“Arrest” and its scope in contemporary Indian criminal justice system

Arrest The emerging trends in the criminal justice system emphasize the need to speedy trail. Since our Constitution envisaged the spirit of fundamental rights to its citizens the Right of life and personal liberty

Article 21 of the Indian constitution read as “No person shall be deprived of his life or personal except according to procedure established by law”. However in spite of the constitutional and statutory provisions are aimed at safe guarding the personal liberty and life of a citizen, growing incidents of torture and deaths in police custody has been a disturbing factor. Experience shows that worst violations of human rights take place during the course of investigation….custodial death in perhaps one of the worst crime in a civilized society governed by the rule of law”{1}

Speedy trial thus an integral and essential part of the fundamental right to life and personal liberty enshrined in Article 21 of the Constitution. {2}In Kadra Pahadiya Vs. state of Bihar {3} it was held that several trials were languishing in jail for several years without their trial having made any progress. The Supreme court commented “it is a crying shame upon our adjudicatory system which keeps men in jail for years an end without a trial.

In this context it is obvious to know about arrest and its scope in the code of criminal procedure.

“Arrest” means the apprehension of a person suspected of criminal activities” {4}

When a person is found to be committed an offence under I.P.C or ant other law for the time being in force, be arrested by the police officer and a Magistrate as according to the following provisos

 ARREST UNDER THE CRIMINAL PROCEDURE CODE:

 

ARREST UNDER THE CRIMINAL PROCEDURE CODE
ARREST BY THE MAGISTRATE(SECTIONS 44, 87, 89,204,319 AND 187) OF)CR.P.C.
ARREST BY POLICE OFFICER(SECTIONS 41, 42 AND 151)
ARREST BY THE PRIVATE PERSON (SECTION 43)

According to the provisions of the Criminal Procedure Code a person who is found to be committed an offence may be arrested as mentioned infra:

  BY A MAGISTRATE:    A Magistrate may arrest under the following circumstances,

Section. 44: when an offence is committed in the presence of a magistrate whether Executive or Judicial, within his local jurisdiction, he may himself arrest or order any person to arrest the offender…..”

Section. 87:  A Magistrate is empowered by this code to issue a warrant of arrest for appearance of any person after recording the reasons in writing.

Section. 89: A Magistrate is empowered to issue a warrant of arrest against who is bound by any bond taken under this code for his appearance.

It s to be noted that under sections 87 and 89 the warrant issued by the Magistrate not only against the accused but also any person who disobey the order by the court.

Section. 204: The Magistrate taking cognizance of an offence thinks fit that there is sufficient ground for proceedings and the case appears to be a warrant case, he may issue a warrant against the accused. However it is to be noted that the discretion of Magistrate is essential in issuing warrant.

Section. 319: As per section 319(2) the Magistrate is empowered to issue arrest warrant against a person appearing to be guilty of offence as the circumstances of the case may require him to do so.

 BY POLICE OFFICER: The power of  police officer to arrest is of two fold, former entitles him to arrest without acting under discretion and the latter puts him into the discretion in arresting the offender a per the amended proviso in the CR.P.C.

Without warrant : (without using discretionary power)

 Section 41 (1) (a) : The police officer may arrest any person who commits in his presence a cognizable offence

Section 41(1) (ba) : The police officer may arrest any person who commits any cognizable offence punishable with an imprisonment of a period more than 7 years.{5}

Section 41(1)(c to i) :  The police officer may arrest without warrant under the circumstances mention in sub clauses c to i.

Section 42 : The police officer may arrest a person who commit in his presence a non cognizable offence and refuses to give his name and address.

Section 151 :A police officer knowing of a design to commit any cognizable offence may arrest without the orders/ warrant from a Magistrate as a preventive action to maintain law and order .

Without warrant (with discretionary power)

 Section 41 (1) (b):  The police officer may arrest any person under this section like wise as in the old code section 41 (a) but after fulfilling the grounds mentioned in Clauses (i) and (ii)  for arrest and recording in writing about the necessity  of arrest in his case diary. As per section 41 (1) (b) (i) for arresting a person it is very essential for police officer to satisfies about well establishment of guilt and under as per section 41(b) (ii) before arresting a person under this section the police officer has to well firmed about necessity of arrest as mentioned in the circumstances stated under sub clause (a) to (e) to clause (ii).

The new sections brought drastic changes in arrest by the police officer by vesting the discretionary power.

With warrant by police officer :

Section 41 (2) : The police officer is not entitled to arrest a person who commits a non cognizable offence or against whom a complaint has been made   except with the warrant of the Magistrate.

On perusing the above amendments it appears that the recognition of need of arrest in certain cases. The Code of Criminal Procedure (Amendment) Act, 2008 which came in to force on 1st November 2010 vide Notification: S.O.2687 (E) OF MINISTRY OF HOME AFFAIRS DATED 30TH OCT 2010.This amendment brought as a result of recommendations made in the 177th Law Commission Report headed by j. B.R. Jeevan reddy.

The theme of the report is to maintain a balance between the liberty of citizens (the most precious of all fundamental rights) and the societal interest a difficult balance but it has to be attempted and achieved to the extent possible. The report taken in to the consideration of the judgments in the cases mainly D.K.Basu (1997) and Joginder kumar (1994) and concentrates on the specific theme “the police officer must be able to justify the arrest apart from his power to do so “

In Amarabati Vs. State of U.P. [2005 CR.L.J 755 ] it was held that arrest and detention in the police custody can cause ill-calculable harm to the reputation and self –esteemed of a person and, that, is why no arrest can be made in routine manner on minor allegation of commission of a crime

In M.C.Abraham Vs. State of M.H. (2003 SCC 628 Cri.) The lordships held that Section 41 gives a discretion to the police officer from a magistrate and even without a warrant may arrest any person in the situation enumerated in that section’

CONCLUSION: It is there fore the concept of arrest has an important role in the criminal justice system and it is inevitable the new changes in the concept of arrest in view of contemporaneous societal changes which recognizes the fundamental rights of citizens.

AIR 1997 SC 610 (D.K.Basu’s case)

  1. AIR SC 1675 (State of M.H. Vs. Champalal)
  2. AIR 1981 SC 939
  3. Oxford Dictionary of Law (3rd Edtn)
  4. The code of Criminal Procedure (Amenment) act 2008.

Can examine lapses in CVC’s appointment: Supreme court

The Supreme Court Monday said it was not barred from examining the validity of a statutory appointment, including that of the Central Vigilance Commissioner (CVC), by the highest constitutional authority if the selection and appointment procedure was vitiated.

“Some constitutional authority is entrusted with the powers to make statutory appointments. We must have faith in the decision of the highest constitutional authority. If that highest constitutional authority does not take into account all the facts that are in dispute and goes ahead with the appointment, can we say judicial review does not lie in that case,” the court asked.

An apex court bench of Chief Justice S.H. Kapadia, Justice K.S. Radhakrishnan and Justice Swatanter Kumar asked: “If judicial review can set aside the constitutional appointment then can’t it do (that) with a statutory appointment?”

“We intend to lay (down) some law for the future (appointment of the CVC),” the court said.

The court was hearing a petition by the Centre for Public Interest Litigation (CPIL) challenging the appointment of CVC P.J. Thomas.

Senior counsel K.K. Venugopal, appearing for Thomas, contended that the court could not go into his suitability.

The court was told that the suitability of the appointee could not be subjected to judicial scrutiny.

“Once the high power selection committee headed by the prime minister finds that he (Thomas) was eligible and suitable for appointment to the post of the CVC, the court can’t go into the question of suitability,” Venugopal argued.

He told the court that “parliament in its wisdom had enacted the law prescribing the qualification for appointment to the post of the CVC. When there is no disqualification prescribed, the court can’t add a new disqualification and say I (Thomas) am not suitable”.

“We are not adding to the qualification or subtracting the qualification. We are (discussing) the question of judicial review and not the review of the merit (of the case),” the judges observed.

“We are not looking into the removal of the CVC but whether the (appointment) decision does not become vitiated because of the non-consideration of the relevant paper (pending charge sheet against Thomas in Kerala’s palm oil import case of 1990s),” the court said.

Venugopal said: “The president appoints the attorney general and the Comptroller General of India (CAG). No one goes to the court to challenge it on the grounds of qualification. There is no qualification.”

“Moral turpitude is an objective factor,” he said.

The court said: “Because the clause (of disqualification) is not there (in the CVC Act), (you think) judicial review is off. You are going to that extent.”

“There are 153 MPs facing criminal charges…,” said Venugopal, indicating that if law makers, even after facing the criminal cases, could be eligible and suitable to be parliamentarians, then there could be no different yardstick for the appointment of Thomas as the CVC.

“The pendency of the charge-sheet alone will not affect the suitability (of Thomas) or make him disqualified for the post”, the Venugopal said.

Referring to another additional affidavit filed by Thomas earlier in the day, Venugopal said that a secretary with all the records of the empanelled officers (for appointment as the CVC) was sitting in the ante-room when the members of the selection committee were discussing the appointment issue. The members could have called for the information, he said.

Justice Swatanter Kumar said: “You say the members of the selection committee could have called for the information but if (a candidate’s) bio-data is silent on that then how could they have asked for it.”

“We are not asking what was discussed. We want to know if all the relevant papers were placed before the selection committee,” the court said.

Attorney General G. Vahanvati, while defending the selection and appointment procedure adopted in the case of Thomas, said that the “relevant papers” being referred by the court relating to the pending charge sheet, grant of sanction for (Thomas’) prosecution, adverse observation of the Kerala High Court and the observation in the CAG and the committee for public undertakings’ (of Kerala assembly) report were not placed before the committee.

The selection committee included Prime Minister Manmohan Singh, Home Minister P. Chidambaram and Leader of Opposition Sushma Swaraj.

AN OVERVIEW ON DOWRY PROHIBITION

 “Too Many Laws but Too Little Justice” – Mr.N.A.Palkhiwala

An eminent jurist of International repute Mr.N.A.Palkhiwala has observed in his book “We the People” that one of the costly failures of the Government in the post-Constitution era in India has been its failure to maintain Law and Order.  It is mostly prevalent in the case of women, who were treating as subordinate to men and socially oppressing from the time immemorial.  Still now the practice of discriminating women is continuing in the society.  The most important aspect to show that the Indian women were still being in oppressed state is dowry in marriages.

From the time immemorial, women in India were subordinate to men and socially oppressed.  The Status of Women was always inferior to that of men.  As a result of the general awakening of the country, a spirit of reform permeated various classes of Indian society and profoundly modified their ideas, habits and customs.  The most striking change in Indian Social life of the day was in the Status of women.  Women not only came out of their purdah and received education, but also took active interest in social and political matters and claimed their rights as citizens.  Inspite of receiving these changes women were being oppressing in the society because of an evil practice called dowry which is responsible for all other violence against women.  A series of laws have been enacted from time to time to raise the status of women.  The laws assume and reinforce the conventional notions of women as having a primary responsibility to the family and motherhood and the need to preserve these roles. All the Acts sounds really pro-women but in the absence of effective publicity, and proper utilisation still all those Acts remains on paper in most of the cases.  The Dowry Prohibition Act is also one of the Acts which remained on paper.

MEANING:- 

Dowry is an age old practice in Indian society referring to property or valuable security given by one party to another as a consideration for marriage.  Mostly the consideration is given by the family members of the bride.  It may also be regarded as a vehicle for setting up a relation of accord between the bride’s family and the husband’s family.  This relationship of accord is accompanied by giving gifts which persists long after the marriage rites.

ORIGIN:-

          In olden days women were not working or employed, so the economic value of women is low then the practice of dowry is originated as a compensation for the lower economic value of women not working or employed.  It is looked upon as a compensation for the maintenance of the girl which is not on par with the productive and reproductive contribution that her subsistence cost the household she married into. 

          Discrimination of women in India begins at home.  Despite religious and regional differences in Indian Society, there are overriding customs and traditions which govern most communities and undermine legislative or other gains women may make.  While an increasing number of women shows interest in being educated or gaining employment, particularly in urban areas, in private sphere, independent decision making by women without the participation of the family, especially decisions regarding marriage, continue to be discouraged, family and marriage dominates the lives of women from the time of their birth.

          The selection of the marriage partner is an important factor in maintaining a hierarchial society.  Dowry payments ensure that a suitable partner from the right class and caste is obtained for the women within the marriage framework the husband and all outside relationship.  Women are dependent on the goodwill of their husbands and mostly they have no independent financial standing.  Women who have financial standing were also tied up with the bands of traditions.              The attitudes towards dowry may be closely associated with the value orientation of a society.  The old world values seem to have disintegrated, life has become faster paced and attitudes more impersonal and materialistic.  Dowry has become one of the easiest ways of acquiring wealth and thereby reaching a high socio-economic status.  As a result an increasingly difficult and frustrating situation for the present generation and their parents has arisen, especially for those from the middle class and the salaried class.  Dowry which was voluntarily given as a token of love and affection has now become a financial obstacle to marriage.  Dowry demands have increased, resulting in exorbitant payments.  The practice of dowry has thus become a rigid custom that is strongly adhered to.     

DOWRY DEMAND AND VIOLENCE:-

          Dowry demands are made both before marriage and at the time of marriage, but in most of the cases they are also made after the marriage where demands are made after marriage it is perceived either as an exercise of the rightful prerogative of the groom and his family, or to express discontent at what was given at the time of marriage or in social comparison with neighbours, at a later date, the dowry is perceived an inadequate. The most common item of dowry demanded is hard cash, usually to expand business, cover marriage expenses, or to buy expensive articles.  This is followed by household furniture and luxury goods.  Jewellery and a share in the bride’s father’s property are also other ways of demand.  When these demands are not met it precipitates serious consequences for the young bride.

          These consequences may be in the form of domestic violence milder to serve form.  It has been reported that, in such cases, the daughter-in-law was not permitted to speak to the neighbours, not correspond with the parents or correspond only under supervision, not permitted to attend social functions or to even step out of the house.  The violence may be quarrelling, beating, taunting, harassing, blackmailing, mental torture and threats of murder.  Even in cases where the parents are aware of the violence their daughters are being subjected to, they may persuade them to bear everything patiently.  The violence against women is very frequent in India.  Statistics show that wives are often the victims of domestic violence in half the states, the percentage of women that are beaten by their husband vary between 10% and 20%.  The practice of dowry has been maintained and thousands of women are murdered every year by their husbands because the dowry is too low.  An estimated 6000 women are killed every year.  However, this figure most likely under estimates the reality as the majority of murders do not get registered.

LEGAL STEPS:-

           At first in the year 1961, the Dowry Prohibition Act is enacted to eradicate the practice of dowry.  It consists of 10 sections.  The penalty for giving and taking dowry is incorporated in Section 3 of the Act. But the Act contains so many loopholes, also the punishment prescribed for demanding, taking and giving dowry were very low. So the Act has been amended from time to time to be effective.

           The Dowry Prohibition (Amendment) Act of 1984 prescribes a minimum punishment of two years imprisonment and fine to anyone demanding dowry. Because of this Dowry Prohibition Act, a person who gives or takes, or helps in the giving or taking of dowry can be sentenced to jail for 5 years and fined Rs.15,000/- or the amount of the value of dowry, whichever is more.  This Act is prohibited to give or to agree to give, directly or indirectly, any property or valuable security, in connection with a marriage. The giving of or agreeing to the giving of any amount either in cash of kind, jewelry, articles, properties, etc. in respect of a marriage is absolutely prohibited by the Dowry prohibition Act. Even the making of a demand for dowry is also now prohibited and it is punishable with imprisonment of 5 years and a fine of Rs.10,000/-

        In Order to provide more teeth to dowry prevention laws, the Government has decided to make it mandatory for couples to make list of gifts exchanged during the ceremonies of marriage.   The Dowry Prohibition (Maintenance of List of present to the Bride and Bridegroom) Rules were introduced in 1985 in pursuance of the same purpose. It clearly stated that the list of gifts, in form of a sworn affidavit, has to be notarised, signed by a protection officer or a dowry prohibition officer and kept by both the parties. Failing this can invite heavy penalty including a three-year term in jail for not only bride and groom but also their parents.

       To stop the offences of cruelty by husband or his relatives on wife, Section 498-A has been added in the Indian Penal Code, and Section 198-A has been added in the Criminal Procedure Code since the year 1983.  In the case of suicide by a married woman, within 7 years from the date of her marriage, the Court may presume that such suicide has been abetted, encouraged by her husband or his relatives. Provision to this effect has been added in the Indian Evidence Act, by adding Section 113-A since the year 1983. 

          Sec.304-B is incorporated in the Indian Penal Code in 1983.  It deals with Dowry Death.  It states that where the death of a woman is caused by any burns or bodily injury or occurs otherwise than under normal circumstances within seven years of her marriage and it is shown that soon before her death she was subjected to cruelty or harassment by her husband or any relative of her husband for, or in connection with, any demand for dowry, such death shall be called “dowry death” and such husband or relative shall be deemed to have caused her death.

          Clause(2) of Sec.304-B stated that whoever commits dowry death shall be punished with imprisonment for a term which shall not be less than seven years but which may extend to imprisonment for life.

          Recently for the Protection of women from Domestic Violence an Act is enacted in the year 2005 which is called as the Domestic Violence Act.  The main objective of the Act is to eradicate the domestic violence against women and to provide protection to women from the domestic violence.  Some measures took by the international community for eradication of domestic violence against women and declared 25th November as the International day to prevent violence against women.

