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Issue 1.3, National Law University, Jodhpur January, 2014

TOP STORIES

1. Mandatory CSR In The Companies Act, 2013 – Are We There,Yet?

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- Arpit Gupta

2. Sahara & Facebook: Time To Stand Guard Against The Ipo

Bypass

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- Siddharth Mishra & Aditya Pratap Singh

3. BIFR & NCLT: An Analysis Of Tribunalization In India 16

- Ali Amarjee

ACKNOWLEGMENTS 24

CRMD Business TimesNational Law University, Jodhpur

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MANDATORY CSR IN THE COMPANIES ACT, 2013 – ARE WE THERE,YET?- ARPITGUPTA

INTRODUCTION

The much-awaited and much-debated Companies Act, 2013 (‘the Act’) received the President’sassent on Aug. 29, 2013. Section 135 of this Act, which is yet to be notified, will make itmandatory for certain companies to set aside 2% of their profits for Corporate SocialResponsibility (‘CSR’). The section applies to three types of companies – a) those with a networth of rupees five hundred crore or more, b) those with a turnover of rupees one thousandcrore or more and c) those with a net profit of rupees five crore or more. These companies wouldbe subject to the following obligations under the aforementioned clause –a. Mandatorily setting up a CSR Committee consisting of members from the Board ofDirectors, which will formulate a CSR policy.b. Ensuring that at least 2% of the average net profits of the company for the past threeyears are spent in accordance with the CSR Policy.c. Where the companies fail to spend the abovementioned amount, furnishing reasons forthe same in the Directors’ Report under clause 134 of the Bill.

In the deliberations which follow, this paper will examine the practical and legal implications ofsuch a law coming into existence, and whether the same should be allowed or not.

THE PREVIOUS LEGAL POSITION ON CSR INITIATIVES IN INDIA:

Previously, there was no legislation with respect to ‘Corporate Social Responsibility’ forcompanies in India. Official notifications by the Government have been released earlier in theform of ‘guidelines’ – some mandatory, some voluntary. The first indication of an officialnotification on CSR guidelines was issued by the Ministry of Petroleum and Natural Gas,whereby public sector oil-companies had agreed to spend at least 2% of their net profits on CSRinitiatives. This was followed by a notification titled ‘Corporate Social Responsibility VoluntaryGuidelines’, which was issued in December 2009 by the Ministry of Corporate Affairs. Furtherguidelines were issued for Central Public Sector Enterprises (CPSEs) in April 2010, whereby thecreation of a ‘CSR Budget’ was made mandatory. The latest notification is the ‘Guidelines onCSR and Sustainability for Central Public Sector Enterprises’, which came into effect from April1, 2013.

Thus, Section 135 of the Companies Act, 2013, is the first of its kind in India, and the third in theworld after Indonesia and Saudi Arabia, wherein a statutory obligation has been imposed oncompanies to compulsorily spend 2% of their average profits on CSR initiatives.

‘MANDATORY’ CSR v. ‘VOLUNTARY’ CSR

One of the principle contentions raised against this provision is that CSR is essentially a‘voluntary’ exercise. CEOs of major Indian companies have stated that the process should be


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more ‘democratic’ and the decision regarding allocation of a public company’s profits towardsCSR should be subject to the shareholders’ vote, not the government’s legislative powers. Thefollowing points highlight the debate on this issue.

‘Aspirational Law’ – A Theoretical ArgumentScholars argue that law cannot be ‘aspirational’ – it is not within the scope of law to statutorilymandate positive action; it can only enforce minimum standards. Thus, whereas law can bancompanies from using child labour, it cannot force companies to build excellent schools or be asenvironmentally conscious as possible. However, it is submitted that the above contention is ill-founded.

As far as the legal strength of this argument is concerned, the Constitution of India itself offers aprominent example of such ‘aspirational law’ being enforced, in the form of Article 21-A of theConstitution.

The Directive Principles of State Policy are non-justiciable, as per Article 37 of the Constitutioni.e. they cannot be enforced in a Court of Law, because these Principles impose positiveobligations on the State. However, a major exception to this constitutional principle lies in theform of Article 21-A, which was consequently given the shape of a legislation through the Rightof Children to Free and Compulsory Education Act, 2009 (‘RTE Act’). The RTE Act, read withArticle 21-A of the Constitution, guarantees to every child of the age of six to fourteen years aright to ‘full time elementary education of satisfactory and equitable quality in a formal schoolwhich satisfies certain essential norms and standards.’ Thus, the ‘Grundnorm’ of our countryitself has imposed positive obligations, and to state that the law cannot do the same is a fallaciousargument.

Even from a practical viewpoint, there is a need for making CSR mandatory. Though certainlarge companies such as Tata, Infosys and Mahindra & Mahindra are active participants when itcomes to CSR activities, the performance of India Inc. has not been very impressive when itcomes to taking up CSR initiatives. Even the expenditure of Reliance India Limited, the largestCSR spender amongst Indian companies, does not amount to 2% of the Profit After Taxes(PAT), as is required under S.135 of the Act. According to a survey carried out by Forbes India,only 6 out of the top 100 companies of India (ranked on the basis of net sales figures) contributedmore than 2% of their profits after taxes towards CSR initiatives. Similarly, in a survey of 51companies, 22% did not disclose their expenditure towards CSR initiatives. The above factsclearly indicate that what India Inc. does is ‘corporate compulsion responsibility’, and not CSR.Hence, from a practical viewpoint, has actually taken a smart move by bringing in the ‘2% ofPAT’ provision. Companies will now be forced to not merely ‘tick the box’, but to explore suchareas where they can effectively implement various CSR initiatives, irrespective of whether theywould prefer to do the same or not.

Thus, it is submitted that ‘voluntary CSR’ is no longer sufficient to ensure that companies realizetheir obligations towards various stakeholders (both at a micro and macro level) – it is onlythrough ‘mandatory CSR’ that companies would take up CSR initiatives in a more streamlinedmanner.


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PROBLEMS POSED BY SECTION 135 OF THE COMPANIES ACT, 2013

Constitutional Validity Of Section 135 Of The Companies Act, 2013Section 135 of the Companies Bill creates a classification amongst the existing companies inIndia. It divides companies into two categories –a. Companies having a net worth of five hundred crore rupees or more, OR a turnover ofrupees one thousand crore rupees or more OR a net profit of rupees five crore or more.b. Other remaining companies.Now, clause 135 is applicable only to companies in category (a) as stated above. Since thisclause creates a ‘classification’, it would attract the tests of being valid on the threshold ofArticle 14 of the Constitution of India i.e. equality before law.The Supreme Court has laid down the following two tests for any classification to be held to bevalid under Article 14 –a. The classification must be based on an intelligible differentia i.e. the groups createdthrough the classification must be easily distinguishable from each other.b. The classification created must have a rational nexus to the object sought to be achievedby the Act.While clause 135 easily satisfies the first test, it is the second test where it fails. As has beenstated by the Minister for Corporate Affairs, the purpose of this clause is to ensure that‘corporate entities contribute meaningfully’ towards the growth and prosperity of the nation. Asimilar concern had been raised by the Standing Committee on Finance. However, nowhere isthere a mention as to how these figures have been arrived at, or why only these particularcompanies should be subjected to such an obligation. Such a categorization of companies seems‘arbitrary’, so to speak – the Ministry of Corporate Affairs seems to have pulled some figures outof the air, in order to bring only ‘big’ companies in the ambit of this clause. However, is there alegal definition of a ‘big’ company? Why shouldn’t companies having a net worth of fourhundred crores, or a turnover of rupees nine hundred crores, or a net profit of rupees four croresqualify as ‘big’ companies and have the same legal obligation as under clause 135?

