
only in the advanced countries but in the developing world as well since its
inception in 1919 gave an added dimension to the effectuation. The ILO exerted
its influence to extend the range of security and the classes of persons
protected thereunder through many conventions and recommendations. The
basic principles and common standards of social security are influencing the
social security measures throughout the world.
Its emergence in India:
Social Security Legislations are of more recent origin in India. Workmen's
Compensation Act, 1923, gave the first piece of social security legislation in
India to protect the workers against employment injury. Some States followed it
by maternity legislations. The more areas are highlighted in many conferences
which are in need of more social security measures and the extension thereof.
We witnessed the emergence of more and more social security legislations and
measures only after independence.
maternity for a certain period and the government also provides for grant of
leave and many other facilities to women employees in certain conditions.
Retirement Benefits:
The Employees Provident Fund Act, 1952, the schemes thereunder, the Payment
of Gratuity Act, 1972 are certain major steps towards providing some security
against minimum economic requirements to employees after retirement. The
system of compulsory contributory provident fund is introduced by the Provident
Fund Act. Apart from these there are State enactments and Plantation Provident
Funds Acts, Seamen's Provident Fund Acts.
Security of Employment:
The Industrial Disputes Act provides incorporating provisions for lay-off and
retrenchment compensations and operates as security against involuntary
unemployment. The lay-off and retrenchment conditions and compensation
thereof act as deterrent against any hasty and capricious action. They provide
some relief and safeguard against such contingencies.
The list of legislation and measures like1. Bonus Act,
2. Minimum Wages Act
3. Payment of Wages Act
4. Factories Act
5. Employment of Children Act etc.
which are focussing towards healthy factory conditions, better working
conditions and maintenance of a tolerable standard of life.
The welfare State
with the National
single fund with
benefits according
The protection granted under the Act, is of course, very wide and extends to all
the cases of unilateral repudiation of the insurance contract by the insurer,
delay in settlement of claims, breach of terms of the policy and all other actions
affecting the interests of the insured. The consumer fora can adjudicate any
dispute regarding such matters. Even if there is unilateral repudiation of the
insurance contract by the insurer, jurisdiction of consumer fora to conduct
adjudication of the complainant is not affected. All this is explained by the
National Commission in LIC of India, A.P. v. Bhavanam Srinivas Reddy, that if the
unilateral repudiation of an insurance contract is held to oust the jurisdiction of
the consumer fora, such an interpretation may lead to abuse and grave public
mischief. The insurance company has to satisfy the court that the repudiation is
justified. Further, in terms of Section 3 of the Consumer Protection Act, the
provisions of the Act are in addition to and not in derogation of any other law. In
this view of the matter, a consumer forum cannot be debarred from
investigating the unilateral repudiation of the claim.
This proposition was followed by the National Commission in National Insurance
Co. Ltd. v. Lal Chand Jain & Sons and Tanawala Synthetic Textile Ltd. v. Oriental
Insurance Co. Ltd. and held that a long delay of more than three years on the
part of an insurance company in deciding the claim of the insured is a deficiency
in service.
In United India Insurance Co. Ltd. v. Mrs. Pooja Gyanchandra Joshi, the National
Commission held that the settlement of a claim by any insurance company on
the plea of belated report of the surveyor amounts of deficiency in service. The
State Commission accepted the complaint and declared the complainant
entitled to the claim. The National Commission also upheld the view of the State
Commission.
In New India Assurance Co. Ltd. v. Sakar Iran Industries, the complainant had
taken a burglary and house breaking insurance policy. During the insurance
period, theft took place in his factory and the insurance company refused the
claim. The commission directed the opposite party to pay to the complainant
compensation along with interest. On appeal the National Commission upheld
the order of the State Commission.
In MCD/DESU v. Basant Devi, the National Commission has held that if an
insurance policy, taken by an employee under salary deduction scheme lapses
due to fault on the part of the employer in remitting premium deducted from the
salary, the employer is liable for deficiency in service and not the insurance
company.