Judicial Decision:

           In a case, State of Uttar Pradesh vs.  Chhoteylal, On 23rd January, 2011 A bench comprising of Justice Aftab Alam and RM Lodha in their judgment held that “It is imperative that the criminal case relating to offences against the State, Corruption, domestic violence, dowry-death, sexual assault, financial fraud and cyber crimes are fast tracked and decided in a fixed time frame, preferably of three years including appeal provisions”.

 FORWARD STEP:

  • Even though a series of laws have been enacted from time to time to raise the status of women those laws remains on papers due to lack of effective publicity and proper utilization.
  • The definition of dowry is also being widened by changing the word “in connection with marriage” to “given before the marriage, at the time and at any time after the marriage”.
  •  The Juristic and legal persons must conduct awareness camps in rural and slum areas to make the people efficient to tackle any kind of problems by using the enacted laws.
  • The educated people must learn the acts and provisions which were laid down by the Government to utilize them properly and to explain them to the masses and illiterates for utilization of laws in a proper way.
  •  The Electronic and Print Media must concentrate on the provisions and they have to publish comparative Articles regarding the previous and present position of Acts.  Also they must give wide publicity to the enacted provisions and how to make use of the provisions.
  •  Every citizen must try to be updated with the Acts laid down by the Government and must properly utilize them when there is a dire need to exercise their rights.

 

          REFERENCES:

  1. GID Data Base (2008)
  2. Genderindex.Org
  3. The Gender, Institutions and Development Data Base.
  4. www.Oecd.org/dev/gender/gid.
  5. Population and Development Review.
  6. www.judis.nic.in

THE ENTRY OF NEW BANKS IN THE PRIVATE SECTOR – A BOOST TO FINANCIAL INCLUSION

  PRESENT BANKING POSITION

It is general principle that greater financial depth, stability and soundness contribute to economic growth. But broadening and deepening the reach of banking is the important factor for growth to be truly inclusive. The union finance minister in his budget speech for the year 2010-11 had announced that ‘The Indian Banking system has emerged unscathed from the crisis. We need to ensure that banking system grows in size and sophistication to meet the needs of modern economy. Besides, there is need to extend the geographic coverage of banks and improve access to banking services. In this context, I am happy to inform the Honourable members that RBI is considering giving some additional banking licenses to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria’.[1]

As of March 31,2009,the Indian banking system comprised 27 public sector banks, 7  new private sector banks, 15 old private sector banks, 31 foreign banks, 86 Regional Rural Banks  (RRBs), 4 Local Area Banks(LABs),1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks.

Systematic and broader distribution of financial services helps both consumer and producers to raise their welfare and productivity. Such access is especially powerful for poor as it provides them opportunities to build savings, make investment, avail credit, and more important insure themselves against financial downturns and emergencies. In spite of crossing such long steps in resource  mobilization, geographical and functional reach, financial viability, profitability and competitiveness, vast segments of population, especially the underprivileged sections of society have still no access to formal banking services. RBI is therefore taking into account granting licenses to a limited number of new banks. A large number of banks would foster greater competition and thereby reduce costs, and improve quality of service. More importantly it would promote financial inclusion and support inclusive economic growth, which is major objective of public policy.

RESERVE BANK’S PAST GUIDELINES TO NEW BANKS

The objective of guidelines issued in january 1993 and subsequently revised in January 2001 was to instill greater competition in banking system to increase productivity and efficiency. The initial minimum paid up capital was prescribed at Rs. 200 crore to be raised to Rs. 300 crore within three years of commencement of business. Promoters were required to contribute minimum 40% of paid up capital of bank at any point of time within a lock-in period of five years. However if contribution exceeds more than 40% promoters are required to dilute their stake after one year of bank’s operation. Non Resident Indians (NRIs) were permitted to participate in primary equity of new bank to maximum extent of 40 percent, In case of foreign banking company or finance company (including multilateral institutions) acting as technical collaborator or a co-promoter it is  restricted  to 20%. Banks could not extend any credit facilities to promoters and business entities investing upto 10% of the equity. The relationship between business entities in promoter group and the bank had to be of similar nature as between two independent and unconnected entites. The shares of the bank had to listed on stock exchange. Capital adequacy of not less than 12% and net Non performing Assets of not more than 5%. Banks were  required to maintain upto 40% of their net bank credit as loans to priority sector. Banks were obliged to open at least 25% of their total number of branches in rural and semi urban centers. An NBFC with good track records was considered eligible to convert into a bank, provided it was not promoted by large industrial house and satisfy other eligibility criteria. The revised guidelines by and large were still cautious in nature. Large industrial houses were not permitted to promote banks. However, individual companies, directly or indirectly connected with large industrial houses were not permitted to own 10 percent of the equity of bank, but without any controlling interest.

RESERVE BANK’S EXPERIENCE

The banks licensed after 1993 guidelines, promoted by individuals, though banking professionals, either failed or merged with other banks or had low growth. only those banks that had adequate experience in broad financial sector, trustworthy people, strong and competent managerial support could withstand the rigorous demands of promoting and managing a bank. Banks licensed in second phase i.e. after 2001 guidelines have been functioning for less than 10 years and their transition from settling stage has been fairly smooth. The experience with Local Area Banks and other small banks has not been encouraging, Low capital base lack of professional management, poor credit management and diversion funds have led to multi-faceted problems, the size of operations and also locational disadvantage of these banks act as a constraint to attracting and retaining professional staff as well as competent management. In support of financial inclusion and  for strong economy banks are required to start with strong initial capital base so as to survive in any adverse condition in the financial sector as well as economy.

LESSONS FROM RECENT GLOBAL CRISIS

 Global financial crisis has changed the way we think about bank regulation and competition The epicenter of the crisis lay in sub-prime mortgage market in the US, it was transmitted rapidly throughout the globe, destabilizing financial market and banking systems. The crisis strike the economic growth and employment throughout the world. A constellation of regulatory practices, accounting rules and incentives magnified the credit boom ahead of recent global financial crisis. The improper control of the same factors accelerated the downturn in markets and intensified the crisis. Macroeconomic stability and financial stability were generally treated as separate and unrelated constructs with former plays a key role on preserving low and stable inflation, while latter controls the firm level supervision of formal banking sector. In this process, not only was growing shadow financial sector ignored, but also factors such as interconnectedness within complex financial system, especially between banks and financial institutions. Magnitude of this crisis has signaled need for major overhaul of global financial regulatory architecture, there is need for allowing entry to private well-governed deposit-taking small finance banks with stipulation of higher capital norms, a strict prohibition on related party transactions, need to evolve various policies on case by case basis, allowing industrial houses to have stake in Indian banks or promote new banks with strict norms and regulations.

 ISSUES FOR CONSIDERATION

The principal issues for framing RBI guidelines and granting of new banking licenses include:

Minimum capital requirements for new banks and promoters contribution

To insist either on initial capital to be brought by applicants1 or assess the required start-up capital to be brought by proposed bank based on the scale, nature, complexity and inherent risk of the operations as proposed in business plan2. Considering the lapse of time since last guidelines issued in January 2001, there is significant need to have minimum capital requirement more than Rs.300crore. nature and sufficiency of financial resources of the applicants shall be examined keeping in view as source of continuing financial support having minimum capital requirement of Rs.1000crore for new banks would evince interest from serious entities having strong capital base and would be able to play substantive role in financial inclusion as they can use strong capital to invest in technology and partnerships.[2] Institutions should also be expected to meet minimum capital requirements for surviving in    exposure to credit risk, operational risk and market risk. India already had experience with some of the banks in past that either failed or merged with other banks or had muted growth, so keeping minimum capital requirement of Rs.1000crore for new banks could withstand the rigorous demands of promoting and managing a bank.

Minimum and maximum caps on promoter shareholding and other shareholders

The 2001 guidelines restricted individual companies, directly or indirectly connected with large industrial houses to own 10 percent of equity of a bank without any controlling interest. They could not extend any credit facilities to promoters and companies investing up to 10% of equity. February 2005 Ownership and Governance (O&G) guidelines requires promoters and other shareholders of bank to dilute their shareholding to a level of 10% or below of bank’s share capital within specified time frame. Higher shareholding is permitted to a level of more than 10% up to 30%, exceeding 30% is subject to higher due diligence standards prescribed in February 2004 guidelines. As in interest of financial inclusion and in support of economy of country, the Canadian model could be best for India, In case of small banks no restriction on ownership up to 10% with permission to hold up to say Rs.1000crore, 30% of capital in banks with shareholders equity more than say Rs. 1000crore and up to say Rs.2000crore,the requirement of ministerial approval to own more than 10% of any class of shares and permitted maximum holding (10% or 20%) in banks with shareholders equity of more than say Rs.2000crore, person can own less than 10% of any class of shares without any approval, more than 10% and up to 20% of any class of voting shares or up to 30% of any class of non-voting shares, approval of minister is required, provided the person does not control the bank. but with strict watch on connected lending and to reduce control of functions, interference by promoters, so as to prevent misuse and diversion of funds. After achieving sufficient experience and growth in size, the bank would be performing professionally and on its own strength.

Foreign shareholding in new banks

NRIs participation in primary equity of new banks was permitted to maximum extent of 40% as per 2001 guidelines. However in case of foreign banking company or finance company (including multilateral institutions) acting as technical collaborator or a co-promoter, equity participation was restricted to 20%. The aggregate foreign investment from all sources (FDI, FII, NRI) in private sector banks was raised to 74%.[3] FDI policy further prescribes that at least 26% of the paid capital of the of private sector bank will have to be held by residents, except for wholly owned subsidiary of foreign bank, this has allowed foreign capital to be used in promotion banks, and foreign technical collaboration in setting up domestic banks.[4] As the objective is to create strong domestic banking entities and a diversified banking sector which includes public sector banks, domestically owned private banks and foreign owned banks, aggregate non-resident investment including FDI, NRI and FII in these banks could be restricted at level of below 50% and locked at that level for 5 to 10 years and as per results within that years on the performance, because 74% could be dangerous as profit outcome by these investment will flow to foreign countries, and also global financial crisis indicated that size is evil in itself, so keeping below 50 percent could be reasonable.

Whether industrial and business companies could be allowed to promote banks

Promotion of new banks by industrial houses were prohibited as per 2001 licensing guidelines ,but individual companies, directly or indirectly connected with large industrial houses were permitted to acquire by way of strategic investment shares not exceeding 10 percent of the paid-up capital of bank, subject to RBI’s prior approval. The ownership of banks by business entities is prohibited by most of the countries but there is strict norms, strong laws and regulations of the countries which typically limit the percentage of voting rights and controlling positions that any shareholder can obtain with prior approval of regulatory authorities. In USA, industrial houses are not allowed to own banks. The regulatory framework is designed to protect a bank from risks posed by the activities or conditions of its parent’s company and parent’s non-bank subsidiaries and maintain the general separation of banking and commerce. This has been formulated by way of GLB Act, 1999[5] by authorizing financial holding companies to affiliate only with companies to affiliate only with companies that were engaged in activities determined to be of financial nature. Industrial houses are permitted to set up banks in Brazil.  However ownership limits beyond certain percentage require regulatory approval so as to manage the moral hazards of intra-group lending and also prevent regulatory capture. In Korea, subsequent to Asian crisis, the industrial houses are barred from promoting new banks as they believe in keeping banking and commerce separate from each other. Twelve percent of countries including the USA restrict the mixing of banking and commerce Prior to nationalization of major commercial banks in 1969, the industrial houses having control of the bank, diverted bulk of bank advances to industry, particularly to large and medium-scale industries and big and established business houses, while the needs of vital sector like small-scale industry, agriculture and exports were neglected. There are several deep rooted fears in allowing industrial and business houses to own banks. Even though industrial and business houses are already permitted in other areas of financial services, banks are special as they highly leveraged fiduciary entities central to the monetary and payment system. If allowed to own such affiliation tends to undermine the independence and neutrality of banks as arbiters of the allocation of credit to real sectors of economy. Conflict of interest, concentration of economic power, likely political affiliations, potential of regulatory capture, governance and safety net issues are the main concerns.

If industrial houses permitted to promote banks they could bring in the required capital for banks, in view of the large developmental needs of the economy, even if threshold levels are kept high. They can be important source of capital and can provide management expertise and strategic direction to banks as they have done to broad range of non-banking companies and other financial companies. These business entities already have their presence in insurance companies, asset management companies and other non-banking finance companies, they are already competing with banks on both assets and liabilities side. Equity of large industrial and business houses is widely held and all are listed on stock exchange and subject to company laws, SEBI laws and regulations on transparency, disclosure and corporate governance.[6] These business houses face a high reputational risk compared to pure individual promoter or other financial services company. Stronger corporate governance norms, competitive banking market, strict prudential regulations, strengthening banking regulation and strict disclosure requirements could mitigate the risks of affiliations of banks with business, but at the same time the cause of concern is that banks are flush with liquidity, there is great risk of diverting funds, as industrial groups are involved in different activities they may be able to rotate funds from one entity to another, which is very difficult for regulator to trace source and utilisation of funds, especially when all entities in the group are not regulated by one regulator.

In industrial groups conflict of interest situation arises from transactions between bank and its affiliates. A bank affiliated to business group may deny loans to its affiliate’s competitors, and instead favour its commercial affiliates in granting loans on preferential terms. There may be great risk of connected lending to companies within groups or to customers of such companies. This would transfer the risk of minority shareholders and relatively uniformed depositors. linking banking with commercial activities may tend to undermine the neutrality and independence of banks in deciding allocation of credit may have substantial adverse effect on productivity of the economy. Industrial groups may not be committed to broader objectives of financial development particularly financial inclusion and providing services to all sections of society.

Business groups having predominant presence and experience in financial sector could be allowed to set up banks, provided they should be subject to strict norms stronger governance guidelines other parameters such extent of financial activities carried out by industrial groups. Structure should be strict and properly regulated to ensure the independence of the banks. Stringent limits should be maintained on transaction between bank and other entities in the group to minimize the prospect of direct and indirect lending to other entities in group.

Restriction can be imposed on connected lending through various means, Brazil and Japan do not permit intra-group lending, Taiwan doesn’t allow unsecured lending and allows secured lending only permission is approved and Australia requires all intra-group to be cleared by board. The Japanese experience with Keirestu, the Korean experience with chaebols and the Indian experience prior to nationalization are strong reminders of pitfalls of commercial interest promoting banks.[7] They could also be allowed to take over RRB’s, before considering them to set up banks. This will give them opportunity to prove their suitability for promoting banks. As the underprivileged sections of society still have no access to banking facilities, allowing industrial houses to promote RRBs provide an immediate impetus to financial inclusion and revitalize RRBs especially those in underbanked regions. The experience gained by allowing this would be much more measured and balanced and surely benefit in taking further steps. In all issuing guidelines on allowing industrial houses to promote banks should be strict and should be changed on case by case basis and regularly examined by regulators for adding impetus to financial inclusion.

Allowing non-banking financial companies to convert into banks or promote a bank

The 2001 guidelines on entry of new banks in private sector permitted NBFCs with a good track record for conversion into bank, provided it satisfied the specific criteria relating to minimum net worth, not promoted by large industrial house, credit rating in previous year, capital adequacy  of not less than 12 percent and net NPA ratio of not more than 5 percent. after 2001 guidelines only one NBFC has been converted into a bank, and functioning has been fairly smooth. In some countries, the financial institution that are already well regulated are favoured for conversion into banks. The entry level criterion for an applicant in Hong Kong is that should already have been Deposit taking company (DTC) or Restricted license bank for not less than three years.

In USA state commercial banks, state saving associations, state saving banks, state trust companies and federal savings associations are allowed to convert into national banks, provided they must show ability to operate in safely and soundly and are in compliance with applicable laws, regulations and policies, and are consistent with National bank act and applicable OCC regulations and policies.

In determining action on conversion application in USA, the OCC normally considers the applicant’s condition and management. This includes compliance with regulatory capital requirements and conforms to statutory criteria, including many of the same standards applicable to chartering de novo national bank; CRA record of performance, etc. The OCC may impose special conditions for approvals to protect the safety and soundness of bank; prevent conflict of interest; provide customer protections; ensure that approval is consistent with statues and regulations or policy considerations.[8]

NBFC model particularly those in lending activities has been successful in expanding the reach of financial system and thus by converting to banks, this model could be scaled up to better leverage the benefits and achieve objective of financial inclusion. The Non Banking Financial sector in India consists of various types of financial institution All-India financial institutions (AIFIs), development finance institution (DFIs), non-banking finance companies (NBFC), etc. NBFCs are mostly private sector institution, which have carved their niche in Indian Financial system. NBFCs proved boon to especially underprivileged sections of society in India. Unlike banking sector, the NBFC is heterogeneous in nature functionally as well as in terms of size, nature of activities and sophistication of operations. NBFCs consists of not only entities that are part of large multinational groups but also small players at district towns with net fund at statutory minimum of Rs 200lakh. Since NBFCs are already regulated by RBI and have track record, the ‘fit and proper concerns could be addressed more easily. As at the end of financial year of 2008-2009, the total assets of NBFCs were at Rs. 95,727crore and public deposits were at Rs. 21,548crore. The sector is being consolidated and while deposit taking NBFC have decreased both in size as well as in terms of the quantum of deposits held by them, NBFCs-ND have increased in terms of number and asset size. To protect interest of depositors, regulatory attention was mainly focused on NBFCs accepting public deposits (NBFCs-D). Over the years, however, this regulatory framework has been widened to include issues of systematic significance.

Conversion of NBFCs into banks would require folding up of large number of branches and withdrawal from many segments of businesses as well as disinvestment from subsidiaries not engaged in businesses permitted to banks. The initial capital requirement for NBFCs is a miniscule Rs.2crore and the due diligence and fit & proper assessment exercise of promoters is minimal both in terms of scope and rigour, as compared to banks. The NBFC model and the bank model are entirely different as NBFC model provides financial access to excluded categories without the same regulation as applicable to banks. On the other hand, the banking license gives the institution full scope to carry out full-fledged banking activities, with stricter regulatory requirements.