Thus, the various discussions on the Bill have failed to show a nexus between the classificationcreated by the section and the object of section 135 of the Act, as there is nothing to suggest thatonly these categories of companies can afford to undertake CSR obligations. Thus, this clausewould be liable to be struck down as violative of Article 14 of the Constitution, if subject tojudicial review.

Absence Of A Monitoring BodyWhen one reads clause 135 of the Companies Bill, 2012, a question which strikes out is this –‘how does the Government expect to ensure compliance of the companies’?Section 135(5) states that when the company fails to spend 2% of its three years’ average profitson CSR initiatives, the Board of Directors are required to state the reasons for the same in thereport required to be produced under clause 134(3)(o). The latter clause states that the CSRpolicy and the initiatives taken thereby must be stated in the report under clause 134. Strangely,there is no mention of the report being submitted to the Government or to a monitoring body –the clause only talks about the report to be submitted by the Board of Directors in the generalmeeting. Also, because a large number of companies would fall within the ambit of this clause, it


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would be a monumental task for the said monitoring body to ensure that each company hascomplied with the said provisions.

Though only to some extent, the Act does provide for measures to ensure compliance. The CSRpolicy developed and initiatives taken in accordance with the same must be mentioned in theDirectors’ Report, failing which, it would be subject to a minimum fine of fifty thousand rupees,which may extend up to twenty five lakh rupees, along with the imprisonment of the defaultingcompany officer for a maximum period of three years. While the Standing Committee onFinance has indicated that this ‘self-disclosure’ policy is sufficient to ensure compliance onbehalf of the companies, it is submitted that the same would not be sufficient and a monitoringbody should be setup.

No Definition Of ‘CSR’Nowhere does the Companies Act, 2013 provide a concrete definition of what amounts to ‘CSR’.This becomes a problem because the scope of the term ‘CSR’ is extremely wide – while certainissues such as environment, healthcare, education etc. are commonly accepted as part of CSRactivities, there is much confusion with respect to the definition of Corporate SocialResponsibility. Therefore, there is a dire need for the Ministry of Corporate Affairs or theParliament to notify the corporations and companies about the definition of CSR.

This is only the first half of the problem – the second half of the problem is the creation of‘Schedule VII’. Schedule VII, as laid down in the Companies Bill, gives a list of activities which‘may be inlcuded’ by companies in their CSR Policy i.e. the list of items given in the Scheduleshould be indicative, and not exhaustive. However, S.135 seems to state otherwise. S.135(3)(a)states that the CSR Committee shall indicate such activities ‘as specified in Schedule VII’. Thismeans that if a company does any activity beyond the scope of Schedule VII, it would notqualify as a CSR initiative.

Now this would have been a viable proposal, had it not been for the narrow scope of CSRactivities that Schedule VII provides for – it lists only 9 activities in total, none of which coverany CSR activities carried out within the company i.e. micro-level activities. For example, theSchedule does not provide for any employee/worker welfare activities. One can also find anumber of macro-level activities (carried outside the company) which have not been included.An example can be activities undertaken to promote awareness against drugs, liquor and otherharmful substances. Not only does this leave scope for litigation to arise, it also robs companiesof their due freedom to decide as to which area of CSR they would like to contribute to.

A possible answer to this question may lie in the previous CSR guidelines issued by theGovernment. For instance, SEBI had released a circular on ‘Business Sustainability Reports’,which made it mandatory for the top 100 listed entities on the BSE and NSE to discloseinitiatives taken from the perspective of ‘Environmental, Social and Governance’ (ESG) norms.This circular contains an Annexure titled ‘Principles to assess compliance with ESG Norms’,which gives a definite, yet broad scope as to what kind of activities can be considered to be‘responsible business practices’. Similarly, a reference can be made to the Voluntary Guidelinesissued in 2009. All these sources, when read with Schedule VII, can give a somewhat defined


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scope as to what constitutes CSR activities, with enough freedom for companies to decide whicharea they would like to work upon.

Tax Benefits Under CSR – Making Mandatory CSR ‘Profitable’Under the Income Tax Act, 1961, there are a number of sections which provide for deduction ofcertain CSR-related expenses –a. Payments which are made towards eligible projects or schemes approved by the NationalCommittee for Promotion of Social and Economic Welfare, which functions under theDepartment of Revenue. (S.35AC)b. Payments made to associations or institutions for carrying out rural developmentprogrammes (S.35CCA)c. Profits or gains earned from newly established industrial undertakings or hotel businessin backward areas (S.80HH).Other sections include Sections 35CCB, 80G and 80GGA.As can be seen, the Income Tax Act provides only for certain categories of CSR expenses to betreated as tax-deductible. As expected, India Inc. has been strongly demanding for making the2% CSR expenditure a tax-deductible expense, as they are being ‘forced’ to fork out 2% of theirprofits by the Government.However, a major problem with this demand is the lack of the definition of a ‘CSR initiative’. Itis a commonly accepted fact among scholars that CSR is very difficult to define. Taking anexample from the Income Tax Act itself, one may argue that point (c) stated above should notqualify as a CSR expenditure as setting up an industrial undertaking or hotel business is acommercial activity, irrespective of the company’s intention. At the same time, it can also beargued that because the said activity is taking place in a backward area, it will generateemployment for the people of the said area, thereby qualifying as a CSR initiative. Thus, thiswould result in litigation, which neither the company nor the government desires.

Assuming that the above limitation can be tackled to some extent, it is the Government’s duty tobring in such policy which fosters a healthy attitude amongst companies with respect to fulfillingtheir CSR obligations. Because only a certain class of companies would be covered by clause135 of the Companies Act, their competitive standing in comparison to the other companies whoare not covered by this clause would be affected, as they are the ones who have to spend 2% oftheir profits. Thus, they must be compensated in some manner for this expenditure, in order toencourage companies to take up such CSR initiatives ‘wholeheartedly’, and not just for the sakeof complying with the law.

It must be noted here that it is not within the jurisdiction of the Ministry of Corporate Affairs todecide the tax-deductibility of CSR expenditure under clause 135, and thus, outside the scope ofthe Companies Bill, 2012. The deductibility of such CSR-related expenditure, if any, can only beprovided for by the Finance Bill, when it is introduced in the Budget i.e. it would fall within thejurisdiction of the Ministry of Finance. Considering that the Finance Act, 2013 has already beenpassed on May 10, 2013, the benefit to the companies, if any, can only be provided in 2014,when the Finance Bill will be discussed in the Union Budget for 2014-15.


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DRAFT CORPORATE SOCIAL RESPONSIBILITY RULES:

The Draft Corporate Social Responsibility Rules (‘the Rules’) for Section 135 of the CompaniesAct, 2013, which shall be applicable from the FY 2014-15, only re-affirm the above problems,without showing any sign of relief from the maladies of Section 135.

First, rule 2 clearly states that the meaning of the term ‘Corporate Social Responsibility’ wouldbe the same as under S.135 of the Act. This gives rise to a paradoxical situation, since nowheredoes S.135 or even the Companies Act ‘define’ CSR.

Second, as already discussed, Schedule VII of the Companies Act, 2013, excludes any micro-level welfare activities carried out by the organization. This problem has been further affirmed inthe Rules, wherein one of the rules explicitly states that –Only activities which are not exclusively for the benefit of employees of the company or theirfamily members shall be considered as CSR activity.

