ARBITRATION AND CONCILIATION (AMENDMENT) ORDINANCE, 2015: A CRITICAL ANALYSIS

Overview: The Arbitration & Conciliation Act, 1996 (1996 Act) was a legislation which consolidated the Arbitration law in India. The inadequacies and defects in the Arbitration Act, 1940, the Foreign Awards (Recognition & Enforcement) Act, 1961 and the Arbitration (Protocol and Convention) Act, 1937 were sought to be cured by the 1996 Act. Despite such an effort to consolidate the law and iron out the creases of the previous legislations for achieving effective alternate dispute resolution, the 1996 Act paved way for unprecedented litigation concerning Arbitrations. The Arbitral process suffered substantial delay. In this background, to remedy the defects the 1996 Act, the President on 23rd October, 2015 has promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2015. The object that the amendment seeks to achieve is twofold. First, to expedite arbitration process and secondly to lay down guidelines and provisions for the judiciary to abide by while disposing applications before it.

Opportunity Lost: Indian lawyers and justice delivery system is under severe criticism for its slow pace not only due to the system (itself) but due slower ( or virtually lack of) reforms. Indian lawyers, at times have been ridiculed by their foreign counterparts as very ingenious in using or abusing the justice delivery system to delay and thus defeat the very purpose of justice delivery system- Justice Delayed Is Justice Denied. Alternate Dispute Resolution primarily using Arbitration, Conciliation & Mediation has been a popular way as effective alternate to traditional justice delivery system. However, in India it is considered to be “smart” to avoid being subjected to fast track, effective alternative way in the nature of International Commercial Arbitration (ICA). Defeating the ICA is considered as a favourite past time of Indian lawyers. In this backdrop, the changes effected by the Ordinance may be considered as an opportunity lost. Today more than any time in the history of international trade, we are experiencing unprecedented transactions across the borders, jurisdictions and countries. With the explosion of Internet, IoT, 3D Plazma Printing and other technology advances, International Commercial Arbitrations needed far greater emphasis. The amendments ought to have considered setting up quarantined International Arbitration Centre so that ICAs can be more meaningful and India can be an example in line with London (LCIA), Singapore (SIAC) and Dubai ( DIAC).

Increased Court Intervention: The Arbitration Act of 1940 had a provision (Section 28) where the Courts only could enlarge the time for making awards, unless the arbitration agreement provided for it by mutual consent of both parties. Invariably in every major arbitration wth high stakes that was under the old law, either of the Party, was before the Court seeking time extension. At times, the Parties took turns in approaching the Courts for time extension. This invariably happened at the last hour when the time for making the award was about to expire. This resulted in uncertainties, delay and additional costs. The Ordinance now under Section 29A mandates that the Court alone can extend the time. The Courts have been further empowered to stipulate certain additional directions while extending the time including substitution of arbitrator/s without annulling previous proceedings. This is an area that would allow Courts’ interference in arbitral proceedings.

Acknowledgements: Mr. Amol Bavare, Partner- Legasis Partners

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Comply by Choice……… Don’t be a Consequential Chooser