The maturity mix of  the asset portfolio is also skewed toward long term and the asset mix may not be compatible to  banking liabilities. If NBFCs are converted into banks they may take long time to align themselves to banking activities.

Permitting independent NBFCs which are not promoted by industrial houses to promote banks and which are having good track record and enhanced the financial inclusion may be useful at the rural levels as the Reserve bank is taking steps to provide opportunities to the poor to build their savings, make investment, avail credit and to insure themselves. The expertise of the NBFCs in financial sector could flow into the bank if NBFCs are allowed to promote banks. There may be improved possibilities of governance in banks due to ownership by experienced entities in financial sector.

The NBFCs if permitted to convert into banks should then be subject to strict governance norms, stringent limits on transaction between bank and related entities in the group. Intra-group lending should not be permitted and secured lending should be permitted only with approvals, they should be regulated with proper care and legislative amendments should be made for efficient transition.

Business model

As objective of granting license for new banks is financial inclusion, the guidelines stipulations shall be on incorporating goals of business plans, financial projections of balance sheet, cash flows and earnings key financial and prudential ratios for proposed bank and its subsidiaries on consolidated basis. The other factors such as appropriate risk management and internal control systems, information and accounting systems, external and internal audit arrangements, and sensitivity analysis should also be addressed.[9]

To cover regional rural areas the minimum capital should be kept low and may be allowed at Rs. 300 or 500crore and license may be given to NBFCs or small players as big promoters are not willing to invest in small regions as intention of RBI is to cover underprivileged sections of society. Global financial crisis has indicated that in world of finance, size is evil in itself. In the height of Asian crisis, one of the few healthy and solvent Indonesian Bank was one of their smallest banks (bank NISP). But Indonesian central bank’s response (probably encouraged by IMF) was to impose one of highest minimum capital requirement in the world. It would have been utterly hilarious were it not so tragic.[10]

The project report should business potential and viability of the proposed bank, business focus, the product lines, proposed regional or locational spread, level of information technology capability and any other which is relevant, detailed information on background of promoters, their expertise, track record of business  and financial worth, investment in companies and details of credit facilities availed by promoters. 40 percent lending to priority sector of net bank credit and 25 percent of its branches in rural and semi-urban areas, other modern infrastructural facilities should also be observed.

Conclusion

It is thus advised that licenses should be given to limited number of banks and for industrial and other promoters the activities in the initial period of granting licenses should be restricted to some reasonable extent and after gaining confidence in promoters and different entities full-fledged banking licenses could be given after restricted period (restricted period may be kept till 2-3 years). The existence and success of banks depend on their ability to meet various needs and wants of customers. The millennium has brought with it challenges as well as opportunities in various fields of economic activities. It is not possible to figure out what will or will not work in emerging banking environment. Failures cannot be avoided, but can be managed and goals should be to maintain attractive risk reward ratio. This again may require the same approach of granting licenses, to weed out failures and give enough freedom to allow success to bloom.

 


* IV B.S.L., LL.B.

[1] Discussion paper on entry of new banks in private sector August 11th 2010 http://rbidocs.rbi.org.in/rdocs/content/PDFs/FIDIS110810.pdf 

[2] Effects of capital  G:\A U-turn banking Entry of new private players – The Economic Times.mht 

[3] Changes and impact G:\The impact of new private sector banks on old private sector banks in India – page 4  Asia-Pacific Business Review4.mht

[4] G:\Permission to opening of new Private sector Banks – Policy mey creat another problem.mht 

[5] Gramm-Leach-Bliley Act, 1999 ( America )

[6] Report of RBI www.rbi.org.in-scripts press release

[7] G:\Indian Banking Sector Reforms Licensing of New Banks in the Private Sector  MBA Knowledge Base.mht 

[8] G:\The impact of new private sector banks on old private sector banks in India – page 5  Asia-Pacific Business Review5.mht 

[9] G:\RBI on new bank license in India Financial Markets Blog.mht

 [10] G:\The impact of new private sector banks on old private sector banks in India – page 6  Asia-Pacific Business Review 6.mht

SEBI & ART FUNDS – An Analysis

Another area where SEBI is trying to protect the interest of the investors is art-fund. It was come to the knowledge of SEBI that most of the entities are operating the art-fund without having been registered with the SEBI. As per the SEBI regulations no entity can be allowed to start a schemes or funds without obtaining a certificate of registration in accordance with the SEBI CIS (Regulations) 1999. SEBI has cautioned that an art fund is deemed to be a collective investment scheme (CIS) as defined under section 11AA(2) of the SEBI Act, 1992.  And that presently no entity offering such investments has been registered.[1]

            Therefore, the launching/floating of the ‘art funds’ or schemes without obtaining a certificate of registration from the Board in terms of the provisions of the Regulations amounts to violation of the provisions of section 12 read with sections 11 and 11AA of the SEBI Act and the Regulations. For such violations, appropriate actions, civil and criminal, under the SEBI Act may be taken by SEBI against such funds/companies.[2]

            In Osian’s-Connoisseurs of Art Private Ltd Vs SEBI, in this case the Osian’s is a leading archive and auction house.  On June 1st 2006, it announced the launch of a private fund called Osian’s Art Fund, worth over Rs 100 crore. The objective of the fund is to generate significant medium and long-term income and capital growth from a cohesive, historically driven portfolio of investment and management in contemporary fine arts from the Indian sub-continent. As a result the Osian Art Fund which was launched in 2006 has received a show-cause notice by SEBI in November 2007 asking as to why the Fund should not be regulated. This is the first fund winch was floating at that time. But as per the CIS Regulations, Osian Art Fund, which pooled investors’ money to invest in art, was supposed to be regulated by SEBI. But the Osian Art Fund was not registered with SEBI. As a result the SEBI has issued an advisory against unregistered art funds in 2008, and it allowed to hear the contentions of the party in 2008.[3]

Conclusion:

Along with that SEBI in its press release on February 13, 2008 in its official website stated that “Art Funds” are “Collective Investment Schemes” as defined under the SEBI Act. In that press release it further stated that “launching or floating of “Art Funds” or Schemes without obtaining registration from SEBI amounts to violation of the SEBI Act and Regulations. Appropriate actions, civil and criminal, under the SEBI Act may be taken by SEBI against such funds/companies.”  In response to that press release SEBI has given another opportunity to Osian on September 5, 2008, to appear before it. But in November 9, 2009 the art fund was redeemed as per the redemption guidelines as shared with the unit holders in June 2009. The company further stated that it may refund the money back to its unit’s holders before December 2009.[4]


[1] http://www.financialexpress.com/news/sebi-to-book-illegal-art-funds/272780/  (February 10, 2010).

[2] http://www.krcco.com/Newsletter%20-%20March%202008.pdf  (February 10, 2010)

[3] http://www.moneylife.in/article/8/2824.html.

[4] http://www.suchetadalal.com/?id=f3e8c67c-13f3-6b57-4ae02af2fe81&base=sections&f, (February 14, 2010).

SECTION 25 COMPANIES UNDER COMPANIES ACT 1956

 Under Indian law, 3 legal forms exist for Non-Profit organizations:

  1. Trusts
  2. Societies
  3. Section 25 companies

 Due to better laws, Section 25 companies have the most reliable strongest organizational structure. Section 25 companies are those companies which are formed for the sole purpose of promoting commerce, art, science, religion, charity or any other useful object and have been granted a licence by the central government recognizing them as such. Thus, there are three criteria for determining whether a particular company is section 25 company or not:

1) Its objects should be only to promote commerce, art, science, religion, charity or any other useful object.

2) It should intend to apply its profits or other incomes only in promoting its objects; and

3) Central government should have granted a licence to such a company recognizing them as such, these types of companies can be either public company or private company having a limited liability.

FORMATION PROCEDURE OF SECTION 25 COMPANIES:

Step – 1 Form 1A: Name approval: An application in E-Form 1A has to be made for availability of name to the registrar of companies, with a fee of Rs. 500/-. It can be filed electronically. Six name in preferential order need to be proposed

Step-2 Application to Regional Director: After the availability of name is confirmed, an application should be made in writing to the regional director of the company law board for granting license under this section. The application must include copies of the memorandum and articles of association of the proposed company, as well as a number of other documents, including a statement of assets and a brief description of the work proposed to be done upon registration. 

Step – 3 Filing of Application copy to the RoC: The applicants must also furnish to the registrar of companies (of the state in which the registered office of the proposed company is to be, or is situate) a copy of the application and each of the other documents that had been filed before the regional director of the company law board.

 Step – 4 Publication of Notice: Within a week from the date of making the application to the regional director of the company law board, the applicants are required to publish a notice in the prescribed manner at least once in at least two news papers. One notice should be in an English newspaper circulating in that district and in a  language of the district in which the registered office of the proposed company is to be situated or is situated and circulating in that district.

 Step – 5 Grant of Approval: If the registrar satisfies that the application is complete in all respects and in the best interest of the country, regional director can grant the licence under this section with or without conditions and may also direct the company to insert in its memorandum, or in its articles, or in both, such conditions of the licence as may be specified by him in this behalf

Step – 6 Other Incorporation formalities: After obtaining licence under section 25 the company shall be formed as a normal company and the other formalities of incorporation shall be complied with.

Step – 7 Registration under Section 80G: If a section 25 company gets itself registered under section 80G then the person or the organization making a donation to the NGO will get a deduction of 50% from his/its taxable income. The company has to apply in Form No. 10G to the Commissioner of Income Tax for such registration. Normally this approval is granted for 2-3 years but can be granted earlier depending upon the situations.

Grant of licence to an existing company:

An existing company should pass special resolution to restrict its object for non-profit making purposes and also obtain approval of the Company Law Board for the same. Name of the company should be changed (including deletion of the word ‘limited’ or ‘private limited’ ) with the permission of the Central Government . 

The ADVANTAGES of section 25 companies over other companies registered under companies act are discussed below:

 1)      All companies having limited liability are required to use the term ‘limited’ or ‘private limited’ as the case may be in their names as required by section 13. But section 25 companies are allowed to dispense with the use of term ‘limited’ or ‘private limited’ from their names [sub-sec. (6)]. This helps the company to enjoy limited liability without disclosing to the public the nature of liability of its members.

2)      A partnership firm is allowed to be a member of the section 25 company [sub-sec (4)] inspite of the fact that the law does not recognizes them as a legal person. The only limitation in this regard is that on dissolution of such a firm its membership of the company ceases.

3)      Minimum Share Capital: As per the provision of section 3 of the companies act a private company is required to have a minimum share capital of rupees one lakh and public company is required to have minimum share capital of five lakh rupees. However Section 25 Companies have been exempted from this requirement regarding minimum share capital by insertion of sub-section (6) through Amendment Act of 2000. As such they can be registered even if they have share capital less than the statutory minimum.

4)      Publication of Name: A section 25 company has been exempted from the provisions of section 147 and as such is not required to mention its name and address as required in case of all other companies.

5)      Annual Returns of a Company not having Share Capital: Section 25 Company without a share capital is also required to file returns with the Registrar as required by section 160 but it has been exempted from mentioning the particulars of the members who are presently with the company or have ceased to be members since holding of its last AGM.

6)      Time and Place of AGM: Section 25 Company has been exempted from provisions provided under section 166(2), As such they are free to determine the date, place and time of its AGM according to their convenience and feasibility the only condition being that time, place and date of such meeting should have been pre determined by the Board of Directors in accordance with directions of the company if any.

7)      Notice of AGM: By virtue of section 171(1) a company is required to call AGM by giving not less than 21 days notice in writing to its members. But Section 25 Company has been given some relief in this regard by allowing them to hold an AGM after giving a notice of 14 days length instead of 21 days as required by section 171(1).

8)      Maintaining of Books of Accounts: Every company is required by section 209(4-A) to maintain books of accounts relating to a period of eight years immediately preceding current year along with its vouchers. However a Section 25 Company is required to maintain books of account relating to a period of only four years instead of eight years immediately preceding the current year.

9)      Increase in Number of Directors: Under section 259 a public company is not allowed to increase the number of it directors beyond the permissible limits under its articles without the approval of Central Government provided such increase results in total number of directors to go beyond twelve. But Section 25 Companies are exempted from this section and are thus free to increase the number of its directors without seeking approval of central government[vide Notification No. 2767, dated 5-8-1964].

10)  Board Meetings: Under section 285 the meeting of Board of Directors should be held at least once in every three months and four meetings should be held in a year. However section 25 companies are required to hold meetings of Board of Directors/Executive Committee/Governing Committee only once in every six months [vide Notification No. SO 1578 dated 1-7-1968]. The rest of the section 285 will apply to section 25 companies as it is, therefore section 25 companies are allowed to hold Board meetings only once in six months but should have held four meetings in a year.

11)  Quorum for Meetings: The required quorum for a board meeting of any company under section 287 is one/third of its total strength which is arrived at after deducting the number of interested directors from the total number of directors on the Board or at least two whichever is higher. But the section 25 company is exempt from this section to the extent that the required quorum for any board meeting is eight members or one/fourth of its total strength whichever is less provided it should not be less than two members in any case.

12)  Exercise of certain Powers: Section 25 companies are allowed to decide following three matters by passing a resolution by circulation instead of at meetings: · the power to borrow moneys other than on debentures, · the power to invest funds of the company, and · the power to make loans. The remaining powers specified in section 292 viz., power to make calls on shareholders in respect of money unpaid on their shares; power to authorise by back of shares in accordance with section 77A; and power to issue debentures, can be exercised only by passing of resolutions at duly conducted meeting of Board of Directors of section 25 company [vide Notification No. 2767, dated 5-8-1964].

13)  Maintenance of Registers of Contracts: Under section 301 a company is required to maintain register of all the contracts to which section 297 or 299 applies. But a section 25 company is exempt to the extent that it allowed to maintain register of only those contracts to which sub-sections (1) and (3) of section 297 apply. Thus they are exempted from maintaining registers of those contracts which are made in pursuance of sub-section (2) of section 297 or are covered by section 299.

14)  Maintenance of Register of Directors: Section 25 company has been exempted from operation of sub-section (2) of section 303 and as such they are not required to notify changes among its directors, etc to the Registrar. They are only required to maintain Registers of their Directors, Managing Directors, Managers and Secretary in prescribed format containing specified particulars and updating the register by making changes in it as when there is some change among the Directors, Managing Directors, Managers and Secretary of the company.

15)  Qualification for Secretaryship: A Section 25 Company is exempt from the provision of section2(45) to the extent that the rules regarding the qualification of a Secretary do not apply to them [vide Notification NO. F.2/3/76-CLV dated 09-01-1976]. As section 2(45) do not apply to them they are free to appoint any person as its Secretary whom it feels fit and proper for the same.

16)  Applicability of CARO: Section 25 Companies are exempted from applicability of Companies Auditor’s Report Order 2003(CARO). CARO has been made applicable to all companies from 1st January 2004. But CARO expressly exempts section 25 companies from its applicability vide Clause 2(iii) of Para I of the Order.

17)  Payment of Registration Fees: The fees payable by a Section 25 Company at the time of registration and further increase of its share capital has been kept very low in comparison to other companies and is at present fixed at mere Rs. 50/- irrespective of the authorized amount of share capital (Circular No. 6 dated 24-06-1996 and Notification No. SO 3879 dated 22-12-1962)

18)  Stamping of Memorandum and Articles: The Articles and Memorandum of a Section 25 Company are not required to be stamped in accordance with the Indian Stamp Act, 1899.

19)  Raising Money: A Company can sell shares of the Company to the public or can accept deposits from public and can therefore raise money easier than other business structure types. The modes of financing business carried on by company are numerous

20)  Easy Transferable Ownership: The shares and other interest of any member in the Company shall be a movable property and can be transferable in the manner provided by the Articles, which is otherwise not easily possible in other business forms. Therefore , it is easier to become or leave the membership of the Company or otherwise it is easier to transfer the ownership.

Drawbacks or Obligations of section 25 companies:

 

Though a Section 25 Company has many advantages and enjoys many privileges yet there are some statutory obligations which are required to be complied with and taken care of by such companies.

1) A Section 25 Company has to ensure that its profits and all other incomes are utilised only for the purpose of promoting its objects and not for any other purpose.

2) It should also ensure that its profits are not distributed as dividend among its members.

3) Section 25 Company cannot alter its objects clause in its Memorandum without seeking the written approval of central government [sub section (8)].

4) If the Central Government has imposed some conditions and regulations upon the company for granting a licence under section 25 then such a company is bound by such conditions and has to ensure adequate compliance with them. Where such conditions and regulations have been imposed then such conditions and regulations are required to be included in the Articles or/and memorandum of the company as may be directed by the government.

5) Section 25 Company is regarded as a ‘company’ within the meaning of the Income Tax Act, 1961 and as such its income is taxable according to the applicable rates similar to those applying to other companies.

 6) If an existing company obtains a licence under section 25 it has to ensure that its objects are confined to those mentioned in section 25 itself and if not make proper alteration to its memorandum and articles.

7) Long Closing Proceedings: It is generally not easy to close the company as compared to other forms of business, the procedure to close is long and involves compliance of various formalities, at times it takes 1-2 years to completely wind-up the company. Moreover in certain cases, it is necessary to take the permission of the High Court to close the Company.

Revocation of Licence: The Central Government after giving reasonable opportunity of hearing can revoke the licence by passing a speaking order.