The National Commission has held in Ozma Shipping Company v. Oriental
Insurance Co. Ltd., that an insurance company cannot be justified in assessing
and paying lower amount than the amount agreed in the policy. Taking a similar
view in Oriental Insurance Co. Ltd. v. Padmanabha Acharya, where FIR was
registered in respect of dacoity in a shop and challan was filed after
investigation the National Commission held that refusal of a claim on the ground
that no dacoity took place was unjustified. The company was held liable to
satisfy the claim as per agreed terms of the policy. The National Commission has
held that an insurance company is liable to pay repair cost to a complainant as
agreed. Any failure to pay in the settled terms would make the company guilty
of deficiency in service.
Delay in making payment of a claim has been simply held as deficiency in
service. In such cases of deficiency, proper interest on the withheld claims
should be paid to the complainants. Further, Compensation for financial loss and
mental stress may be allowed in such cases. In National Insurance Co. Ltd. v.
Nagendra Prasad Singh, a claim had been made in respect of a taxi which had
met with an accident.
An interesting issue of medi-claim policy has been favourably considered by the
consumer fora in New India Assurance Co. Ltd. v. Ambalal Chandulal Shah. In
this case, while taking a medi-claim policy, the complainant had disclosed in the
proposal that he was mildly hypertensive. Meanwhile, the complainant
underwent coronary angiography and was thereafter admitted for coronary bypass surgery, but his claim for reimbursement of expenses was repudiated by
the insurance company. The State Commission and National Commission
refused to interfere with the decision of the district forum.
All the above cases indicate that the machinery for the settlement of consumer
disputes is working in accordance with the spirit of the legislation and is
protecting the consumer interest to the optimum possible.
Insurance and Consumer Protection Act
Section 2(i)(o)-Service
1. Unilateral Repudiation of insurance contract
2. Delay in settlement of claims
3. Breach of terms of the policy
4. Other actions affecting the interests of insured deficiency in Service- Section
2(1)(g)
Part IV
Regulatory frame Work for Multinational Companies
The UNCTAD Code on Transfer of Technology
Give Salient features of UNCTAD Code of Transfer of Technology?
The States have the right to adopt appropriate steps for encouraging transfer
of technology under mutually fair and reasonable terms.
The principles of sovereignty and political independence of States should be
recognised.
States should co-operate in the international terms for transfer of technology
in order to promote economic growth.
Describe Nationalisation and Compensation?
Para 55 of 1990 Code acknowledges the right of the State to nationalize the
assets of TNC's and to pay adequate compensation in accordance with national
laws under the Ecosoc.
In 1990 a draft Code was formulated on the basis of proposal by
G-77 countries.
Define General Treatment?
Chapter IV of the Code provides for general provisions relating to the
treatment of TNC's and Chapter V deals with Inter-Government Corporation.
General treatment of TNC by the countries in which they operate.
Nationalization.
Jurisdiction.
(a) Paragraph 48, Regulation of the role of the TNC in different countries, their
entry and establishment.
Their role is the economic development and prohibiting their presence in
certain areas.
(b) Para 50, Non-discriminatory or equality of treatment.
Subject to national treatment protesting National Security and public order,
the TNC should be entitled to treatment not less favourable then the domestic
enterprises in certain circumstances.
The liberalization process started from 1970's in developing countries, in
particular in India during 1990's had opened the activities of Trans-National
Corporations (TNC's) Developing Countries.
(a) To prevent interference in the internal affairs of the countries.
(b) To eliminate their restrictive business practice and conform to their national
development plans.
(c) To bring about assistance in transfer of technology and management skills in
developing countries.
(d) To regulate the re-partition of the profits accruing from their operators.
(e) To promote investment of their profits in developing countries.
Many NGO's pointed out the right of TNC's and child labour.
Foreign Company
Discuss the procedure in setting up a Liaison Office/Representative
Office of a foreign company?
What are the standard conditions imposed for
Liaison/Representative Office of a foreign company?
operations
of
QUESTION
Q. 1. What is a foreign company?
OR
When a company is called a 'foreign company' and a 'foreign controlled
company'?
Ans 1. The terms 'foreign company' and 'foreign controlled company' are
explained as follows:
1. Meaning of a 'foreign company'
What is the meaning of a foreign company (Section 591)?
