Part I

Government Control of Corporate Activity

COMPETITION LAW

Give intrduction to Comptition Law?

In the pursuit of globalisation, India responded to opening up its economy, removing controls and
resorting to globalisation. The natural corollary of this motion is that the Indian market should be
geared to face competition from within the country and outside. The Central Government for this
purpose, constituted a High Level Committee on Competition Policy and Law. The Committee
submitted its Report in 2000 to Central Government. On the basis of this Report made the
competition law in the shape of the Competition Act of 2002 to ensure competition in India by
prohibiting trade practices which cause appreciable adverse effect on competition in markets within
India and as well provides for the establishment of a quasi-judicial body i.e., Competition
Commission of India which came into operation in 2009, to undertake competition advocacy for
creating awareness and imparting training on competition issues. This law also curbs negative
aspects of competition through the Competition Commission of India (CCI) which has a principal
Bench and also additional benches. The Competition Commission is empowered to pass orders for
granting interim relief or any other compensation or any order imposing penalties.

An appeal from orders of the Competition Commission lies to Supreme Court or to Competition
Appellate Tribunal as prescribed in 2007. The Central Government has the power of supervision and
control over the Competition Commission of India. The Director-General is the head of the too such
Commission.

Moreover, the Competition Law was made keeping in view of economic development of our
country, preventing the practices having adverse effect on competition, promoting and sustaining
competition in markets, protecting the interests of consumers and ensuring freedom of trade carried
on by other participants in markets in India.

Competition Policy

The Competition Policy may be defined as 堵 overnment measures that directly affect the behaviour
of enterprises and the structure of industries�. The object of competition policy is to promote
efficiency and maximise welfare. It is well-known that in the presence of competition, welfare
maximisation is synonymous with allocative efficiency. The taxes are generally welfare-reducing.

The competition policy has two objectives in general. The first involves putting in place a set of
policies that enhance competition in local or national markets. It may include a liberalised trade
policy, relaxed foreign investments, ownership requirements and economic deregulation.

The second objective is legislation or law makings to prevent anti-competitive business practices and
unnecessary governmental intervention. Hence an effective competition policy promotes the
creation of business environment which improve static and dynamic efficiencies and leads to
efficient resource allocations, and in which the abuse of market power is prevented mainly through
competition. It also requires a creation of regulatory framework for achieving all around efficiency.
The policy also prevents artificial entry barriers and facilitates market access and complements other
competition promoting activities. The trade liberalisation alone is not sufficient to promote
competition and there might be a need for a separate competition policy through the strong
implementation of competition law.

The economic consequences of the competition policy leads a positive approach to resource
allocation and industrial growth, productivity and efficiency, competitiveness, inflexibility, minimum
efficient scale, Industrial concentration capacity utilisation, technology and research and
development within a specific market regime with the goal of consumer welfare.

What are the Advantages of Competition?

� Stimulating innovation and efficiency.

� Providing Consumer with a variety of alternatives, enhancing product differentiation and better
satisfaction of consumers.

� It includes competitive products in Competitive prices. in giant sectors.

� Bigger manufacturers tend to keep the market reserved for themselves and try to subvert free
competition by wing methods like�

(a) Forcing a competing firm out of business by predation and other methods.

(b) Buying out competing firms by takeover or merger.

(c) Colluding with competing firms and fixing prices.

� In order to stop the unfair trade practices, a free competition, regulation is needed:

1. To prevent practices having adverse effect on competition.

2. To promote and sustain competition in markets.

3. To protect the interests of consumers.

4. To ensure freedom of trade carried for other participants in markets.

� The Competition Commission of India under the Competition Act, 2002 is to facilitate competition
and to regulate a firm from abusing its market power.

Name briefly the Competition Laws in other Countries?

1. (a) Sherman Act, 1890 誘.S.A.

(b) Clayton Act, 1914

(c) Celler-Kefauver Act, 1950

2. Competition Law in European Union.

Treaty of Rome, 1957.

3. U.K. Competition Act, 1998.

Define nature and scope of the Indian MRTP Act, 1969?

� The Indian Law was contained in the MRTP Act (now repealed by the Competition Act, 2002). Its
genesis can be found in Article 38 and Article 39 of the Constitution of India embedded in the
directive principles of State Policy. The Act originally was to curb monopolistic and restrictive trade
practices only.

� 1984 Amendment to the Act brought unfair trade practices within purview of the Act.

� The Act was mainly directed towards:�

1. Prevention of Concentration of Economic Power.

2. Control and restriction of monopolies.

3. Control and restriction of monopolistic trade practices.

4. Prohibition of restrictive trade practices.

5. Prohibition of unfair trade practices.

� The 1991 Amendment to the Act deleted provisions relating to concentration of economic power
in a few hands.

� The MRTP Act did not addressed Competition and anti-Competitive practices.

� It lacked provisions for implementing WTO Agreements and commitments and to deal with
identifiable anti-competitive practices.

� In order to make a comprehensive policy on competition the Central Government appointed

Raghavan Committee which submitted its Report in May, 2000.

SACHAR COMMITTEE REPORT - 1977

Under the Chairmanship of Justice Sh. Rajinder Sachar, former Judge of the High Court of Delhi.

Appointed/constituted by Government in terms of the Ministry of Law, Justice & Company Affairs
(Department of Company Affairs).

To recommend changes (structural or form) in Companies Act, 1956 and Monopolistic & Restrictive
Trade Practices Act, 1969.

Topics on which recommendations sought are:

(1) Formation of Board of Directors (BOD) in consonance with the interest of minority shareholders.

(2) Exercise of managerial powers by the BOD to protect the interest of shareholders and creditors.

(3) To increase participation of workers in share capital.

(4) To make provisions of mismanagement more effective so as to protect public interest and
companies� interest.

(5) More professional attitude of company and better remuneration.

(6) Companies� contribution to social causes.

(7) Simplification of winding-up procedure.

(8) Changes in foreign companies.

(9) Changes in the MRTP Act.

(10) Changes in the Companies Act, 1956 and the provision for exclusion or inclusion of Government
or public company.

RECOMMENDATIONS OF SACHAR COMMITTEE

Concepts and Definition:

(a) Combination of definition of 疎 lter� and 疎 lteration� and 僧 odify� and 僧 odification� into
one.

(b) Definition of 僧 ember� (Section 2(27) to be replaced by definition provided in Section 41

(member).

(c) Changes in the definition of 喪 elative� under Section 2(41) in line with the provisions of Section
6.

(d) Definition of 舛 ompany� to indicate Company before the commencement of this Act

(e) Definition of 舛 ourt� must include Registrar and Company Law Board (CLB).

(f) New (i) Accountant (ii) Auditor

definition:

(iii) Professional (iv) Recognised Shareholders�

manager Association.

Part A 祐 tate the Sachar Committee's Recommendations for the Companies Act, 1956?

Classification of companies:

1. Few structural changes within the existing classification of public and private companies.

2. Existing companies fulfilling certain conditions to be compulsorily converted into limited

companies.

3. Guarantee companies allowed only as public limited companies as per Section 25.

4. No public company, itself, converts into private company.

5. Changes in Private Limited Structure.

6. Apply provision of Private Limited Company, Public Limited Company.

7. Boost to small scale industries, therefore, advent of new class of industries

(a) Small private � paid up capital Rs. 5 lakh

(b) Others

Management Structure and Professionalisation of Management:

1. Professionalisation of management is an inevitable necessity for the well-being of the company

itself. Thus, this needs to be carried forward.

2. Representation of minority shareholders in Board and other measures for protecting their
interests.

3. For workers� participation in management. The 2-tier Board is not recommended.

4. Public Limited Companies � Paid up capital of 50 lakh, one managing director or whole time
director.

5. No person to hold office of MD in more than one public limited company unless � specified
procedure and permission of CLB.

6. Maximum directorship 10 to 20

7. Section 283 � regarding the vaction of office was proposed to be amended.

Director to file returns, mandatory, before registrar

8. Board meeting at least once in every two months.

9. Amendment to Section 203 � no vacation of office after the commencement of winding-up.

Managerial and Executive Recommendation:

(1) Recommendations of the Bhoothalingam Committee on wages. Incomes and Prices Policy
including top managerial salaries�

(a) Managerial remuneration should be regulated by the Company by special resolution at the
Annual General Meeting and subject to the recommendation of this Committee.

(b) Division of Companies according to effective capital and maximum/minimum salary payable. Any
abridgement of laid guidelines needs prior approval of the Central Government.

(2) Appointment/reappointment � at Annual General Meeting � special resolution.

(3) Annual report of Board must enclose � undertaking � compliance of statutory guidelines. Any
breach cognizable by CLB on a complaint.

Shareholder Protection and Mismanagement:

1. Recognition of shareholder 痴 Association � maintain vigilance over earning companies.

2. Proxy holders�

� Right to vote by show of hands.

� Right to speak and express their opinion.

3. The twin proof requires, in Section 397, justifying winding-up in onerous and even a single act of
oppression is sufficient. Further Government under Section 408(i) can exercise its process after
abiding by the principles of natural justice.

4. Appointed Director under Section 408 by Central Government to report every three months.

5. The power of Central Government under Section 409 to be transferred to CLB

6. Under Section 409 interim order operative � two months unless extended. CLB to pass final
orders within six months.

7. Appeal from CLB to a High Court. High Court to decide within six months.

8. CLB should have power to investigate under Section 237(a).

Accounts and Audit:

1. Maintenance of account by companies on mercantile system � obligatory.

2. The 詮 inancial Year� � 18 months � permitted by ITO and Registrar of Companies.

3. Companies with paid-up capital of Rs. 25 lakhs or more to employ:

(a) Chief Accountant or Financial Controller

(b) A Cost Accountant and an Internal Auditor for companies engaged in manufacturing/specified
activities.

Social Responsibilities of Company:

(1) Openness and disclosure of corporate affairs.

(2) Public accountability, like adherence to environmental laws.

Political Donations:

1. Pressure increased during 1957 General Elections. Bombay and Calcutta High Courts condemned
the Act.

2. Parliament 祐 ection 293A Companies (Amendment) Act, 1960.

3. Santhanam Committee call for total ban under Section 293A.

Part B 祐 tate the Sachar Committee's Recommendation for MRTP Act, 1969?

Concept and Definition:

� Title of Act should be changed to Monopolies and Trade Practices Act as it includes Unfair Trade
Practices also.

� 舛 ommission� should be read as MRTPC and therefore necessary changes should be made in
the definition.

� The concept of calendar year and adoption of lowest figure for production should be changed �
instead use of the term 殿 verage annual production� for 3 years preceding the calendar year
should be made (in which dispute arise).

� Amendment of definition of 組 oods� under Section 2(e) so as to bring it in conformity with Sale
of Goods Act so as to include shares and stocks.

� No exemptions for Government/Government-controlled/owned under-takings from the purview

of the Act.

� No exemption for newspapers also.

Concentration of Economic Production:

� The role of MRTPC to be strengthened.

� Section 30 of MRTP Act 預 mendment.

� In case of a merger/amalgamation approved by Central Government under Section 396 of

Companies Act, in public interest then no approval be required of MRTPC under Section 20 or 23.
� In case of acquisition if the result is control of 33.3% or more of voting power or the cost of
acquisition more than Rs. 3 crore � matter compulsorily be referred to MRTPC for final disposal.

� The power to initiate action under Section 27 for division of an undertaking is with the Central
Government, who rarely exercises it. However in case a reference is made to MRTPC, then MRTPC
should hear the matter and pass final orders.

� Section 29 � amendment � MRTPC to pass final order after following natural justice.

� Proposal for diversification falls under Section 22 but if proposal is for manufacturing of new
articles by utilising waste/by-product or within the licensed capacity 容 xemption to be granted.

Monopolistic, Restrictive and Unfair Trade Practices:

� Protection of the consumers against false/misleading advertisements and other UTP. The
Committee proposes to specify certain UTP and prohibit them.

� Commission must be given more protection so as to see compliance of its orders under Section 31
and protection to pass order on any RTP which occurs while inquiring into any MTP under Section
37.

� Prohibition of collective agreement and RTP arising out of collective bidding, collective
discrimination, re-sale price maintenance subject to exception of general defences.

� All prohibited practices � MTP, RTP and UTP should be made actionable whether it is in the form
of agreement or not.

� The requirement of compulsory registration of agreements relating to RTP should be abandoned.

� Section 41 to be amended and the MRTPC to be empowered to exempt any class of goods from
RPN.

� Provision to be added to entitle a complainant to recover damages, amount of loss from the
guilty party.

� All matters relating to recovery of loss or damage should be triable by the MRTPC and not by the
Magistrate.

Administrative Machinery:

� Chairman of the Commission should be a sitting Judge of a High Court and should enjoy all
privileges of a High Court Chief Justice. All appeals from Commissions lie to the Supreme Court.

� If the office of the Chairman falls vacant the senior-most member should fill in until a new
Chairman is appointed.

� The post of Registrar of Restrictive Trade Agreement and Director-General (DG) should be
Director-General of Investigation (IDG) of Trade Practices (TP).

� Section 8 to be amended 預 ppoint DG of T.P. and appoint the members/staff.

� The DGTP must be empowered:�

a. to search, seize and impound document.

b. to initiate proceeding.
c. to move for recovery of damages on behalf of Central or State Government.

� Section 12 to be amended to empower the commission with respect to:�

a. Production of books of account and other documents.

b. Examination of same by an officer.

c. Must be made a court of records.

d. Punish for contempt.

e. To issue injunction � interim/final.

� Amendment to Section 13(3) to empower the MRTPC with respect to particular traders.

� Amendment to Section 18 of the Indian Evidence Act. To make the provision not applicable to the
proceedings before MRTPC.

� Amendment of Sections 50 and 51 � made into one Section 50 to punish persons contravening
provisions of MTP, RTD and UTP by the commission.

� Appeals to lie before the Supreme Court if there is a substantial question of law involved.

COMPETITION LAW ON THE RECOMMENDATIONS OF RAGHAVAN COMMITTEE

What are the Objects of Competition Act, 2002?

Most of the recommendations made by the Raghavan Committee were accepted and the
Competition Act, 2002 was passed accordingly.

Objects of the Act:

� To provide for the establishment of a Commission to prevent practices having adverse effect on
Competition.

� To promote and sustain competition and freedom of trade in the markets.

� The main objective of the Act is to promote free Competition in India.

Prohibition of Anti-Competitive Agreements:

(a) Two types of agreements, horizontal and vertical which have the potential of retrociting
competition.

(b) Horizontal agreements refer to the agreements amongst competitors in the same stage of
production and in the same market.

(c) Vertical agreements in actual or potential relationship of buying or selling to each at different
stages of production and at different markets.