Thus, any previous reliance on the Rules for broadening the scope of CSR activities, beyond thenarrow scheme envisaged under Schedule VII has been in vain. Additionally, the rules also statethat tax treatment of this CSR expenditure is to be notified by the Central Board for DirectTaxes, as per the Income Tax Act, 1961. However, no such notification has been released tilldate.

THE POSITION IN INDONESIA AND SAUDI ARABIA – A COMPARATIVEANALYSIS

There are only two other countries in the world that have a law similar to that enshrined inSection 135 of the Companies Act, 2013 – Indonesia and Saudi Arabia. The followingparagraphs compare their mandatory CSR provisions with that of India.

IndonesiaIn July 2007, Indonesia became the world’s first country to announce a mandatory law regardingCSR, which applies to natural-resource based companies, including companies that affect theenvironment. The same had been upheld by Indonesia’s Constitutional Court in 2008. However,the language of clause 74 of the Company Liability Act Number 40/2007, does not specify anyparticular amount/proportion to be paid towards CSR initiatives, or what kind of activities are tobe covered. Further regulations by the Indonesian Government are still awaited.

Saudi ArabiaOne of the two countries where mandatory CSR is imposed on companies is Saudi Arabia. Beinggoverned by Islamic laws, Saudi companies are required to pay ‘zakat’, which is one of the fourpillars of Islam. Under this law, Saudi companies are required to pay amounts equal to 2.5% ofincome and capital to the Zakat Department. The payment made has to be disclosed to theCapital Markets Authority (the Saudi version of SEBI).


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This has been termed by many to be equivalent to a ‘CSR Tax’, or a ‘government levy oncorporate profits’. This is where the Indian law is distinct from its Saudi counterpart – eventhough a ‘mandatory’ obligation has been imposed on the companies, the same is not equivalentto a tax.

How is ‘mandatory CSR’ in India different from a ‘tax’?

From a legal viewpoint, the primary purpose of a ‘tax’ is the collection of revenue. When theGovernment imposes a tax, it need not identify a specific benefit accruing from the same.However, that is not the purpose of S.135 of the Companies Act, 2013 – the money being usedby the companies in CSR initiatives would not be filling the coffers of the Government. Also, thesaid money would be directed towards specifically earmarked activities.

From a practical viewpoint, money given as ‘tax’ goes to the State, and not directly to thecommunity. For what purpose that money is used is left to the discretion of the Government,which often does not percolate to the grassroot level due to corruption, bureaucracy,overpopulation etc. Hence, mere payment of taxes cannot be a means of ensuring that socialgood is being done. On the other hand, the measure under S.135 is much more effective than atax – companies have full freedom to give priority to social causes they want to support, andbecause the money is directly pumped into CSR initiatives, the impact is much higher.

CONCLUSION

Section 135 of the Companies Act, 2013, seems to be a ‘knee – jerk’ reaction by the Governmentin order to improve the CSR scenario in India. The following solutions are suggested in order tomake this Bill more effective and more ‘company friendly’ –

1. Amend Schedule VII to include a broad definition of CSR. As has been suggested earlier,reference can be made to the earlier guidelines issued by the Central Government for thispurpose. Because the Act seeks to restrict the scope of CSR activities to those which have beenenlisted in Schedule VII, it should provide a vast definition for CSR, in order to providecompanies with the freedom to select from a large number of areas.

2. Tax sops must be provided for this expenditure. As has been discussed in much detailearlier, this will provide a positive environment for the companies to function in, with respect toCSR activities.

3. Appoint a separate body for overlooking compliance with the obligations under clause135. This measure is bound to result in administrative difficulties, and the presence of a separatebody which would monitor the CSR expenditure would ensure a higher and more effectivedegree of compliance. Leaving it only in the hands of the shareholders would not be sufficient.

The new world order needs three Es – economic growth, ecological sustainability and equitablesociety. As business is not conducted in vacuum, Indian companies need to understand and thinkof themselves as responsible members of the society. The mandatory two percent CorporateSocial Responsibility requirement will go a long way in ensuring the sensitization of social and


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environmental problems in business circles and will ensure a productive route of disbursement offunds to build social capital in India.


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SAHARA & FACEBOOK: TIME TO STAND GUARD AGAINST THE IPOBYPASS- SIDDHARTH MISHRA & ADITYA PRATAP SINGH

A. PrologueThe notion of “a company going public is a good option to raise money” is getting downsized.The tangential thinking in the corporate world is that there are more problems than benefits forcompanies going public. Hence the rush for finding disguised route to raise money. Recentexamples are companies like Facebook and Sahara which chose to go through the disguisedprivate placement route instead of an IPO. There is prima facie nothing wrong when a companychooses to raises funds through one method or another. However, the problem appears when thecompanies create a bypass to the existing law. Resorting to such loop holes gives the impressionthat the corporate world is shouting out loud “just because there are rules it does not mean youhave to follow them.” Time and again, incidents like Enron , Parmalat or Satyam have remindedus about how the loop holes in the laws can be manipulated.This paper aims to first study the method used by Facebook and Sahara in by passing the IPOrequirements. The authors shall then move on to the analysis of the decisions of High Court andSupreme Court in the ongoing SEBI- Sahara controversy. The paper will thereafter proceed toshow the inadequacies in the Indian system for tackling something like the initially intendedGoldman Sachs SPV for Facebook. The authors then finally provide their concluding remarkswith suggestions.

B. Facebook MethodFacebook had raised $500 million from Goldman Sachs and a Russian investor in a transactionthat values the company at $ 50 billion. As part of its deal with Facebook, Goldman wasexpected to raise as much as $ 1.5 billion from investors of Facebook.Facebook actually raised money from an SPV of Goldman Sachs, which in turn allowed variousGoldman Sachs clients to take indirect interest in Facebook shares. While the S.E.C. requirescompanies with more than 499 investors to disclose their financial results to the public, Goldmaninitially expected its proposed SPV to get around such a rule. The rationale was that since theSPV would be managed by Goldman, it would be considered as a single investor, even though itwould conceivably be pooling investments from thousands of clients. However there was a slightvariation in the plan and subsequently Goldman decided to refrain from giving Facebook sharesto US investors and instead decided to sell these shares to their overseas clients. The reason whyGoldman changed its mind about allowing US clients to invest in Facebook was due to the mediaattention that the company was getting. Such attention would not have been consistent with theproper completion of US private placement under US law as SEC regulation D prohibits generaladvertising, general solicitation, or public communication about the securities offered. Moreoverthere was a fear that if the SEC found the SPV route to be fishy it could try to force Goldman tobuy back all the shares it had sold after the completion of the deal.

[B.1]US Law regarding Private PlacementThe Securities Act of 1933 requires securities which are offered to the public to be registeredunless they fall under an exception. The major exemption used when opting for a privateplacement is Regulation D. The SEC generally requires the issuer or its agent to have asubstantive pre-existing relationship with each offeree in order to avoid a general solicitation.Additionally, the law requires adequate disclosure concerning the issuer, its business and the


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securities offered if the offer includes non-accredited investors as well. The type of informationrequired to be disclosed depends upon the size of the offering and whether the issuer is subject tothe reporting requirement of Securities Exchange Act, 1934.