Over the period of past 12 months some very basic legislations brought out to the fore role of Corporate Compliance professionals. The Companies Act, 2013 mandated setting up of compliance systems. It also legislated OECD principles of good governance, though India is not yet a member of OECD. Board of Directors role in the management of companies has assumed an ‘orbit tilt’ in favour of Compliance & Ethics not just because the laws mandate it because of the good governance imperative. The SEBI Insider Trading Regulations for the first time defined and mandated role of a “Compliance Officer”. RBI prescribed Compliance as a critical theme for banks’ board deliberations. Many other legislations including sector specific regulations brought out highly regulated regime of Compliance. On one hand, we all are grappling with overregulation, on the other hand some legislative initiatives have attempted to simply the effects of complexities that existed due to redundant laws, archaic practices such as notarial attestations. Impetus on “Make In India” forced a constructive dialogue on “Ease of Doing Business”.
Looking at recent global development such as the US DoJ memo of 9/9 popularly refereed as Yates Memo seeks accountability of the individuals in the companies that perpetrated wrongdoing. To quote from the Yates Memo: “There are, however, many substantial challenges unique to pursuing individuals for corporate misdeeds. In large corporations, where responsibility can be diffuse and decisions are made at various levels, it can be difficult to determine if someone possessed the knowledge and criminal intent necessary to establish their guilt beyond a reasonable doubt. This is particularly true when determining the culpability of high-level executives, who may be insulated from the day-to-day activity in which the misconduct occurs. As a result, investigators often must reconstruct what happened based on a painstaking review of corporate documents, which can number in the millions, and which may be difficult to collect due to legal restrictions.” 9/9 Memo is probably a game changer not only in the US but also across the globe. We are experiencing stricter enforcement regimes that are crossing the boundaries.
There are five myths around doing ethical business (a) “It is is never going to happen to me”; (b)” everyone does it so do I”; (c) “laws are so complex that it is impossible to comply with all laws” ; (d) “I am doing so much good for public that my goodness will outshine my wrongdoings”; and most prevalent myth is (e)”I am so well connected that I can get away”. All these and other myths have vanished.
In India, we are at crossroads today. While territorial boundaries have vanished, barriers and territorial jurisdictions remain. We are experiences classic conflicts of (a) Overregulation v/s deregulation; (b) Bottom-line Shareholder Profit v/s Triple Bottom-line focus; (c) Principle based Regulations v/s Rule based Regulations; (d) Comply or explain v/s Comply or Perish . For analysing compliance we need to understand that firstly we all live in complex normative systems. The complexity of the normative systems vary from society to society and from country to country. Each of the corporate executive has some knowledge of few applicable rules relating to the business. Thus, the normal question that an executive asks is “What ought I to do?” One needs to ask oneself “What does law require from me?” If you ask former question, though you may have general intention to comply your motivation to do specific acts of compliance do not result from requirements of system of normative behaviour. At corporate level we must thus understand subtle differences and drivers of norms, intentions, obligations, actions and consequences. Compliance with thousands of obligations result in performance of tasks which is obligatory according to laws, however intentions to comply may be evidenced by various actions including a policy based approach. Intentions and commitments to one-self goes hand in hand. These cannot be driven only by fear of consequences. Those who choose to comply due to fear of consequences or consequentialist choosers probably cannot bring about change in mind-sets or change in behaviour patterns. Once we accept the “Compliance by Choice” all the conflicts vanish. You are complying for right reasons. Once we adopt “Compliance by Choice” it follows that self-interests, intentions and motivations are inconsequential questions needing no answers.
“Compliance by Choice” converts difficulty of doing business to ease of doing business, it brings about sustainability, value creation, impact and power to the business of your company.
Over past 8 years, we at Legasis worked with 450 odd companies through C-Mission ( Compliance Mission) in setting up IT enabled compliance systems that focussed on creation of robust action items and task lists under complex legal systems ( including Indian legal system). We also attempted to create awareness about consequences of non-compliance. The dialogue about cost of non-compliance vs cost of compliance needs no further elaboration. We are now moving to “Compliance by Choice”. I am confident that all corporations will join us in our endeavour to create sustainable compliant environment because we want it and not because someone tells us. “Compliance by Choice” is probably our corporate existence for right reasons.

Suhas Tuljapurkar

Legasis.

COMPANIES (AMENDMENT) ACT, 2015 A Step in the Right Direction for Ease of Doing Business

The Companies (Amendment) Bill 2014 has received Presidential Assent on 25th May 2015 and has been published in the Official Gazette a day later and notified as the Companies (Amendment) Act 2015. Earlier the Rajya Sabha passed the Companies (Amendment) Bill, 2014 on 13th May 2015 which was previously passed by the Lok Sabha on 17th December 2014.

This Act will reflect in at least 16 amendments in the erstwhile Companies Act 2013.

The Government had received representations from various stakeholders such as Industry Chambers, Professional Institutes, Legal Experts and Ministries/Departments expressing practical difficulties in complying with certain requirements laid down in the commenced provisions of the Companies Act, 2013.

The primary intention of passing the Companies (Amendment) Act 2015 is to improve India’s ranking on the Ease of Doing Business survey on which India currently ranks 142 among 189 countries. Prime Minister Narendra Modi has been focused on improving the current business environment and improving perception of foreign investors regarding the regulatory compliance burden.

Summary of Amendments for Ease of Doing Business:
• Doing away with the requirement for minimum paid up share capital for incorporation of a Company
• Making the use of Common Seal optional.
• Denying access of Board resolutions filed with the Registrar during public inspection of Company’s documents.
• Allowing companies to write off past losses/depreciation before declaring dividend for the year.
• Prescribing thresholds beyond which fraud needs to be reported to the Central Government, however any fraud below such threshold must be reported to the Audit Committee.
• Relief under Section 185 for loans, guarantees or securities to wholly owned subsidiaries
• Enabling the Audit Committee to concentrate on its other core activities by granting omnibus approvals for related party transactions on annual basis.
• Substitution of ‘Special resolution’ with ‘Ordinary resolution’ with respect to the approval of related party transactions by non-related shareholders.
• Exemption for approval of related party transactions between holding companies and wholly owned subsidiaries.
• Applying the restrictions of Bail only for offences relating to Fraud under Section 447.
• Cases of Winding Up to be heard by 2 member Bench instead of a 3 member Bench.
• Only offences carrying imprisonment of two years or more to be tried by the Special Courts.
• Specific punishment prescribed for contravention with regards to the deposits accepted under the Act.
• Correcting the requirement of transferring equity shares for which unclaimed/unpaid dividend has been transferred to the IEPF even though subsequent dividend(s) has been claimed.