 Winding up of the company It can also be wound up if the objects for which it had been established have been fully achieved. The surplus assets if any may be given to a similar charitable cause.

 Hence, having noticed various benefits and drawbacks of section 25 companies, its clear that such companies are a well regulated form of non-profit organizations and the prescribed incorporation and dissolution procedures and other provisions helps the government in keeping a check on the working of such companies.

REGISTRATION OF A PRODUCER COMPANY

The Companies (Amendment) Act 2002 vides notification no. S.O. 135 (E) inserted part IX – A of the Companies Act, 1956 ( hereinafter referred to as “the Act” ) and introduced the concept of Producer Company[1]. In the year 2002 an expert committee led by noted economist Y.K Alagh framed legislation for incorporation of a producer company, and conversion of inter- state cooperative society into a producer company and its reconversion into cooperative society.

It aims at upliftment of rural producers for following reasons:

  • Rural producers have been at a potential disadvantage given their limited assets, resources, educational and access to advanced technology.
  • In Indian context the farmers disposes of his produce in unprocessed form there is no plough back of surpluses from value addition to the farm.
  • Agribusiness enterprises are therefore increasingly looking for direct tie up with the farmers to source the agricultural produce required by them.

Therefore companies (Amendment) act 2002 part IX-A is a step in this direction.

MEANING

“Producer” means any person engaged in any activity connected with or relatable to any primary producer such as-

1.     Produce of farmers of agriculture including animal husbandry, horticulture, floriculture, pisiculture, viticulture, forestry, forest products, revegetation, bee-raising and farming plantation products and produce from any other primary activity or service which promotes the interest of farmers or consumers.

2.    Produce of persons engaged in handloom, handicraft and other cottage industries.

3.    Any other product resulting from any of the above activities or any by- products thereof.

4.    Any product from an ancillary activity that would promote any of the above activities or any thing ancillary thereto.

5.    Any activity which is intended to increase the production of anything referred to in (1) to (4) above.

“Producer Company” means a body corporate having objects or activities as specified and registered as producer company under the act.

“Producer” institution means a producer company or any other institution having only producer or producers or Producer Company or producer companies as its members whether incorporated or not having objects referred to in section 581 B and which agrees to make use of services of the Producer Company or producer companies as provided in its articles.

THE CONSTITUTIONAL PROVISION

The entry 44 of list 1 (union list) of seventh schedule of the Constitution of India carries legislation for incorporation, regulation of corporations.

OBJECTS OF PRODUCER COMPANY

A producer company means a body corporate, having objects specified in section 581 B and registered as a Producer Company.

The object of a producer company shall relate to all are any of the following namely:

1.     1. Production , harvesting , procurement, grading , pooling ,handling marketing, selling, export of primary produce of members or import of goods or services for their benefit:                         

Provided that the producer company may carry on any of the activities specified in this clause either by itself or through other institution;

1.     Processing including preserving drying, distilling , brewing , venting canning and packing of produce of farmers;

2.    Manufacture, sale or supply of machinery, equipment or consumables mainly to its members;

3.    providing education on mutual assistance principles to its members and others;

4.    rendering technical services , consultancy services , training , research and development and all other activities for the promotion of interests of its members;

5.    generation , transmission and distribution of power , revitalisation of land and water resources their use , conversion and communications relatable to primary produce;

6.    insurance of producers on their primary producer;

7.    promoting techniques of mutuality and mutual assistance ;

8.    welfare measures or facilities for the benefit of members as may be decided by the board;

10.  Any other activity, ancillary or incidental to any of the activity referred to in clauses (a) to (i) which include extending of credit facilities or any other financial services to its members.[2]

Producer Company shall deal primarily with the producer of its active member.

Under Clause (a) sec 581A – An Active Member means a person who fulfils the quantum and period of patronage of company as specified by the article of Producer Company.

FORMATION

Also, the Act deals with number of members required for incorporation of a  producer company after complying with the requirements and provisions of the act in respect of registration. [3]Any ten or more individuals, each of them being a producer or two or more producer institution or a combination of ten or more individual producer institution can form a producer company provided that if a person ceases to be a primary producer, the board of director is entitled to ask him to surrender his shares.

NOMENCLATURE

The Guidelines issued by the Ministry Of Company Affairs regarding selection of names for proposed company:-

SECTION 20

CONFIRMATION OF NAME FROM THE REGISTRAR

An application in form-1 –A of companies (central government’s) general rules and forms 1956 shall be made to the registrar of companies in the state where the registered office of the proposed company will be situated. A fee of Rs. 500 will be also sent .the applicant shall give four alternative names. The name of the promoters should also be the subscribers to the memorandum. The last words of the company should be “……………..producer company limited”[4].

The registrar’s confirmation of availability of name will be valid for six months and if a company with that name is not registered within six months, a fresh application will have to be made to the registrar with fees of Rs. 500

REGISTRATION COMPLIANCES

Within six months of confirmation from the registrar regarding availability of name, the promoters of a producer company shall produce to the registrar of the state in which the registered office will be located the following:

1.     Memorandum of association duly signed by the subscribers and witnessed (2 copies).

2.    Articles of association duly signed and witnessed as above (2 copies).

3.    declaration in form No. by an advocate of the supreme court or high court, an attorney or pleader entitled to appear before high court, or a secretary or a chartered accountant, in whole –time practice in India, who’s is engaged in the formation of company or by a person named in the memorandum as director of the company, to the effect that all the requirements of the act and the rules there under have been complied with in respect of registration and matters precedent and incidental thereto.

4.    List of persons named in the MOA as first directors and their consents in form -29 to act as directors.

5.    form -32 in duplicate giving particulars of the said persons named as directors

6.    form -18 in respect of situation of registered office

7.    power of attorney on NJ stamp paper , if any , executed by any subscriber authorising a person to sign the MOA and AOA on his behalf or executed by a producer institution as subscriber

8.    Power of attorney on NJ stamp paper signed by all subscribers authorising one of the subscribers or other person authorising him to make corrections on any of the document as may be required by the registered.

9.    Evidence as to deposit of fees for incorporation of the company on the basis of the authorised capital as given in schedule X to the act.

The formalities for registration are identical for all companies as per Section 581 C (1) that for registration of a producer company under part IX –A, the provisions of the act in respect of registration have to be complied with.

Where any subscriber is illiterate?

Where any subscriber is an illiterate person, he can give his thumb impression or mark on the column for signature in Memorandum of Association, Article of Association and his name, address description and occupation and number of shares agreed to be taken by him shall be written by another person writing for him above the mark.

GRANT OF CERTIFICATE OF INCORPORATION

The ROC if satisfied that all formalities relating to registration are duly compiled with, shall register one MOA, AOA and other necessary documents and issue a certificate of incorporation within 30 days of receipt of document for registration.

On registration, the producer company shall be deemed to be a private limited company limited by share without any limit on the number of member and its share capital is to be dividing only into equity shares.[5]

OPTION TO INTER-STATE COOPERATIVE SOCIETIES TO CONVERT INTO PRODUCER COMPANIES

MEANING:

An Inter-State Cooperative Society means a Multi-State State Cooperative Society as defined in section 3(p) of Multi-State cooperatives Act, 2002 and includes any Cooperative Society registered under any law in force and which has after its formation, extended any of its objects to more than on state.

The Inter-State Cooperative Society whose objects not confined to one state can opt for conversion into a producer company.[6]

PROCEDURE:

For registration as a Producer Company an application is required to be submitted along with the prescribed document to the registrar for registration as Producer Company.

  • Following enclosures and documents are required to be submitted with along

the application:

  • A copy of the special resolution passed with2/3 majority of the member.
  • A statement showing the of names, addresses and occupation of the Directors and the Chief Executive.
  • A list of the members.
  • A statement indicating that the Inter-State Cooperative Society is any one or more of the objects specified in section 581B.
  • A declaration by two or more Directors certifying that the particulars given as per para (1) to (4) above are correct.

The Registrar on being satisfied that all the required document relating to registration have been duly complied with shall within 30 days of receipt of the application Issue a Certificate of Incorporation.And the word ‘Producer Company Limited ‘shall form part of its name to explain its identity.[7]

PROVISIONS:

The Inter-State Cooperative Society shall, upon registration stand transformed into a producer company, and shall be governed by the provision of Part IX A of the Companies Act, 1956.

All its properties, assets, liabilities, debts etc. shall vest in Producer Company with effect from the Registration date.

All legal proceeding may be continued against the Producer Company.

RECONVERSION OF PRODUCER COMPANY INTO INTER-STATE COOPERATIVE SOCIETY:

A Producer Company may be reconverted into Inter-State Co-operative Society  after obtaining approval of its members in general meeting by Two-third majority or on request by its creditors representing three-fourth of its value of creditors, may make an application to High Court for its reconversion into ‘Inter-State Co-operative Society’.

DISCRETION OF HIGH COURT:

The High Court, may after having been satisfied, sanction the reconversion which shall be Binding on all members and all creditors and also on the company.

A certified copy of  the order shall be filed with the registrar.

The Producer Company which has been sanctioned reconversion, shall now make application for registration as Inter-State Co-operative Society under the Multi-State Co-operatives Act, 2002.

CONCLUSION (Section 581K, 581L and 581M)

Where an inter state co-operative society transforms into a producer company, every shareholder of the erstwhile society shall deemed to have become shareholder of the producer company from the date of registration. The directors, officers and employees will be governed by provisions of section 581 N and the capital of the erstwhile society shall form part of the capital of the producer company. All the existing arrangements, legal proceedings and all the fiscal and other concessions against the co-operative society shall be deemed to have been granted to the producer company.

[1] Enforceable with effect from February 6th, 2003

[2] Section 581 B

[3] Section 581 C

[4] Section 581 F

[5] Section 581 C (2)

[6] Section 581J

[7] http://www.asaindia.org/PDFs/MPC_II.pdf

PROGRESSIVE ABOLITION OF CHILD LABOUR

 “What I am today is because of education and I want every Indian child to be so touched by the light of education”

-Prime Minister Dr.Manmohan Singh.

          Children are the future custodians of all the present philosophies including sovereignty, rule of law, justice, liberty, fraternity and international peace and security.  The human rights jurisprudence categorically recognized the rights of the child.  The Declaration of Geneva in 1924 gave a clarion call that Mankind owes to the child the best it has to give”. The Universal Declaration of Human rights rightly obliges family, as a fundamental unit of society, to focus on children so as to afford them necessary pre-conditions to growth.  Article 24 of the UN declaration Provides: “Every Child shall have the right to such measures of protection as are required by his status as a minor, on the part of his family, society and the State”.  It is now universally recognized that for a comprehensive development of its personality, the child should grow in a family environment and in an atmosphere conducive to care, affection and understanding.

           The Industrial revolution, which led to urbanization, has been responsible for changes in family structure.  The concept of child labour is also directly attributable to the developments in the industrial production process following the industrial revolution.  Labour and human dignity can be considered as purchasable at cheapest possible price.  Poverty of parents led to children offering themselves for work in highly exploitative conditions.  These children of lesser god witness the forfeiture of their childhood without fully knowing themselves the trauma of work life and its impact on their mental and moral development.

Reasons for Development of Child Labour:

          Chronic Poverty is the most important factor for the prevalence and perpetuation of child labour.  Nearly half of the India’s total population subsists below the poverty line.  India stands 2nd position in the employment of child labour while Africa stands in the first position.  In this situation, the child, since its very appearance in the world, is endowed with an economic mission.  Economic compulsions weigh so heavily on poor parents that they do not mind colluding with the child’s employer in violating the laws and placing the child under risks of inhuman employment situation.  Poverty and child labour always beget each other and tend to reinforce each other.  Other reasons are disenchantment with and a lack of faith in the educational system as schooling does not guarantee a job.  There is also a deeply ingrained Indian tradition that a girl child is to work in the house with the mother and the boy is to learn the father’s trade.  Though in the organized and the unorganized sectors there is no dearth of adult labour, employees prefer hiring children as they are more amenable to discipline, too young to organize themselves and fight for their rights, can be paid less and bullied to obedience.  The lack of concern within the community indifference among the middle class adults to their social surroundings and the existence of exploitative elements result in the erosion of the natural rights of the poor children.  The fact that the children cannot speak for themselves makes them easy targets for exploitative working conditions and wages. 

          Still another reason for the ever increasing child labour is said to be, the accelerated pace of mechanization of agriculture which pushes the surplus farm labour to the cities in search of livelihood.  A survey conducted by the commission of child labour in Kolkata revealed that socio-economic conditions of the families compelled children to come in search of employment.

          Analyzing the reasons which prompt the children to work, it was shown by experts that as many as 47.5 percent of child workers did so, not so much because of poverty but because of the fathers force them to leave school and join work while they themselves either sit idle, or want the extra money to satisfy their various addictions.  In some cases, it is reported that the children themselves compare the advantages of continuing education with joining the labour force and decide in favour of the latter because of the dignity, freedom and responsibility which they get as a contributing member of the family.  On the other hand, some children admitted that they pushed into this, and left to themselves they would like to pursue their education.  The increasing number of child labourers also indicates the failure of family planning, especially in the poverty belts.

          In a case of employment of children below 14 years of age in carpet industries in the State of Uttar Pradesh, Supreme Court held that state is under obligation to provide socio-economic justice to the children and render facilities and opportunities for development of their personalities.  In Bandhua Mukti Morcha vs. Union of India, 1997 Lab IC, 2107 the Supreme Court held that basic cause of child labour is poverty instead of total abolition shall have adverse affect and should be banned progressively in a planned manner.

             In Hindustan Times dated 1st August, 1984: Statement made by the Minister of State for labour in the Rajya Sabha, on 30th July, 1984 is published it was stated that there is a concentration of child labour in certain industries such as match works in Tamil Nadu, Carpet industry in Jammu and Kashmir and Uttar Pradesh, State quarries in Madhya Pradesh , diamond cutting in Gujarat, glass and bangle in Uttar Pradesh, tea Plantation in West Bengal and brassware in Uttar Pradesh.

           Samithu Kothari made a study into facet of child labour, the working conditions of children engaged in the match works at Sivakasi in Tamilnadu.  He rightly captioned the work:  “There is blood on those match sticks”.  Blood stains are there, not only on the match-sticks but also on other materials, the carpets in your drawing room, the slabs of slates used in your house, the diamonds adding glow and glory to a well cared figure, the glass and bangles than given glitters to the dress and the body, the brass-ware in your house, and even in the tea you sip”.

VARIOUS ACTIVITIES PERFORMED BY CHILD LABOUR:

Child Labour in the Agricultural Sector:   According to a recent ILO report about 80% child labourers in India are employed in the agriculture sector. The children are generally sold to the rich moneylenders to whom borrowed money cannot be returned.

Street Children : Children on the streets work as beggars, they sell flowers and other items, instead of being sent to school. They go hungry for days to gather. In fact, they are starved so that people feel sorry for them and give them alms.

Bonded Child Labour :  This is also known as slave labour and is one of the worst types of labour for children and adults, alike. In fact, in 1976 the Indian Parliament enacted the Bonded Labour System (Abolition) Act; herein declaring bonded illegal. However, the fact remains is that this system of working still continues. According to certain experts approximately 10 million bonded children labourers are working as domestic servants in India. Beyond this there are almost 55 million bonded child labourers hired across various other industries.

Children Employed At Glass Factories :  According to recent estimates almost 60,000 children are employed in the glass and bangle industry and are made to work under extreme conditions of excessive heat.

Child Labour in Matchbox Factories :  Of the 2,00,000 labour force in the matchbox industry, experts claim that 35% are children below the age of 14. They are made to work over twelve hours a day, beginning work at around 4 am, everyday.

Carpet Industry Child Labour :  According to a recent report by the ILO almost 4,20,000 children are employed in the carpet industry of India.

The Other Industries :  According to researchers there are about 50,000 children employed in the brass industry of India and around the same amount in the lock industry.

          The children of poor parents are more an economic asset than a liability.  When child labour recruiting agents go about in the flood or drought hit areas offering loans, it is not uncommon that poor parents surrender their children to them, by availing of the loan facilities to ensure the survival of the family.  The failure to implement strictly child labour prohibition laws is the non-universalisation of compulsory primary education but with the implementation the Right to Education Act, 2009 this drawback of the proper non implementation of child labour laws shall hope to be overcome in India.

             While Child labour is the product of poverty and unemployment, it further contributes to underdevelopment and unemployment.  It contributes to unemployment, because the existence of child labour, results in the increase of adult unemployment; and to under development, because a child labourer by the time he becomes as adult, is fully burnt out.  The encouragement of child labourers to work and contribute towards the family income, prompts parents to have more children.  Thus child labour defeats the goal of family planning.  Child labour also hinders the prospect of implementing the policy of compulsory primary education which is now made important by the implementation of the Right to Education Act, 2009.

Position in Developed Countries and in India:-

          In the developed countries in the west, child labour could be checked through effective enforcement of ‘Prohibition of Child labour’ laws, and compulsory primary education.  In most developing countries, however, millions of children still work in factories, workshops, agriculture, mines, quarries and service enterprises.  It is estimated that child labour makes up “more than 10% of labour force in some countries of middle east and from 2 to 10% in much of Latin America and some parts of Asia.  The world considers the issue of child labour to be a rather serious one in Sub-Saharan Africa. However, there are a set of experts in Africa who do not consider it to be serious and prefer to sweep it under their carpet in order to look into more ‘serious’ issues. There are still others who prefer to wear a blindfold and believe that child labour issues are far more serious in other nations, whereas it is as good as non-existent in their own nation. However, ILO statistics provide a more serious picture. It states that over 40% of the children of Africa are working. They are mainly working as slaves in private households, apart from other industries. So the African people do not believe it as a serious issue.  While the picture, as we see is grim, yet nothing can really be done as there is no consistent or factual empirical evidence where child labour in Africa is concerned.