As per Section 591, a company shall be a foreign company if(a) It is incorporated outside India; and
(b) It has established a place of business in India.
Discuss establishment of place of business in India by estoppels?
What is foreign controlled company?
Place of business in India is a must. It must be shown that the company has
more or less a permanent location in India from which it regularly conducts
business. At least some degree of regularity in the conduct of business should
be shown. Following points may be noted:
(a) If a company incorporated outside India employs agents in India but has no
office or place of business in India, it will not be a foreign company.
(b) A company is said to have a place of business in India if it has a specified or
identifiable place at which it carries on business such as an office, store house,
godown or other premises and has some concrete connection between the
locality and business of the company. A mere occasional connection would not
be sufficient. [Deverall v. Grant Advertising Inc., (1955) 25 Comp Cas 37].
(c) Where the representatives of a company incorporated outside India
frequently visit and stay in a hotel for looking after the purchase of machinery
and other articles, it may be said that the company has a place of business in
the hotel. (Re, Tovarishestvo Manufacture Liudvig Rabenek, 1944 Ch 404).
(d) Where a company incorporated outside India uses the premises in India for
storing works of art and for viewing of works of art stored there, the company
has established a place of business in India.
Sections 408 to 423 of the English Act save for some sections which have no
application to India.
Sections 591 to 608 of the Act are relevant and provide in detail the duties of a
foreign company in terms of supplying information to the Registrar of
Companies, submitting account conditions on issue of prospectus, registration
charges on properties held by it in India, and the like. This article, which does
not claim to be exhaustive, attempts to deal with some of the provisions in the
Act which affect foreign companies.
Section 591 of the Act provides that Sections 592 to 608 shall apply to all
foreign companies. A foreign company falls under the following two heads: a company incorporated outside India which, after the commencement of the
Act (1 April, 1956), establishes a place of business within India; and
a company incorporated outside India which has, before the commencement
of this Act, established a place of business within India and continues to have an
established place of business within India at the commencement of this Act.
The foreign company must be distinguished from a "foreign controlled
company"; the latter means a company (foreign or Indian) in which a majority
shareholding and voting power is in the hands of foreign individuals and/or
bodies corporate.
"Place of business" extends to having a specified or identifiable place at which it
carries on business, like an office, store house or godown or having a share
transfer or registration office or maintaining a liaison or branch office.
"Establish" would imply having a more or less permanent location from which
the company habitually or with some degree of regularity conducts its business.
"Carrying on business" by a company would be satisfied if its business is carried
on at a fixed and definite place in India for a sufficiently and reasonably long
period of time [P.J. Johnson v. Astrofiel Armandorn (1989) 3 CLJ 1].
Explain the initial obligations of the Foreign Company?
Explain the continuing obligations of the Foreign Company?
A foreign company of which more than 50 per cent paid-up share capital (equity
or preference) is held by Indian citizens or bodies corporate, would attract
compliance with more provisions than are stipulated below.
Foreign companies shall within 30 days of establishing a place of business in
India deliver to the Registrar of Companies for Registration (Section 592) the
following documents-
Section 593 provides that if any alteration is made or occurs in the charter,
statutes, memorandum and articles of association of a foreign company or other
instrument constituting or defining its constitution, its registered or principal
office, its directors or secretary, the name or address of any of its authorised
representatives in India or its principal place of business, the foreign company
shall within a period of 30 days of the alteration, deliver to the Registrar for
registration, a return containing the details of alteration.
It may be noted that changes in particulars of directors and secretary, as
originally notified, need not be delivered.
Accounts
The provisions concerning the accounts of a foreign company are detailed in
Section 594. It lays down the general obligation - once in every calendar year to
make out a balance sheet and profit and loss account in respect of its Indian
business, under the presumption that it were an Indian company, giving details
also of its subsidiaries and to deliver three copies of the documents to the
Registrar. When not in English, a certified translation should also be annexed. A
list of all places of business established by the foreign company in India with
reference to which the balance sheet is made out should also be sent regularly.
