Reasons For Failure Of Mergers & Acquisitions Deal

Mergers and Acquisitions are vital tools of business strategy to facilitate organizational and economic growth of a business. The terms are often used inter-changeably, however both offer different legal implications. Mergers mean the unification of two players into a single entity, while acquisitions are situations where one player buys out the other to combine the bought entity with itself[1]. Mergers can take place in the form of a purchase in which one business buys another, or they can be a management buyout, in which the business is bought by the management from the owner.

With reference to the legal process of initiating an M&A strategy, the businesses are required to undergo a long drawn and tedious process of sanctioning the initiation of the M&A process by the High Court. At different stages various provisions of the Companies Act, 2013 have to be complied with. Further, the involvement of the central government through the appointment of an Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs also has to be dealt with. All of the compliances should be carried out to the satisfaction of the Court, resulting in unavoidable delays that may sometimes render the M&A irrelevant or detrimental to the business by the time it is concluded.

However, the serpentine legal process is not the only factor that contributes to an unfavorable M&A. This article aims to analyze the various reasons that add to the failure of M&A deals and enable businesses to mitigate the related risks in the future.

Analysis and Reasons for Failed M&A Deals

Mergers and acquisitions gained significant popularity after 2015. Nearly 3,600 deals worth more than $310 billion were associated with mergers and acquisitions. [2] They are lengthy and complex processes, so a lot can go wrong when negotiating a deal. As per a recent article by Harvard business review, nearly 70% to 90% of the mergers and acquisition deals were deemed to be a failure.[3]

Regulatory issues

Adhering to the legal mandates of the relevant jurisdiction is necessary. There is a chance that the shareholders of an organization may cause legal difficulties by dissenting from the approval of the mergers or by disagreeing with the business’s decision to merge. This would significantly slow down the functioning of the company, forcing it to pay appraisals to the shareholders as a remedy.

Example: HDFC and Max Life Merger Deal:

HDFC Life and Max Life had announced their merger plans in August 2016 through a three-step merger process, under which Max Life would first merge with its parent company Max Financial Services, and subsequently the life insurance business would be demerged from Max Financial and would be merged into HDFC Life. This merger transaction would have led to the automatic listing of HDFC Life through a reverse merger process and would enable HDFC Life to hold a majority stake in the combined entity. The Insurance Regulatory and Development Authority of India (IRDA) denied permission for the proposed merger of Max Life Insurance Co. Ltd and HDFC Standard Life Insurance Co. Ltd (HDFC Life), and observed that the structure of the deal violates Section 35 of the Insurance Act, 1938, which barred the merger of an insurance company with a non-insurance firm.[4]

Mistakes in Negotiation and Overrated Synergies

In various mergers and acquisitions, there are cases of overpayment for the purpose of breach of agreement. Acquiring a company based on money without knowing the working format, procedure, structure of the company and going through the due diligence process will lead to a failed merger.

Mergers and acquisitions are considered significant tools for increasing revenue, reducing net working capital, and improving venture power. Overvalued synergies go hand in hand with transfer overpayment. Overvaluation of exchange synergies is often the initial stage of overpayment. While the prospect of numerous costs remaining largely equivalent between the two combined organizations is attractive, it is also decidedly harder to achieve in practice than most directors admit. Also, energy cooperative income is no less confusing. M&A practitioners would therefore be encouraged to look at the expected cooperation from the exchange through a deeply traditionalist contact point.

Lack of Due Diligence

The importance of due diligence can never be emphasized enough. One of the main problems that arise during the process is that the acquirer depends on the target company to provide information that is not always suitable for their management. This creates obvious problems with agency.

Example: Daimler-Benz and Chrysler Group

In 1998, German automaker Daimler Benz merged with Chrysler Group for $36 billion. This was seen as a win-win situation for both companies as it was essentially a merger between equals. However, after a few years, Chrysler’s value dropped to just $7.4 billion. The merger proved unsuccessful. Many reasons contributed to this, but all experts agree that Daimler Benz never did  proper due diligence before merging with Chrysler. In other words, it overestimated the value of the target company, which led to the failed merger.