Conclusion:
The relaxations granted by the Companies (Amendment) Act 2015 dilute the burden of procedural compliances, especially when it comes to related party transactions which have been a problematic area for many corporates.

The intent of the legislators is clear i.e. removal of all impractical and redundant provisions which have limited applicability in modern business transactions. Corporates will now be able to carry on day to day business and concentrate on more critical issues without worrying about approvals at every stage for group level transactions.

Arun Jaitley, Finance Minister stated that “A broad-based committee will continue to go into this question for the next few months as to where the shoe pinches, and this may not be the last amendments which we are bringing in,”1

The Companies (Amendment) Act, 2015 has brought significant changes and removed various practical difficulties in implementation of the new corporate regime. However only industry acceptance, foreign investors’ participation and this year’s rankings on the Doing Business Index will tell whether these changes have positively impacted the Indian economy.

1http://www.thehindu.com/news/national/rajya-sabha-passes-changes-in-companies-act/article7201967.ece

COMPANIES (AMENDMENT) BILL, 2014 A Step in the Right Direction for Ease of Doing Business

The Rajya Sabha passed the Companies (Amendment) Bill, 2014 on 13th May 2015 which was previously passed by the Lok Sabha on 17th December 2014 which will reflect in at least 16 amendments in the erstwhile Companies Act 2013.

The Government had received representations from various stakeholders such as Industry Chambers, Professional Institutes, Legal Experts and Ministries/Departments expressing practical difficulties in complying with certain requirements laid down in the commenced provisions of the Companies Act, 2013.

The primary intention of passing the Companies (Amendment) Bill 2014 is to improve India’s ranking on the Ease of Doing Business survey on which India currently ranks 142 among 189 countries. Prime Minister Narendra Modi has been focused on improving the current business environment and improving perception of foreign investors regarding the regulatory compliance burden.

Summary of Amendments for Ease of Doing Business:

  • Doing away with the requirement for minimum paid up share capital for incorporation of a Company
  • Making the use of Common Seal optional.
  • Denying access of Board resolutions filed with the Registrar during public inspection of Company’s documents.
  • Allowing companies to write off past losses/depreciation before declaring dividend for the year.
  • Prescribing thresholds beyond which fraud needs to be reported to the Central Government, however any fraud below such threshold must be reported to the Audit Committee.
  • Relief under Section 185 for loans, guarantees or securities to wholly owned subsidiaries
  • Enabling the Audit Committee to concentrate on its other core activities by granting omnibus approvals for related party transactions on annual basis.
  • Substitution of ‘Special resolution’ with ‘Ordinary resolution’ with respect to the approval of related party transactions by non-related shareholders.
  • Exemption for approval of related party transactions between holding companies and wholly owned subsidiaries.
  • Applying the restrictions of Bail only for offences relating to Fraud under Section 447.
  • Cases of Winding Up to be heard by 2 member Bench instead of a 3 member Bench.
  • Only offences carrying imprisonment of two years or more to be tried by the Special Courts.
  • Specific punishment prescribed for contravention with regards to the deposits accepted under the Act.
  • Correcting the requirement of transferring equity shares for which unclaimed/unpaid dividend has been transferred to the IEPF even though subsequent dividend(s) has been claimed.

Conclusion:

The relaxations granted by the Companies (Amendment) Bill 2014 dilute the burden of procedural compliances, especially when it comes to related party transactions which have been a problematic area for many corporates.

The intent of the legislators is clear i.e. removal of all impractical and redundant provisions which have limited applicability in modern business transactions. Corporates will now be able to carry on day to day business and concentrate on more critical issues without worrying about approvals at every stage for group level transactions.

Arun Jaitley, Finance Minister stated that “A broad-based committee will continue to go into this question for the next few months as to where the shoe pinches, and this may not be the last amendments which we are bringing in,”[1]

The Companies (Amendment) Bill, 2014 has brought significant changes and removed various practical difficulties in implementation of the new corporate regime. However only industry acceptance, foreign investors’ participation and this year’s rankings on the Doing Business Index will tell whether these changes have positively impacted the Indian economy.

[1] http://www.thehindu.com/news/national/rajya-sabha-passes-changes-in-companies-act/article7201967.ece

“Experts” under CA 2013 Company Secretaries :

With the commencement of the Companies Act 2013 (“Act”) and DLF matters have raised many questions on the definition and liabilities of “Experts”. While dealing with the legal provisions, I see transparency and accountability going hand-in-hand. While a new era of possibilities has begun for Company Secretaries in practice[1] and employment[2] from increasing their professional potential, with Indian businesses at inflexion point, the speed of growth may give way to quality of inputs. In first blog of the series on “Experts”, I propose to share my thoughts on what it entails to be a Company Secretary today.