In other words, the foreign company shall maintain books of accounts of its
Indian business and file, every year, three copies of its world accounts (within
nine months from the close of the financial year), Indian business accounts
(within nine months from the close of the financial year) and a list of places of
business established in India.
In respect of its Indian business, the foreign company is required to maintain at
its principal place of business in India, proper books of accounts with respect to
all sums of money received and expended by the company and the matters in
respect of which the receipt and expenditure take place, all sales and purchases
of goods by the company, and all assets and liabilities of the company.
Where the foreign company sets up a liaison office in India, it shall prepare a
"statement of receipts and payments" and a "statement of assets and liabilities"
instead of a balance sheet and profit and loss account. These shall be in the
prescribed form and shall be duly audited, the auditor giving his report as to the
truth and fairness of the receipt and payments during the financial year.
How the service on the Foreign Company is made?
The Government has granted several exemptions and made modifications in
regard to the above, in the light of its general policy as to foreign companies.
Exemptions are also given to liaison offices. Special clarifications are issued in
regard to foreign shipping, airline and insurance companies and also trade and
industrial activities of foreign companies.
No person shall issue, circulate or distribute in India any prospectus offering for
subscription, shares in or debentures of a foreign company (whether
incorporated or to be incorporated, and whether it has or has not established, or
when formed will or will not establish, a place of business in India), unless the
prospectus is dated and provides particulars of the following matters: The instrument constituting or defining the constitution of the company;
The enactments or provisions having the force of enactments, by or under
which the incorporation of the company was effected;
Any address in India where the said instrument, enactments or provision, or
copies thereof, and if the same are not in English, a translation thereof, certified
in the prescribed manner, may be inspected;
The date on which and the country in which the company was incorporated;
Whether the company has on established place of business in India, and if so,
the address of its principal office in India.
If the liability of the members of the company is limited, it must cause notice of
that fact also to be stated in the prospectus.
The first three requirements do not apply in case of issue of prospectus more
than two years after the date on which the company is entitled to commence
business.
Similarly, no person shall issue a form of application for shares in or debentures
of such a company or intended company unless the form is issued with a
prospectus which complies with the above (save when issued in connection with
a bona fide invitation to enter into an underwriting agreement with respect to
the shares or debentures).
Where such prospectus includes a statement purporting to be made by an
"expert", it must be ensured that such person has given, or has before delivery
of the prospectus for registration not withdrawn, his written consent to the issue
of the prospectus with the statement included in the form and context in which
it is included, or there does not appear in the prospectus a statement that he
has given and has not withdrawn his consent as aforesaid.
"Expert" includes an engineer, a valuer, an accountant, and any other person
whose profession gives authority to a statement made by him.
Before issue of the prospectus, it has to be delivered (with specified
attachments) for registration to the Principal Registrar in the form of a copy duly
certified by the Chairman and two other directors of the company as having
been approved by the managing body of the company. Material mis-statements
in the prospectus attract civil, but not criminal penalties, in the case of foreign
companies.
On reading Section 582(b) of the Act, it is clear that the provisions of
Part X of the Act dealing with winding-up of unregistered companies shall apply
to foreign companies, whatever the number of their members
[1985 (58) Comp Cas 285].
A foreign company incorporated in a foreign country may be wound up in India if
it has an office and assets here, and if a pending foreign liquidation does not
affect the jurisdiction to make a winding-up order.
Where a foreign company is already being wound-up in the country of its
domicile, the winding-up in India will be ancillary to the foreign liquidation, and
the liquidator's powers in this country are restricted to dealing with assets in
this country [Re Russian and English Bank Ltd., 1932 (2) Comp Cas 424].
Describe Winding-Up of Foreign Companies?
A subsequent winding-up in the foreign country does not affect prior
proceedings taken in India, and the liquidator's discretion is not fettered [1958
(28) Comp Cas 204]
Section 584 of the Act provides that where a body corporate incorporated
outside India which has been carrying on business in India ceases to carry on
business in India, it may be wound-up as an unregistered company,
notwithstanding that the body corporate has been dissolved or otherwise
ceased to exist as such under or by virtue of the laws of the country under
which it was incorporated. Such winding-up can only be made through the court.