          The problem of child labour in India is very acute.  The National Sample survey in 1983 estimated that there were 17.8 million child workers in India in the age group of 5 to 15 years.  Operation research Group placed the figure at 44 million in 1983.  It has been estimated by the Planning commission that by the year 2000, India has 20 million child workers (UNICEF 1994). Recent Survey on Child Labour shows that 10% of the total population in India is child labour and from all the States in India, Andhra Pradesh occupies 1st position with constituting 16% of total child labour is in it.  Mostly working children were belonging to the families of extremely poor.  They work in highly exploitative and stressful conditions including bonding situations.

           China accounts for the third largest number where child labour is concerned. In fact, many think it to be a phenomenon that has just begun to surface. However, the fact is that child labour in China has been there for years. This is so despite that there have been strict official regulations that ban employment of minors. And according to the laws of China, a minor is an individual below the age of sixteen-years. Due to poverty, teenagers and younger children have been migrating to the southern and coastal regions of China. This is because these regions have been developing and provide a lot of opportunities to earn.

Definition of Child Labour:-

          The actual number of child labour vary according to different concepts and definition as to what exactly child labour means.  The National Sample Survey defined “Child Worker as a Person below the age of 14 years, who is wage earner”.  The concern for working children, a Bangalore based Organization, described a child Labourer as a person who has not completed fifteen years of age and is working with or without wage on a part time or full time basis.  It estimated that a number of working children in India is close to 100 million.  Most of the work done by children whether with or without wage does contribute to the economic activity of the household to them.

           Often school going children also will be working as part time workers in some factories.  This also may not be taken into account by the census.  Even child labour is banned in certain industries by enacting specific legal provisions for the abolition of child labour the employers may not reveal to the census enumerators, facts and figures regarding the number of child workers.  Most often parents also collude with the employer lest the child loses the job.  Domestic work such as cleaning, cooking, which is unpaid and is considered unproductive, other domestic works such as grazing cattle sowing, weeding, threshing or assisting the parents in house hold crafts, etc may not be taken into account by the census enumerators.  Other facts such as pledging the labour of the children against a loan, working in road side cafes, automobile workshops, construction sites, etc., also may not come under the purview o f the census.  It may also ignore self-employed children who are working in the areas of shoe-shining, rag–packing, newspaper selling, peanut or fruit vending.  However the estimated data shows that 10% of the total population of India is child labour.  Many steps are being taken by the Indian Government from the pre-Independence period for the eradication of this drastic problem but still now the problem remains unsolved and the number of child labour were growing day-by-day due to poverty.

Legal Steps for the Prevention of Child Labour:-

          To discuss about the child labour prevention laws in a vide way one must go through those laws by dividing the laws from its origin in pre-independence or post-independence periods.  Most of the pre-independence laws prescribed punishment for the child labour to the parents of the child and also employer but the post- independence laws exempted the parents from punishment.

A.Pre-Independence Laws:-

          The origin of statutory protection of child labour in India can be traced back to the Indian Factories Act, 1881.  This law is mainly regulated working hours, rest intervals, minimum wages and nature of work of child labour but it does not prevented the employment of children.

          Later on the Children Act, 1933 was enacted to prohibit the pledging of labour of children below 14 years by parents.  It prescribes Punishment for parents and employer of the child labour.  It imposes minimum fine of Rs. 200 to the employer for employing child labour and also Rs.50 for the parents who pledged their children for the labour.

          In the Year 1938 the Employment of Children Act was enacted to prohibit the employment of children below the age of 14 years in specified hazardous occupations.  This Act specifically prohibits the employment of children below 14 years of age in the railway and other means of transport.

B. Constitutional Provisions:-

          Article 15(3) of the Indian constitution enables the state to make special provisions for women and children.  It contains an exception to prohibition of discrimination on grounds of religion, race, caste, sex, etc as contained in Article 15(1).  Article 23 prohibits traffic in human beings and other forms of forced labour.  It is provided in Article 24 that “no child below the age of fourteen years shall be employed to work in any factory or mine or engaged in any other hazardous employment”.

          Apart from the fundamental rights related to children, certain directive principles in the constitution direct the state policy and action in relation to child rights, including employment and education of children.  Article 39 directs the state to so direct its policy “ that the health and strength of workers, men and women, and tender age of children are not abused and that citizens are not forced by economic necessity to enter vocations unsuited to their age or strength” and “ that children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity and that children and youth are protected against exploitation and against moral and material abandonment”. 

          In pursuance to the duty laid down in the above case some of the laws were enacted prohibiting the employment of children below 14 years of age.  However this Article does not prohibit the employment of children in any innocent or harmless job or work.

         The framers of the Constitution realizing the importance of the children and their education have imposed a duty on the State under Article 45 as one of the directive principles of the State Policy to provide free and compulsory education to all children until they complete the age of 14 years within the 10 years from the commencement of the Constitution.  The object was to abolish the illiteracy and child labour from the country.  It was expected that the elected government of the country would honestly implement this directive.  The framers perhaps were of the view that in view of the financial condition of a new state it included it in Chapter IV as one of the directive principles of State Policy.  But the politicians of our country belied the hope of the framers of the constitution.  It is unfortunate that it has taken 52 years from the commencement of the Constitution to initiate some measures by amending the Constitution to start with although 40% of the population is still illiterate and 10% of the total population is working as child labour.

          In the meantime, the Supreme Court in Unnikrishnan case declared that the right to education for the children of the age 6 to 14 years is a fundamental right.  Even after this, there was no improvement.  A demand was being raised from all corners to make education a fundamental right.  Consequently, the government enacted Constitution (86th Amendment) Act 2002 which would make education a fundamental right.  The Constitution (86th Amendment) Act has added a new Article 21A after Article 21 and has made education for all children of the age of 6 to 14 years a fundamental right.  It provides that “the State shall provide free and compulsory education to all children of the age of 6 to 14 years in such manner as the State may, by law, determine”.

C. Post-Constitutional Laws:-

          After attaining the Independence India enacted the Factories Act in the year 1948, under section 19 of this Act Children below the age of 14 years are prohibited from employment in the factories and the employers who are employed such children are liable to be punished with imprisonment or fine or with both. 

          Later on Some of the provisions in the enacted laws like the Plantation Labour Act, 1951; the Mines Act and the Indian Factories Act, 1952; the Motor Transport Act and the Apprentice Act,1961;  the Minimum Wages Act, 1948; the Atomic Energy Act; The Shops and Establishment Act; The Beedies and Cigar Workers (Condition and Employment) Act, 1966 prohibits the employment of children below a certain age.

          In 1986 the Child Labour (Prohibition and Regulation) Act 1986 (CLA) was enacted with a view to rationalizing earlier legislation on child labour, progressive elimination of child labour in hazardous employments, and regulating conditions of child labour in non-hazardous industries.

          In nutshell, the Child Labour Act bans the employment of children below 14 years of age only in certain specified occupations and processes, regulated the conditions of work of children in employments where they are permitted to work; seeks to provide a uniform definition of child in related laws, and prescribes enhanced penalties for employing children in violation of the provisions of this Act and other legislation which prohibit employment of children.  In effect, this does not make any departure from its predecessor law, the Employment of Children Act 1938, so far as abolition of child labour is concerned.

          One major loophole that is visible is that work or process carried on by the occupier with the aid of his family has been taken out of the purview of the Child Labour Act.  Thus, it permits employment of children in hazardous processes, if a process is undertaken by any of their family members.  That is how many clever employers have installed looms from carpet weaving in children’s homes.  Beedies too are largely manufactured in this way.  Matches and fireworks also thrive this way with the aid of child labour.  

          The Child Labour (Prohibition and Regulation) Act, 1986 is now the principal central law relating to employment of child labour.  The Central and “State governments, of late, are showing vigorous concerns for the plight of child labour.   A large project with the help of the United Nations International Children Emergency Fund (UNICEF) is being undertaken by the National Labour Institute, NOIDA for training of labour and factory inspectors for a stricter enforcement of this law.  The whole emphasis is put on the honesty of inspectors and “Punishment includes imprisonment” of erring employers.  It appears that the word “hazardous” is treated purely as having physical implications.  The very concept of child labour snatches away from a child his childhood and should be considered as hazardous and thus violative of Article 24 of the Constitution.   The Child Labour Act fails to take note of the aspect that the working child unknowingly experiences a psychological trauma of adulthood without physically being prepared to bear its onslaught.  It is also incomprehensible why the Act does not even specify the minimum age of employment of children in processes and occupations where the child labour is not prohibited.

D. Precedents:-

                    In People Union for Democratic Rights V. Union of India AIR 1983, Sc 1473, it was contended that the Employment of Children Act ,1938 was not applicable in case of employment of children in the construction work of Asiad Projects in Delhi since construction industry was not a process specified in the schedule to the Children Act.  The court rejected this contention and held that the construction work is hazardous employment and therefore under Article 24 no child below the age of 14 years can be employed in the construction work even if construction industry is not specified in the schedule to the Employment of children Act, 1938.  Expressing concern about the ‘sad and deplorable omission’, Bhagwati,J., advised the State Government to take immediate steps for inclusion of  construction work in the schedule to the Act, and to ensure that the constitutional mandate of Article 24 is not violated in any part of the country.

           In Labour Working on Salal Hydro Project vs. Jammu and Kashmir AIR 1984 SC 177, the Court has reiterated the principle that the Construction work is hazardous employment and children below 14 cannot be employed in this work.       

           A Child is a national asset; it is the duty of the State to look after the child with a view to ensuring full development of his personality.  Emphasizing the significance of the dignity of youth, and childhood in a civilized society, Bhagawati, C.J. observed in Sheela Barse and others vs Union of India and others (1986) 3 SCJ 423 that some years ago our country came out with a National Policy for the welfare of Children which contained the following perambulatory declaration:  “The Nation’s children a supremely important asset.  Their nurture and solicitude are our responsibility.  Children’s programme should find a prominent part in our national plans for the development of human resources, so that our children grow up to become robust citizens, physically fit, mentally alert and morally healthy, endowed with the skill and motivations needed by society.  Equal opportunities for development to all children during the period of growth should be our aim, for this would serve our large purpose of reducing inequality and ensuring social justice”.

Main features of the Supreme Court  in  their Judgment dated 10.12.96 

On 10th December 1996 in Writ Petition (Civil) No.465/1986 the Supreme Court of India, gave certain directions on the issue of elimination of child labour. The main features of judgment are as under:

–        Survey for identification of working children;

–        Withdrawal of children working in hazardous industry and ensuring their education in appropriate institutions;

–        Contribution @ Rs.20,000/- per child to be paid by the offending employers of children to a welfare fund to be established for this purpose;   

–        Employment to one adult member of the family of the child so withdrawn from work and it that is not possible a contribution of Rs.5,000/- to the welfare fund to be made by the State Government;

–      Financial assistance to the families of the children so withdrawn to be paid -out of the interest earnings on the corpus of Rs.20,000/25,000 deposited in the welfare fund as long as the child is actually sent to the schools;

–      Regulating hours of work for children working in non-hazardous occupations so that their working hours do not exceed six hours per day and education for at least two hours is ensured. The entire expenditure on education is to be borne by the concerned employer.

–            The implementation of the direction of the Honourable Supreme Court is being monitored by the Ministry of Labour and compliance of the directions have been reported in the form of Affidavits on 05.12.97, 21.12.1999, 04.12.2000,  04.07.2001 and 04-12-2003 to the Honourable Court on the basis of the information received from the State/UT Governments.   

 

 

The Right of Children to Free and Compulsory Education Act:

          After the enactment of the Constitution (86th Amendment) Act 2002 the State Provided protection to the Children from the age 6 to 14 years from the child labour by providing compulsory education but it has taken another 8 years for the passage of the Right of Children to Free and Compulsory Education Act or Right to Education Act (RTE), which was passes by the Indian Parliament on 4th August 2009, describes the modalities of the provision of free and compulsory education for children between 6 and 14 years in India under Article 21-A of the Indian Constitution.  With the enactment of this legislation India became one of 135 countries to make education a fundamental right of every child when the Act came into force on 1st April 2010.

          The first time in the history of India a law was brought into force by a speech by the Prime Minister.  In his speech, Dr. Manmohan Singh, Prime Minister of India stated that, “We are committed to ensuring that all children, irrespective of gender and social category, have access to education.  An education that enables them to acquire the skills, knowledge, values and attitudes necessary to become responsible and active citizens of India”.

          The RTE Act if implemented properly will be much effective than any other previous laws which were enacted specifically to prohibit the child labour.  It its common sense the Right to Education Act main objective is to provide the free and compulsory education to all the children in India between the aged of 6 and 14 years but it indirectly imposes a duty on the State by the term COMPULSORY that all the children between the age of 6 to 14 years must be surely educated.  So it in an indirect way throw  light on the eradication of the child labour by making education compulsory to all the children between the ages of 6 to 14 years.

COMPULSORY EDUCATION:-

          The Constitution (86th Amendment) Act, 2002 and the Right to Education Act, 2009 specifically provides that it is the mandatory and primary duty of the State to provide free and compulsory education to the children below the age of 6 to 14 years. It is indirectly restricts the children from doing any other activity when they were in the age between 6 to 14 years.  Also it provides for free education where it makes the education to be available to the poor people.  Mostly the child labour were belong the children of the poor people.  Due to their economically backward condition parents were unable to feed the children and the work of the child will also become useful to make their both ends meet in a difficult way.

          The Act clarifies that “Compulsory Education” means obligation of the appropriate government to provide free elementary education and ensure compulsory admission, attendance and completion of elementary education to every child in the six to fourteen years age group. “Free” means that no child shall be liable to pay any kind of fee or charges or expenses which may prevent him or her from pursuing and completing elementary education. 

          The ultimate objective of development of any country must be the improvement of the quality of life of its people.  One of the mechanisms of enhancing the quality of life of its people is acquired by means of education.  The compulsory education provided by the Right to Education Act 2009 to the children between the ages of 6 to 14 years is very much useful to enhance the quality of the people.  Child labour shall be prevented by making use of the compulsory education provision. 

Government Policies:

          So as to be in consonance with the constitutional provisions and the United Nations (UN) Declarations on the Rights of the child, the Government of India adopted the National Policy for Children (NPC) in August 1974.  This Policy provided that “It shall be the policy of the state to provide adequate service to children both before and after birth and through the period of their growth, to ensure their full physical, mental and social development.  The State shall progressively increase the scope of such services so that, within a reasonable time, all children in the country enjoy optimum conditions for their balanced growth.”  This policy does seem to admit that a child is entitle to enjoy his childhood through play, learning, getting a parental emotions, love and nutritional and health care.  Toward this the National Policy envisaged the need for “free and compulsory education for all children upto the age of 14 years, provisions for health and nutritional programmes and services, providing alternative forms of education for children unable to take full advantage of formal school education for whatever reasons, and measures for protecting children against neglect, cruelty and exploitation.”  Ironically however, the Government only lays emphasis on regulation of child labour than concentrating on abolishing it altogether.  By making use of the Right to Education Act, 2009 the provision of compulsory education is very much useful to abolish the child labour by providing free and compulsory education to all the children below the age of 14 years. 

         The provision for regulation of the child labour which is constituted in the Child Labour (Prohibition and Regulation) Act 1986 in present situation shall be need to amend as the Right to education Act enacted in 2009 is providing compulsory education to all the children below the age of 14 years.  At present situation there is no need to regulate the child labour.

          While focusing on the general development action programme, the National Policy envisaged utilization of non-formal education.  The National Commission on Labour also recommended arrangements to combine work with education through non-formal schemes.  It has also provided for linking these programmes with schemes of public libraries.  The policy identified to specific sectors of employment where the incidence of child labour is high.  It involved a six-point package to tackle the problem of child labour.  The government plans to establish special schools in these areas so as to not only provide education and vocational training but also take care of the nutritional care and needs of working children.

          The National Policy on Child Labour (1988) suggested that children employed as part of the family should be treated differently from those outside the family set-up.  Its strategy aimed at including the families of child workers in antipoverty programmes, arranging special programmes for the Scheduled Castes and Tribes whose children have to undertake wage labour and imparting compulsory formal or non-formal education to all children, particularly those employed in hazardous industries.

          The German funded programme, Child Labour Action and Support Project was launched in 1992.  The German Government had given an initial contribution through the International Labour Organisation.

           The Government is also implementing the International Programme for Elimination of Child Labour.  The Programme was launched in January 1933.  33 action programmes under this have been approved and more proposals are under consideration.  One project with an ‘integrated’ approach aims at rehabilitating 5,000 children every year from the carpet trade.  Of course, the Indian Government is spending annually Rs.10 crore on ten national level pilot projects in priority industries to wean away child labour and rehabilitate them.  The government has drafted a Bill to ensure equal wages for the minor and adult workers.  The move meant to make employment of child labour less lucrative.

          One way to minimize the incidence of child labour is to enhance the school enrollment by making proper utilization of the recently enacted Right to Education Act, 2009.  It enables the poor people to access school and attains free education upto the age of 14 years. Another recent initiative of the Indian Government is Sarva Siksha Abhiyan launched in 2001, universalizes the elementary education by community ownership.  Rajiv Vigyan Mission is also helpful to provide education for the needy children.  Rajiv Udyog Mission is taking part in providing employment to the children who are attained 14 years by ensuring sufficient training in the skilled work Project Based Plan of Action envisages starting of projects in areas of high concentration of child labour. Pursuant to this, in 1988, the National Child Labour Project (NCLP) Scheme was launched in 9 districts of high child labour endemicity in the country. The Scheme envisages running of special schools for child labour withdrawn from work. In the special schools, these children are provided formal/non-formal education along with vocational training, a stipend of Rs.100 per month, supplementary nutrition and regular health checkups so as to prepare them to join regular mainstream schools. Under the Scheme, funds are given to the District Collectors for running special schools for child labour. Most of these schools are run by the NGOs in the district.  