No disclosures are required if the offer is to only accredited investors or to those purchasers orpurchaser representatives, if the issuer reasonably believes them to have knowledge andexperience in financial and business matters so as to be capable of evaluating the merits and risksof the investment. The distinction is in light of the fact that the accredited investors are peoplelike directors, executive officers or general partners of the issuer and also other individuals/ trust/Corporations who have high net worth. Such entities can therefore be considered to be in soundposition to have knowledge and experience in financial and business matters so as to be capableof evaluating the merits and risks of the investment unlike common investors.Furthermore the law provides that securities may be sold to no more than 35 purchasers,excluding accredited investors, in any one offering. The rule does not limit the number ofaccredited investors in a single offering. However, a general solicitation directed only toaccredited investors would not meet the requirement that the securities be sold without generalsolicitation.

Companies with more than $10 million in assets whose securities are held by more than 500owners must file annual and other periodic reports. These reports are available to the publicthrough the SEC's EDGAR database.

C. Sahara MethodTwo group companies of the Sahara Group were offering Optionally Fully ConvertibleDebentures (“OFCD”) to millions of people who were allegedly “associated” with the SAHARAGroup. Sahara argued that this was a private placement as the companies had approached onlythose who were associated with the Sahara Group. The method prima facie seems to be simplebut on a closer look it appears that Sahara is taking leverage of associating the investor base of alisted company(listed Sahara stocks- Sahara Housing Finance Corporation and Sahara OneMedia and Entertainment) in its promoter group. Sahara offered its investors OFCDs as a privateplacement saying that they are associated with the company who is issuing the instrument andthereby it is not a public offer. Thereby Sahara raised money for these two new companies fromthe public without any disclosure requirements as in the case of an IPO.

D. Proceedings in the SEBI Sahara caseSahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing InvestmentCorporation Limited (SHCL) were two group companies of Sahara India Group of Companies.Sahara Prime City Limited (SPCL) filed Draft Red Herring Prospectus (DRHP ) in September2009 with SEBI in connection to proposed IPO. SIRECL and SHICL were issuing optionallyfully convertible debentures (OFCDs). Decision regarding OFCDs issue was taken on the BoardMeeting dated February 29, 2008 which was approved in EGM dated March 3, 2008.

The issue of OFCDs was not disclosed in DRHP and hence SEBI barred the two Sahara Groupcompanies and Subrata Roy from raising funds based on complaints received from ProfessionalGroup for Investor Protection. The lead managers of SPCL i.e. Enam Securities Pvt. Ltd(Coordinating Lead Managers) were asked by SEBI if the issue of OFCD is in compliance with


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Companies Act, 1956 and the rules made there under, applicable rules and guidelines framed byRBI, Ministry of Corporate Affairs and National Housing Bank. SEBI was subsequentlyinformed that the aforesaid company is in compliance with all applicable laws including theguidelines issued by Ministry of Corporate Affairs.

The entire basis given by the company for the issue of OFCDs was that it was only to be meantfor people to whom the information memorandum was circulated and/or approached privately,who are associated/affiliated or connected in any manner with Sahara Group of companies,without giving any advertisement in general public

Objects of the issue as per RHP: The funds received were to be utilized for various purposes likedevelopment of townships, residential apartments, shopping complexes etc.

[D.1]Decision of SEBI on the basis of the issuesSEBI primarily had to deal with two main issues:i) Whether the impugned OFCD offers have been made to the public and if so, whetherlisting of the OFCDs, so offered, is mandatory?ii) Whether Section 60 B of the Companies Act, 1956 provides “an alternative route” forraising capital without complying with section 73 of the Act and other SEBI requirements, ascontended by the Said Companies ?After deliberating in detail and taking into consideration the various statutory provision of theCompanies Act SEBI answered both the question against the companies. As regards the firstquestion, SEBI stated that the company contravened S.73 of the Companies Act. The underlyingreason for the SEBI inference can be deduced on the lines of the relevant portion in thejudgement.

1. SEBI inferred that the companies contention that offer does not come under the purviewof the Public issue since it has not been made to more than 50 Person is erroneous and fallible.The relevant statutory provision dealing with underlining argument upon which the SEBI basesits reasoning is contained under S. 67 of the Act. The quantum of the amount involved and thevery arithmetic deduction becomes the underlining basis for SEBI’s conclusion. SEBI ruled thatOFCDs had been offered to more than 50 persons and hence there was a failure to disclose theinformation on the part of the group company whom the OFCDs have been offered, establishesfirmly that OFCDs have been offered to more than 50 and therefore the issue becomes a publicissue. The defence of section 81 (1A) which has been advanced by the Company was rejected bythe SEBI on the ground that A resolution under section 81 (1 A) of the Act does not take awaythe ‘public’ nature of the issue.

2. As regards the Second issue, SEBI came to the conclusion that the intention to list isimmaterial and no company issuing the securities can wish away this legal requirement byclaiming that they do not wish to intend to list. The underlining reason is to interpret S.55A(1)(b) and Section 73 of the Act harmoniously. The statutory requirement of section 73 (4)cannot be done away with. The close reading of SEBI order appears that Sahara Company wasclandestinely violating statutory norms of listing. Arithmetic calculation arrived by SEBIestablished that the offer ought to have been subscribed to more than 50 persons and in that casethe company has to comply with various statutory requirements viz. registering the prospectus


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with ROC before making the public issue (Section 60), making an application to list theirsecurities to recognized stock exchanges (Section 73). At the same time the proceduralrequirements contained in SEBI Act as well as ICDR Regulations and mandatorily had to becomplied with which was not done tacitly by the company as per SEBI contention. Hence SEBIarrived at the decision that company must apply for listing once the Company has offered theirsecurities to the public. As per SEBI on the determination of the first issue itself, the securitiesoffered by the company is a public offer and it is mandatory for them to list the securities. Thus,it can be concluded that the Section 60 B of the Act which deals with Information Memorandumdoes not prescribe any alternate procedure that enables the issuer to overcome the obligation tocomply with provision of the Act relating to public offering.

[D.2] Proceedings in Supreme CourtThe Supreme Court framed around 11 questions of law for consideration, prominent of themwere-1. Whether SEBI has jurisdiction or power to administer the provisions of Sections 56, 62,63, 67, 73 and the related provisions of the Companies Act, after the insertion of Section55A(b)?2. Whether The Definition Of Securities Under Section 2(h) Of Sebi Act Also IncludesOFCDs Issued By The Appellant?After discussing the relevant provisions of SEBI Act and Companies Act Supreme Courtobserved the following -• SEBI has the requisite jurisdiction under Section 55A against the unlisted which haveissued securities to fifty persons or more.• Sahara had the legal obligation to file a prospectus under section 60 (B) which it hadfailed to do.• Sahara violated section 73 of Companies Act by not applying for listing of its securitieson a recognized stock exchange.• OFCDs issued by Sahara would fall within the ambit of section 2(h) and SEBI hasjurisdiction over hybrids like OFCDs issued by Sahara’s.Therefore, the court held that there was no illegality in the proceedings initiated by the SEBIagainst Sahara’s and thus ordered it to refund the entire amount collected through RHPs with15% interest and within 3 months.

E. Analysis of The SEBI-Sahara ControversyThis part of the paper will be focusing on the various facets of the issue involved by highlightingthe various statutory provisions as enumerated in the SEBI Act as well as the Companies Act,1956.