(d) Horizontal agreements are related to prices, quantities, bids (collusive tendering) and market
sharing.

(e) Vertical agreements: Tie-in-arrangements, exclusive supply/distribution agreements and refusal

to deal.

What are the anti-competitive agreements of the Act?

The Act provides for the prohibition of entering into anti-competitive agreements is respect of
production, supply, storage, distribution, acquisition or control of goods or provisions of services
which causes or is likely to cause an adverse effect on competition within India.

� Such agreements entered between competitors are horizontal and;

� Between enterprises at different stages or levels of production in different markets are vertical.

Prohibition of Abuse of Dominant Position:

� The Act does not prohibit dominance but abuse of dominance is prohibited.

� Dominance is the position of strength enjoyed by an enterprise or group* which can withstand
any competitive pressure in the relevant market by its economic strength.

� The Act prohibits the abuse of such dominant position which includes direct, or indirect, unfair or
discriminatory purchases or selling on condition including predatory prices of goods and services;

� Limiting production or restricting services;

� Practices which deny market access;

� Conclusion of contracts subject to acceptance by accepting supplementary obligations.

Regulation of Combinations:

� Combination between enterprises is also prohibited under the Act, if it causes or is likely to cause
adverse effect on competition within the relevant market in India.

� Such combinations can be achieved by acquisition of one or more enterprises or by one or more
persons;

� Acquisition or control or merger or amalgamation of enterprises under certain circumstances.

Establishment of Competition Commission of India:

� For implementing the competition Law the Act provides for the establishment of Competition
Commission of India (CCI) with adequate powers for effective enforcement of the law and with
appropriate machinery for the implementation of its decisions.

Though the Competition Commission took a shape in 2002 by the Competition Act of 2002, it came
to be operated from July 2009 though effective date pertains to 14 October, 2003.

Structure of the Commission:

� A multi-member body consisting a Chairperson and not less than two or not more than 6 other
members.

� Qualified persons of ability, integrity and standing from the fields of judiciary, economics, Law,
international trade, Commerce and Industry.

� Independent functioning, with independent investigative, prosecution and adjudicative functions.

Penalties for Non-compliance of Orders:

Act contains provisions for punishing contravention of the orders of the Commission, failure to
comply with the directions of Director-General, making false statements, or omissions to furnish
material information.

If any person without reasonable cause, fails to comply with the orders or directions of Commission,
he shall have to be punished with fine which may extend to Rs. 1,00,000 for each day during which
such non-compliance occurs, subject to a maximum of Rs. 10 crore.

Further if any person does not comply with the orders or directions issued, or fails to pay the fine
imposed, he shall without prejudice to any proceeding be punishable with imprisonment for a term
which may extend to three years or with fine which may extend to Rs. 25 crore or with both.

Competition Appellate Tribunal:

The Competition (Amendment) Act of 2007 inserted the provision for constituting and functioning of
Competition Appellate Tribunal. Thereby an appeal from the orders of the Competition Commission
by the Central Government or State Government or a local authority or an enterprise or any
aggrieved person, can lie either to Supreme Court or to the Competition Appellate Tribunal. Every
appeal is to be filed within a period of 60 days from the date on which a copy of direction or decision
or order made by the Commission is received by the Central Government or the State Government
or a local authority or enterprise or any person aggrieved in the prescribed form along with the fee
required thereof. The disposal of appeal is to be made by the Competition Appellate Tribunal within
six months from the date of receipt of the appeal.

Competition Advocacy:

The Competition Commission has a positive role in making Competition policy in the country and
advising the Government of India as and when required. The Commission also takes suitable
measures for promotion of competition policy and advocacy, creating awareness and training.

Competition Fund:

The Act provides for constitution of a competition fund which will be for meeting salaries and
allowances and other expenses of the Commission.

RECOMMENDATIONS OF RAGHAVAN COMMITTEE

� The recommendation includes both policy and Law of Competition.

� Competition law should cover all consumers who purchase goods or services.

� The state monopolies, government procurement and foreign companies should be subject to
Competitive Law.

� All agreements (include horizontal and vertical) should be covered by competition law if it is
prejudicial to the competition.

� Horizontal agreements with regard to prices, quantities, bids and market shaving are anti-
competitive.

� Vertical agreements like, tie-in arrangements, exclusive supply distribution agreements and
refusal to deal are generally anti-competitive.

� Agreements that contribute to improvement of production, distribution and promote technical

and economic progress should be dealt with leniently.
� Abuse of dominance rather than dominance should be the key for Competition Law.

� Abuse of dominance includes practices like restriction of quantities, markets and technical
developments.

� Predatory pricing in the long run is prejudicial to Consumer interests and it is to be treated as
abuse.

� Mergers need to be discouraged, if they reduce or harm Competition.

� If the suggested merger is more than the value of assets of entity of Rs. 500 crore or more and of
the group to which the merged belongs at Rs. 2000 crore or more, it requires prior notifications.

� Recommended for constitution of a Competitive Commission of India (CCI).

Basing on these recommendations the competition law was made in India by repealing the MRTP
Act, for protecting the interest of consumers and preventing the practices having adverse effect on
competition. It is to be noted that all the pending cases before the MRTP Commission on or before
the commencement of the Competition Act, 2002 i.e., in the year 2003 were transferred to and
adjudicated by Competition Commission is accordance with the MRTP Act, 1969.

Further all the cases pertaining to unfair trade practices under the MRTP Act, 1969, pending before
the commencent of the Competition Act, 2002 were transferred to and disposed of by the National
Commission constituted under the Consumer Protection Act, 1986.

Brahm Dutt v. Union of India, MANU/SC/0054/2005 : (2005) 2 SCC 431

Facts:�The petitioner contended that Competition Commission of India envisaged under the
Competition Act, 2002 was more of a judicial body having adjudicatory powers. Therefore, the
Chairman of the Commission had necessarily to be nominated by Chief Justice of India or by a
Committee presided over by him and the right to appoint judicial members of Commission should
rest with Chief Justice of India or his nominee.

The Union of India in reply submitted that it was proposing certain amendments to the Competition
Act, 2002 (Amendment made in 2007) and Rule 3 of the Competition Commission of India (Selection
of Chairperson and other members of the Commission) Rules, 2003 so as to enable the Chairman
and the members to be selected by a Committee presided over by the Chief Justice of India or his
nominee. It was reiterated that the Chairman of the Commission should be an expert in the field and
need not necessarily be a judge or a retired Judge of Supreme Court or High Court. It was also
submitted that an Appellate Authority would be constituted (provision made in 2007 amendment)
and that body would essentially be a judicial body confirming to doctrine of separation of powers as
recognised by the Constitution of India.

Issue:�Challenge to constitutional validity of Competition Act, 2002 with respect to appointment of

Chairperson and members of the Competition Commission of India.

Decision:�It cannot be gainsaid that the Competition Commission as contemplated at present, has
a number of adjudicatory functions as well. A decision cannot be as held, pronounced on matter
argued in a theoretical context and based only on general pleadings on the effect of various
provisions of the Competition Act, 2002. The petitioner must approach court with specific averments
in support of the challenge with reference to the various sections of the said Act. Finally it was
decided that since it would be appropriate to consider validity of relevant provisions of the said Act
after the same Act is amended (Amended in 2007) by the Government, it would not be proper to
pronounce on the question at this Stage.

Saurabh Prakash v. DLF Universal Ltd., MANU/SC/5198/2006 : (2007) 1 SCC 228

Facts:�The appellant made an application to DLF for sale of an apartment and a parking space for a
total consideration of Rs. 54, 37, 664 and paid Rs. 5.48 lakhs as earnest money. In the application
form it was stated that the possession would be given in four years. In the agreement it was stated
that the existing Fire-Fighting Safety Code/Regulations were already covered and extra fire-fighting
charges would be levied if further measures were required to be taken due to additional
requirements imposed by the authorities. It was also stipulated that DLF would send the buyer an
apartment buyer 痴 agreement which the buyer would have to sign.

On 8-8-1995, DLF sent the appellant an unsigned apartment buyer 痴 agreement for his signatures
thereupon. In this agreement, DLF unilaterally altered the time period of handing over the
possession. It extended the time period by a grace period of 90 days. If also added several other
exclusion clauses on various grounds and limited their liability for delay. The appellant signed the
agreement and returned it to DLF.

On 31-10-1995 DLF sent the agreement signed by it at a future date i.e., 6-11-1995. It had
subsequently taken this date i.e., 6-11-1995 as the base date for computing the compensation
payable by it for delay. It also purported to have counted delay on the appellant 痴 part with
reference to the date of application and thus it had burdened the appellant with interest for such
prior period also. The said period is not a long one.

Issue:�The respondent had taken an advantage of eight months for which no compensation had
been paid to anyone. Even at the rate it had offered compensation this could have come to Rs.
1,20,000 for the appellant 痴 flat. Since there were 134 flats in Windsor Court, DLF had gained well
over Rs. 1.5 crore, also issue raised for an additional demand for Rs. 2,08,099.62.

Decision:�The power of Competition Commission for compensation for damages for breach of
contract, is restricted to case where loss or damage has been caused due to monopolistic, restrictive
or unfair trade practice and not from mere breach of contract.

KLM Royal Dutch Airlines v. Director-General of Investigation and

Registration, MANU/SC/8162/2008 : (2009) 1 SCC 230

Law Point:悠 ngredients necessary to constitute Unfair Trade Practice.

Facts:裕 he appellant was a worldwide airlines company. A consignment of three parcels was
booked for carriage by the complainant, out of which two parcels went missing and could not be
delivered to the addressee immediately. The said missing parcels where however traced out and
were forwarded to the destination later on. The allegations were made that due to the missing of
the aforesaid two parcels in the course of transmission, the complainant suffered a loss.

By the impugned judgment and orders, MRTP Commission found the appellant guilty of adoption of
and indulgence in unfair trade practices to the extent that there was deficiency in service. The
Commission issued a direction to the appellant to cease the aforesaid trade practice and also file an
affidavit stating that the appellant would desist from the same in future. Being aggrieved by the
aforesaid order passed by the MRTP Commission, the appeals were made in Supreme Court.

Issue:邑 hether any deficiency in service could be said to amount to an unfair trade practice as
envisaged under the provisions of the MRTP Act, 1969.
Decision:唯 efore it can be said that the act amounts to an unfair trade practice the complainant is
required to show that the trade practice was employed for the purpose of promoting the sale, use or
supply of any goods or the provision of any services and also that the statement or advertisement is
the false representation of the kind specified under Section 36A of the MRTP Act, 1969. It was also
held that there could be no finding by the MRTP Commission that the appellant was guilty of unfair
trade practice. Hence the order of Commission was set aside by the Supreme Court.

THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999

INTRODUCTION

Several amendments were made in Foreign Exchange Regulation Act (FERA) as part of the ongoing
process of economic liberalisation relating to foreign investments and foreign trade for closer
interaction with the world economy. In 1993 FERA was reviewed in light of subsequent
developments and economic and financial experience in relation to foreign trade and investments.
Hence it was decided by the Central Government to enact a new law i.e., Foreign Exchange
Management Act, 1999 (FEMA) in consultation with Reserve Bank of India. The main reason behind
this law is the substantial development in our foreign exchange reserves, growth in foreign trade,
rationalisation of tariffs, current account convertibility, liberalisation of Indian investments abroad,
increased access to external commercial borrowings by Indian corporates and participation of
foreign institutional investors in our stock markets.

Moreover, FEMA is dynamic law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly development and maintenance of
foreign exchange market in India. FEMA though was enacted in 1999 came into force from 1st June,
2000.

IMPORTANT PROVISIONS IN FEMA

Capital Account Transaction:

Capital Account Transaction (CAT) means a transaction which alters the assets and liabilities,
including contingent liabilities, outside India of persons resident in India or assets or liabilities in
India of persons resident outside India including permissible class of capital account transaction, and
also admissible limit of capital account transaction.

The RBI is empowered under FEMA to prohibit, restrict or regulate viz.

(1) transfer or issue of any foreign security by a person resident in India

(2) transfer or issue of any security or foreign security

(3) borrowing or lending in foreign exchange

(4) deposit between persons resident in India and persons resident outside India

(5) export, import or holding of currency or currency notes

(6) transfer of immovable property outside India

(7) acquisition or transfer of immovable property in India

(8) giving a guarantee or surety in respect of any debt, obligation or other liability by a person
resident in India or owned to a person resident outside India or by a person resident outside India.
Currency:

Within the meaning of the provisions of FEMA 鼎 urrency� includes all currency notes, postal notes,
postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange
and promissory notes and credit cards.

Foreign Exchange:

Under FEMA 吐 oreign exchange� means foreign currency and includes, deposits, credits, balances
payable in foreign currency, drafts, travellers chaques, letters of credit or bills of exchange drawn in
Indian currency but payable in foreign currency and drafts, travellers chaques, letters of credit or
bills of exchange drawn by banks, institution or person outside India but payable in Indian currency.

Foreign Security:

The foreign security means any security, in the form of shares, stocks bonds, debentures or any
other instrument denominated or expressed in foreign currency and includes securities expressed in
foreign currency, but where redemption or any form of return such an interest or individuals is
payable in Indian currency.

Security under FEMA:

The 壮 ecurity� means shares, stocks, bonds and debentures, government securities, savings
certificates, deposit receipts and any mutual fund but does not include bills of exchange or
promissory notes other than government promissory notes.

Regulation, Restrictions and Management of Foreign Exchange:

Within the meaning of FEMA no person, without the general or special permission of RBI can deal in
or transfer any foreign exchange or foreign security to any person not being an authorised person,
no person can make any payment to or for the credit of any person resident outside India in any
manner, no person can receive otherwise through an authorised person, any payment by order or
on behalf of any person resident outside India in any manner, no person enter into any financial
transaction in India as consideration for or in association with acquisition or creation or transfer of a
right to acquire, any asset outside India by any person, no person resident in India shall acquire,
hold, own, possess or transfer any foreign exchange, foreign security or any immovable property
existing outside India.

Export of Goods and Services:

Every exporter of goods shall furnish to the Reserve Bank or to such other authority a declaration in
such form and in such manner containing true and correct material particulars, including the amount
representing the full export value or, if the full export value of the goods is not ascertainable at time
of export, the value which the exporter, having regard to the prevailing market conditions, expects
to receive on the sale of the goods in the market outside India.

Further every exporter of goods is to furnish to RBI the required informations for purpose of
ensuring the realisation of export proceedings by such exporter.

Again, where any amount of foreign exchange is due or has accrued to any person resident in India,
such person is to take all reasonable steps to realise and repatriate to India such foreign exchange
within such period as prescribed by RBI.