Government has accordingly been taking proactive steps to tackle this problem through strict enforcement of legislative provisions along with simultaneous rehabilitative measures. State Governments, which are the appropriate implementing authorities, have been conducting regular inspections and raids to detect cases of violations. Since poverty is the root cause of this problem, and enforcement alone cannot help solve it, Government has been laying a lot of emphasis on the rehabilitation of these children and on improving the economic conditions of their families.  

The coverage of the NCLP Scheme has increased from 12 districts in 1988 to 100 districts in the 9th Plan to 250 districts during the 10th Plan.

 Strategy for the elimination of child labour under the 10th Plan:

        An evaluation of the Scheme was carried out by independent agencies in coordination with V. V. Giri National Labour Institute in 2001. Based on the recommendations of the evaluation and experience of implementing the scheme since 1988, the strategy for implementing the scheme during the 10th Plan was devised. It aimed at greater convergence with the other developmental schemes and bringing qualitative changes in the Scheme. Some of the salient points of the 10th Plan Strategy are as follows:

  • Focused and reinforced action to eliminate child labour in the hazardous occupations by the end of the Plan period.
  • Expansion of National Child Labour Projects to additional 150 districts.
  • Linking the child labour elimination efforts with the Scheme of Sarva Shiksha Abhiyan of Ministry of Human Resource Development to ensure that children in the age group of 5-8 years get directly admitted to regular schools and that the older working children are mainstreamed to the formal education system through special schools functioning under the NCLP Scheme.
  • Convergence with other Schemes of the Departments of Education, Rural Development, Health and Women and Child Development for the ultimate attainment of the objective in a time bound manner.  

The Government and the Ministry of Labour & Employment in particular, are rather serious in their efforts to fight and succeed in this direction. The number of districts covered under the NCLP Scheme has been increased from 100 to 250, as mentioned above in this note. In addition, 21 districts have been covered under INDUS, a similar Scheme for rehabilitation of child labour in cooperation with US Department of Labour. Implementation of this Project was recently reviewed during the visit of Mr. Steven Law, Deputy Secretary of State, from the USA. For the Districts not covered under these two Schemes, Government is also providing funds directly to the NGOs under the Ministry’s Grants-in-aid Scheme for running Special Schools for rehabilitation of child labour, thereby providing for a greater role and cooperation of the civil society in combating this menace. 

Elimination of child labour is the single largest programme in this Ministry’s activities. Apart from a major increase in the number of districts covered under the scheme, the priority of the Government in this direction is evident in the quantum jump in budgetary allocation during the 10th Plan. Government has allocated Rs. 602 crores for the Scheme during the 10th Plan, as against an expenditure of Rs. 178 crores in the 9th Plan. The resources set aside for combating this evil in the Ministry is around 50 per cent of its total annual budget.  

The implementation of NCLP and INDUS Schemes is being closely monitored through periodical reports, frequent visits and meetings with the District and State Government officials. The Government’s commitment to achieve tangible results in this direction in a time bound manner is also evident from the fact that in the recent Regional Level Conferences of District Collectors held in Hyderabad, Pune, Mussoorie and Kolkata district-wise review of the Scheme was conducted at the level of Secretary. These Conferences provided an excellent opportunity to have one-to-one interaction with the Collectors, who play a pivotal role in the implementation of these Schemes in the District. Besides, these Conferences also helped in a big way in early operationalisation of Scheme in the newly selected 150 districts.

                The Government is committed to eliminate child labour in all its forms and is moving in this direction in a targeted manner. The multipronged strategy being followed by the Government to achieve this objective also found its echo during the recent discussions held in the Parliament on the Private Member’s Bill tabled by Sri Iqbal Ahmed Saradgi. It was unanimously recognized therein that the problem of child labour, being inextricably linked with poverty and illiteracy, cannot be solved by legislation alone, and that a holistic, multipronged and concerted effort to tackle this problem will bring in the desired results. 

Forward Steps:-

          The ideal scenario on Child Welfare would be when every child enjoys the fullness of childhood through education, recreation and adequate health facilities.  It is impossible to attain these facilities by the child labour.  All the children were able to enjoy the completeness of childhood only

  • when the true conscience of the nation is awakened;
  • when all the policy makers and the bureaucrats take the issue of child labour seriously and commit themselves to the cause of the holistic development of every child in India;
  • when the employers would not even contemplate the idea of employing a child for any work which might deny the child of a normal childhood;
  • when all the parents will become aware of the jeopardy of child labour and take upon themselves the duty of caring for the physical, social and psychological and mental development of the child;
  • When all the Policies laid down by the Government under Various Plans and Laws were implemented properly ;
  • The government and the legal persons must conduct campaigns to make the people educate about the legal provisions existing for the abolition of the child labour.

     References:

  1. Baland, Jean-Marie and James A. Robinson (2000) ‘Is child labor inefficient?’ Journal of Political Economy 108, 663–679
  2. Basu, Kaushik, and Homa Zarghamee (2009) ‘Is product boycott a good idea for controlling child labour? A theoretical investigation’ Journal of Development Economics 88, 217–220
  3. Bhukuth, Augendra. “Defining child labour: a controversial debate” Development in Practice (2008) 18, 385–394
  4. Emerson, Patrick M., and André Portela Souza. “Is Child Labor Harmful? The Impact of Working Earlier in Life on Adult Earnings” Economic Development and Cultural Change 59:345–385, January 2011 DOI: 10.1086/657125 uses data from Brazil to show very strong negative effects–boys who work before age 14 earn much less as adults
  5. All India Reports 1983, 1984, 1996, 1997.
  6. 10th Indian National Five Year Plan
  7. Humbert, Franziska. The Challenge of Child Labour in International Law (2009)
  8. Humphries, Jane. Childhood and Child Labour in the British Industrial Revolution (2010)
  9. ILO, Investing in every child: An economic Study of the Costs and Benefits of Eliminating Child Labor

10.  www.vvg.nli.org

11.  Kirby, Peter. Child Labour in Britain, 1750-1870 (2003)

12.  labour.nic.in

13.  Ravallion, Martin, and Quentin Wodon (2000) ‘Does child labour displace schooling? Evidence on behavioural responses to an enrollment subsidy’ Economic Journal 110, C158-C175

Impact of International laws on Municipal Laws

Abstract

John F. Kennedy had rightly said, “We prefer world law in the age of self-determination to world war in the age of mass extermination. “

There are many contrasts between the working of Municipal laws and International law and through this project I would like to bring out the impact International law has on the laws governing individual nation states. Firstly, this project will attempt to bring out the major theories propounded in relation to International laws and municipal law. Secondly, it will then proceed to understand the Role of Municipal rules in International Law. Thirdly, the research paper will then tackle the Role of International law before Municipal Law. Finally, the project will highlight the importance of treaties and its effect on the municipal laws. 

 Introduction

Since the dawn of human civilization law has always played a central role in the development of mankind. The idea that order is necessary and chaos inimical to a just and stable existence[1], has always been the central idea of law. Law or the law does not consist of the total number of laws in force. The constituent elements of which the law is made up are not laws, but rules of law or legal principles[2].

Law is territorial in nature.[3] It is because no state in times of peace allows other state or states to prescribe for and exercise powers over persons, events or things within its justification[4]. Thus the Austinian theory of law which says that every law is a direct or circuitous command of the sovereign in the character of a political superior is the basis of what we call Municipal Laws. Thus Municipal law is the law applied within a State. It is also called as ‘lex proprium civitatis’. The Roman called it the jus civile, the corpus juris civilis. It is the law of civitas that is the State.  But Municipal laws proved inadequate in providing a relevant background for an expanding and developing nation. This need was served by the creation and progressive augmentation of jus gentium. This provided simplified rules to govern the relations between foreigners and between foreigners and citizens. Thus this gave rise to the system of what we know as International Law.

International Law consists of those rules which govern sovereign states in their relations and conduct towards each other[5]. The principal subjects of International law are nation states and not individual citizens.[6] International law itself is divided into conflict of laws( or private international law as it is sometimes called) and public international law(usually just termed international law).[7]

Chapter 1: Major Theories Propounded in relation to  International laws and Municipal law

There are has been many theories propounded in relation to International Law and Municipal laws. The most notable of them all will include the Positivist theory and Monist theory. We will be looking at these theories in detail in the following pages. 

Positivism stresses the overwhelming importance of the state and tends to regard International law as founded upon the consent of states[8]. It is actual practice, illustrated by customs and by treaty[9], which formulates the role of International Law, and not formalistic structures, theoretical deductions or moral stipulations. Accordingly when positivists such as Triepel and Strupp consider the relationship of International Law to Municipal law, they do so upon the basis of the supremacy of the state and the existence of wide differences between the two functioning orders. This theory is known as dualism and stresses that the rules of the systems of International Law and Municipal law exist separately and cannot purport to have an effect on, or overrule, the other[10]

This is because of the fundamentally different nature of inter-state and intra-state relations and the different legal structures employed on the one hand by the state and on the other hand as between states. Where municipal legislation permits the exercise of International law rules, this is of no sufferance as it were and is an example of the supreme authority of the state within its own domestic jurisdiction, rather than of any influence maintained by International Law within the internal sphere[11]

Those writers who disagree with this theory and who adopt the Monist Theory tend to fall into two distinct categories: Those who, like Lauterpacht, uphold a strong ethical position with a deep concern for human rights and, others, like Kelsen who, maintain a monist position on formalistic logical grounds. The monists are united in accepting a unitary view of law as a whole and are opposed to the strict division posited by the positivists[12].

The ‘naturalist’ strand represented in England by Lauterpacht’s works sees the primary function of all law as concerned with the well being of individuals, and advocates the supremacy of International law as the best method available of attaining this. It is an approach characterized by absolute independence of states, and illuminated by faith in the capacity of the rules of International law to imbue the International law to imbue the international order with a sense of moral purpose and justice founded upon the respect for human rights and the welfare of individuals[13].

The method by which Kelsen elucidates his theory of Monism is markedly different and utilizes the philosophy of Kant[14] as its basis. Law is regarded as constituting an order which lays down patterns of behavior that ought to be followed, coupled with provision for sanctions which are employed once an illegal act or course of conduct has occurred or been embarked upon[15]. Since the definition appertains within both the internal sphere and the international sphere, a logical unity is forged[16] and because states owe their legal relationship to one another to the rules of International law, such as the one positing equality, since states cannot be equal before the law without a rule to that effect, it follows that International law is superior to or more basic than municipal law.[17]

A third approach, being somewhat a modification of the dualist position and formulated by Fitzmaurice and Rousseau amongst others, attempts to establish a recognized theoretical framework tied to reality. This approach begins by denying that any common field of operation exists as between International law and Municipal law by which one system is superior or inferior to the other.[18] Each order is supreme in its own sphere, much as French law and English law are in France and England. Just as one cannot talk in terms of the supremacy of French law over English law, but only of two distinct legal systems each operating within its own field, so it is possible to treat International law and Municipal law in the same way. They are both the legal element contained within the domestic and international systems respectively, and they exist within different juridical orders[19].

 Chapter 2: Role of Municipal Rules In International Law                                                                                                    

The general rule with regard to the position of municipal law within the International sphere is that a state which has broken a stipulation of international law cannot justify itself by referring to a breach of an international obligation to argue that the state acted in such a manner because it was following the dictates of its own municipal laws[20]. The reasons for this inability to put forward internal rules as an excuse to evade international responsibility are obvious. Any other situation would permit international law to be evaded by the simple method of domestic legislation.[21]

Accordingly, state practice and decided cases have established this provision and thereby prevented countries involved in International litigation from pleading municipal law as a method of circumventing International law[22]. Article 27 of the . lays down that in so far as treaties are concerned, a party may not to be bound invoke the provisions of its internal  law as justification for its failure to carry out an international agreement, while Article 46(1) provides that a state may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law regarding competence to conclude treaties as invalidating its consent[23]. The international court considered this provision in Cameroon v Nigeria in the context of Nigeria’s argument that the Moroua Declaration of 1975 signed by the two heads of state was not valid as it had not been ratified.[24] The court also took the view that ‘there is no general legal obligation for states to keep themselves informed of legislative and constitutional developments in other states which are or may become important for the International relations of these states’.[25] The International Court, in the Applicability of the obligation to Arbitrate case,[26]  has underlined ‘the fundamental principle of International law that international law prevails over domestic law’, while Judge Shahabuddeen emphasized in the Lockerbie case[27] that inability under domestic law to act was no defense to non compliance with an International obligation.

However such expressions of the supremacy of International law over municipal law in International tribunals do not mean that the provisions of domestic legislation are either irrelevant or unnecessary.  On the contrary, the role of internal legal rules is vital to the workings of the International legal machine[28]. One of the ways to understand this is by examining municipal laws[29]. A country will thus express its opinion on such vital international matters as the extent of its territorial sea, or the jurisdiction it claims or the conditions for the acquisition of nationality through the medium of its domestic law-feelmaking .Thus, it is quite often that in the course of deciding a case before it, an International court will feel the necessity to make a study of relevant pieces of municipal legislation.

Chapter 3: Role of International law before Municipal Law

The problem of International law within the municipal law system is, however, rather more complicated than the position discussed above, and there have been a number of different approaches to it. States are, of course, under a general obligation to act in conformity with the rules of International law and will bear responsibility for breaches of it, whether committed by the legislative, executive or judicial organs.[30]

In this chapter we will look at the approach adopted by the Common law system most notably the doctrine of Incorporation will be discussed.

The common law system has its roots in the UK’s legal system and it will be unjust to not discuss UK’s position concerning International law’s effect on its Municipal laws.

It is part of the public policy of the UK that the courts should in principle give effect to clearly established rules of International law. Various theories have been put forward to explain the applicability of International law rules within the jurisdiction. One expression of the positivist- individualist position has been the doctrine of transformation. This is based upon the perception of two quite distinct systems of law, operating separately, and maintains that before any rule or principle of International law can have any effect within the domestic jurisdiction, it must be expressly and specifically ‘transformed’ into municipal law by the use of appropriate constitutional machinery, such as an Act of Parliament.[31]

Another approach known as the doctrine of incorporation holds that international law is part of the municipal law automatically without the necessity for the interposition of a constitutional ratification procedure[32]. This doctrine refers to customary international law and different rules apply to treaties.

Customary International Law

It is in this sphere that the doctrine of incorporation has become the main British approach. It is an old established theory dating back to the eighteenth century, owing its prominence at that stage to the considerable discussion then taking place as to the precise extent of diplomatic immunity. In the case of Buvot v. Barbuit[33], Lord Talbot declared unambiguously that ‘the law of nations in its full extent was part of the law of England’, so that a Prussian commercial agent could not be rendered liable for failing to perform a decree. This was followed twenty seven years later by Triquet v. Bath,[34] where Lord Mansfield, discussing the issue as to whether a domestic servant of the Bavarian Minister to Britain could claim diplomatic immunity, upheld the earlier case and specifically referred to Talbot’s statement. This acceptance of customary international law rules as part and parcel of the common law of England, so vigorously stated in a series of Eighteenth century cases, was subject to the priority granted to acts of parliament and tempered by the Principle of Stare Decisis or precedent, maintained by the British courts and ensuring that the judgments of the higher court are binding upon the lower courts of the hierarchical system. Accordingly, a rule of International law would not be implemented if it ran counter to a statute or decision by a higher court.[35]

The basic approach adopted by the majority of common law states is clear, complications have arisen where the country in question has a written constitution. India, whose constitution refers only in the vaguest of terms to the provisions of International law is a perfect example[36]. Art. 253 of the Constitution of India states: “Notwithstanding anything in the foregoing provisions of this chapter, Parliament has power to make any law for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision made at any international conference, association or body.”

Let’s take a look at a very important case in question, Vishaka v State of Rajasthan[37],

A group of social activists and non-governmental organizations brought as a class action a petition under Art. 32 of the Indian Constitution referring to the Supreme Court’s powers under that provision to issue directions for the enforcement of certain fundamental rights incorporated in the Constitution that were being violated by alleged practices of sexual harassment of women in the workplace in India. Article 32 of the Constitution empowered the Supreme Court to issue guidelines for the enforcement of constitutionally guaranteed rights.

Since domestic law did not address the issue and did not formulate effective measures to prevent sexual harassment of working women at the workplace, the Court decided to formulate general principles in order to define the concept of sexual harassment and to ensure its eradication. To do so, the Court referred to the Convention on the Elimination of All Forms of Discrimination against Women and on the statements of the United Nation Committee on the Elimination of Discrimination against Women (the international body responsible for supervising the application of this Convention).

In order to explain its reliance on international law, the Court stated the following:

“Gender equality includes protection from sexual harassment and the right to work with dignity, which is a universally recognized basic human right. The common minimum requirement of this right has received global acceptance. The international conventions and norms are, therefore, of great significance in the formulation of the guidelines to achieve this purpose.”

(…) “The government of India ratified the above Resolution on 25 June 1993 with some reservations which are not material in the present context. At the Fourth World Conference on Women in Beijing, the government of India also made an official commitment, inter alia, to formulate and operationalize a national policy on women which will continuously guide and inform action at every level and in every sector; to set up a Commission for Women’s Rights to act as a public defender of women’s human rights; and to institutionalize a national level mechanism to monitor the implementation of the Platform For Action. We have therefore no hesitation in placing reliance on the above for the purpose of construing the nature and ambit of the constitutional guarantee of gender equality in our Constitution.”