[E.1] SEBI went beyond its Powers?Quite a few experts have come up with this argument that the said order of the SEBI is anencroachment on the power of Registrar of Companies. In the instant case the Company beingunlisted company, it is the prerogative of Registrar to Call for information or explanation. Theunderlining provision is contained in Section 234 (1) which deals with Power of Registrar to callfor information or explanation. On pursuing through the affidavit which has been filed by thepetitioner in the HC it has been stated by the Company that the petitioner company hascommunicated necessary information to Registrar of Companies which has been duly verified


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and was found satisfactory by the ROCs letter dated 14.10.2010. However the other way roundto this stand is that since as per SEBI the issue was to more than 50 persons it has become apublic issue and thereby there was a requirement of listing which was not complied and therebySEBI derives its power. Taking que from the Bombay HC decision of PWC and Ors. v. SEBI &Ors. , wherein it was held that powers conferred to SEBI to regulate capital markets is of wideamplitude and SEBI’s general domain extends to protecting investors of listed companies and thesecurities markets thereby, it can be said that SEBI had taken this step in order to safeguard theinterest of investors and therefore the same is well within its jurisdiction.

[E.2] Is SEBI justified in initiating Action against the Petitioner Company?The SEBI order barring Sahara from raising the money if seen in the holistic line can beconsidered to be justified. A classic example of how grave the situation can turn out can be seenfrom the article featuring in Business Outlook. In the instant case, the article states how the hardearned money of the investor has been laying with the Sahara Prime City for over 6 years andthere has been no assurances whatsoever by the Company. It is important to highlight thecomment by the investor himself “Shankar’s dream of living in his own home has become anunending pursuit. Four years after he retired in 2006, this septuagenarian is yet to find thatelusive calmness retired life is supposed to provide. In 2004, Dr Shankar booked two flats—onefor himself and another for his daughter—in a housing project developed by the Sahara group inBangalore. So far Dr Shankar’s family has paid nearly Rs 8 lakh (Rs. 3.9 lakh each) as advancemoney and instalment for buying the two two-bedroom flats measuring 850 sq.f.t each. Fouryears after the initial deadline to complete the flats has passed, the doctor, who now teaches probono in medical colleges, says construction activity is yet to begin.” When Mr. Shankarinquires of his status he is replied that “an alternate site has been identified and land acquisitionis in progress “and Shankar rues that “There is not even clarity on whether Sahara has land todevelop the project. This is the story of one investor who has polled his retirement savings inSahara Project and similar things have also echoed in Chennai and many other cities.Thus what SEBI has done is that it considered the matter in the broader sense considering thefact that Sahara invests the investors’ money in numerous ventures like sponsoring of IndianCricket Team, stake in IPL team Sahara Pune Warriors, investment in Production houses and thesame is being done without informing to the investor.

The substance of law should flow from the layman perspective and hence in order to protect theinvestors’ money SEBI has taken such a stance which if touched on the cornerstone of law mightgo against SEBI but when seen from holistic perspective SEBI has not taken erroneous stand.

[E.3] Tug of war between market regulatorsOne of the major aspects of this case was the conflict of jurisdiction between SEBI and Ministryof Corporate Affairs. Sahara challenged the SEBI orders on the ground that SEBI does not havethe requisite jurisdiction as both the companies were not listed. But this contention was rejectedby both Securities Appellate Tribunal and Supreme Court.Supreme Court in its judgment observed that-“ Ministry of Corporate Affairs does not have the machinery to deal with such a large publicissue of securities, its powers are limited to deal with unlisted companies with limited number ofshareholders or debenture holders and the legislature, in its wisdom, has conferred powers onSEBI.”


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Even the Supreme Court observed that the various provisions of SEBI Act and Companies areinterconnected and sometime may overlap each other. But under both of them primary concern isthe protection of investors.Recently the Corporate Ministry has written to the Registrar of Companies any unlistedcompanies making an offer of shares or debentures or other securities which exceed 49 innumber cannot be registered and approved by the RoC. The matter should be referred to bothSEBI and ministry as a measure to prevent Sahara-like cases. Effectively it means that any fund -raising by a private entity must be approved by the SEBI.But this case again reiterated the need for a unified financial regulator. This is where the panelheaded by Justice Srikrishna and its recommendations will be crucial which identified the needof a Unified Financial Agency (UFA).

[E.4] What are Private placements?The OFCDs issued by the companies in this case were issued on a private placement basis andnot as a public offer. It was urged by the Sahara that the unlisted companies are permitted toissue OFCDs to more than 49 persons on a private placement basis. But the Supreme Courtobserved that “After insertion of the proviso to Section 67(3) in December 2000, privateplacement allowed under Section 67(3) was also restricted up to 49 persons.”It was observed that the millions of investors cannot, by any stretch of imagination, would fallunder the category friends, associates and others and the same would be restricted to the personsto whom the offer is made.

F. Expected problems if Facebook method is used in IndiaGiving a brief recap, Facebook tried to get money from the public without going public. Theregulation were conveniently bypassed by Goldman making an SPV who initially purchased theshares of Facebook and then wanted to sell it to US investors who were its clients by whichGoldman alone would be the record owner of the shares and the investors would hold the sharesof the record or beneficially. By this mechanism the issue would come under 500 person’srequirement. However later Goldman feared tripping over the SEC laws and stepped back tooffering shares only to non US investors. But if the same method is used in India, the companieswould not be deterred in the existing legal framework because of ambiguities and loopholes inthe existing legal framework.

[F.1]No concept of accredited investors: Fostering ‘Buy One get many’ formulaeUnlike the US which does not include the general employee of a company in the list ofaccredited investors there is no exclusion of general employees from being included in an offerbeing made of the nature of private placement and being considered to be associated with thecompany already. US makes this distinction as general employees can be considered to be muchuninformed than directors or promoters of the company.Sahara went one step ahead in saying “only those persons shall be eligible to apply to whom theinformation memorandum was circulated and/ or approached privately, who are associated/affiliated or connected in any manner with Sahara Group of companies”. Therefore they indulgedeveryone associated with Sahara Pariwar to be eligible for an offer under private placement.The implication of this route if not checked is that it creates a situation of “Buy One get many”as it provides the leverage to the promoter group to gather money from larger investor base againand again by doing regulatory compliance in an IPO for just one company and securing the


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investor base for “n” number of companies that can be floated by promoter group without goingpublic.

[F.2]Context in which ‘offer’ mentioned not clearObligation to do an IPO for a company is when the offer is made to 50 or more people.However, it is not clear what the term ‘offer’ precisely means. Clause 1 of s. 67 of CompaniesAct, 1956 uses the language “any reference in this Act or in the articles of a company to offeringshares or debentures to the public shall”. The phrase “offering shares or debenture to the public”leaves the clause ambiguous which might be solved if there is a finding that “offering of sharesor debentures” is a phrase which can be used in reference to a company only and not ashareholder. Even in the case of Rajesh Kumar Maheshwari v Union of India it was observed“we are not aware of any law which compels the existing members to transfer their shareholdingto the public generally. The existing members are full owners and are fully entitled to transfertheir shares to persons of their choice”. Therefore if a requirement is being placed upon thecompany to issue a prospectus if the shareholder wants to sell his shareholding then his right tosell would be subject to the company issuing the prospectus. Thereby it would be obstructing theright of the shareholder to freely transfer their shares.So it is certain that till the time this ambiguity persists there can be a possibility that a privatecompany in India adopt the Facebook method to gather money from investors in India itselfwhile simultaneously avoiding any accountability to public money and regulatory compliancesthat a public company needs to undergo.