Penalties under FEMA:

If any person contravenes any provision of FEMA or orders, directions and Regulations of RBI he is
liable to:

(a) Penalty upto 3 times the sum involved in such contravention, where such amount is quantifiable,
or upto Rs. 2,00,000 where the amount is not quantified and where such contravention is a
continuing one further penalty upto Rs. 5000 for every day after the first day during which the
contravention continues.

(b) An adjudicating authority adjudging any contravention under FEMA, may if he thinks fit in
addition to any penalty which he may impose for such contravention direct that any currency,
security or any other money or property in respect of which such contravention has taken place shall
be confiscated to the Central Government and further direct that the foreign exchange holdings if
any, of the person committing the contravention or any part thereof, shall be brought back into India
or shall be retained outside India in accordance with the directions made thereof.

RELEVANT PROVISIONS OF EXCHANGE CONTROL MANUAL FOR THE PURPOSE OF FEMA

State the relevant procedure of Refund of Inward Remittances?

Some of the relevant provisions of Exchange Control Manual under FEMA, which are still existing
are:

If a request is made from the overseas for cancellation of Inward Remittances, Authorised Dealers
may do so without referring to Reserve Bank, if refunds are not to compensate for a loss.

What is the application for remittances in foreign currency?

� A person, firm or bank may apply to an Authorised Dealer for remittances in any foreign currency
to a beneficiary abroad.

� Application should be made in Form-A1, if the purpose of remittance is import of goods into
India.

� For any other purpose in Form-A2.

� The Authorised Dealer may sell the Foreign Exchange applied for if he thinks fit provided it is
within his powers, and the purpose of remittance is an approved one.

What is the mode of payment of rupees against sale of Foreign Exchange?

In case of sale of Foreign Exchange or remittance in Foreign Exchange amounting to Rs. 20,000 or
more the payment received by the Authorised Dealer, from the applicant should be through a
crossed cheque drawn on the applicant bank account or on the bank account of the Firm/Company.
Payment can also be accepted in the form of a Banker 痴 Cheque/Pay Order/Demand Draft.

Receipt of Payment in cash in case of such sale of Foreign Exchange or remittance in Foreign
Exchange is strictly prohibited.

Exception:

However where purpose of sale of foreign exchange is for travel abroad for business etc., cash may
be received by the Authorised Dealer from Applicant upto Rs. 50,000.
Where the rupee equivalent for drawing foreign exchange exceeds Rs. 50,000 either for any single
instalment or for more than one instalment reckoned� together for a single journey/visit it should
be paid by the traveller by means of a cross cheque/demand draft/pay order as stated above.

What is the status of Travell-ers Cheque neg-otiable only in India?

Rupee Travellers Cheque cannot be encashed outside India, if they are issued solely for use within
India. In such a case they cannot be taken or sent out of India.

What is the mode of reim-bursement outside India?

Reimbursements should be strictly refused where such traveller 痴 cheques have been encashed
outside India.

Rupee Travellers Cheque, which are issued by authorised dealers, encashable outside India, may be
reimbursed by Authorised Dealers or by their selling Agent.

How the Import of Foreign Curr-ency Notes takes place?

When the stock of foreign currency notes with Authorised Dealer is not adequate for meeting their
normal business requirement they can import foreign currency notes from their overseas branches
or correspondents.

Define mode of Reconversion of Indian Currency?

� Foreign currency may be sold against Indian Rupees held by persons who are not residents of
India but are passing through or leaving India after a visit, at the time of their departure from India.

� For this purpose, a Bank or Encashment certificate issued by a Authorised Dealer, exchange
bureau or Authorised Money changer in form BCI, ECF or ECR, is required to show that the rupee
had been acquired by sale of Foreign Exchange to an Authorised Dealer or money changer in India.

� Such a certificate is valid for such reconversion, i.e., a period of three months should not be over
from the date of sale of the foreign currency by the traveller.

What is the Rates of Exchanges?

Authorised dealers and their Exchange bureau may buy from and sell to public foreign currency
notes and coins at rates of exchange determined by market conditions. Dealings in foreign currency
notes and coins between authorised dealers themselves and between authorised dealers and money
changers would also be at rates determined by market conditions.

FERA AND FEMA - COMPARISION

� SIMILARITIES

� DIFFERENCES

� CHANGES/PROGRESSION FROM FERA TO FEMA 輸 STEP AHEAD

WHAT are the similarities between FERA and FEMA?

The similarities between FERA and FEMA are as follows:�

� The Reserve Bank of India and Central Government would continue to be the regulatory bodies.

� Presumption of extra-territorial jurisdiction as envisaged in Section (1) of FERA has been retained.
� The Directorate of Enforcement continues to be the agency for enforcement of the provisions of
the law such as conducting search and seizure

DIFFERENCES BETWEEN FERA AND FEMA

Sr. No. DIFFERENCES FERA FEMA

1 2 3 4

1 PROVISIONS FERA consisted of 81 FEMA is much

sections, and was more more simpler
complex and consists of
only 49 sections.

2 FEATURES Presumption of negative These

intention (Mens Rea) and presumptions of
joining hands in offence Mens Rea and
existed in FERA abetment have
been excluded
in FEMA

3 NEW TERMS IN FEMA Terms like Capital Account Terms like

Transaction, Current Account Capital Account
Transaction, person, service Transaction,
etc., were not defined in Current Account
FERA. Transaction
person, service
etc.,have been
defined in detail
in FEMA

4 DEFINITION OF Definition of 鄭 uthorised The definition of

AUTHORISED PERSON Person� in FERA was a Authorised
narrow one [2(b)] person has been
widened to
include banks,
money changes,
off-shore
banking Units
etc. [2(c)]

5 MEANING OF 迭 There was a big difference in The provisions

ESIDENT� AS the definition of 迭 of FEMA, are in
COMPARED WITH esident�, under FERA, and consistent with
INCOME TAX ACT. Income Tax Act Income Tax Act,
in respect of the
definition of
term 迭
esident�. Now
the criteria of 的
 n India for 182
days� to make
a person
resident has
been brought
under FEMA.
Therefore a
person who
qualifies to be a
non-resident
under the
Income Tax Act,
1961 will also be
considered a
non-resident for
the purposes of
application of
FEMA, but a
person who is
considered to be
non-resident
under FEMA
may not
necessarily be a
non-resident
under the
Income Tax Act.
For instance a
businessman
going abroad
and staying
there for a
period of 182
days or more in
a financial year
will become a
non-resident
under FEMA.

6 PUNISHMENT Any offence under FERA, was Here, the

a criminal offence, offence is
punishable with imprison- considered to be
ment as per Code of Criminal a civil offence
Procedure, 1973 only punishable
with some
amount of
money as a
penalty.
 Imprisonment is
prescribed only
when one fails
to pay the
penalty.

7 QUANTUM OF PENALTY The monetary penalty Under FEMA the

payable under FERA was quantum of
nearly five times the amount penalty has
involved. been
considerably
decreased to
three times the
amount
involved.

8 APPEAL An appeal against the order The appellate

of 鄭 djudicating office�, authority under
before 擢 oreign Exchange FEMA is the
Regulation Appellate Special Director
Board� went before High Appeals. Appeal
Court against the
order of
Adjudicating
Autho-rities and
special Director
(Appeals) lies
before 鄭
ppellate
Tribunal for
Foreign
Exchange.� An
appeal from an
order of
Appellate
Tribunal would
lie to the High
Court. (Sections
17, 18, 35)

9 RIGHT OF ASSISTANCE FERA did not contain any FEMA expressly

DURING LEGAL express provision on the recognises the
PROCEEDINGS. right of an impleaded person right of
to take legal assistance appellant to
take assistance
of legal
practitioner or
chartered
accountant
 (Section 32)

10 POWER OF SEARCH AND FERA conferred wide powers The scope and
seizure on a police officer not below power of search
the rank of a Deputy Super- and seizure has
intendent of Police to make a been curtailed
search to a great extent

What is the difference between FEMA and FERA?

1. Object of the Acts. The main object of FERA was to conserve the foreign exchange resources and
prevent the misuse thereof. However, the main, object of FEMA is to promote and develop the
foreign exchange management of the country. In other words, FERA sought to 祖 ontrol� foreign
exchange transactions while FEMA seeks to regulate and manage it.

2. Meaning of person resident in India. Citizenship was the criterion to determine the residential
status of a person under FERA. The definition of resident in India has been redefined in FEMA. A
person residing for more than 183 days in India is a resident of India as per Fema.

3. Structure of the Act � Prohibition/relation. FERA prohibited almost all the foreign exchange
transactions unless a general or special permission was issued. However, under FEMA, all the current
account transactions are permissible except some transactions controlled by the rules.

4. Nature of offences: The offences under FEMA shall be treated as civil wrongs whereas under
FERA, offences were subject to criminal punishments. Therefore, FERA was held to be draconian,
severe and harsh.

5. Presumption of mens-rea. Under FERA there was a presumption of exis-tence of guilty mind,
unless the accused proved otherwise. Under FEMA, however, the prosecution will have to prove that
a person has committed an offence.

6. Power to arrest. Section 35 of FERA empowered the Enforcement officers to arrest a person, if
they had reason to believe that the person was guilty of FERA violations, FEMA provides such power
of arrest only in the following cases:�

a. Where the accused person fails to pay the full payment of penalty within 90 days from service of
notice on him.

b. Where the accused person fails to furnish the security for his appearances before the Adjudicating
Authority, the Adjudicating Authority may, in his discretion, order that the accused person be
detained in the custody of an officer of the adjudicating authority.

7. Compounding of offences. All the offences under FEMA are compoundable whereas
compounding was not permissible under FERA.

8. Appellate authorities. There was only one appellate authority under FERA whereas in FEMA,
there exists two appellate authorities.

9. Right of legal assistances. The accused has a right to take the assistance of a legal practitioner or a
chartered accountant under FEMA and under FERA, even a friend or a relative of the person could
represent the accused person before the Adjudicating Authority.

10. Role of Reserve Bank of India has been portrayed as a facilitator under FEMA instead of a
regulator of foreign exchange as it was under FERA.
There is, however, one underlying similarity in both these legislations that FEMA, just like FERA, is
also governed by the notification to be issued by the Central Government/Reserve Bank of India for
granting general permissions.

A STEP AHEAD FROM FERA TO FEMA

Enactment of FEMA has brought in many changes in the dealings of Foreign Exchange, as compared
to FERA. Some of them are restrictive, and some have widened the scope.

How FERA made a progress in drawal of Foreign Exchange?

However the relevant progress made, from FERA to FEMA, is as follows:�

Now, the restrictions on drawal of Foreign Exchange for the purpose of current Account
Transactions, has been removed. However, the Central Government may, in public interest, in
consultation with the Reserve Bank impose such reasonable restrictions for current account
transactions as may be prescribed.

FEMA has also, by and large, removed the restrictions on transactions in Foreign Exchange on
account of trade in goods and services except for retaining certain enabling provisions for the
Central Government to impose reasonable restrictions in public interest.

How the omission of Criminal Proceedings takes place in FEMA?

Under FERA, any contravention was a criminal offence and the proceedings were governed by the
Code of Criminal Procedure. Moreover the Enforcement Directorate had powers to arrest any
person, search any premise, seize documents, and initiate proceeding.

Now all this has been done away with, and contravention of FEMA is no more a criminal offence, and
only monetary penalty, i.e. civil proceedings are applicable. Civil imprisonment is provided, only in
case of default to pay fine.

Define Residential Status?

The definition of 迭 esidential Status� under FEMA has gone through considerable change. It has
now been made compatible with the definition provided under 的 ncome Tax� Act.

The residential status is now based on the physical stay of the person in the country. The period of
182 days as provided, indicates that it is not necessary that there should be a continuous period of
stay. The period of stay would be calculated by adding up all the days of stay of the individual in the
country.

An Indian resident becomes a non-resident when he goes abroad and takes up a job or engages in
business.

A major change in the definition of residential status of partnerships and firms is worth noticing.
Earlier, under FERA, a branch was considered a resident of a place where it was situated. Now, under
FEMA, an office, branch or agency outside India, owned or controlled by a person resident in India,
will be considered a resident of India for the purposes of this Act.

If a person residing in India whose Company or Firm has a branch in Mauritius, such branch will be
considered to be a resident in India.

What is the position of immovable property outside India under FERA and FEMA?
Earlier, under FERA, there was no restriction placed on foreign citizens who were residents of India
for acquiring immovable property outside India.

Now FEMA prohibits a resident to acquire, own, possess, hold or transfer any immovable property
situated outside India. This restriction applies irrespective of whether the resident is an Indian citizen
or foreign citizen. With this provision being effective a foreign citizen who is a resident of India has
to take approval of the Reserve Bank of India for selling or buying any immovable property situated
outside India.

How the transaction of immovable property in India takes place under FERA and FEMA?

Earlier, under FERA, a foreign citizen could acquire or transfer immovable property in India only after
seeking permission from the Reserve Bank.

Now, under FEMA, the control of Reserve Bank is determined by the residential status of a person.
Only a non-resident as defined within the meaning of FEMA would require permission of the Reserve
Bank to acquire or transfer an immovable property in India. The distinction based on citizenship has
been abolished and that based on residentship has been introduced.

What are the provisions of Export of Services under FEMA?

FERA had no provision for export of services. Now, FEMA has included payment received by an
Exporter of Services in its ambit.

Every Exporter, who receives payment from outside India for his services is obliged to furnish details
of payment to the Reserve Bank.

For example; a Doctor, or Engineer or Lawyer or Accountant or any other professional may give
opinions or consultation to people outside India, via internet or e-mail, and his fees may be credited
to his credit account. Then he is obliged to furnish details of such payment to Reserve Bank.

Define the terms which are included in FEMA in progress to FERA.

Some new terms like 鼎 apital Account Transactions, Current Account Transactions�; have been
included in FEMA. Reserve Bank has been conferred with powers (with consultation with the Central
Government) to specify maximum permissible limit upto which exchange is admissible for such
transactions.

WHAT TYPE OF restrictions?

What are the restrictions pertain to Foreign Exchange under FEMA?

Although under FEMA, offences pertain to transactions in Foreign Exchange only. However relevant
restrictions are as follows:�

� Only a person Authorised by Reserve Bank can deal in Foreign Exchange.

� No one can make a payment to a person who is a non-resident, without permission of Reserve
Bank.

� No one can receive any payment from a person who is a non-resident, without permission of
Reserve Bank.

� A resident of India cannot deal in foreign exchange, foreign security or any immovable property
situated outside India, without the permission of the Reserve Bank. (Section 4)
� Similarly, a person who is a non-resident cannot acquire immovable property in India without
permission.