Hence, even though an M&A deal may seem lucrative on paper, it is essential for the respective businesses to carry out thorough due diligence and research on predicted profitability trends and projected growth patterns of the proposed merger or acquisition.

Deficiency in Strategic Plan

A good “why” is an essential part of all successful M&A transactions. This means that without a good motive for the transaction, it is doomed from the start.

The academic M&A literature is replete with studies of managers engaged in “empire building” through M&A and research on how hubris is a common trend in M&A.

Difficulty with Integration and Swap Ratio Differences

Integration difficulties that are mostly faced by companies when a new company has to follow or accept a new set of challenges and regulations to position itself in the market. It is very difficult for society to adapt to new conditions. Various plans are created in the form of strategies to help the company adapt to the new environment. This integration sometimes becomes the reason for the failure of the merger due to insufficient effort and imprecise planning.

Example: IDFC Group and Shriram Group deal:

IDFC Group and Shriram Group called off their talks of a merger after failing to agree on a swap ratio. A swap ratio is the ratio at which the acquiring company offers its shares in exchange for the target company’s shares during a merger or acquisition.

The two parties had, on July 8, 2019, entered into a 90-day agreement to evaluate a strategic combination of their relevant financial services. Shriram Employee Trust, Piramal Group and Sanlam Group were set to become the largest shareholders in IDFC and drive the business, but the deal would have hurt the government, which owned a 16.38 per cent stake in IDFC. So due to the difficulty in integration and swap ratio differences this deal was called off. This was the reason for the failure of this deal.[5]

Lack of Involvement of Top Management:

Management involvement is a catch-all answer that also includes many of the abovementioned reasons within its ambit. 

No phase of the M&A process can successfully sustain itself without proper involvement of the management, from the search for a suitable target company to the integration of both companies into a newly created entity.

When managers consider other tasks in their company more important than successful M&A implementation, they should not be surprised when their business is ultimately considered a failure.

Lack of Adequate Communication

Proper communication is one of the most important features of any agreement or contract. If the purpose of closing the deal is unclear, the intent of the buyers and sellers is also unclear, then communication is poor. If there is a lack of synergy and the buyer and seller are unable to articulate the desired results, this is a sign of poor communication. Not only that, but poor communication can also include a lack of communication between key managers and employees. Whenever a company enters into a merger or acquisition, there should be an honest and clear disclosure of the motive and intent. All doubts should be clarified at the initial stage. All levels of society should be given the opportunity to have their say. Messages should be interpreted in a general sense and according to common sense.

Culture Mismatch

Culture mismatch is another significant factor that causes merger failures. If companies have different cultural aspects, then there is a chance of low employee productivity, which leads to lower profits. Culture includes the willingness of employees to collaborate, share, support and team together with a single motive. Company culture is shaped by company founders, but it was also influenced by company managers and employees.

Example: Facebook and WhatsApp

Facebook bought messaging platform “WhatsApp” in 2014 for $22 billion. However, companies quickly realized that the corporate cultures were clashing. There are some memorable articles about table size and toilet stall arguments, but there have been discrepancies in values. WhatsApp famously valued the privacy of its customers and employees (no wonder they had a problem with short toilet boxes), while Facebook had more of an “open door” policy when it came to privacy. Since WhatsApp had committed to using a no ads and no encryption policy for the app its customers, it was clearly not a match that would have succeeded and the founders of WhatsApp eventually left Facebook.

Therefore, while considering an M&A it is not only important to ascertain the collective vision and objectives of the businesses, but also to make sure that the culture, policies and values of the businesses stay in alignment going forward.

Human Resource Issues

Human resource issues also pose a threat to the merger. There is insecurity as people tend to leave their jobs due to sudden changes in the course of work or because of cultural or identity issues. There are many human resource related issues even in the pre-combination stage such as the acquisition of key talent etc. as those could be the major concern for the companies for acquisitions. Another critical HR issue is the selection of a leader who will actually manage the new business combination for smooth business operations. These issues may lead to a lack of direction and the postponement of major business decisions. Companies should put their best people in charge of implementing M&A deals, and seek union and community involvement to avoid the risk of deal failure.