The Court added:

“It is now accepted rule of judicial construction that regard must be had to international Conventions and norms for construing domestic law when there is no inconsistency between them and there is a void in the domestic law.”

The Court then referred to Australian decisions and concluded:

“There is no reason why these international Conventions and norms cannot therefore be used for construing the fundamental rights expressly guaranteed in the Constitution of India which embody the basic concept of gender equality in all spheres of human activity.”

Once justified the reference to international instruments, the Supreme Court of India closely relied on the General Recommendation of the United Nations Committee on the Elimination of Discrimination against Women in order to define the actions and situations that shall be qualified as sexual harassment. Besides, the Supreme Court followed the guidelines issued by the United Nations Committee when elaborating the measures to be taken in order to protect women against harassment and the judicial remedies to be granted to sexual harassments victims.

Chapter 4: Treaties and Conventions

As far as treaties as treaties are concerned, different rules apply as to their application within the domestic jurisdiction for very good historical and political reasons. While customary law develops through the evolution of state practice, international conventions are in the form of contracts binding upon the signatories.[38] For a custom to emerge it is usual, though not always necessary, for several states to act in a certain manner believing it to be in cohjtgnformity with the law. Therefore, in normal circumstances the influence of one particular state is not usually decisive[39]. In the case of treaties, the states involved may create new law that would be binding upon them irrespective of previous practice or contemporary practice[40]. In other words, the influence of the executive is generally of greater impact where treaty law is concerned than is the case with customary law.

It follows from this that were treaties to be rendered applicable directly within the state without any intermediate stage after signature and ratification and before domestic operation, the executive would be able to legislate without legislature. Because of this, any incorporation theory approach to treaty law has been rejected.[41]

One of the principal cases in English law illustrating this situation is the case of the Parlement Belge.[42] It involved a collision between this ship and a British tug, and the claim for damages brought by the latter vessel before the Probate, Divorce and Admiralty division of the High Court. The Parlement Belge belonged to the King of Belgians and was used as a cargo boat. During the case, the Attorney General intervened to state that the court had no jurisdiction over the vessel as it was the property of the Belgian Monarch, and that further, by a political agreement of 1876 between Britain and Belgium, the same immunity from foreign legal process as applied to warships should also apply to this packet boat. In discussing the case, the court concluded that only public ships of war were entitled to such immunity and that such immunity could not be extended to other categories by a treaty without parliamentary consent. Indeed, it was stated that this would be ‘a use of the treaty-making prerogative of the Crown…without precedent, and in principle contrary to the law of the Constitution.[43]

The interpretation of treaties not incorporated by statute into municipal law, and the decision as to whether they have been complied with, are matters exclusively for the Sovereign as ‘the court must speak with the same voice as the executive’[44]. An exception is where reference to a treaty is needed in order to explain the relevant factual background,[45] for example where the terms of a treaty are incorporated into a contract.[46]

Where the legislation in question refers expressly to a relevant but unincorporated treaty, it is permissible to utilize the latter in order to constrain any discretion provided for in the former.[47] Further, it has been argued that ratification of an international treaty (where no incorporation has taken place) may give rise to legitimate expectations that the executive, in the absence of statutory or executive indications to the contrary, will act in conformity with the treaty.[48]

However treaties relating to the conduct of war, cession of territory and the imposition of charges on the public purse[49] do not need an intervening act of legislation before they can be made binding upon the citizens of the country.[50] A similar situation exists also with regard to relatively unimportant administrative agreements which do not require ratification, providing of course they do not purport to alter municipal law. In certain cases, Parliament will give its approval generically in advance for the conclusion of treaties in certain fields within specified limits, subject to the terms negotiated for particular treaties being promulgated by statutory instrument(secondary legislation).[51]

In conclusion it may stated that parliamentary legislation will be required where a treaty for its application in the common law system requires a modification of, or addition to, existing common law or statute, affects private rights, creates financial obligations for the country or increases the powers of the Sovereign.[52] 

Conclusion

International law since the middle of the last century has been developing in many directions, as the complexities of life in the modern era have multiplied. For, as already emphasized, municipal law reflects the conditions and cultural traditions of a particular country within which it operates.  The country evolves a certain specific set of values – social, economic and political and this stamps its mark on the legal framework which orders life in the environment. International law is also a product of its environment. It has developed in accordance with the prevailing notions of international relations and to survive it must be in harmony with the realities of the age.

Nevertheless, there is continuing tension between those rules already established and the constantly evolving forces that seek changes within the system. One of the major problems of municipal law is to determine when and how to incorporate standards of International law into the already existing framework, so that, on the one hand, the law remains relevant and, on the other, the system itself is not too vigorously disrupted.

The growth of positivism in the nineteenth century has had the effect of focusing the concerns of International law upon sovereign states. They alone were the ‘subjects’ of International law  and were to be contrasted with the status of non-independent states and individuals as ‘objects’ of International law. They alone created the law and restrictions upon their independence could not be presumed. But the gradual sophistication of positivist doctrine, combined with the advent of new approaches to the whole system of international relations, has broken down this exclusive emphasis and extended the roles played by non-state entities, such as individuals, multinational firms and international institutions.

Thus in conclusion, reality circumscribes the concept of sovereignty in operation and increases the necessity for worldwide co-ordination of matters as different as the policies adopted to combat economic problems, environmental dangers and terrorist threats.

 


[1] See Malcom N. Shaw, International Law, Fifth Edition, Cambridge University Press, Cambridge,2003 pp.1

[2] See P J Fritzgerald, Salmond on Jurisprudence, Twelfth Edition, Univrsal Law Publishing Co.Pvt.Ltd., 2004,pp 10

[3] Ibid at pp.11.

[4] Ibid at pp 12.

[5] Ibid at pp. 14

[6] Supra Note 1 at pp.1

[7] See J.Bentham, Introduction to the principles of Morals and legislation, London, 1780

[8] Supra Note 1 at pp 121.

[9] See J.H.Jackson, Status of Treaties in domestic legal Systems : A Political Analysis, AJIL Pvt. Ltd. 1992, pp.310 

[10] Supra Note 1 at pp. 122

[11] See R.W.Jennings and A.D.Watts, Oppenheim’s International law,9th Edition, Sweet Maxwell and Co., 1992,  pp. 53

[12]See G.Fitzmaurice, The General Principles of International Law Considered from the standpoint of the Rule of Law, Cambridge University Press, Cambridge, 1992, pp. 5

[13] See generally, Lauterpacht, International Law, London, 1950.

[14] Kant’s philosophy: According to which all of man’s knowledge consists only of his own conceptions..

[15]  See Kelsen, General theory of Law and state, Cambridge University Press, Cambridge, 1945, pp.363 

[16] Supra Note 1 at pp. 122

[17] See, Kelsen, Principles of International Law, Cambridge University Press, Cambridge, 1952, pp. 557

[18] Supra Note 12 at pp. 53; See also C.Rosseau, Droit International Public, Paris Univ. Press, Paris, 1979, pp.4-16.

[19]  Ibid at pp. 30

[20] Supra Note 1 at pp. 124

[21] See e.g. C.W.Jenks, The Prospects of International Adjudication, London Publishing House, London, 1964, Ch. 9.

[22]  Supra Note 1 at pp. 124

[23] Note also Article 13 of the Draft Declaration on the Rights and duties of states, 1949, which provides that every state ‘has the duty to carry out in good faith its obligations arising from treaties and other sources of International law, and it may not invoke provisions in its constitution or its laws as an excuse for failure to perform this duty’, Yearbook of the ILC, 1949. pp. 286, 289.

[24]ICJ Reports, 2002, para.265

[25] Ibid., para.266

[26] ICJ Reports, 1988,pp.12, 34; 82 ILR, pp.225,252

[27] ICJ Reports, 1992, pp.3, 32; 94 ILR, pp. 478, 515; ee also Westland Helicopters Ltd v AOI, 80 ILR, pp.595, 616.

[28] Supra Note 1 at pp. 126.

[29]See e.g. the Anglo- Iranian Oil Co. case,  ICJ Reports, 1952, pp.93; 19 ILR, pp.507.

[30] Supra Note 1 at pp. 128; See also e.g. the Exchange of Greek and Turkish Populations case, PCIJ, Series B, No.10, pp.20.

[31] Supra Note 1 at pp. 129.

[32] Ibid at pp. 129.

[33] (1764) 3 Burr. 1478.

[34] (1737) Cases t. Talbot 281.

[35] See Trendtex Trading Corporation v. Central Bank of Nigeria[1977] 2 WLR 356; 64 IL, pp. 111, 128.

[36] See e.g. D.D. Basu, Commentaries on the Constitution of India, New Delhi, 1962, Vol. II.

[37] AIR 1997 SC 3011

[38] Supra Note 1 at pp.135

[39] Ibid at pp. 135

[40] See Generally A.D. Mcnair, The law of treaties, Oxford University Presss, Oxford, 1961, pp.81-97.

[41] Ibid at pp. 95                                                                                                            

[42] (1879) 4 PD 129.

[43] Ibid., pp.154.

[44] Lonrho Exports v. ECGD[1996] 4 All ER 673, 688; 108 ILR, pp.596, 613.

[45] Lord Oliver in Maclaine Watson v. Department of Trade and Industry emphasized that the conclusion of an international treaty is a question of fact, thus a treaty may be referred to as part of the factual background against which a particular issue arises, [1989] 3 All ER 523, 545; 81 ILR, pp.671, 702.

[46] Supra Note 42.

[47]  See e.g. R v. Secretary of State, on the application of the Channel Tunnel Group 119 ILR, pp. 398, 407-8.

[48] See Lord Woolf MR in Ex Parte Ahmed and Patel[1998] INLR 570, 584, relying upon the approach of the High court of Australia in Minister of Immigration v. Teoh, (1995) 128 ALR 353, as to which Hobhouse LJ stated that where the secretary of state had adopted a specific policy, it was not possible to derive a legitimate expectation from the treaty going beyond the scope of policy: at 592.

[49] Supra Note 1 at pp.138.

[50] Supra Note 38 at pp. 89.

[51] Supra Note 1 at pp.138.

[52] See, Sinclair and Dickson, National Treaty Law, Sweet Maxwell and Co., London,  1989, p.230.

TRAC PROPOSED DRAFT TAKEOVER CODE REGULATIONS 2010

 A COMPARATIVE STUDY WITH REGULATIONS 1997

1.1. Introduction:

From the beginning of the Takeover Regulations, 1997 up to know more than twenty three amendments has been made. But at present there is a steady increase in corporate restructuring by the Indian companies in order to stand in the race of competition filed the number of takeovers of listed companies has been increasing from time to time.[1] As a result by taking into consideration the increase of takeover market a need has arisen to review the Takeover Regulations, 1997. Towards the achievement the SEBI by its order dated September 4, 2009 has constituted the Takeover Regulations Advisory Committee (TRAC)[2] under the chairmanship of Mr. C. Achuthan,[3] Committee to examine, review and to suggest suitable amendments to it as it deemed fit.

But the committee felt that the legal framework regulating the substantial acquisition of shares and takeovers is precise, unambiguous and conflicting the interest of such shareholders.  As a result the committee felt the need to balance the interest of various stakeholders and to provide a fair, equitable and transparent regime is necessary. Hence the committee instead of making amendments to the existing regulations, it proposed a draft Takeover Regulation, 2010, which maintains such balance and achieve the goal of protection of the interests of the public shareholders in takeover situations.

The Report of the committee was submitted on July 19, 2010 and named the proposed takeover regulations as “Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2010”. The report is divided into three parts, and it will be kept in SEBI website up to August 31, 2010 for allowing public comments.[4]

1.2. Objectives of the Proposed Regulations:

If we compare the objectives of both the previous and the proposed regulations seems to be one and the same, it like a new wine in old bottle. But as per the Mr.C.Achuthan, Committee the following are the main objectives of the proposed Takeover Regulations, 2010, they are, to provide transparent legal framework for facilitating takeover activities, fair, transparent and equitable framework to protect the interest of investors, to balance the various conflicting objectives, to provide an exit opportunity to each shareholders when takeover of a target company takes place, to bring fair and accurate disclosures, and finally to bring fair competition among acquirers interested in taking over the same target company etc.[5]

Major changes in the TRAC Proposed Takeover Code Regulations 2010 and its Comparison with Regulations 1997:

As compared with the Current Takeover Code Regulation,1997, the following are the major changes which are introduced by the TRAC Committee under the proposed Draft Takeover Code Regulations, 2010, can be classified into three parts. The first part deals with regard to changes, expansion and inclusion of new definition under the regulations. The second part deals with regard to the new trigger points for making the open offer. And the third part deals with regard to the other provisions under the proposed takeover regulations and its impact on different sectors. They are as follows.

1.3. Alteration to Definition parts

            Changes in the definition part has been divided into three parts, they are as follows.

1.3.1. Changes to existing definitions:

1)      Control: The first major change taken place in the definition part is the term ‘Control’.[6] The term has be expanded and includes situations where a person has the ability or right to appoint majority of the directors or to exercise control in any other manner amounts to control. On the other hand the Directors and officers, who would enjoys certain rights in the Target Company on account of their employment, would not be considered to be in control of the Target Company. The exemption of change from joint control to single control not considered as change in control under the old regulations has been deleted in the new proposed Takeover Regulations,2010.[7]

2)      Disinvestment: As per the new definition along with the direct, even the indirect sale of the governments holding either by the central, state or even the sale by the Government company is also included in the definition of the term disinvestment.[8]

3)      Persons acting in concern: The scope of the term has been expanded and included others like trustee companies trustees, sponsor, Assets Management Company are also treated as persons deemed to be action in concern.[9] Along with the above even the Financial Advisors are also now included in the definition of the term person acting in concert under the new Proposed Regulations, 2010.

4)      Prompter: Instead of having a detail definition of the term promoter under the old Regulations,1997, under the present Proposed Takeover Regulation,2010 a reference was given to the SEBI (Issue of Capital Disclosure Requirements) Regulations,2009 to make the definition of the term same under both the regulations.

5)      Shares: As per the new definition of the term ‘Shares’ it also included the Depository Receipts. If further says all Depository Receipts which entitle the holder to exercise the voting rights in the target company are also treated as shares under the new definition.[10]

8.3.2. Definitions of terms deleted:

The following are some of the definitions of the terms which are defined under the old Takeover Regulations,1997 like, Investigation office, Panel, Public Shareholding, Sick Industrial Company etc, has not been defined and totally deleted under the Proposed Takeover Regulation,2010.[11]

1.3.3. New terms added to Definition part:

            The following are some of the new definitions has been added to the proposed Takeover Regulations, 2010, they are as follows;

  •   Business Day – instead of the term working day under the old definition a new word ‘Business day’[12] was defined but given the same meaning.
  • Acquisition – It means, directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company.[13]
  • Delisting threshold – It means a shareholding entitling exercise of ninety per cent of the voting rights in a target company, excluding voting rights on shares held by a custodian and against which depository receipts have been issued overseas, with reference to the share capital of the target company as of the last day of the tendering period.[14]
  • Manager to the open offer- means the merchant banker for the propose of Regulation – 12.[15]

1.4. Increased trigger limit for open offer:

As per the existing Takeover Code Regulations, 1997 an open offer is trigged upon acquisition of 15% or more shares or voting rights. It was introduced in 1998 and continued without any change up to know even though several arguments came to increase it. But under the proposed Takeover Regulations, 2010 the trigger limit has been increase from 15% to 25%.[16]  The committee recommendations for such increase is based on three points namely, estimation of average promoter shareholding prevailing in listed companies is 25% to 30%, helps to meet the international practices for open offer triggers and[17] as per the existing Indian corporate law, recognize that the shareholding more that 25% is sufficient to block the special resolutions which are required for critical decisions.[18]

1.5. Creeping Limit for Financial year:

In case of a creeping acquisition for every financial year, an acquirer holding 25% or more voting rights in a target company is only allowed to acquire additional voting rights in the target company up to 5% within a financial year[19] without making an open offer.[20]

1.6. Increase in Minimum Open Offer:

According to the existing Takeover Regulations,1997 an acquirer is required to make a statutory open offer for acquisition of a minimum 20% of the voting capital from public shareholders in case if once the threshold limit of 15% is reached. But under the proposed Takeover Regulation, 2010 it has been increased the statutory open offer size to 100% of remaining shareholders. The basic reason behind such increase in open offer size is to protect the interest of minority shareholders and each minority shareholders is entitle to exercise his right to exit the company in entirety in the event of Takeovers or Substantial acquisition of shares.[21]

But the impact of such increase may create higher acquisition cost for any takeover of a listed company and the large players may take a lead for acquisitions. On the other hand the criticism against such increase is that, it creates a lack of debt funding problem for domestic players in India to make acquisitions.[22]

1.7. Automatic delisting or restore to minimum public shareholding:

According to the existing Takeover Code the minimum public shareholding is required to be maintained and there is no provision for a single shot delisting of Target Company, the same should be undertaken in compliance with delisting regulations made by SEBI. But under the proposed Regulations there is an automatic delisting is available in case in the open offer the acquirer crossed 90% of shares or voting rights.