What are the obligations of Exporter of Goods and Services?

Every exporter of goods and services is under an obligation to give details to the Reserve Bank
regarding the value of export, mode of payment, and amount of payment received etc.

How the repatriation of Foreign Exchange takes place?

Where any amount of foreign exchange has become due or accrued to any person who is a resident
of India, he shall realise and repatriate (Bring Back) such amount within the time specified by the
Reserve Bank.

An 鄭 uthorised Person� under FEMA, is a person who is authorised by Reserve Bank to deal in
Foreign Exchange.

Who is the Authorised Person?

For being registered as an 鄭 uthorised Person�, necessary application alongwith relevant

documents has to be furnished to Reserve Bank.

An 鄭 uthorised Person� is also, not given a free hand to deal in Foreign Exchange. He has to
furnish details and information to the Reserve Bank from time to time as may be required by it.

Explain the procedure of prosecution of offences committed?

Before detailing the procedure for prosecution, it is important to mark out the Adjudicating
Agencies. They are:

Who is Adjudicating Authority?

The inquiry of any contravention of FEMA is conducted by an Adjudicating Authority appointed by

the Central Government.

State the jurisdiction of Special Director (Appeals)?

The Special Director (Appeals) is authorised to hear the appeals arising out of an order of the
Adjudicating Authority.

State the jurisdiction in appeal to the Appellate Tribunal.

The Appellate Tribunal is entitled to hear appeals from an order made by Adjudicating Authority or
special Director (Appeals).

What are the powers of Director of Enforcement?

The Director of Enforcement and other officers have the power to conduct investigation and search
and seize any article.

PROCEDURE UNDER FEMA

How the inquiry by Adjudicating Authority under (S. 14) takes place?

The inquiry into any contravention of FEMA is conducted by an Adjudicating Authority.

� When, an inquiry is to be conducted against a person for any contravention, the Adjudicating
Authority shall issue a notice to such person.

� The notice will also indicate the date on which the offender is required to appear before
authority, and also the nature of the offence committed by him.

� Such person (offender) will have a right to give reasons or explanation, and then a date will be
fixed for his appearance. He can appear either personally or through an Advocate or a chartered
accountant.

� On the date of appearance, the Adjudicating Authority shall present its case, and explain the
reason, type and implications of the offence committed by offender.

� Then in turn, such person will also be given an opportunity to put up his case, and to produce
documents and evidence.

� Finally, if Adjudicating Authority is convinced, that the offender has committed an offence, it will
impose such fine and penalty, as it thinks fit.

How the appeal to Special Director (Appeals) (S. 17) preferred?

Appeal from an order of 鄭 djudicating Authority� lies before 鉄 pecial Director (Appeal)�

� The appeal shall be made in 擢 orm No. 1�, along with three copies of the order appealed
against and the requisite fees.

� The appeal should be filed within 45 days, from the date of receipt of the impugned order.

� On the date of hearing of the appeal the applicant may appoint a legal practitioner or a chartered
accountant to appear, plead and act on his behalf before the Special Director (Appeal)

� The order of the Special Director (Appeals) made at the conclusion of the proceedings shall be in
writing and shall state briefly the grounds for the decision.

How the appeal to the Appellate Tribunal (S. 19) preferred?

鄭 ppellate Tribunal� is entitled to hear appeal arising out of an order from 鄭 djudicating
Authority� and 鉄 pecial Director (Appeal).�

� The appeal shall be made in Form No. 2, along with three copies of the impugned order and
requisite fees.

� The appeal shall be made within 45 days, from the date on which copy of the impugned order is
received.

� A copy of the order and appeal shall be sent to the opposite party, i.e. 泥 irector of
Enforcement,� and a date shall be fixed for hearing of the appeal.

� The appellant shall have the right to present his case/appeal through a legal practitioner or a
chartered accountant.

� On the fixed date of hearing, the 鄭 ppellate Tribunal� shall pass its order in writing with the
reasons.

How the appeal to High Court (S. 35) preferred?

� An appeal from the decision of 鄭 ppellate Tribunal� lies before High Court.

� The appeal shall be filed within �60 days� from the date of communication of the decision or
order of the Appellate Tribunal to him on any question of law arising from the impugned order.

What is the amount of penalty under FEMA?

Any contravention, under FEMA, may invite following kinds of penalties:

� If the amount against the offence can be quantified, then penalty will be 典 HRICE� the sum
involved in contravention.

� Where the amount cannot be quantified the penalty may be imposed upto two lakh rupees.

� If, the contravention is continuing everyday, then Rs. Five Thousand for every day after the first
day during which the contravention continues.

Further in addition to the penalty, any currency, security or other money or property involved in the
contravention may also be confiscated.

CASE LAWS

Union of India v. Venkateshan S., MANU/SC/0355/2002 : AIR 2002 SC 1890

Facts:唯 y order dated 8 February, 2000 the Joint Secretary, Ministry of Finance, Government of
India made a detention order under Section 3(1) of the Conservation of Foreign Exchange and
Prevention of Smuggling Activities Act (COFEPOSA) directing that one B. Shankar be detained and
kept in custody with a view to prevent him from acting in any manner prejudicial to the
augmentation of foreign exchange. The said order was served upon detenue on 15-2-2000 along
with grounds of detention and copies of the documents relied upon the Detaining authority the
order was challenged by filing writ petition in High Court of Karnataka.

The High Court quashed and set aside the detention order on the ground that what was considered
to be criminal violation of the Foreign Exchange Regulation Act, 1973, has ceased to be on repeal of
FERA which is replaced by the FEMA in 1999. This order was challenged. It was argued that in view of
the fact that FERA had been repealed and in its place FEMA had been enacted by virtue of which
violations of the provisions of the FEMA are now only civil wrongs, a person cannot be continued to
be preventively detained under COFEPOSA Act for violations of FERA after its repeal.

Issue:邑 hether a person who violates the provisions of the FEMA to large extent can be detained
under COFEPOSA Act?

Decision:裕 he person dealing in foreign exchange in violation of provisions of FERA which is

repealed by FEMA, can be detained under Section 3 of the COFEPOSA Act. Mere fact that such an
activity ceases to be an offence under FEMA after repeal of FERA is immaterial. For preventively
detaining a person under COFEPOSA it is not essential that that person must be involved in criminal
offence. That apart, COFEPOSA Act and FEMA occupy different fields.

FEMA

Mantosh Saha v. Special Director, Enforcement Directorate, (2008) 69 AIC (SC)

Facts:輸 memorandum was issued by the Enforcement Directorate, Ministry of Finance. On the basis
of certain statements recorded it was indicated therein that M/s. Godsons (India) and its proprietor,
the present appellant had acquired foreign exchange contravening the provisions of Section 8(1) of
the FERA, 1973 thereby rendering him liable to be proceeded under Section 50 of FERA.

The memorandom was issued under Rule 3 of the Adjudication Proceedings and Appeal Rules, 1974.
The reply to show cause notice was filed by the Appellant. The Special Director passed an order on
13 May, 2005 imposing penalty of Rs. 25 lakhs on the appellant.

The appellant preferred an appeal before the Appellate Tribunal and filed an application for
dispensing with the requirement of pre-deposit. By order dated 7-3-2006 the Tribunal passed an
order directing deposit of 60 per cent. of the penalty amount for the purpose of entertaining the
appeal. An appeal was filed under Section 35 of the Act. Section 35 of the Act which came to be
dismissed by the High Court holding that no case for hardship was made out either before the
Tribunal or before it and, therefore, there was no scope of interference with the order of the
Tribunal. However the time permitting the deposit was extended.

Issue:邑 hether the interim order of stay can be passed. And whether any reduction of the amounts
to be deposited as directed by the Tribunal is called for.

Decision:誘 ndisputably the appellant had deposited the amount which was directed to be
deposited. However for the balance amount demanded with a view to safeguard the realisation of
penalty the appellant shall furnish such security as may be stipulated by the Tribunal. On that being
done, the appeal shall be heard without requiring further deposit if the appeal is otherwise free
from defect. The appeal was disposed of by Supreme Court accordingly.

THE FOREIGN CONTRIBUTION (REGULATION) ACT, 1976

Give introduction to FCRA, 1976?

The FCRA,1976 came into existence at a time when some of the foreign countries had stalled funding
and extending hospitality to individuals, associations, political parties, candidates, editors and
owners of newspapers.

This Act came into effect from 5th August, 1976 to regulate the acceptance and utilization of foreign
contribution by certain individuals or associations with an objective of ensuring that Parliamentary
institution!". Political associations, academic and other voluntary 4:1;.,anizations. haying an
influence on national interest, :function in a manner consistent with values of a sovereign
democratic republic.

What are the applications of FCRA?

The FCRA applies to all citizens of India, :n India or outside India. it also applies to associates,
branches or subsidiaries outside India of companies registered or incorporated in India.

What are the restrictions to FCRA?

The FCRA puts a restriction on elected candidates, newspersons like correspondents, columnists,
editors or even publishers, judges, government servants of corporations owned and controlled by
the government, members of legislature, members and office bearers of any political party from
taking any foreign contribution, whether direct or indirect. The Act also imposes a restriction on
acceptance of foreign hospitality (e.g., cost of travelling, boarding, lodging , transport) by these
people. A foreign contribution may be a donation, delivery or transfer by any foreign source in form
of currency, foreign securities or articles It does not include articles worth less than Rs. 1000 in
Indian markets given as gifts for personal use.
What are the exceptions to FCRA?

This restriction does not apply to contributions accepted by way of salary. wages, remuneration or
other payments in the ordinary course of business; or as an agent of a foreign source. Acceptance of
foreign contribution is also not barred when received by way of gift in his capacity as a member of
any Indian delegation or from a relative when such contribution being above Rs. 8000 per annum
has been received with previous permission of the Central Government

Any citizen receiving any scholarship, stipend or any such payment shall intim-ate the Central
Government about the source, purpose and amount of such payment.

How the modifications In FCRA takes place?

If the Central Government is satisfied that the acceptance of a certain foreign contribution or
hospitality is likely to affect the sovereignty and integrity of India, the public interest, freedom Or
fairness of election, friendly relations with an$ foreign state or harmony between religious, racial,
linguistic or regional groups, castes or communities, then it has the power to restrict foreign
contribution to any person not mentioned in the Act.

Further, if the Central Government is of the opinion that if it is necessary or desirable in the interest
of the general public, it may exempt any association, organisation or individual from the operation of
this Act or any part thereof_

IMPORTANT PROVISIONS UNDER FCRA

Foreign Source:

The foreign source under the FCRA includes (a) the government of any foreign country or territory
and its agencies, (b) any international agency, not being the United Nations- or any of its specialised
agencies, the World Bank, International Monetary Fund or such agency as the Central Government
may decide, (c) a foreign company, (d) a corporation not being a foreign company incorporated in a
foreign country or territory, (el a multinational corporation. (f) a trade unton, (g) a foreign trust, (h) a
societyclub or other association of individuals formed or registered outside a citizen of a foreign
country.

Foreign Hospitability:

The Foreign Hospitability (FH) under the FCRA means any offer, not being a purely casual one made
by a foreign source for providing a person with a costs of travel to any foreign country or territory or
with free boarding, lodging, transport or medical treatment;

Regulations and Restrictions on Foreign Contribution and Foreign Hospitability:

The restrictions are viz,:

(a) the contribution cannot be accepted by a candidate for election,

(b) the contribution cannot be accepted by any correspondent, columnist. cartoonist, editor, owner,
printer or publisher of a registered newspaper,

(c) the contribution cannot be accepted by any judge, government servant or employee of any
corporation,.

(d) the contribution cannot be accepted by member of any legislature,

(e) the contribution cannot be accepted by any political party or its office bearer,

Penalties for Offences under FCRA

If any person, on whom any prohibitory order has been served, pays, delivers, transfers or otherwise
deals with any article or currency whether Indian currency or foreign currency.. he shall be punished
with imprisonment upto three years or with fine or with both subject to additional fine by court
equivalent to market value of the article the amount of currency.

Further punishment for accepting or assisting any person, political party or organisation in accepting
any foreign contribution or any currency from a foreign source, shall be punished with imprisonment
upto five years or with fine or with both.

Again whoever accepts any foreign hospitability in contravention of any provision under FCI&A shall
be punished upto) three years or with fine or with both.

State by CBI v. K. Milian, Chief Functionary of the Cress, (2001) 4 SCC 290

Facts:裕 he appeals by CBI were directed against the Judgment dated 7-9-1999 of a single Judge of
Delhi High Court. By the impugned judgment, the High Court in exercise of power under Section 482
of Cr. P.C. held that a breach of undertaking given by an Association under Section 6(1)(b) of the
Foreign Contribution (Regulation) Ad, 1976 would nut amount to contravention of the provisions of
the Act within the meaning of Section 23 of the Act and as such the criminal prosecution had been
launched, would not lie. The High Court quashed the criminal proceedings arising out of FIRS the CBI
appealed in Supreme Court.

issue:.--reaction 23 of the Foreign Contribution (Regulation) Act, 19Th, makes only the contravention
of any provisions of the Act and Rules punishable and the information provided in Form FC-1 in
Schedule of the Act and violation thereof whether constitutes a contravention of the provision of Act
and Rules,

Decision:悠 f a society is registered under Section ti of the Foreign Contribution (Regulation) Act,
1976 for receiving foreign contribution only through a particular branch of a bank, but the society
deposits the contribution received by it from a foreign organization in another bank without
intimating Central Government about receipt of contribution, would amount to violation of Section
6(11(h) and attract the penal provisions under Section 23 of the Act.

The sick Industrial Companies (Special Provisions) Act, 1985 *

Introduction of sick Industrial Companies in India

Discuss briefly the salient features of the Act relating to sick industries and its objectives?

What is a sick industrial company?

For industrial Companies becoming sick in India, the Government has formulated 'The Sick Industrial
Companies (Special Provisions) Act, 1985' (SICA) which got amended in the year 1993 with a prime
objective of:-

� To timely detect the sick and potentially sick industrial companies,

� To speedily take preventive, ameliorative, remedial & other measures, and

� To enforce the measures so determined.

The 'sick industrial company' defined under the provisions of Section 3(1)(o) of SICA means an
industrial company (being a company registered for not less than five years) having at the end of any
financial year accumulated losses equal to or exceeding its entire net worth.

Accordingly, sick industrial company means a company:-

i. must be an industrial company which is as specified in the First Schedule to the Industries
(Development and Regulation) Act, 1951 (IDRA) but does not include an ancillary industrial
undertaking or a small scale industrial undertaking as defined under IDRA,

ii. should be in existence for at least five years since the date of incorporation.

iii. should have accumulated losses equal to or exceeding its networth at the end of any financial
year.