[F.3]Lack of clarity to distinguish one offer from otherIt is also not clear as to what distinguishes one offer of securities from another when they aremade by the same company. Is it the type of securities issued, the time-gap between two offers orinvolvement of separate processes? The answers are not readily available. Although it does notappear that Sahara has advanced the argument of separate offers (with each being to less than 50persons), that could potentially be used as an escape to stay outside the purview of public offerrequirements as Sahara can counter the finding of SEBI by arithmetic calculations by saying thatOFCDs were never given in number to more than people at a time.

[G]ConclusionFrom these two incidents it can well be deciphered that going Public to raise money is becomingout of fashion. In the wake of these corporate horses getting more enthusiastic it becomes evenmore onerous for regulatory bodies to match up with their enthusiasm. Laws in US werepractical enough to deter Goldman Sachs from including US investor in their offering whereas inthe case of Sahara such a happening fell into a jurisdictional conflict. Above all this, it can alsobe seen that the powers of MCA to punish these corporations are way less than what SEBI hasgot. Since these are the circumstances, it should be imperative on the part of Government that itshould either recognize the superiority of SEBI over MCA over such matters or instead form aunified body to look after listed and unlisted companies together. Also there is a much need ofproviding more clarity in the norms that are to be followed in case of a private placement as areavailable in US in the form of Regulation D and Comptroller’s Handbook. And finally theambiguities stated need to be resolved at the earliest before some other investors fall prey toshortcomings in the law to check the IPO bypass


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BIFR & NCLT: AN ANALYSIS OF TRIBUNALIZATION IN INDIA – ALIAMERJEE

INTRODUCTION

The 42nd Amendment and its insertion into Part XIVA paved the way fortribunals in India. They were seen as a panacea to the increasing burden of litigation on the HighCourts and the Supreme Court. Subsequently, a number of tribunals were established. Theseincluded Administrative Tribunals, Rent Control Tribunals and Tax Tribunals. Recently, theApex Court also upheld the constitutional validity of the National Company Law Tribunal(NCLT). The constitution and functioning of these tribunals have been controversial andintensely debated.

In Associated Cement Co. Ltd. v. P.N.Sharma , a five judge Constitution bench ofthe Supreme Court defined ‘Tribunals’, distinguishing them from Courts and held at ¶ 10:

“They are both adjudicated bodies and they deal with and finally determine disputes betweenparties which are entrusted to the jurisdiction…

...Judicial functions and judicial powers are one of the essential attributes of a sovereign State,and on considerations of policy, the state transfers its judicial functions and powers mainly to thecourts established by the Constitution…

…The basis and the fundamental feature which is common to both the courts and the Tribunals isthat they discharge judicial functions and exercise judicial powers which inherently vest in asovereign state.”

The exclusive benefit of the Tribunals for distinguished service and courts of first instance wasshut down in part by the Supreme Court of India in its landmark judgment in L. Chandra Kumarv. Union of India and others. The Supreme Court diversified and re-distributed the jurisdictionof service matters et al., in between these Tribunals for which purpose they have beenestablished and High Courts in accordance with the spirit of the Constitutional mandateenunciated by the framers of the Constitution. This was in consonance with the ‘Basic StructureDoctrine’ and the provisions contained under Article 226,227, 32 and Articles 323 A and 323 Bof the Constitution of India.

Part II of this paper provides a brief background of the BIFR and NCLT. In addition, it lends aninsight into the legal challenge to the NCLT. Part III provides a comparative analysis of theBIFR and NCLT. Part II elucidates the problems of tribunalization of justice in India. The fourthpart highlights similar legal conundrums in foreign jurisdictions. In Part V, the author puts forthhis conclusion.

THE BIFR AND NCLT

Brief Background

The government of India enacted the Sick Industrial Companies (Special Provisions) Act, 1985(1 of 1986) or “SICA” to combat conditions of industrial sickness prevailing in the 1980s. It wasbased on the recommendations of a Committee of Experts headed by Mr. T. T Tiwari. Its


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principal objective was to determine sickness and expedite the revival of potentially viable unitsor closure of unviable ‘Sick Industrial Companies’. It was expected that by revival, idleinvestments in sick units will become productive and by closure, the locked up investments inunviable units would get released for productive use elsewhere.

The Board of experts named it the Board for Industrial and Financial Reconstruction (BIFR) andwas functional from 1987. The Appellate Authority for Industrial and Financial Reconstruction(AAIRFR) was constituted in April, 1987. The Law Commission of India in its 124th Report of1988 pointed out that the different types of litigation coming before the High Court in exercise ofits wide jurisdiction has to some extent been responsible for a very heavy institution of matters inthe High Courts, took a cue from the Supreme Court judgement in the Sampath Kumar case andrecommended for establishment of specialist Tribunals. Government companies were broughtunder the purview of SICA in 1991 when extensive changes were made in the Act including,inter-alia, changes in the criteria for determining industrial sickness.

The time taken by the CLB, BIFR and AAIFR in dealing with cases of industrialsickness, mergers and amalgamations was enormous and unnecessary. Therefore, it was desiredthat, in place of various bodies presently looking into different matters, a body should beconstituted to handle all these matters and to dispose of all pending matters as well as fastdisposal of new matters which might be referred to it in the future.

Hence, the Government constituted a Committee under the Chairmanship of Justice V.Balakrishna Eradi, to review the law relating to insolvency and winding up of Companies andSICA etc. The Committee made various recommendations with the main objective of expeditingthe revival/ rehabilitation of a sick Company and protection of workers’ interest, which wereincorporated in the Companies (Amendment) Bill, 2001. The said Bill was subsequently passedby both the Houses of the Parliament and finally got the assent of the President of India on 13thJanuary, 2002 and became the Companies (Amendment) Act, 2002.

Legal Challenge To The NCLT

The BIFR was constituted without many legal hurdles. However, the establishment of the NCLTdid face significant legal challenge.

The constituting and implementing of NCLT was challenged as it was seen to transfer thejurisdiction of the High Court in company matters to this quasi-judicial Tribunal before theMadras High Court. The judgment of the Madras High Court on the issue of constitution ofNCLT and NCLAT was appealed before the Supreme Court. The Madras High Court neverquestioned the legislative competency in establishing NCLT, but expressed its concern over theindependence of the mechanism and its effectiveness. A five-judge constitution bench headed byChief Justice K G Balakrishnan, however, approved the amendment with certain conditions. Thebench said a judicial officer or a person with legal background should head the tribunal and not aretired bureaucrat, as envisaged by the Parliament. It may be pointed out that the LawCommission, as referred to by the Supreme Court in the case of L Chandra Kumar , had alsorecommended the creation of specialist Tribunals in place of generalist Courts. Therefore, thecreation of National Company Law Tribunal and Appellate Tribunal and vesting in them thepowers exercised by the High Court with regard to company matters cannot be said to beunconstitutional.


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BIFR AND NCLT: A COMPARITIVE ANALYSIS

Definition of Industrial Company

The definition of an Industrial Company seems to be faulty because by strict interpretation itcovers only an ancillary undertaking, which indeed cannot be the correct intention of thelawmakers.

The Definition of a Sick Industrial Company has been tightened. A Company havingaccumulated losses in any financial year equal to 50% or more of its average net worth duringfour years immediately preceding such financial year and which has failed to pay its creditors for3 consecutive quarters will be a Sick Industrial Company. The Net worth has now been definedto mean the sum total of the paid up capital and free reserves, after deducting the provisions orexpenses as may be prescribed. Previously, The Companies Act did not define the net worth andas per Section 3(1)(ga) of SICA which defined the net worth the words ‘after deductingprovisions and expenses as may be prescribed, were not there, and as such, companies were notdeducting preliminary expenses or development expenses while calculating its net worth.