Where a foreign company ceases to carry on business in India or its substratum
is gone or it carries on ultra vires business, it may be wound-up under the 'just
and equitable' ground; (1972 (42) Comp Cas 197 Bom).
Part V
Corporate liability in Environment Protection
Relevant provisions relating to environmental protection laws
The Water (Prevention and Control of Pollution) Act, 1974
Discuss briefly the salient features of the law relating to water
prevention?
Provided that nothing contained in this sub-section shall render any such person
liable to any punishment provided in this Act, if he proves that the offence was
committed without his knowledge or that he exercised all due diligence to
prevent the commission of such offence.
(2) Notwithstanding anything contained in this sub-section (1), where an offence
under this Act has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer
shall also be deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.
Explanation _ For the purpose of this section,
(a) "company" means any body corporate, and includes a firm or other
association of individuals; and
(b) "Director" in relation to a firm, means a partner in the firm.
The Environment (Protection) Act, 1986
Discuss the liability in offences by companies with reference to
Environment Act?
(1) Where any offence under this Act has been committed by a company, every
person who, at the time the offence was committed, was directly incharge of,
and was responsible to, the company for the conduct of the business of the
company, as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person
liable to any punishment provided in this Act, if he proves that the offence was
committed without his knowledge or that he exercised all due diligence to
prevent the commission of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence
under this Act has been committed by a company and it is proved that the
offence has been committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director manager, secretary or
other officer of the company, such director, manager, secretary or other officer
shall also deemed to be guilty of that offence and shall be liable to be
proceeded against and punished accordingly.
Explanations- For the purpose of this section,
(a) "company" means any body corporate and includes a firm or other
association of individuals;
from a certain act or to take certain order with respect to certain property in his
possession or under his management, if such Magistrate considers that such
direction is likely to prevent, or tends to prevent, obstruction, annoyance or
injury to any person lawfully employed, or danger to human life, health or
safety, or a disturbance of the public tranquillity, or a riot, or an affray.
(2) An order under this section may, in cases of emergency or in cases where
the circumstances do not admit of the serving in due time of a notice upon the
person against whom the order is directed, be passed ex parte.
(3) An order under this section may be directed to a particular individual, or to
persons residing in a particular place or area, or to the public generally when
frequenting or visiting a particular place or area.
(4) No order under this section shall remain in force for more than two months
from the making thereof:
Provided that, if the State Government considers it necessary so to do for
preventing danger to human life, health or safety or for preventing a riot or any
affray, it may, by notification, direct that an order made by a Magistrate under
this section shall remain in force for such further period not exceeding six
months from the date on which the order made by the Magistrate would have,
but for such order, expired, as it may specify in the said notification.
(5) Any Magistrate may, either on his own motion or on the application of any
person aggrieved, rescind or alter any order made under this section, by himself
or any Magistrate subordinate to him or by his predecessor-in-office.
(6) The State Government may, either on its own motion or on the application of
any person aggrieved, rescind or alter any order made by it under the proviso to
sub-section (4).
(7) Where an application under sub-section (5), or sub-section (6) is received,
the Magistrate, or the State Government, as the case may be, shall afford to the
applicant an early opportunity of appearing before him or it, either in person or
by pleader and showing cause against the order, and if the Magistrate or the
State Government, as the case may be, rejects the application wholly or in part,
he or it shall record in writing the reasons for so doing.
the Factories Act, 1948
Define cleanliness under Factories Act, 1948?
(1) Every factory shall be kept clean and free from effluvia arising from any
drain, privy or other nuisance, and in particular
(1) Effective arrangements shall be made in every factory for the treatment of
wastes and effluents due to the manufacturing process carried on therein, so as
to render them innocuous, and for their disposal.
(2) The State Government may make rules prescribing the arrangements to be
made under sub-section (1) or requiring that the arrangements made in
accordance with sub-section (1) shall be approved by such authority as may be
prescribed.
Explain Sec.
Occupier?
41B.