('Net Worth' means the sum total of paid-up capital and free reserves)

'Potentially Sick Industrial Company' means an industrial company whose accumulated losses is
more than fifty per cent. or more of its peak net worth during the immediately preceding four
financial years.

______________________

* This Act was repealed by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (1 of
2004).

The reasons for industrial sickness may differ from industry to industry and within the industry from
unit to unit. These can be categorised as follows:-

What are the reasons of becoming sick?

What are the symptoms of becoming sick?

1. Internal Reasons

1. Internal Reasons-The reasons which can be controlled by the company itself. Some of them are as
follows:-

i. Mismanagement

ii. Underestimation of the cost of the project

iii. Delay in the implementation of project

iv. Increase in cost due to delay in implementation of project

v. Under Utilisation of Resources

vi. Diversion of Funds

vii. Lack of Management depth

viii. Bad Industrial Relations

ix. Bureaucratic management

x. Inadequate working capital

xi. Heavy Expenditure in Advertisements.

2. External Reasons

2. External Reasons-The reasons which cannot be controlled by the company and are external in
nature. Some of them are as follows:-

� Adverse Government Rules & Regulations

� Adverse Price Control Policy

� Recession Trend/economic conditions

� Tough Competition

� Shortage of Manpower, Raw Materials etc.

� Changes in Technology

� Changes in Consumer Behaviour

� Shortage of Power Supply

� Delay in getting any financial assistance.

3. Symptoms of Industrial Sickness

Frequent Liquidity Problems, Fall in sale/profits, rapid increase in debtors, Reduced Working Capital,
etc.

� Unfavourable Market Development

� High Managerial turnover

� Labour unrest

� Rise in staff and customers' complaints and failure to respond such complaints

� Declining morale of the employees

� Lack of planning and strategic thinking

� Strike, lockout.

Comment on establishment of Board for Industrial and Financial Reconstruction (BIFR

What are the obligations of such companies?

Explain the role of BIFR?

Under the provisions of SICA, the Central Government has established Board for Industrial and
Financial Reconstruction (BIFR), (presently situated at New Delhi) consisting of experts for timely
detection of sick and potentially sick companies, speedy determination of remedial and other
measures with respect to such companies and for expeditious implementation of these measures.

If the industrial company becomes sick as per the definition, it is the obligation of such company to
make reference to BIFR within sixty days from the date of finalisation of duly audited accounts of the
company for the financial year at the end of which the company has become sick. The date of
finalisation of the duly audited accounts means the date on which the audited account of the
company are adopted at the annual general meeting of the company.

Even before finalisation of accounts for the relevant year, if the Board has sufficient reasons to form
an opinion that the company has become sick, the Board of directors must within sixty days from the
date of forming such opinion make a reference to the BIFR.

In the case of potentially sick industrial company, the company shall within sixty days from the date
of finalisation of the duly audited accounts of the company for the relevant financial year report to
BIFR and shall hold a general meeting of the shareholders for considering such erosion.

Such Companies have to comply with the BIFR Regulations, 1987 and application have to be made
under Form A (in respect of an industrial company other than a Government Company) with BIFR
and in Form AA in respect of a Government Company.

The BIFR will make such enquiry as it may deem fit for determining whether the concerned company
has become sick. Such enquiry can be made by BIFR upon the receipt of information from the Board
of Directors of the concerned company or from other agencies like Central Government, RBI, etc. or
upon its own knowledge as to the financial position of the company.

The BIFR may if it deems necessary, appoint any Operating Agency (any Public Financial Institution,
State Level institution, scheduled bank or any other person as may be specified by BIFR) to enquire
into and make a report.

BIFR or the operating agency, as the case may be, shall complete the inquiry within sixty days from
the commencement of the inquiry.

If the Board decides to institute inquiry then it may appoint one or more persons as special
directors(s) of the company concerned with a view to safeguard the financial and other interests of
the company or in public interest.

Define the mode of execution of Order by BIFR

How the winding-up takes place?

What are the objectives of the Act?

Notwithstanding anything contained in the Companies Act, 1956 or any other law or the
memorandum and articles of the industrial company or any other instrument, such appointment of a
special director shall be valid and such special director need not hold any qualification shares and
cannot be removed except with BIFR's consent and that age limit and number of directors
restrictions do not apply to such a director.

If the Board is satisfied after the completion of inquiry that the company has become sick, the BIFR
has to make an order in writing whether it is possible for the sick industrial company to make its
networth exceed the accumulated losses within a reasonable time.

If the Board is satisfied after the completion of inquiry that it is not practically possible to make its
net worth exceed the accumulated losses within a reasonable time, it may direct the operating
agency to prepare a scheme for such measures in relation to such company. The operating agency
then shall, within a period of ninety days from the date of such order prepare a scheme which may
provide any or more of the following measures:

� Financial Reconstruction
� Change in Management

� Amalgamation

� Sale or lease of a part or whole of any industrial undertaking of such company

� Rationalisation of managerial Personnel

� Such other Preventive, ameliorative and remedial measures as may be appropriate

The BIFR may on such recommendation sanction the scheme and will periodically monitor the
sanctioned scheme.

Considering all the relevant facts, if the BIFR is of the opinion that the sick industrial company is not
likely to make its net worth exceed the accumulated losses within a reasonable time, it may, after
offering opportunity of being heard to all concerned parties, form a opinion to wind up the company
and forward its opinion to the concerned High Court.

The High Court on the opinion of the Board may order winding-up of the sick industrial company in
accordance with the provisions of the Companies Act, 1956.

This Act is to make special provisions with a view to securing the timely detection of sick and
potentially sick companies owning industrial undertakings.

� The speedy determination by a group of experts of the preventive, ameliorative, remedial and
other measures which need to be taken with respect of companies.

� Expeditious enforcement of the minimum so determined and for matters connected therewith or
incidental thereto.

Explain the Industrial undertaking?

Sec. 5. Discuss briefly Appellate Authority for Industrial and Financial Reconstruction

� Essentially the legislation is enacted to safeguard the economy of the nations and to protect
viable sick units.

� Aimed at reviving and rehabilitating sick industries.

Sec. 3 (1)(O):-A sick industrial company is an industrial company being a company registered for not
less than five years, which has at the end of any financial year accumulated losses equal to or
exceeding its entire net worth:-

� Loss of production;

� Loss of employment;

� Loss of revenue to Central as well as State Government;

� Locking up of funds of banks and financial institutions.

Section 3(d) of the Industries (Development and Regulation) Act, 1951 defines Industrial undertaking
as any undertaking pertaining to an industry in one or more factories by any person or authority
including Government.

� This Act excludes ancillary industry and small scale industry from its purview.
� An ancillary undertaking is one in which the investment in fixed assets whether held on
ownership or on lease or on hire purchase does not exceed Rs. 75 lakh and it also satisfies the
following conditions:-

(i) The manufacture or production of parts, components,

sub-assemblies or intermediaries.

(ii) Rendering of services and its supplies not more than 50% of its production.

� A sick unit means a company with erosion of net worth by 100% or more of its net worth.

� When the erosion of net worth is of the order of 50% the Board of Directors of the sick unit are
required to bring this fast to the notice of the Board of Industrial and Financial Reconstruction and
also to the shareholders within 60 days.

� The Board of Industrial and financial Re-construction was set up in 1987 for providing speedy
mechanism for amalgamation, merger etc., in large and medium sector.

� The Board consists of a Chairman and not less than two and not more than 14 other members to
be appointed by the Central Government.

� The Chairman and members shall be persons who are qualified to be High Court Judges, or
persons of ability, integrity and those who have special knowledge and professional experience, of
not less than 15 years in Science, technology, economics, banking industry, law, labour matters, etc.

Consisting of Chairman and not more than three other members.

� The chairman shall be a person who is or has been a Judge of the Supreme Court or who has been
a Judge of High Court for not less than five years.

� A member shall be a person who has been Judge of a High Court or an officer not below the rank
of a Secretary to the Government of India.

The Board or the Appellate Authority shall, for the purpose of inquiry have the powers as vested in
the Civil Court in the case of:-

(a) Summoning and enforcing the attendance of any witness;

(b) Discovery and production of document or material object;

(c) Reception of evidence on affidavit;

(d) The requisition of any public record;

(e) Issuing of any Commission.

4. Discuss briefly the Board for Industrial and Financial Reconstruction

1. When the company has become a sick industrial company the Board of Directors of the Company
shall, within 60 days from the date of audited accounts in the financial year, make a reference to the
Board for determination of the measure which shall be adopted with respect to the company.

2. If Central Government, RBI, or a State Government or a public financial institution or a State level
institution has sufficient reason to believe that any company has become sick, it can make a
reference to the Board.
Provided:

1. All or any of the industrial undertakings under such company is situated in such State.

2. Such financial institutions have an interest in the company.

Sec. 15. Discuss briefly reference to Board

Section 15 makes it mandatory for the Board of Directors of a sick industrial company to make a
reference to the Board. But it is not mandatory for any other agency as specified is Section 15(2) to
make a reference to the Board.

� The BIFR may make such inquiries for determining whether a company has become a sick unit
upon receipt of a reference under section 15 or upon information received with regard to such
company or upon its own knowledge.

� The BIFR can appoint any operating agency such as public financial institutions, state level
institution, scheduled Bank or any other person for such inquiry and report within 60 days from the
commencement of the inquiry.

Sec. 16. Explain briefly enquiry into working of the Industrial Company?

Section 16(4) -The Board may appoint one or more persons to be special directors for safeguarding
the financial and other interests of the company.

Where a reference has been made to the Board for considering a company as sick industrial
company under Section 3(1)(O) the creditors have the right to intervene in the inquiry stage where
they dispute such claim and have

material to show that industrial sickness is a devise to defeat claims as held in the case of Sponge
from India Ltd. v. Neelima Steels Ltd., (1990) 68 Comp Cas 201.

After the inquiry under section 16 the Board may make an order for the improvement and
revamping of the company and may give such time for the purpose as it deems fit.

After passing an order under Section 17 the operating agency specified shall prepare within a period
of 90 days from the date of such order a scheme with regard to:-

(a) Financial re-construction.

(b) Any change in management.

(c) Amalgamation or take over by any company.

(d) The sale or lease of any part or whole of any industrial undertaking of the sick industrial
company.

(e) Any such, preventive, ameliorative and remedial measurers.

Sec. 18. Explain briefly pre-paration of schemes

� All such schemes shall be laid before the General Body by its shareholders.

� The Scheme can induce transfer of controlling shares or substantial shareholder's interest as held
in the case of Bennett Coleman & Co. Ltd. v. Appellate Authority for Industrial and Financial
Reconstruction, 1995 (3) AD (Del) 432 (DB).
� The Terms, revival or rehabilitation would cover the selling off of assets and starting a fresh
industrial undertaking at a different place as held in the case of Upper India Couper Paper Mills Co.
Ltd. v. AAIFR, (1992) 75 Comp Cas 653 (Del).

Sec. 19. Explain briefly rehabilitation by Financial Assistance?

The rehabilitation package may contain the provision of additional financial assistance for either the
modernization or expansion of the plant.

� Under Section 19(3A) the banks and financial institutions will adopt a consortium approach and
designate a bank or financial institution for the disbursement of loans provided in the Scheme.

Section 19A provides for interim relief for sick companies during the pendency of an enquiry under
Section 16. The Board is empowered to make an order within 60 days from the receipt of an
application.

Sec. 20. Explain briefly winding-up of Sick Industrial Company?

� The Board is free to accept or reject an application.

� Where the Board after making an inquiry under Section 16 and considering all the facts and after
hearing all the parties concerned is of the opinion that it is not feasible to revive or rehabilitate the
sick industrial undertaking can recommend to the High Court the

winding-up of the Company as held in the case of Lakshmi Porcelains Ltd. v. Union of India, 1995 (35)
DRJ 182.

Sec. 21 The Board can direct any operating agency to prepare an inventory of all assets and
liabilities.

Sec. 23. Explain briefly proce-dure in the case of loss of 50% net work by Industrial Companies?

Sec. 22 If any inquiry under Section 16 or implementation of scheme is pending under Section 17,
then no proceeding for the winding-up of the industrial company or for execution or any
proceedings against the properties of the industrial undertakings shall be suspended.

Any land of legal proceedings is prohibited under this section as held in Punjab United Forge Ltd. v.
Hindustan Hydraulics (P) Ltd., (1992) 75 Comp Cas 316 (PCA).

Sec. 22A-The BIFR can order the sick industrial undertaking not to dispose of any asset without its
consent under this section.

� If the accumulated losses of any company at the end of any financial year preceding four financial
years (earlier) have resulted into erosion of 50% of its net worth.

� Within 60 days report the matter to the BIFR.

� Hold a general meeting of the company shareholders informing about the matter.

� Before 21 days of such meeting, the Director of the company should forward the report to every
member of the company.

Sec. 24. Explain briefly mis-feasance proceedings?

In the course of inquiry or implementation of any scheme, if it appears to the Board that any officer
or employee of the sick industrial company has misapplied or retained or misappropriated any
money, the Board can direct to repay or restore the money or property and also report to the
Central Government for any other action.

� Misfeasance is the improper performance of some act which a man may lawfully do or omission
of an act which a person ought to do.

Sec. 25. Explain briefly to Appeal?

Any person aggrieved by the order of the Board can prefer an appeal with the Appellate Body within
45 days from the date of such order to him.

-The order of the Board or Appellate Authority would not be appealable in Civil Courts.

Sec. 33. Explain briefly to Penalties?

Whoever violates the provisions of the act or any scheme made thereunder by the Board or an order
of the Appellate Authority shall be punishable with simple imprisonment for a period upto three
years and shall also be liable to fine.

Sec. 34. Explain briefly to offences by Company?

(1) Where any offence, punishable under this Act has been committed by a company, every person
who, at the time the offence, was in charge of, and was responsible to the company for its conduct
of its business, as well as the company, shall be deemed to be guilty of the offence and shall be liable
to be proceeded against and punished accordingly.

Provided that nothing contained in this sub-section shall render any such person liable to any
punishment, if he proves that the offence was committed without his knowledge or that he had
exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where any offence punishable under this
Act has been committed by a company and it is proved that the offence has been committed with
the consent or connivance of, or is attributable to any neglect on the part of, any director, manager,
secretary or other officer of the company, such director, manager, secretary or other officer shall
also be deemed to be guilty of that offence and liable to be proceeded against and punished
accordingly.