But incase if the acquirer shareholding has crossed the 75% but has not reached 90% in such case the acquirer is required to restore minimum public shareholding of 25%.[23] In this context there is a need to bring the coordination between the two regulations on delisting provisions.[24]

1.8. Indirect acquisition and its pricing an open offer:

As compared with earlier, recently there was litigation in the Supreme Court where people are struggling to explain when an indirectly acquired company would trigger an open offer. In order to overcome this the TRAC has attempted to clear the air surrounding indirect acquisitions .In its report submitted to SEBI on July 19, the Takeover Regulations Advisory Committee has laid out specific provisions for the open offer timing, size and price for indirectly acquired companies provisions that are ambiguous in the current takeover law. In the old regulations there is a common treatment for all indirect acquisition of Target Company irrespective of the size of the target company. But under the proposed regulations certain parameters has been laid down for determining the treatment of the indirect acquisition.[25]

The best example for such case is the Dunlop Case, in 2005, in which a Ruia controlled Singapore based SPV by the name of Wealth Sea had indirectly acquired 74.5% voting power in Dunlop India, via the acquisition of its British Virgin Islands-based parent. Since the transaction was structured as an indirect acquisition, no open offer was made—until 2007, when SEBI stepped in and ruled that an indirect change of control must result in an open offer. Hence the TRAC reproduced the principle and said that a 100% open offer is required for all indirect acquisitions whenever there is a change in control in an Indian listed company, regardless of whether or not that company is material to its parent.

Hence the only materiality distinction the TRAC made is for determination of the open offer price.  It further clarified that If the indirectly acquired company forms a significant part, that is, more than 80% of the Net Asset Value or Sales Turnover of the parent or 80% of the deal value, then such an acquisition will be treated as a direct acquisition and the price of the 100% open offer will be determined accordingly. But in case if the indirectly acquired company is less than 80%, then the 100% open offer will be priced based on separate indirect acquisition pricing norms. Hence the TRAC has made it clear that in both cases, whether it is material or immaterial the offer price will take into account the value of the shares of the indirectly acquired company.[26]

On the other hand in case of such indirect acquisition an immediate short form of public announcement has to be published within four business bays and a detailed public notice to be issued within 5 business days of completions of such acquisition.

1.9. One reference date for calculating Open offer price:

Under the current law both the parent and the target company public announcement dates have to be used as reference dates for the purpose of calculating the offer price. The best example for such debate is in Coflexip’s case, in which the price was Rs,43/- as of 2001, but it became double in 2002 at Rs,84/-. Hence finally the SAT came into picture and finally ruled that the 2001 date was the correct reference date. So in order to avoid such differences the TRAC has proposed only one reference date for the purpose of calculating the open offer price and that date  shall be the date on which the parent acquisition is announced in the public domain, or the date on which the parent enters into any agreement, whichever is earlier. Hence we can say that the reference date which has been set, is the date of the first announcement. So in a way the acquirer is protected from the volatility in the share prices in the Indian stock exchange as soon as the deal is announced for all subsequent periods.

 This new proposed reference date also introduces clarity in cases where the parent company is unlisted, the reason behind for giving such clarity in case of unlisted company is the debate that took place just recently in the 2009 Disa India case, where the Netherlands based company Disa Holdings was acquired but  no official public announcement was made, since the company was unlisted in the Netherlands. Therefore Disa Holding’s listed Indian subsidiary Disa India claimed that there was no reference date linked to the parent transaction at all and hence no such date had to be used for open offer price calculation. The argument which was raised in the Disa India case was upheld by the SAT. But the TRAC has now clarified that the reference date is any date on which the parent acquisition comes into the public domain, and not just an official public announcement date.

The TRAC further said that a 10% per annum has to be added to the open offer price in cases where the time period between the announcement of the parent deal and the public announcement for the target company exceeds 5 days.

1.10. Short form Public announcement:

In the Proposed Takeover Regulations a new concept called the ‘Immediate Short Form’ public announcement has been introduced and it applies both to the direct and indirect acquisitions. In case of direct acquisition an immediate short form public announcement is to be issued on the date of agreeing to acquire shares or voting rights or control and later within 5 business days of issue of public notice a detailed public notices is required to be issued by disclosing all material facts. In case of indirect acquisition an immediate short form of public announcement has to be published within four business bays and a detailed public notice to be issued within 5 business days of completions of such acquisition.  

1.11. Removal of Whitewash provisions:

Under the existing Takeover Regulation there is an exception that an open offer is not required in case if the shareholders of the target company pass a special resolution by postal ballot to that effect for approving the change in control. But under the proposed regulations it has been removed, to protect the interest of minority shareholders.[27]  One more allowed change is that under the current Takeover Code Regulations an acquirer is allowed to nominate a director on the target Board if he has deposited the full offer amount in an escrow account and can do so only after the expiry of 15 days window for competing offers has closed, this created a controversy. As a result the TRAC has made it clear that there should not be any change to be take place in the constitution of the Board of the Target Company during the Period of Competition offers.[28]

1.12. Governance Issue/Mandatory Recommendation by Independent Directors:

In the old regulations the Board of Directors of the target company can sent their recommendations on the open offer to their shareholders. But under the proposed regulations it imposed an obligation of the target company to constitute a independent directors and such independent directors are required to make a reasoned recommendation on the open offer and shall be published by target company. On the other hand no representatives can be appointed by the acquirer in the Board of the target company unless he deposits 100% consideration in the escrow account and the deadline for making competition offers is expired.[29]

1.13. Additional provisions for Withdrawal of Open offer:

Under the old regulations withdrawal of open offer is allowed only under specified circumstances like death of sole acquirer, or any other circumstances as deeded fit by the SEBI, that to after acquiring required statutory approval. Along with the above circumstances one more exemption is allowed for withdrawal, the additional provision says that, withdrawal of open offer is allowed if any condition stipulated in the acquisition agreements is not met for reasons outside the reasonable control of the acquirer.

1.14. Voluntary Open Offer and its restrictions:

In the proposed Takeover Regulations an acquirer holding collectively 25% or more voting rights in the target company can make an voluntary open offer for a minimum size of 10% of voting capital shares of the target company and it should be in compliance with minimum public shareholding norms.[30] On the other hand an exception is provided that, the voluntary open offer can be raised to a fully fledged offer for 100% remaining shareholders in case if a competitive bid is filed, within fifteen business days of such filing of competitive bid.[31]

The restrictions against such voluntary open offer are, no voluntary open offer can be made in case if the acquirer has acquired and shares in the preceding fifty two weeks, and also no such voluntary open offer can be made by the acquirer for a period of six months after the open offer.[32]

1.15. Overhaul of Exemptions from open offer:

As compared with the current law, the TRAC has laid down a clear picture with regard to the exemptions from making an open offer. [33]And also it has shifted the provisions dealing with exemptions from Regulation – 3 to Regulation – 10 to bring a clear and unambiguous picture to the Regulations. Now under the present proposed Takeover Code Regulation, 2010 the TRAC has made it more difficult particularly to automatic exemption route and has closed all the loopholes which are existing in the current Takeover Code, and also introduced anti-abuse conditions in the exemptions part and it further classified the exemptions part into two parts namely, transactions which trigger a statutory open offer due to substantial acquisition of shares or voting rights or change in control and the transactions which trigger a statutory open offer due to acquisition of shares or voting rights exceeding prescribed thresholds limit but where there is no change in control.

On the other hand a complete exemption from making an open offer is provided under the current Takeover Code in case of an acquisition in accordance to a scheme of arrangement, if such restructuring is undertaken either by the target company or its parent. But under the proposed Takeover Regulations, 2010, the TRAC has made it more difficult to obtain an open offer exemption, it proposed that the exemption for such schemes of arrangement is available only in cases where the cash equivalent component of the consideration is less than 25% of total consideration paid under the scheme and the persons who were previously holding voting rights of the target company’s parent are required to continue to hold 33% voting rights either directly or indirectly of the restructured company after the post restructuring.[34]

One more exemption in the TRAC report is that it proposed to make buybacks automatically exemption but in case if because of such  buybacks if the shareholding goes beyond the control threshold then he is required to make an open offer, but it does not apply if the acquirer has obtained an exemption from the Board. In order to get this exemption he should not vote on the buyback in the Board meeting or shareholders meeting and his increase in voting rights does not cross the control threshold.

1.16. Prohibition of Non-competent fee:

Under the Takeover Code Regulations, 1997 a non-competent fees upto 25% of the offer priced is permitted to be paid to the promoters of the target company in addition to the offer price. But under the TRAC Proposed Takeover Code Regulations, 2010, the provision of non-compete fee was omitted and the promoters to be paid the same price per share as the pub shareholders entitled. d

1.17. Activities and Timelines for Open offer Process:

Under the proposed Takeover Regulations the procedural timelines for various activities in the open offer process has been reduced from 95 days to 57 business days from the date of public announcement. It further clarified that under the old Regulations the Public announcement should be made within 4 working days of entering into an agreement or making a decision for acquisition.

But under the TRAC Proposed Takeover Regulations,2010 a new concept called the “Short Form Public Announcement” should be made on the  same day of agreeing to acquire shares or voting rights or control over the target company and a detailed public statement should be within 5 business days from making of the short form public announcement.[35]

1.18. Impact of Recommendations on different sectors:

By taking into consideration the different recommendations made by the TRAC, it has be tried to laid down the following, are the impacts of those recommendations on different sectors as follows, they are;

1.18.1. Impact on promoters of Target Company:

The first impact of the proposed Takeover Code Regulation, 2010 on the promoters of the Target Company is that, due to the increase of initial trigger threshold limit from 15% to 20% made the hostile takeovers of some of the listed companies having promoter shareholding lower made easy, the second impact is that the promoters are not now allowed to get non-compete fee and eligible only for the price which can be paid to other public shareholders of the target company. the third impact is that the creeping acquisition upto 5% per annum till 75% is allowed for any acquirer holding 25% or more voting rights in the target company, makes the promoters to increase their shareholding upto 75% in the target company without making an open offer, whereas under the current regulation it is allowed only upto 55% .

1.18.2. Impact on public shareholders:

The impact of such recommendations on the public shareholders is that, the increase of offer size from 20% to 100%  provides an exit opportunity to the shareholders regarding his all shares and the prohibition of non-compete fee provides an equal treatment and bring uniformity regarding the price offered, reducing the timeline for open offer decreased the market risk to the public shareholders, and finally they can get an option to take decisions regarding the open offer basing on the mandatory statement required to be made by the independent directors of the target company to their shareholders.

1.18.3. Impact on acquirers:

The impact of the recommendation of the TRAC proposed Takeover Code Regulations, 2010 against the acquires is that the cost of acquiring a listed company has been increased because of increasing the open offer size, and for domestic acquires there is a hurdle for getting fund because the banks have limitation of financing for acquisition of shares of another company, this gives an advantage to the foreign acquirers. On the other hand there is an option available to the acquirers to directly go for delisting of the target company if the acquirer acquires the shares exceeding the delisting threshold.

 Conclusion:

Hence it is clear that as compared with the current Takeover Code Regulations, 1997, the advisory committee proposed draft Takeover Code Regulations, 2010, is very clear and removed the confusion on certain provisions and tried to bring fair, equitable and transparent legal framework which is in conformity with the best global practices. On the other hand it also tried to protect the interest of investors by providing an exit opportunity and by prohibition of competent fee where all the shareholders will get the same price.

Before going to conclude, it is important to say that a human being remembers everything to forget and forgets everything to remember new things, in the same way the advisory committee, while submitting the draft to SEBI, it has also not taken into considered certain aspects like, in a recent Subhkam Ventures Pvt Ltd vs. SEBI, 2010 case, where the supreme court has made it clear about the meaning of the term, control and made the distinction between “positive and negative control” and finally held that acquisition of certain affirmative rights with the purpose, only to protect the investment does not constitute the acquisition of control, in this scenario even the advisory committee has also failed to discuss about the concept of negative control, under the proposed regulations. In the same way further,  more clarity is required to be given to the provisions, dealing with the voluntary open offer particularly, with respect to the situation,where the person holding less that 25%  shares desires to consolidate his shareholding, through open offer is allowed or not.

One more lacuna in the TRAC report is that it has pointed out about the need for uniformity regarding the “taxation issues” in case of shares acquired in open offer. In this context, it has just simply suggested that SEBI has to take up the matter with the Government but it has not tried to make any suggestions on it.

Last, but not the least, one more area, where the TRAC report has not taken into consideration is that, today the corporate takeovers has changed its path from domestic takeovers to cross border takeovers, the best example, in present days, is that Vedanta Resources Plc a company listed in the London Stock Exchange, which controlling the Indian sterlite Industries Ltd has decided to acquire a controlling stake in Cairn India Ltd, and filed the draft letter of offer with SEBI, on the other hand the Mahendra & Mahendra entered into a memorandum of understanding with Ssangyong Motor Company (SYMC) to acquire a majority control stake in the South Korean SUV Maker, in this context, the need of a clear and separate provisions to deal with situations in case of a cross border takeover has to be considered, but failed to do so, except that, it dealt with the issues relating to the ADR and GDR concerned and the holding of depository receipts and restricted the exemptions to it.

Hence as compared with the current regulations, we can say this proposed draft takeover regulations 2010, up to some extent has tried to remove all the loopholes , but we are not the one to say whether the recommendations made by the TRAC is good or bad because a decision will never be a good or bad, but it depends upon the changing circumstances and future needs, in the same way, the SEBI has also allowed the public feedback up to August 31st, by uploading the report in its website.  Now it’s the time to wait whether the TRAC report will succeed in its journey or not, after facing the hurdles in the form of criticism. Time will decide.


[1] Koushik Chatterjee, NEW TAKEOVER CODE: IS IT ACHIEVABLE FOR CORPORATE INDIA.

http://www.moneycontrol.com/news/current-affairs/ne-takeover-code-is-it-achievable-for-corporate-india_471100.html (August 27, 2010)

[2] Takeover Regulations Advisory Committee, hereinafter called as “TRAC”.

[3] He is the former Presiding Officer of the Securities Appellate Tribunal.

[4] Report of The Takeover Regulations Advisory Committee Mr. C. Achuthan, PROPOSED TAKEOVER REGULATIONS, 2010. (Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2010).

http://www.sebi.gov.in/commreport/tracreport.pdf (September 2, 2010).

[5] Report of The Takeover Regulations Advisory Committee Mr. C. Achuthan, PROPOSED TAKEOVER REGULATIONS, 2010. (Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2010). http://www.sebi.gov.in/commreport/tracreport.pdf

[6]New Regulations,2010, Regulation – 2(1)(g). Old Regulations,1997, Regulations – 2(c).

[7] http://www.bmradvisors.com/upload/documents/MAE2010,%20July%2023%20pdf1280126707.pdf

[8] New Regulations,2010, Regulation – 2(1)(i). Old Regulations,1997, Regulation – 2(1)(cc).

[9] New Regulations,2010, Regulation – 2(1)(r). Old Regulations,1997, Regulation – 2(1)(e).

[10] New Regulations,2010, Regulation – 2(1)(w). Old Regulations,1997, Regulation – 2(1)(k).

[11] A Comparison of Regulations, 1997 with the Recommendation given by TRAC. http://www.takeovercode.com/uploads/comparison_definitionsn.pdf

[12] Proposed Takeover Regulations,2010, Regulation – 2(1)(e).

[13] Proposed Takeover Regulations,2010, Regulation – 2(1)(c).

[14] Proposed Takeover Regulations,2010, Regulation – 2(1)(h).

[15] Proposed Takeover Regulations,2010, Regulation – 2(1)(p).

[16] http://www.dishtracking.com/blog/cnbc-tv18/cnbc-tv18-presents-rules-of-the-ma-game-on-trac/

[17] A Comparison of Regulations, 1997 with the Recommendation given by TRAC. http://www.takeovercode.com/uploads/comparison_definitionsn.pdf

[18] Proposed Takeover Regulations,2010, Regulation – 3(1).

[19] Proposed Takeover Regulations,2010, Regulation – 3(2).

[20] http://in.reuters.com/article/idINIndia-50260620100720

[21] Report of The Takeover Regulations Advisory Committee Mr. C. Achuthan, PROPOSED TAKEOVER REGULATIONS, 2010. (Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2010).

http://www.sebi.gov.in/commreport/tracreport.pdf

[22] http://www.bmradvisors.com/upload/documents/MAE2010,%20July%2023%20pdf1280126707.pdf

[23] Proposed Takeover Regulations,2010, Regulation – 7(4)&(5).

[24] Takeover Regulations — Proposed Makeover,

http://www.taxguru.in/sebi/takeover-regulations-%E2%80%94-proposed-makeover.html

[25] Proposed Takeover Regulations,2010, Regulation – 5(1).

[26] Isha Dalal, INDIRECT ACQUISITIONS: ON TRAC.                                    http://www.moneycontrol.com/news/management/indirect-acquisitions-on-trac_474112.html

[27] Takeover Regulations — Proposed Makeover,

http://www.taxguru.in/sebi/takeover-regulations-%E2%80%94-proposed-makeover.htm

[28] Amrish Shah, COMPETING OFFERS: ON TRAC.

http://thefirm.moneycontrol.com/news_details.php?autono=476292

[29] Proposed Takeover Regulations,2010, Regulation – 26.

[30] Proposed Takeover Regulations,2010, Regulation – 6.

[31] Proposed Takeover Regulations,2010, Regulation – 7(2).

[32] Proposed Takeover Regulations,2010, Regulation – 6(2).

[33] Bharat Vasani, EXEMPTIONS: ON TRAC.

http://thefirm.moneycontrol.com/news_details.php?autono=478240

[34] Sandeep Katwala, ON TRAC? FOREIGN ACQUIRERS.

http://thefirm.moneycontrol.com/news_details.php?autono=481535

[35] Arun Scaria and Sahil Shah (ed.,), INDIAN TAKEOVER REGULATION UP FOR OVERHAUL.