Compulsory
Disclosure
of
Information by
the
(1) The occupier of every factory, involving a hazardous process, shall disclose
in the manner prescribed all information regarding dangers, including health
hazards and the measures to overcome such hazards arising from the exposure
to or handling of the materials or substances in the manufacture, transportation,
storage and other processes, to the workers employed in the factory, the Chief
Inspector, the local authority within whose jurisdiction the factory is situate and
the general public in the vicinity.
(2) The occupier shall, at the time of registering the factory involving a
hazardous profess, lay down a detailed policy with respect to the health and
safety of the workers employed therein and intimate such policy to the Chief
Inspector and the local authority and, thereafter, at such intervals as may be
prescribed, inform the Chief Inspector and the local authority of any change
made in the said policy.
(3) The information furnished under sub-section (1) shall include accurate
information as to the quantity, specifications and other characteristics of wastes
and the manner of their disposal.
(4) Every occupier shall, with the approval of the Chief Inspector, draw up an onsite emergency plan and detailed disaster control measures for his factory and
make known to the workers employed therein and to the general public living in
the vicinity of the factory the safety measures required to be taken in the event
of an accident taking place.
(5) Every occupier of a factory shall, (a) if such factory engaged in a
hazardous process on the commencement of the Factories (Amendment) Act,
1987 (2 of 1987), within a period of thirty days of such commencement; and (b)
if such factory proposes to engage in a hazardous process at any time after
such commencement, within a period of thirty days before the commencement
of such process, inform the Chief Inspector of the nature and details of the
process in such from and in such manner as may be prescribed.
(6) Where any occupier of a factory contravenes to the provisions of sub-section
(5), the licence issued under Section 6 to such factory shall, notwithstanding
any penalty to which the occupier of factory shall be subjected to under the
provisions of this Act, be liable for cancellation.
(7) The occupier of a factory involving a hazardous process shall, with the
previous approval of the Chief Inspector lay down measures for the handling,
usage, transportation and storage of hazardous substances inside the factory
premises and the disposal of such substances outside the factory premises and
publicise them in the manner prescribed among the workers and the general
public living in the vicinity.
Discuss Sec. 96A. Penalty for contravention of the provisions of
Sections 41B 41C and 41H?
(1) Whoever fails to comply with or contravenes to any of the provisions of
Sections 41B, 41C or 41H or the rules made there under, shall, in respect of
such failure or contravention, be punishable with imprisonment for a term which
may extend to seven years and with fine which may extend to two lakh rupees,
and in case the failure or contravention continues, with additional fine which
may extend to five thousand rupees for every day during which such failure or
contravention continues after the conviction for the first such failure or
contravention.
(2) If the failure or contravention referred to in sub-section (1) continues beyond
a period of one year after the date of conviction, the offender shall be
punishable with imprisonment for a term which may extend to ten years.
The Bhopal toxic gas leak tragedy
The Bhopal crisis was triggered by a technological accident: 45 tons (1,00,800
IB) of methyl isocyanate (MIC) gas escaped from two underground storage tanks
at a Union Carbide pesticide plant. The accident occurred between 10 p.m. (2
December) and 1.30 a.m. (3 December) when the plant was on second shift and
the surrounding population was asleep in slum "hutments" that are densely
packed together in this part of Bhopal (fig.5.1).
Leaked gases were trapped under a nocturnal temperature inversion in a
shallow bubble that blanketed the city within five miles of the plant. Next
morning, over 2,000 people were dead and 3,00,000 were injured. Another
15,000 people died in subsequent months owing to injuries caused by the
accident. At least 7,000 animals perished but damage to the natural
environment remains largely unassessed (Prasad and Pandey 1985).
Emergency services were completely overwhelmed and confusion was rampant
in the affected neighbourhoods. Police instructed people to run away from the
area, but many of those who did so inhaled large amounts of toxic MIC and
succumbed to its effects. Residents were unaware that the simple act of
covering their faces with wet clothes and lying indoors on the floor provided
effective protection against the gas. That night, and in the days that followed,
nearly 4,00,000 people fled the city in a haphazard and uncontrolled
evacuation. Two weeks later, during Government attempts to neutralize the
plant's remaining MIC, another wave of mass flight involved 2,00,000 people.
(Shrivastava 1992; Diamond 1985; Morehouse and Subramanian 1988).