Explanation.-For the purposes of this section,-

(a) "company" means any body corporate and includes a firm or other association of individuals; and

(b) "director", in relation to a firm, means a partner in the firm.

board for industrial and financial reconstruction (BIFR)

How does the hearings in BIFR takes place?

Normally, in case of competitive bids, the Operating Agency2 prepares comparative tables etc. and
presents them before the BIFR. The BIFR considers the various competitive bids and depending upon
the facts of the case, it may request the proposers to increase or improve their offers. Some of the
important factors, which BlFR normally considers while approving an acquisition or change in the
management of a sick company are:

� The capacity and standing of the acquirer.

� The financial commitments and the seriousness of the acquirer. The proposer may be required to
deposit some money in a no-lien interest bearing bank account to demonstrate its commitment.

� Long-term viability of the unit/company.

� A fair treatment to the secured creditors, labourers and all other interested parties.

What is the mode of Final BIFR Order/Scheme?

After being satisfied about various aspects, the BIFR can order the publishing of the draft scheme for
the rehabilitation of the sick company. After a period specified by the BIFR, the BIFR hears objections
and suggestions, if any, from the various concerned parties on the draft scheme. After suitably
modifying the draft scheme, a final scheme is ordered by the BIFR. If an appeal is made before the
BIFR, then the fate of the scheme will depend on the outcome of the BIFR order.

What are the advantages in BIFR scheme?

How does the reduction of Share Capital takes place?

Features of BIFR

a. CAPITAL RESTRUCTURING

After erosion of the net worth, the share capital appearing in the

balance-sheet is only notional and it may be worthwhile to bring the existing share capital of the
company in line with reality. It is possible to reduce the share capital of the company without going
to the court under Section 100 of

___________

1. BIFR stood dissolved by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (1 of
2004).

2. Operating agency means any public financial institution state level institutions, Scheduled Bank or
any other specified by BIFR.

the Companies Act, 1956 by incorporating the capital restructuring features in the BIFR scheme
itself. This is fair to the new promoter, as any further

share capital that it will bring in will be in line with the actual worth of the shares.

b. SETTLEMENT OF CREDITORS

Discuss briefly Shares at Discount in one-time settlement to creditors?

A One-Time Settlement (OTS) proposal may be made to the secured creditors (banks, financial
institutions, etc.) involving concessions and sacrifices by repayment of the entire dues over a short
period of two or three years. Alternatively, the scheme may provide for restructuring of the liabilities
and repayments over the rehabilitation period.

Reliefs and concessions within the RBI parametres are generally easily agreed upon, but relief
beyond that may require some convincing and adequate justifications. Generally, banks and financial
institutions are extremely hesitant to waive any portion of the principal amount of loans. However,
the OTS and/or the restructuring of liabilities depends entirely upon the way the matter is presented
and discussed/negotiated with the secured creditors.
What is the Right to Re-compens-ation?

Many times the banks/financial institutions insist that they shall have a right to re-compensation in
respect of the amounts waived and sacrifices made by them, if the sick company is revived. This, in
effect, means that if the sick company revives, then the amounts waived/sacrifices made by them
shall be made good by the company. Though, there may be a justification for including such a term
in an existing promoter's scheme of rehabilitation, there is no justification for including such a term
in the new promoter's scheme. This issue should be considered while finalizing the OTS or
restructuring of liabilities.

What is the Leveraged Buy Out?

Under a BIFR scheme if a suitable package is worked out with the secured creditors, then the
acquirer can, in effect, acquire the sick company by way of a leveraged buy out wherein he gets an
opportunity to pay a part of the total consideration, that is, dues of the secured creditors, over a
period of time. In a non-BIFR situation the acquirer would not easily be able to achieve such a
financing pattern.

It is important to note that a scheme can be sanctioned by the BIFR only if consented to by the
concerned Government, banks, public financial institutions, State level institutions or any institution
or authority required by the scheme to provide financial assistance, reliefs, concessions or sacrifices.
Therefore, for any scheme to go through, the consent of the above persons is a must. The consent of
the other creditors is, strictly speaking, not necessary for the scheme to go through, even if the
scheme involves extinguishments or reduction of their rights. However, the BIFR will normally hear
all the parties concerned before sanctioning the scheme.

c. ISSUE OF QUASI-EQUITY INSTRUMENTS

One of the features, which can be gainfully incorporated in a BIFR scheme, is the issue of optionally
convertible instruments to the secured creditors as a part of the OTS/restructuring of the liabilities.
If the company does not revive during the conversion option period, then to that extent the secured
creditors are not adversely affected as the nature of the instrument continues to be a debt.

However, if the company revives and the stock prices of the company start looking up (if listed) then
it works out to be a win-win situation. The company gains by way of conversion of loans into shares,
which may be at a premium and the creditor gains by being able to recover its money faster through
the sale of the shares as also a possible recovery of a higher amount by way of appreciation in the
value of the shares.

One can also consider offering the shares of one of acquirer group's healthy listed company at a fair
price to the secured creditors as repayment of their dues.

d. INCOME-TAX ISSUES

The present position in law is that the consent of the CBDT (Central Board of Direct Taxes) is
necessary before a scheme containing reliefs and concession under the Income-tax Act, 1961 is
approved. Even then, it is better to include tax concession and litigious tax issues in the scheme.

One important point that can be incorporated in the scheme is relating to the set-off of the carried
forward business loses and depreciation against the capital gains that may be made by the sick
company from the sale of its surplus assets. Presently, the issue is not fully settled under the income
tax law and, therefore, there is a scope for litigation in regular income tax assessment. It may also be
advisable to ask for exemption under Section 41(1) of the Income-tax
Act, 1961 regarding the non-taxability of the interest waived, etc.

e. USE OF EXISTING PRODUCTION FACILITIES PENDING THE FINAL BIFR ORDER

To take advantage of the time gap before the company is acquired; it may be advisable to propose
an arrangement for using the production facilities of the sick company on a job-work basis or a
short-term lease. The advantages to the acquirer are that it gets a hands-on experience of the
production facilities and it starts exploiting the business potential of the production facilities. At the
same time, for the sick company it would ensure capacity utilization, which at the very least, will
keep the production facilities and the workers working and will generate revenue.

f. REQUEST FOR SUSPENSION OF CONTRACTS, AGREEMENTS, ETC

It may be advantageous to request the BIFR, as a part of scheme, to suspend operation of those
contracts, agreements, awards, settlements, etc. which are likely to adversely affect the quick and
smooth implementation of the scheme. The BIFR is empowered to do so for an initial period of two
years which may be extended by one year at a time, such that the total suspension period cannot
exceed seven years in the aggregate.

SYMPTOMS OF SICKNESS

(Report of Tiwari Committee)

� Continuous irregularity in cash-credit accounts.

� Low capacity utilization.

� Profit fluctuations, downward trends in sales and stagnation or fall in profit followed by
contraction in the share of the market.

� Higher rate of rejection of goods manufactured.

� Reduction in credit summations whenever the companies are in financial difficulty, they open a
separate account with another bank and deposit all collections therein.

� Failure to pay statutory liabilities.

� Larger and longer outstanding in the bill accounts.

� Longer period of credit allowed on sale documents negotiated through the bank and frequent
returns by customers of the same.

� Constant utilization of cash credit facilities to the maximum and failure to pay timely instalment
of principal and interest on term loans and instalment credits.

� Non-submission of periodical financial data/stock statements, etc. in time.

� Financial capital expenditure out of funds provided for working capital purposes.

� Decrease in working capital on account of-

� Increase in debtors and particularly dues from selling agents.

� Increase in debtors.

� Increase in inventories which may include large number of slow or non-moving items.
� Increase in inventories which may include large number of slow or non-moving items.

� A general decline in that particular industry combined with many failures.

� Rapid turnover of key personnel.

� Existence of a large number of law suits against the company.

� Rapid expansion and too much diversification within a short time.

� Sudden/frequent changes in management - whether professional or otherwise and/or dominated

by one man/few individuals.

� Diversion of funds for purposes other than running the unit.

� Any major change in the shareholdings.

THE ESSENTIAL SERVICES MAINTENANCE ACT, 1968

What are the objectives of ESMA, 1968?

To provide for the maintenance of certain essential services and the normal life of the community.

Explain Essential Services?

(i) Postal, telegraph or telephone service.

(ii) Railway Service, other transport Services for the carriage of passengers or goods by land, water
or air.

(iii) Any service connected with operation of aerodromes or repair or maintenance of aircraft.

(iv) Any service connected with loading, unloading, movement or storage of goods any part.

(v) Any service connected with the clearance of goods or passengers through customs or prevention
of smuggling.

(vi) Any service in any Security press.

(vii) Any service in any defence establishment.

(viii) Any service in connection with the affairs of the union.

(ix) Any other service connected with matters where the Parliament has power to make laws.

� Where the Central Government is of the opinion that strikes would prejudicially affect the
maintenance of any public utility service.

� The public safety or the maintenance of supplies and services necessary for the life of the
community.

� Or that which would result in the infliction of grave hardship on the community.

� By notifications in the Official Gazette, the Government can declare to be an essential service.

Define strike?

2 (1) (xvii) (b)-

The cessation of works by a body of persons while employed in any essential service, refusal under a
common understanding of any number of persons, includes:-

� Refusal to work overtime where such work is necessary for the maintenance of any essential
service.

� Any other conduct which is likely to result in substantial retardation of work of any essential
service.

Sec. 3. Explain briefly power to prohibit strikes in certain Employments?

If the Central Government is satisfied that in the public interest it is necessary to prohibit striking
essential services by general or special order it can do so. The order shall be in force for six months
only but the Central Government can extend it for any period not exceeding six more months.

� After issuance of the order, no person shall go or remain on strike.

� Any strike declared before or after the issue of the order in such service shall be illegal.

Explain briefly Sec. 4. Dismissal of employees participating in illegal strikes?

(a) whoever goes or remains on or otherwise takes part in any such strike or,

(b) who instigates any person to commence or go on for such strike shall be liable for disciplinary
action including dismissal in accordance with the conditions of service applicable to him.

Explain briefly Sec. 5. Penalty for illegal strikes?

Any person who commences or takes part in any such illegal strike shall be punishable with
imprisonment for a term of six months or with fine which may extend to Rs. 2000 or with both.

Explain Sec. 6. Penalty for instigation?

Any person who instigates other persons to take part in such an illegal strike shall be punishable with
imprisonment for a term of one year imprisonment, or with fine which may extend to Rs 2000 or
with both.

� If the Central Government is satisfied, in the public interest, it may by general or special order,
prohibit lockouts in any establishment catering to essential service.

� An order under Section 8(1) shall be in force for six months only. But the Central Government can
extend it if in the public interest, is necessary to do so.

Explain Sec. 8. Power to prohibit Lock-outs?

Section 8(4)(a).-No employer in relation to an establishment to which an order applies shall declare
any lock-out.

(b) Any such lock-out declared before or after the issuance of such order shall be illegal.

What are the Consequences of Sec. 8 of ESMA?

Section 8(5).-Any such contravention shall be punishable with imprisonment for a term which may
extend to six months or fine up toRs. 1000 or with both.

Explain Sec. 9. Power to prohibit lay-off?

Section 9(1).-If the Central Government is satisfied it may prohibit lay-off, on any ground other than
shortage of power or national calamity, of any workman whose name is on the master rolls of any
such establishment in public interest.

Explain Sec. 10. Power to arrest without warrant?

Any police officer may arrest without warrant any person who is reasonably suspected of having
committed any offence under this Act.

The offences under this section shall be tried summarily by under this Act and Sections 262 to 265 of
Cr.P.C, 1973 shall apply to such trials.

THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

The SEBI was established on April 12,1988 through an administrative order to promote orderly and
healthy growth of securities market and investor's protection but it became a statutory and a
powerful organisation due to tremendous growth in capital market in 1992 when SICA was repealed
and the office of the Controller of Capital Issues was abolished. Government of India issued an
Ordinance on 30th Jan, 1992 and pursuant to this Ordinance SEBI was set-up on 21st Feb, 1992. The
SEBI Act replaced this Ordinance on 4th April, 1992.

The regulatory powers of the SEBI were increased through the Securities Law (Amendment)
Ordinance of January, 1995 which was subsequently replaced by an Act of Parliament. SEBI is under
the overall control of the Ministry of Finance. Its Head Office is at Mumbai (formerly Bombay). It has
since become a very important constituent of the financial regulatory framework in India.

SEBI' s governing board comprises of a Chairman, two members from the ministries of the Central
Government dealing with Finance and Administration of Companies Act, 1956, and one member
from the officials of RBI and five other members of whom at least three are wholetime members. All
members, except the RBI member, are appointed by Government of India. Their terms of office,
tenure, and conditions of service are also laid down by Government of India. It can also remove any
member from office under certain circumstances. Government of India is empowered to supersede
the SEBI in any of the following cases:

� If it is deemed to be expedient in public interest

� If SEBI' s board is unable to discharge its functions or duties

� If it persistently defaults in complying with any direction issued by the government

� If its financial position and administration deteriorates.

Regulation of the capital markets and protection of investor's interest is primarily the responsibility
of the Securities and Exchange Board of India (SEBI), which is located in Bombay.

(Functions of SEBI)

What are the Fraudulent and Unfair Trade Practices?

Briefly explain Inspection and Enforcement Procedure of SEBI?

� Regulating the business in stock exchanges and any other securities markets
� Registering and regulating the working of collective investment schemes and venture capital
funds including mutual funds.

� Registering and regulating the working of the depositories, participant, Custodians of Securities,
FIIs Credit Rating Agencies

� Promoting and regulating the self-regulatory organisations

� Registering and regulating the working of stock-brokers, sub-brokers, share transfer agents,
trustees of trust deeds, merchant bankers, underwriters, portfolio managers, investment advisors
and share intermediaries.

� Prohibiting fraudulent and unfair trade practices relating to securities markets.

� Promoting investor's education and training of intermediaries of securities markets.

� Prohibiting insider trading in securities, with the imposition of monetary penalties, on erring
market intermediaries.

� Regulating substantial acquisition of shares and takeover of companies.

� Calling for information from, carrying out inspection, conducting inquiries and audits of the stock
exchanges and intermediaries and self regulatory organizations in the securities market.

Keeping this in view, SEBI issued a new set of comprehensive guidelines governing issue of shares
and other financial instruments, and has laid down detailed norms for stock-brokers and sub-
brokers, merchant bankers, portfolio managers and mutual funds.

On the recommendations of the Patel Committee Report, SEBI on

27th July, 1995, permitted carry forward deals. Some of the major features of the revised carry-
forward transactions as directed by SEBI are:

� carry-forward deals permitted only on stock exchanges which have screen based trading system.

� transactions carried-forward cannot exceed 25% of a broker's total transactions on any one day.