Overriding Provisions

As per Section 32(1) of SICA, the provisions of SICA prevailed over all other laws exceptFEMA and Urban Land Ceiling Act. In the absence of such overriding powers even if thescheme of revival is approved by the NCLT, formalities and procedures as required under theCompanies Act and other laws will be required to be completed.

Moratorium on declaration of sickness

SICA provided for a moratorium period of five years for a newly setup Company and as such noreference was required to be made to BIFR in the first five years of the registration of theCompany. This moratorium has been withdrawn by the Amendment Act and now the Companymay become sick even in the second or third year after registration.

Singularity of Proceedings

Section 22(1) of SICA provided for suspension of all legal proceedings when a Company filedits case in BIFR and the enquiry was pending or the scheme was under preparation orimplementation with the BIFR or an appeal was pending with the AAIFR and as such the SickIndustrial Company was protected against any suit for recovery of money, execution againstproperty of the Company or Winding Up proceedings. However, this provision of SICA wasgreatly misused by many of the Companies.

This protection has not been provided in The Companies (Second Amendment) Act, 2002 andtherefore, pending the proceedings for Revival and Rehabilitation of a Sick Industrial Companybefore the NCLT the Creditors of the Sick Industrial Company may file a suit for recovery ofdebts. This provision will create hardship to Companies genuinely interested in revival, because,before the scheme is approved by the NCLT and grant is received if a creditor files a suit againstthe Company and takes away the property/ assets of the Company, what is left to be revived.However, Winding Up proceedings by any Creditor have been kept pending as the jurisdictionover the same is of that of the NCLT.


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Burden of preparing revival scheme

Now the burden of preparing the scheme for revival of a sick company is on the Company itself,which was earlier on the BIFR.

Payment of Cess

Previously, no cess was payable. Now all companies have to pay cess at the rate of 0.005% to0.1% of its gross receipts or turnover to the Central Government towards the rehabilitation andrevival fund to be used for rehabilitation and revival of sick companies.

Winding up Provisions

The National Company Law Tribunal has also been empowered to pass an order for winding upof a company. Therefore Practising Company Secretaries may represent the winding up casebefore the Tribunal. Unlike the earlier position allowing only government officers to act asOfficial Liquidators, now professionals like Practising Company Secretaries have been permittedto act as Liquidator in case of winding up by the Tribunal. In addition, the quantum of duesunpaid has been increased from Rs.500 to Rs.1 Lakh in the case of a winding up.

Reduction of Capital

As per the amended Companies Act, subject to confirmation by the Tribunal, a company limitedby shares or a company limited by guarantee and having a share capital may if so authorized byits articles by special resolution reduce its share capital. The Practising Company Secretaries willbe able to represent cases of reduction of capital before the Tribunal.

PROBLEMS OF TRIBUNALIZATION AFFLCITING THE INDIAN JUDICIALSYSTEM

In the past few years, Parliament has systematically taken away important judicial functions ofthe High Courts and the civil courts and vested them in quasi-judicial tribunals. The stature ofour High Courts has been reduced and, if this trend continues, vitally important cases will cometo be decided by tribunals that are wholly controlled by the executive. The tribunalization of ourjudicial system will lead to consequences that our country will bitterly regret. Despite the factthat the functioning of most tribunals is in a pathetic state, the zeal to create more tribunals hasnot abated. Very few have realized that the real solution lies in strengthening the existing courtsand confining tribunals to a few specialized areas. It is equally important to ensure thatspecialized tribunals are not manned by generalist civil servants or judges.

The Company Law Board

The Company Law Board (CLB), created in 1988, began functioning in May 1991. It was alsopatterned on the ITAT and marked a major departure in the creation of tribunals. Till then, alltribunals outside the judiciary dealt with disputes between the citizen and governmentdepartments. For the first time private disputes between two shareholders or between theshareholders and the company were shifted to a quasi-judicial body. The functions discharged bythe High Court for almost 80 years were now shifted to four benches of the Company LawBoard. Strangely, for the last two decades, the government has been unable to recruit even nine


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members for this tribunal and, over the years, cases which were heard by two members are nowbeing heard by a single member.

Following the establishment of were set up. The rationale was that there were too many casespending before the civil courts and banks had to wait for several years to recover their money. In2002, the constitutional validity of the CLB and Debt Recovery Tribunals (DRT) tribunals wasupheld in the Delhi Bar Association case. The DRT experiment is now accepted to be amiserable failure and Parliament had to introduce a Securitization Act2 which enabled banks toattach assets of defaulters without recourse to any kind of judicial process. It never occurred toanyone that instead of creating two or three Debt Recovery Tribunals in Tamil Nadu or otherstates, it would have been easier (and cheaper) to dedicate three civil courts to deal exclusivelywith bank cases.

Intellectual Property Appellate Board

A common feature of recent Indian tribunals is that they are created with great enthusiasm butsoon abandoned. Most of them do not have adequate infrastructure. The Intellectual PropertyAppellate Board (IPAB) was established to deal with trade mark and patent cases. The decisionsin these cases have international consequences, but the IPAB has an extremely small office andthe chairperson does not even have an official car; a tourist taxi is hired for this purpose. Thecourtrooms of the Customs, Excise and Service Tax Appellate Tribunal at Chennai are crampedand hardly conducive to a dignified hearing. The Competition Appellate Tribunal, which isheaded by a Supreme Court judge, is equally small. In the IPAB, the salaries and workingconditions of its staff are substantially lower than that provided to similarly situated persons inother departments. Thus, the net result is that our tribunals are very poorly equipped in terms ofinfrastructure and supporting manpower.

National Tax Tribunal

Section 5(5) of the National Tax Tribunal Act, 2005 permitted the Central Government totransfer members of the National Tax Tribunal from one bench to another upon ‘consultation’with the Chairperson. The Central Government agreed to interpret ‘consultation’ to mean‘concurrence’ with the opinion of the Chairperson. It also clarified that the opinion of the ChiefJustice of India (CJI) cannot be overpowered by the Secretaries of Ministry of Law & Justice andFinance Ministry on matters of appointment. The proposed changes, however, are yet to see thelight of the day.

Constitutional Challenges to other tribunals

The Green Tribunal

The Supreme Court lifted the initial stay imposed by the Madras High Court on appointment ofmembers of the specialized tribunal dealing with environmental matters. The Supreme Courtexpressed its anguish on step motherly treatment meted out to the green tribunal and directed theCentre to provide adequate office space and proper accommodation to its members.

‘


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Electricity Disputes Tribunal

The two-judge bench of the Supreme Court admitted a petition challenging the constitutionalityof the Tribunal constituted under the Electricity Act, 2003. The impugned provisions areidentical to the one in PMLA which were earlier struck down.

West Bengal Land Reforms & Tenancy Tribunal

The Calcutta High Court , in July this year, faulted the composition of the West Bengal LandReforms & Tenancy Tribunal for having ‘two state government representative and one judge’ onthe bench.

Selection Committee and Appointments

The Central Government made rules designating the Revenue Secretary to head the SelectionCommittee for appointments under the Prevention of Money Laundering Act, 2002. To this, theSupreme Court in Pareena Swarup v. Union of India directed the Central Government to replacethe Chairperson of the Selection Committee with a judge nominated by the CJI. Further, theappointment and removal of members of the tribunal has to be made only upon consultation withthe CJI.