Company Secretaries are now considered as “experts”[3] and also fall under the ambit of “Key Managerial Personnel”[4]

An “expert” includes an engineer, a valuer, a chartered accountant, a company secretary, a cost accountant and any other person who has the power or authority to issue a certificate in pursuance of any law for the time being in force.

This certificate is as per Rule 11(2) of the Companies (Management and Administration) Rules 2014, which states that the annual return filed by a listed company or a company having paid-up share capital of 10 crore rupees or more or turnover of 50 crore rupees or more, shall be certified by a Company Secretary in practice and the certificate shall be in Form No. MGT.8.

This certification is exhaustive in nature as it includes:

  • Maintenance of statutory registers and records
  • Timely filing of forms and returns with statutory authorities
  • Timely convening of the Board, General and other Committee meetings
  • Related party transactions
  • Acceptance of deposits
  • Borrowings from members and outsiders
  • Loans and investments made by the company
  • Loans and advances to directors and others
  • Share Capital including restructuring
  • Payment of dividend and transfer of unclaimed dividend
  • Proper constitution of Board of Directors and filling of vacancies

If a Company Secretary in practice certifies an annual return fraudulently or incorrectly, he will be punishable with fine which shall not be less than Rs.50,000 but which may extend to Rs. 5 lakh as per Section 92(6) of the Act.

 

Another avenue of certification for Practicing Company Secretaries is Secretarial Audit which is applicable to

  • Every Listed Company AND
  • Every public Company having paid of share capital of Rs. 50 crore or more
  • Every public Company having a turnover of Rs. 250 crore or more

The scope for Secretarial Audit is not limited to the Companies Act 2013, it extends to compliance certification for The Listing Agreement, Secretarial Standards, SEBI regulations and all other laws as may be specifically applicable to the Company.

In case of contravention, the Company, the Company Secretary in practice and every officer of the Company in default shall be punishable with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 5 lakhs.

Being considered an “expert” comes with its own set of risks.

Class Action Suits[5] can be initiated by members and depositors, if they are of the opinion that management or conduct of the affairs of the Company are being conducted in a manner prejudicial to their interest, they are entitled to file an application before the Tribunal and can claim damages or compensation or demand any other suitable action from any expert or advisor or consultant for providing incorrect or misleading information or any fraudulent conduct.

There has always been a tendency of Companies to conveniently shift the blame to the “Experts”. Let us take the example of the DLF Case[6] in which the management was quick to respond by blaming expert advice.

Mr. K.P Singh, DLF Chairman submitted that “given the complexity and specialized nature of the process of IPO of DLF and his advanced age of 82 years, he heavily relied on the advice of various experts involved in the process such as Merchant Bankers and acted bona fide on such expert advice.”

Mr. Rajiv Singh, DLF Director submitted that “while approving the Financial Statements contained in the Offer Document, he was largely guided by expert advice required, and the contents of the Offer Document had been certified to be true, correct and in due compliance with all disclosure requirements by relevant expert advice.

Mr. T.C Goyal, DLF Director submitted that “he acted in good faith on the basis of expert advice of Merchant Bankers and legal advisors and no mala fide intent can be imputed on him.”

Mr. Ramesh Sanka, DLF Director submitted that “the statements of the DLF limited were duly reviewed and recommended by the audit committee of DLF prior to being tabled before the Board of Directors after having been audited by its Statutory Auditors. DLF had, for the purposes of the IPO, appointed eminent Merchant Bankers, lawyers and other advisors to ensure that detailed due diligence is undertaken with regard to all aspects of the company for the purposes of ensuring due disclosure of information.”

The risk and liability exposure for Company Secretaries has increased manifold and it is imperative for transparency and disclosure levels to be stepped up accordingly.

Also, the certifications provided by the PCS in Form MGT-8 and Form MR-3 will be available as public domain information after filing of the same with the MCA. Any discrepancies noticed by competitors can adversely affect the reputation of the PCS in his fraternity and the corporate world at large.

[1] Section 2(25) of Companies Act 2013

[2] Section 2(24) of Companies Act 2013

[3] Section 2(38) of Companies Act 2013

[4] Section 2(51) of Companies Act 2013

[5] Section 245(1)(g) of Companies Act 2013

[6] SEBI Order No WTM/RKA/IVD-7/117 – 124 /2014 dated 10th Oct 2014 http://www.sebi.gov.in/cms/sebi_data/attachdocs/1413191997529.pdf