� 90-day limit for carry-forward and squaring off allowed only till the 75th day (or the end of the
fifth settlement).

� daily margins to rise progressively from 20% in the first settlement to 50% in the fifth.

In accordance with the amendment in 1995 an adjudicating mechanism was created within SEBI and
any appeal against this adjudicating authority is to be made to a separate Securities Appellate
Tribunal. These appeals are heard only in the High Courts.

The main features of the amendment in 1995 to the Securities Contract (Regulation) Act, 1956
pertaining to SEBI's functioning are:

� The ban on the system of options in trading has been lifted.

� The time limit of six months, by which stock exchanges could amend their bye-laws, has been
reduced to two months.

� Additional trading floors on the stock exchanges can be established only with prior permission
from SEBI.
� Any company seeking listing in stock exchanges would have to comply with the listing agreements
of stock exchanges, and the failure to comply with these, or their violation, is punishable.

SEBI is vested with powers to take action against these practices relating to securities market
manipulation and misleading statements to induce sale/purchase of securities.

SEBI has the powers of Civil Court in respect of discovery and production of books, documents,
records, accounts, summoning and enforcing attendance of company/person and examining them
under oath. SEBI can levy fines for violations relating to failure to submit information to SEBI/to
enter into agreements with clients/to redress investor grievances, violations by mutual funds/stock
brokers and violations related to insider trading and takeovers.

Important provisions under SEBI Act, 1992

Collective Investment Scheme

Any scheme or arrangement offered by any company under which:

(a) the contributions or payment made by the investors are pooled and utilised from such scheme.

(b) the contributions and payments are made to such scheme or arrangement by the investors with
a view to receive profits, income and property whether movable or immovable from such scheme.

(c) the property, contribution or investment forming part of scheme, the investors do not have day-
to-day control over the management and operation of the scheme.

Prohibition of Manipulative and Deceptive Services, Insider Trading and Substantial Acquisition of
Securities or Control

No person shall directly or indirectly:

(a) use or employ in connection with the issue, purchase or sale of any securities listed on a
recognised stock exchange, any manipulative or deceptive device.

(b) employ any device, scheme or article to defraud in connection with issue or dealing in securities
which are listed on a recognised stock exchange.

(c) engage in any act, practice, course of business which operates as fraud in connection with the
issue, dealing in securities which are listed in a recognised stock exchange.

(d) engage in insider trading.

(e) deal in securities while in possession of material or non-public information.

(f) acquire control of any company or securities more than the percentage of equity share capital of
a company whose securities are listed in a recognised stock exchange.

Securities and Exchange Board of India General Fund

All the grants, fees, and charges received by the SFBI, and all sums received by SEBI from other
sources, are credited to securities and Exchange Board of India General Fund.

This Fund is applied for the salaries, allowances and other remunerations of the members, officers
and other employees of the SEBI, and the expenses of SEBI.

Major Penalties under SEBI Act

Penalty for non-furnishing of any Rs. 1 lakh for each day during

document, return or report to SEBI which such failure continues or

Rs. 1 crore whichever is less.

Penalty for non-filing of return Rs. 1 lakh for each day during

within specified time to SFBI which such failure continues or

Rs. 1 crore whichever is less.

Penalty for failure to maintain Rs. 1 lakh for each day which such

books of account or records failure continues or Rs. 1 crore

whichever is less.

Penalty for failure to enter into Rs. 1 lakh for each day during

agreement with clients which such failure continues or

Rs. 1 crore whichever is less.

Penalty for failure to redress Rs. 1 lakh for each day during

Investor's Grievance which such failure continues or Rs. 1 crore whichever is less.

Penalty for failure to observe Rs. 1 lakh for each day during

Rules and Regulations by an which such failure continues or

asset management company Rs. 1 crore whichever is less.

Penalty for insider trading Rs. 25 crore or three times of amount of profits made of insider trading
whichever is higher.

Penalty for non-discloser of Rs. 25 crore or three times the amount acquisition of shares and take-
overs of profit made out of such failure

whichever is higher.

Penalty for fraudulent Rs. 25 crore or three times the amounts

and unfair Trade Practices of profit made out of such practices

whichever is higher.

Clariant International Ltd. v. Securities and Exchange Board of India, MANU/SC/0694/2004 : (2004) 8
SCC 524 Facts:-

The Colour Chem Ltd. was the target company. Its shares were listed on BSE and NSE. An agreement
was entered into by and between one Hoechest and one Clariant pursuant whereto and in
furtherance whereof the German speciality chemicals business of the target company was
transferred to Clariant by transferring about 6 lakh equity shares of Rs. 100 each of the target
company. On or about 21-11-1997, with a view to give effect to the said agreement, Clariant sought
for an exemption from compliance with the requirements of making an open offer to the
shareholders of the target company in terms of the provisions of the SFBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997. Such exemption however, was not granted. Hoechest in
the aforementioned situation decided to sell off the shares held by it in the target company to Ebito,
a company which was floated on 19-5-2000 as a special purpose vehicle. The actual transfer took
place on 13-10-2000. Ebito by reason of the aforementioned transfer became 100% subsidiary of
Clariant.

A complaint was received by SEBI to the effect that as by reason of the aforementioned arrangement
a transfer of 50.1 per cent shares/voting rights and control in the target company had been made
without any public announcement, the provisions of regulations had been violated. Upon an enquiry
made in this behalf, the board came to the conclusion that the acquirer had actually acquired the
control over the target company on 21-11-1997. By reason of an order SEBI on 16-10-2002 issued
certain directions.

An appeal was preferred against the said order of SEBI by the acquirer wherein the primary question
raised was the rate of interest for the delay involved in making payment to shareholders who had
tendered the shares in the public offer required to be made in terms of Regulations.

Issue:-

The rate of interest was on the higher side, the dividends having been paid in the meantime, the
same should be set off from the amount of payable interest and the interest was payable only to
those shareholders who held shares on the targeting date.

Decision:-

The interest can be awarded in terms of an agreement or statutory provisions. It can also be
awarded by reason of usage or trade having the force of law or an equitable considerations. The
interest cannot be awarded by way of damages except in cases where money due is wrongfully
withheld and these are equitable grounds therefor for which a written demand is mandatory.

Technip SA v. SMS Holding (P) Ltd., MANU/SC/0385/2005 : (2005) 5 SCC 465 Facts:-

Technip and Coflexip were both registered in France and takeover of Coflexip by Technip also took
place in France, the applicable law was of France. In terms of French law, according to Technip there
was no control of Coflexip by Technip in April 2000 and as such there was no change in control of
SEAMEC on that date but in July, 2001. It is further submitted that in any event the SEBI Regulation
did not apply to the take-over because SEAMEC was not the target company and that while taking
over Coflexip, Technip neither had the common objective nor was there any agreement between
Technip and Coflexip with regard to SEAMAC. The rate of interest had also been challenged.
Although there was no challenge to the rate which was fixed by SEBI, if the Tribunal's order is
upheld, then the impact of interest would be much greater. It was submitted that in any event, the
dividend paid must be adjusted against the interest claimed. It was the Final Submission of Technip
that if April, 2000 is to be taken as the date of control, then only those shareholders who were
shareholders of SEAMAC on the specified date and continued as such till the offer was made were
entitled to the benefit of the Tribunal's order.

The respondent argued that the law applicable to SEAMAC was Indian Law and to determine if there
was a change in the management and control of SEAMAC the provisions of the Regulations would
apply. The respondent also claimed that Technip had in fact applied to SEBI to exempt them from
the operation of the Regulations. The application had been rejected. This issue according to the
respondent could not, therefore, be reopened. It was said that SEAMAC was very much in the
contemplation of Technip when it decided to take-over Coflexip.
Issue:-

Whether Technip acquired control of SEAMAC through Coflexip in April, 2000 or in July, 2001?

Decision:-

On examination of remaining facts, having regard to balance of probabilities, there was no evidence
that Technip obtained de facto control of Coflexip in April, 2000. In any case even if Technip did
acquire Coflexip in

April, 2000, the shareholding of Coflexip in SEAMAC did not constitute a substantial part of the
assets of Coflexip. The take-over of SEAMAC was only an incidental fall out of control of Coflexip and
SEAMAC formed only about

2 per cent of total asset base of Coflexip at the time. Hence Technip did not acquire control of
SEAMAC in April, 2000. Substantial acquisition took place in July, 2001. Hence the public offers are to
be with reference to share price of SEAMAC in July, 2001.

EMERGENCE OF SECURITIES DEPOSITORIES IN INDIA

The global securities market is passing through an interesting phase. Driven by globalization of the
securities market, technology innovations and increasing trade volumes, the financial industry is
moving straight towards global heights through processing. In this globalization era led by major
financial markets, you may wonder where India fits in. Before you start making any judgment, read
through the following words used by the Securities Industry Association (SIA) of USA, in arguing the
case of dematerialization in the world's biggest securities market, i.e., United States of America.

"Some of the latecomers to the capital markets have leap-frogged into the next century by rapidly
moving into the dematerialized status already or at least very soon. Among these would be...India."

Unbelievable! When we compare this statement with the following one made by an international
magazine covering clearing and settlement in the worlds' securities markets not very long ago.

"India's financial markets, unlike the country itself, have long conjured up images of interminable
delays, infuriating obstructions and an infrastructure that belongs more to the 19th than the 20th
century. The country has long been a safekeeping and settlement nightmare; the country's sub-
custodians struggling gamely-if ultimately pretty ineffectively-to deliver a consistent level of service
to clients. Bogged down by lack of liquidity, entry restrictions on foreign participants, heavy
transaction costs and frankly painful registration processes, any talk of the markets' supposed
liberalization back in early nineties rings decidedly hollow."

When we look at the above two statements, the first being the recent reference, one realizes that
things have changed dramatically in the securities market for better, as far as India is concerned. No
longer we have the taboo of bad deliveries, payment delays, paper movement and slower
settlement. The two entities, which can among others claim, a major credit for improving the market
efficiency of the Indian Securities market are National Securities Depositories Ltd. (NSDL) and the
Central Depository Services Ltd. (CDSL), both established in Mumbai.

In 1996, the Indian Government passed the Depositories Act allowing the establishment of securities
depositories in India. The principle function of a depository in the Indian context is to dematerialize
securities and enable their transaction in book-entry form. In simple terms, the depository has the
following functions:

Corporation:
It is the succession of a recognised stock exchange, being a body of individuals or a society registered
under the Societies Registration

Act, 1860, by another stock exchange, being a company incorporated for the purpose of assisting,
regulating or controlling the business of buying, selling or dealing in securities carried on by such
individuals or society.

Dematerialization:

It is the process of converting securities in physical form into holdings in book-entry form.

Demutualisation:

It is the seggregation of ownership and management from the trading rights of the members of a
recognised stock exchange in accordance with a scheme approved by the Securities and Exchange
Board of India.

Rematerialization:

It is the process of converting securities in electronic form into holdings in physical form, for those
investors who opt to move out of the depository system.

Account Transfer:

The securities are transferred by debiting the transferer's depository account and crediting the
transferee's depository account.

Pledge and Hypothecation:

Depositories allow the securities placed with them to be used as collateral to secure loans and other
credits. The securities pledged/hypothecated are transferred to a segregated or collateral account
through book entries in the records of the depository.

Linkages with the Clearing System:

The clearing system performs the functions of ascertaining the pay-in (sell) or payout (buy) of
brokers who have traded in the stock exchange. Actual delivery of securities to the clearing system
from the selling brokers and delivery of securities to the buying broker is done electronically by the
depository. To achieve this, the depositories and clearing system are electronically linked.

Corporate Actions:

The depository may handle corporate actions in two ways. In the first case, it merely provides
information to the issuer about the persons entitled to receive corporate benefits. In the other case,
depository itself takes the responsibility of distribution of corporate benefits.

Mumbai, being the financial capital of India and hub of stock market activities, was the natural
choice for establishment of depositories. NSDL was registered as a depository on June 7, 1996. The
depository commenced operations on November 8, 1996 by implementing a state-of-the-art
technology system in record time. NSDL operates as a profit institution and is owned primarily by the
IDBI, UTI, NSEIL, SBI with several other Indian and Foreign Banks having a small shareholding.

Bombay Stock Exchange (BSE) established the CDSL, in 1998, which commenced operations on
March 22, 1999.CDSL is a public company for profit, and is owned by the BSE, Bank of India, Bank of
Baroda, SBI, HDFC Bank, Centurion Bank, and Standard Chartered Bank, Bank of Maharashtra, Union
Bank of India, Calcutta Stock Exchange and other depository participants.

The changes in the last five years, thanks to the two major infrastructures, NSDL and CDSL, have
altered the face of the Indian capital market. Gone are the days of paper deliveries and the related
issues of bad deliveries. The settlements through book entry transfer of securities have removed the
major problem of bad deliveries, delay in settlement and the related cost in the settlement.
International norms of rolling settlements have been introduced and well adapted to the Indian
markets conditions. With effect from April 2002, the system of settlement in the Indian capital
market has moved to T+3 settlements. Both the depositories have faced the challenges of T+3,
effectively and efficiently. With these changes, the settlement system in India has been completely
overhauled. The move from an Account period settlement in "Paper form only" to a T+3 settlement
in pure electronic form has been achieved in a record span of under five years, whereas it took
anywhere between 10-20 years in most of developed countries.

Today, Indian settlement infrastructures have been built to meet the requirements of the 21st
century. Everybody will envy the settlement infrastructure, wherein 99 per cent of the settlement in
the country takes place in the dematerialized way. Even the developed capital markets are struggling
to achieve this. Improvements that have taken place in the Indian capital market have been the
model for others to emulate.

As on August 2002, the statistics of NSDL is impressive:

Companies Available for Demat: 4,464

Companies Signed for Demat: 4,510

Debt Instruments Admitted for Demat: 4,767

Commercial Papers Admitted for Demat: 619

Depository Participants of NSDL: 213

Depository Participants Service Center Locations: 1,718

Active Client Accounts (in thousands): 3,797

Demat Custody (Qty in crores) 6170

Demat Custody (Value in Rs. crores) 478,845

Mumbai, being the financial capital of India has its own share in the success of depositories. The
number of investors account from Maharashtra (no doubt major portion of this is from Mumbai)
alone is more than 30 per cent. The impressive growth in the number of investor accounts in NSDL is
reflected in the graph below:

Not far behind is the CDSL, which too has equal number of companies whose shares are available for
Demat. CDSL also has 1710 debt instruments available for Demat. CDSL services investors through its
network of 176 Depository Participants.