Proliferation of Bureaucracy: Rebutting the Efficiency Argument

The ostensible reason for creating tribunals is often attributed to the huge backlog of cases andthe need for specialization. However, the real reason is that tribunals are an excellent source ofpost-retirement opportunities for several bureaucrats and High Court judges. For instance, theNational Company Law Tribunal (NCLT) required 62 members throughout India, the majority ofwhom will most certainly be retired civil servants. The term of office is deliberately restricted tofive years so that no self-respecting and competent lawyer will apply. Similarly, the NationalTaxation Tribunal (NTT) contemplates a strength of 50 members. Thus, creating more tribunalsgenerates more post-retirement opportunities for the bureaucracy.

When the National Taxation Tribunal with a strength of 50 members was mooted, theparliamentary committee strongly opposed its creation. In the past, the Wanchoo Committee andthe Chokshi Committee had recommended that Taxation Tribunals must be specialized benchesof the existing High Courts. The two committees repeatedly emphasized that such tax benchesshould not be created as quasi-judicial tribunals. All these warnings went unheeded as thepossibility of getting 50 post-retirement opportunities was too salivating for retired members ofthe Indian Revenue Service.

The fact that the bureaucracy will heed no warning is also made clear by the fact that not a singlesuggestion made by the Constitution Bench of the Supreme Court in Madras Bar Associationhas been implemented till date. The Supreme Court too must share part of the blame, as it hasfailed to check the unbridled growth of tribunals.

Countering Concerns of Increasing litigation

The Constitution provides for constitution of additional courts and Articles 128 and 224(1)allows for expansion of the existing strength of the higher judiciary. If litigation explosion is a


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concern, Justice Ruma Pal questions why the Legislature did not take recourse to theseconstitutional measures which have an inbuilt advantage of judicial ‘independence’.Furthermore, Justice Pal views the presence of technical members as meaningless for ‘improvingthe quality of adjudication’, because the courts are free to seek expert opinion when necessary.She adds, “To have technical members (meaning officers of the Executive) on a Tribunal is asrepugnant to the independence of the judiciary as, for example, having the Secretary of theMinistry of Finance sitting on a Bench of the Supreme Court or High Court to decide income-taxmatters”. Moreover, contrary to its objective, tribunal increase the burden on the courts as theirdecisions amenable to the jurisdiction of High Courts and the Supreme Court. Viewed from thisperspective, it appears that the Executive intends to circumscribe the role of the judiciary.

TRIBUNALS IN FOREIGN JURISDICTIONS

In the United States and other Commonwealth countries to point out that any attempt to takeaway the inherent jurisdiction of the civil courts has always been struck down. In Canada, agreen tribunal was constituted to decide rent control cases. This tribunal was based on the reportof a committee which noted that there were large arrears in rent control cases and therefore atribunal was justified. The Canadian Supreme Court held the tribunal to be unconstitutional afterextensively analyzing the case law on the subject.8 It held that tribunals could not take away thecore functions and judicial power vested in the judiciary. Where the dispute was primarily civilin nature, the case has to be heard only by the established judiciary and not by quasi-judicialtribunals.

In the United States, the Supreme Court struck down the bankruptcy tribunal on the sole groundthat the term of office of the member was 14 years, whereas judges who heard cases ofbankruptcy had a lifetime tenure. The Supreme Court pointed out the dangers of creatingtribunals that encroached into the established functions of the judiciary. This decision alsoexamined the American law on the subject and held that no branch of government couldaggrandize itself at the expense of other branches. Equally important were decisions of the PrivyCouncil and the Australian High Court, which held that any attempt to take away judicial powerand vest them in a tribunal was not permissible.

The functioning of tribunals was first examined by the Franks Committee and its report led to theTribunals Act, 1948. In 2003, the functioning of tribunals was carefully scrutinized by acommittee headed by Justice Legatt. In the United Kingdom, almost a million cases are decidedeach year by more than 70 tribunals. A reading of this report shows the urgent need foroverhauling our tribunal system. Justice Legatt repeatedly emphasized that tribunals must notonly be independent but seen to be independent by the public. They should not be seen asdepartments of ministries or as part of the executive branch of government. The independence ofthese tribunals could be ensured only by placing them fully under the control of the LordChancellor. The Indian tribunal system suffers from every evil pointed out by Justice Legatt. Ourtribunals continue to be created on an ad hoc basis and their growth has been haphazard. Thereare no uniform recruitment conditions for service, retirement age and so on. These tribunals haveto depend on the parent ministry for their daily existence.

CONCLUSION


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There is no doubt that tribunals are an essential part of the justice delivery system and have animportant role to play. It is necessary to ensure that tribunals are confined to disputes betweencitizens and government departments and are not formed to decide disputes which are essentiallycivil or criminal in nature. If such tribunals are to be formed, they should be part of the judiciaryitself like the rent control and motor-vehicle tribunals. Similarly, substantial questions of lawcannot be decided by tribunals as this is the exclusive realm of the judiciary. It is equallynecessary that all tribunals must come under the Ministry of Law and have uniform conditions ofservice. This was recommended in Chandra Kumar’s case in 1977.

Business decisions require speedy determination and the long-drawn legal battles in the court oflaw stifle business impetus. With the constitution of NCLT and NCLAT, multiplicity oflitigation before various Courts or quasi-judicial bodies or forums regarding revival orrehabilitation of companies, Petitions relating to merger or amalgamation or winding up will beavoided as all these matters will be heard and decided by a single alternate forum viz., NCLT.Further, all the parties to the dispute will be bound by the Tribunal’s orders and in case of non-availability of a workable proposal for revival or rehabilitation etc., the Tribunal can decide thematter on merits. For this purpose, the Tribunal may introduce its own rules and regulations orany Scheme which would be acceptable to the parties. There will be various Benches which willbe constituted under NCLT and NCLAT which will rectify the current process which iscumbersome and lengthy.

Finally, one must realize that tribunals are primarily meant to resolve disputes; in India, theirprimary function is to provide employment to retired bureaucrats. Adjudicating disputes isancillary or incidental to this object. Taking away disputes from courts and vesting them intribunals has proved to be disastrous to the Indian legal system. The fatal attraction with tribunalshas weakened the judiciary without any improvement in the disposal of case or in the quality ofjustice


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ACKNOWLEDGMENTS

CONTRIBUTORS

Arpit Gupta

Siddharth Mishra

Aditya Pratap Singh

Ali Amerjee

EXECUTIVEDIRECTOR

Dr. Rituparna Das

MANAGERIAL BOARD

CONVENOR

Rathin Somnath

MANAGERIAL SECRETARIES

Varun Natarajan Anjali VS Sharma Sibani Saxena

MEMBERS

Alimpan BanerjeeGarima Shahani

Divya Jyothi MehraArundhati Venkataraman

EDITORIAL BOARD

EDITORS IN CHIEF

Prateeti Goyal Rathin Somnath Devvrat Singh Shekhawat

EXECUTIVE EDITORS

Devashish MarwahReetika Jain

Sushmita SurYashita Sharma

ASSOCIATE EDITORS

Supritha SureshKhusboo Agarwal

Garima TyagiAyushi Mishra

The copyright and views expressed in the articles published in the ‘CRMD Business Times’ vests solely &completely with its respective author/s. The Centre of Risk Management and Derivatives takes noresponsibility for the views expressed by the authors in this newsletter.

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