This impressive result is a reflection of a campaign that involved:

Strong government, regulatory and stock exchange support the Minister of Finance, Securities
Exchange Board of India (SEBI), and Reserve Bank of India(RBI) openly promoted the depository and
provided supportive regulatory changes(e.g., SEBI's introduction of compulsory dematerialized
settlement only in a growing number of securities starting in 1999 and RBI's increase in permitted
lending limits against dematerialized securities pledged).

Depository Participant (DP) supports as DPs was not only the benefits of reduced paper, but also
new clients and the ability to cross-sell a growing number of products/services to them.

An aggressive investor communications programme (publications, seminars, website, videos, TV

"infomercials" and credible spokespeople from across a spectrum of backgrounds-academics,
business writers, government/regulatory officials) and provision of an active grievance redressal
mechanism.

Both the depositories have successfully deployed technology for the full benefit of the ultimate
stakeholder i.e., the Indian investor. Today, making use of Internet, these depositories provide user-
friendly features, which provide complete control to the investor in the settlement process.

In line with global trends, further steps are being taken to implement the world's best practices. The
planned implementation of an Electronic Contract Note System is the first step towards "Straight
Through Processing", which is aimed at enabling a move from T+3 to T+2 settlement. Additionally
the implementation of RTGS (Real Time Gross Settlement) system, planned for implementation in
the near future, will improve the payment side of settlement. With all this sophistication and
modernization that is taking place in the securities market, related to exchanges, clearing and
settlement, Depository Participants, brokers, etc. the day is not too far when the Indian securities
market will be recognised as one of the well developed markets in the world.

TATA Consultancy Services (TCS), which was entrusted with the responsibility of implementing the
NSDL, depository solution, based on its earlier state-of-art solution implementation at SIS,
SegaInterSettle, Switzerland, is working closely with NSDL in constantly bringing the benefits of its
global securities experience to the Indian securities market.

Who is the Issuer/Registrar and Transfer Agent Guided Tour under NSDL?

India set up its first depository (NSDL) under the Depositories Act passed by the Parliament in
August, 1996. NSDL was set up with an initial capital of INR one billion (USD 28 million), promoted by
Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of
India Ltd. (NSEIL). Subsequently, State Bank of India, Global Trust Bank Limited, Citibank NA,
Standard Chartered Bank, HDFC Bank Limited, The Hongkong and Shanghai Banking Corporation
Limited, Deutsche Bank, Dena Bank and Canara Bank have become a shareholder of NSDL.

Stated in simple terms, the depository system comprises of Depository Participants (DPs), through
whom the investors and brokers use depository facilities, the Companies or their share registrar and
transfer agents (R&T agents), who agree to have their shares and securities admitted into the
system, and the clearing corporations/houses of the stock exchanges, who sign up with the
depository to facilitate trading and settlement of demat securities.

In order to clear and settle trades that have been done for dematerialised securities, clearing
members have to open Clearing Member Accounts with the DPs. Similarly, investors have to open
Depository Accounts with DPs in order to use the facilities of the depository system. These investors
offer their share certificates and scrips to the latter for dematerialisation i.e., credit to their
electronically maintained accounts. For transfer or transmission of these shares or for further
purchases, the investors operate these accounts almost like any other running account in banks.
NSDL itself functions as the central accounting and record keeping office and clearing house in
respect of these shares and securities through electronic operations. As all these are electronically
linked, speed, accuracy and safety are assured. Risks attendant on handling physical scrips are
eliminated.

Depository helps eliminating the following problems:

� At the time of issue of securities, processing, printing and posting of physical securities increases
the issue cost. In addition, very high load at the time of a public issue, both with the registrar and the
postal system, results in inefficient distribution of securities leading to investor dissatisfaction.

� The increase in trading in secondry market increases the cost to the company for effecting
transfers and also increases time taken for transfer causing inconvenience to the investor.

� The reconciliation of the securities in the hand of the various investors and market intermediaries
is at best achieved once in a year in the physical form, which increases the possibility of proliferation
of bad paper.

� The system of handling market deliveries also increases the unchecked growth of bad paper. In
addition, the issuing company is unable to monitor, in a regular fashion, the change in holding
pattern of securities.

� The load on the registrar and the postal system also increases at the time of book closure and
record date for distribution of corporate benefits, which results in higher cost and delay in
processing these.

NSDL provides an efficient solution to the ills associated with paper and offers numerous benefits to
various market participants and reduces transaction cost. Advantages specific to you as an issuing
company/registrar and transfer agent are:

� The electronic holding reduces paperwork and thereby reduces direct costs of record keeping,
physical handling, movement and safekeeping of certificates.

� Corporate actions such as public offers, rights, conversions, bonus, mergers/amalgamations, sub-
divisions & consolidations will be carried out without the movement of papers, saving both cost and
time.

� Information of beneficiary owners is readily available. The issuer gets information changes in
shareholding pattern on a regular basis, which would enable the issuer to efficiently monitor the
changes in share holdings.

� Instances of loss/theft/mutilation/forgery, etc. of certificates will be completely eliminated.

� The company acquires a progressive , investor friendly image.

� Company can save substantial time of the secretarial department spent on transfer of shares,
followup with registrars, etc.

An issuer of securities can join NSDL directly by establishing electronic connectivity with NSDL (TYPE-
I) or by utilising the services of a registrar and transfer agent who is connected to NSDL (TYPE-II). In
the latter case, the company may hire a registrar to obtain electronic connectivity to handle demat
shares, while keeping the share registery work with itself or it may outsource the share transfer
work as well. NSDL does not charge any fees for making the securities available in the dematerialised
form.
TYPE-I

Steps involved in joining NSDL when the issuer company decides to go in for a in-house route are:

� Issuer sends a letter of intent (LOI) to join NSDL.

� The issuer enters into an bipartite agreement with NSDL. The agreement has a standard format
(part of NSDL Bye Laws and hence, SEBI approved) and is the same for all issuers.

� After signing the agreement, the issuer has to get the VSAT installed.

� The issuer has to install the required IT hardware. The hardware shall be strictly in accordance
with the specifications given. The hardware is to be used exclusively for NSDL operations.

� The application software for depository operations (DPM-SHR) will be provided by NSDL.

� The issuer/R&T agent has to nominate a System Administrator.

� NSDL conducts training programme for representatives of the issuer/R&T Agent. This is done to
familiarise the staff with the depository system.

� Once the hardware and software are installed, there will be a test run (for about four days) after
which dematerialisation of securities can start.

� It is observed that the whole procedure of establishing connectivity takes about eight to ten
week's time.

TYPE-II

The steps involved in joining the depository through a registrar are:

� Issuer sends a letter of intent (LOI) to join NSDL.

� A Tripartite Agreement has to be entered into between NSDL, the issuer and the registrar.

� If the registrar is already connected electronically to NSDL, then dematerialisation of securities

can start immediately.

� If the registrar has yet to attain connectivity, then it may take about 8-10 weeks to commence
dematerialisation. The registrar will take all the steps stated in Type-I.

Comment on the role of Registrar in Type-II connectivity?

Dematerialisation:

The demat request generated on behalf of the clients by the various DP's are available with the
registrar. The physical papers along with a copy of the demat request will be received by the
company. The registrar will forward the electronic request to the company. Once the company has
completed the scrutiny of the document and has done the necessary updation in its Register of
Members (RoM) it will send a confirmation to the registrar. The registrar on the basis of this advice
will confirm the demat request. The investor will now have electronic balances. These investors are
known as "Beneficiary Owners"(BO).

Benpos:
The list of investors in a particular security is downloaded to the registrar every week (as of every
Friday). The registrar is expected to forward the same to the company in a format as agreed
between them.

Book Closure & Record Date:

The company will inform NSDL and registrars about the impending record date. This date may be
critical for the purpose of distributing interest proceed or call/put option or for final redemption. The
registrar will solicit the benpos for the record date and NSDL will download the BO information to
the registrar as of the record date. The registrar will forward it to the company.

Rematerialisation:

If a BO wishes to hold physical securities he will approach his DP and make an application for the
same. The DP will enter the request in the NSDL system and forward the physical application to the
company. The NSDL system will forward the request to the registrar. The registrar will forward the
electronic request to the company. The company on the basis of the electronic request and the
physical application received will print a certificate in the name of the BO and will directly send it to
the BO.

THE SECURITIES CONTRACTS (REGULATION) ACT, 1956

The Securities Contracts (Regulation) Act, 1956 came into effect from 20-2-1957 was enacted with
the objective of preventing undesirable transactions in securities by regulating the business of
dealing in securities and it provides for the regulation of stock exchanges and of transactions in
securities dealt in on them with a view to prevent undesirable speculation in them. It also provides
for procedure of buying and selling of securities outside the limits of stock exchange though licensing
security dealers.

Define Stock Exchange?

Stock exchange means any body of individuals, whether incorporated or not, constituted for the
purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

How the recognition of Stock Exchange takes place?

Any stock exchange which is desirous of being recognised for the purposes of this Act may apply in
the manner and with annexures as prescribed in the Act. The Central Government after receiving an
application and making due inquiry may grant recognition, subject to the conditions imposed upon
it. Any application for grant of recognition can be refused only after giving an opportunity to the
stock exchange concerned to be heard and any reasons for refusal are to be recorded in writing and
communicated to the concerned stock exchange.

In the interest of trade or general public, recognition may be withdrawn after a notice stating the
reasons has been served to the stock exchange. Such withdrawal can take place only after an
opportunity to be heard is given to the governing body.

Define powers of a recognised Stock Exchange?

A recognised stock exchange may make rules or amend any rules relating to voting rights. These
stock exchanges may also make bye-laws for regulation and control of contracts. Any bye-law made
by the Stock Exchange when approved by the Securities and Exchange Board of India, is published in
the Gazette of India and the Official Gazette of the State in which the principal office is situated.
Define power of Securities and Exchange Board of India?

The Securities and Exchange Board of India (SEBI) may make or amend the bye laws of a recognized
stock exchange if it receives a request to do so from the governing body or it is satisfied after
consultation with the governing body that it is necessary to do so.

If the Central Government is of the opinion that the governing body of any stock exchange is to be
superseded, it may do so after serving a notice and giving the governing body an opportunity to be
heard. Further, the government may appoint any person or persons to exercise and perform all the
powers and duties of the governing body.

If in the opinion of the Central Government an emergency has arisen and business of recognized
stock exchange should be suspended, it may direct the stock exchange to do so for maximum seven
days.

SOME IMPORTANT PROVISIONS OF SECURITIES CONTRACTS (REGULATION) ACT, 1956

Government Security:-

It means a security created and issued, whether before or after the commencement of this Act, by
the Central Government or a State Government for the purpose of raising a public loan and having
one of forms specified in Clause (2) of Section 2 of the Public Debt Act, 1944.

Option of Securities:-

It means a contract for the purchase or sale of a right to buy or sell securities in future, and includes
a teji, mandi, a teji a mandi, a galli a put, a call or a put and call in securities.

Derivatives:-

It includes security derived from debt instrument, share, loan, whether secured or unsecured, risk
instrument or contract for difference or any other form of security.

Securities:-

It include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities
of a like nature in or of any incorporated company or other body corporate and derivatives and also
units.

Spot Delivery Contract:-

It means a contract which provides for actual delivery of securities and the payment of a price
therefor either on the same day as the date of the contract or on the next day, the actual profits
taken for the despatch of the securities or the remittance of money therefor through the post being
excluded from the computation of the period aforesaid if the parties to the contract do not reside in
the same locality and also the transfer of securities by the depository from the account of a
beneficial owner to the account of another beneficial owner when such securities are dealt with by a
depository.

Clearing Corporation:-

A recognised stock exchange may, with the prior approval of the Securities and Exchange Board of
India, transfer the duties and functions of a clearing house to a clearing corporation, being a
company incorporated for the purpose of periodical settlement of contracts and differences, the
delivery of, and payment for securities.
Every clearing corporation shall for the purpose of transfer of the duties and functions of a clearing
house to a clearing corporation make bye-laws and submit the buy-laws to SEBI for its approval.

Listing of Securities:-

Where the securities are listed on the application of any person in any recognised stock exchange,
such person shall comply with the conditions of the listing agreement with that stock exchange.

Delisting of Securities:-

A recognised stock exchange may delist the securities, after recording the reasons, from any
recognised stock exchange.

A listed company or an aggrieved investor may file an appeal before the Securities Appellate
Tribunal against the decision of the recognised stockexchange delisting the securities.

SECURITY CONTRACTS

Explain the concept of Illegal Contracts?

Briefly explain Void Contracts?

Discuss briefly the exceptions to the Securities Contracts (Regulation) Act, 1956?

If the Central Government is satisfied that it is necessary to do so, it may declare this provision of the
Act to apply to that area. Consequently, every contract in such state or area otherwise than between
members of a recognized stock exchange in such state or through or with such member shall be
illegal. The Central Government may declare that no person, except with permission of Central
Government, can enter into a contract for sale or purchase of a security. Any contract in
contravention of this provision is also illegal.

Any contract entered into in any state or area specified in the above provision which is in
contravention with any bye-laws specified on that behalf shall be void as resect to the rights of any
member of the recognised stock exchange and other persons who knowingly participate in such
transaction

Any person except with the permission of the Central Government, cannot assist, organise or be a
member of any stock exchange not recognized for entering into a contract in securities.

This Act does not apply to the Government, Reserve Bank of India, any local authority or any
corporation set up by a special law or any agent thereof. The Act is also not applicable in cases of
convertible bond or share warrant in so far as it entitles the person to obtain at his option from the
company or other body corporate issuing the same from any of its share holders or agents' shares of
the company whether by conversion of the bond or the warrant.

The Central Government may exempt any class of contracts from application of this Act in the
interests of trade and commerce or overall economic development of the country.

CASE LAWS

Canara Bank v. Standard Chartered Bank, MANU/SC/0730/2001 : AIR 2002 SC 132 Facts:-

The securities were purchased by the appellant. The respondent filed the suit for recovery of sale
consideration. The plea was done for squaring up of transaction taken by appellant in written
statement. The permission to raise plea was that the transaction was opposed to public policy. The
Appellant did not file any application for amendment of the written statement before the special
court.

Issue:-

Permission to such a plea to be raised whether would be contrary to the plea already taken in the
written statement and whether the amendment to written statement can be allowed at the stage of
appeal.

Decision:-

No plea was that the transactions were fictitious. The prices fixed under the transaction did not
allege to derived prices. The allegation was that there was an understanding between the seller and
notified person to the effect that the notified person would ensure a return of 15% in turn and
purchase and sale of securities would take place under the instruction of notified person would not
make the transaction. Contrary to the circulars of RBI or opposed to public policy the amendment
could not be allowed at the stage of appeal in Supreme Court.