Geographic Restrictions

Geographical barriers cannot be overlooked. These play an important role when it comes to cross-border mergers. In general, when a cross-border merger occurs, a two-layer articulation is needed due to the merger of two different companies into different countries with a different set of rules and regulations prevailing in the respective countries.

Other External Factors

External factors may include market position, competition, financing situation, and credit in the company’s lending. If all these things are against the company, there is a chance for the merger to fail.

                                                                          Source: PWC Report[6]

The Way Forward

It is expected that mergers and acquisitions will exceed $105 billion, breaking the record for the largest transactions. [7]  High-rated deals like Reliance Industries’ (RIL) potential $10 billion (Rs 76,000 crore) acquisition of European drug chain Walgreens Boots; the Adani and JSW groups, bidding for Ambuja Cements, and the HDFC twin merger are the leading big mergers and acquisitions (M&A) deals. Consolidation of all the market players has been a major driving force behind the M&A transactions. Tech Mahindra and Infosys focused on exiting entities, while Byju’s acquired Aakash Education, White Hat Junior and Topper Technologies.

According to the 2022 M&A report, despite the ongoing challenge posed by the Covid-19 pandemic and geopolitical tensions in South Asia, the market is showing strong signs of recovery. M&A volumes hit an all-time high in 2021 with more than 80 deals worth more than $75 million. The increase in investment can be partly attributed to Indian government policies such as the productivity-linked incentive program introduced under the Ease of Doing Business initiative. [8]

Thanks to the great interest of foreign buyers, the Indian market for mergers and acquisitions also did well (the US accounted for 35 percent of invested dollars). India’s economy is set for strong growth in 2022 – The IMF has forecast GDP growth of 8.2 percent in 2022, making it the fastest growing major economy and double the expected growth rate of China.

With a total of 174 deals in Q1 2022 (up 28% year-on-year), the stage is set for India’s M&A market to witness strong technology-driven performance. This would make the M&A management process more efficient and powerful. For example, sellers are seeing in real-time how artificial intelligence and machine learning are automating many of the time-consuming parts of M&A—from preparation and marketing to due diligence on both the sell-side and the buy-side. [9]

According to Data site, a leading provider of SaaS technologies to the M&A industry worldwide, deal activity from January to May 2022 shows that companies continue to invest in technology acquisitions as they undertake digital transformations accelerated by Covid-19. Trading on the Datasite platform shows that new global TMT projects rose 18 percent worldwide in the first quarter.

The median time to open and close a new deal or asset sale or merger at Data site increased five percent year-over-year this year, while deal preparation time is also increasing, up 31 percent over the same period. This means that many vendors are “ready” but have not yet launched their projects. [10]

                                                                            Source: VCC Edge[11]

If handled properly, mergers and acquisitions can be a powerful means of propelling a business to greater profitability. Businesses should be cognizant of the abovementioned factors discussed before taking the M&A leap, to ensure sustainable and stable growth projections for their future.

It can be fairly concluded that mergers and acquisitions are powerful means to propel a business to greater profitability, if dealt with properly. Businesses should be cognizant of the abovementioned factors discussed before taking the M&A leap, to ensure a sustainable and stable growth projections for their future.

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The Dawning of Data Centres in West Bengal

It is rightly said that “Data” is the new oil in today’s digital world. Data consumption and cloud-based services have grown exponentially in the past decade, and they are increasing their efficiency by making use of cloud computing and artificial intelligence. Consequentially, the requirement for storage and management of data has grown as well. This demand, along with the government initiatives for digitising India, has given rise to the growth of data centres in the country.

The data centre industry is expected to grow further in the next few years to provide support for the upcoming 5G technology. Data centres require round-the-clock uninterrupted availability of power to operate effectively. However, such requirements inevitably increase carbon-di-oxide emissions. Therefore, there has also been a significant push towards the establishment of “Green Data Centres” – a sustainable solution that is dependent only on renewable energy.

In view of the increasing significance of data, data centers, and the associated regulatory requirements of data localization, the Legislature has also brought about various reforms such as the Digital India programme in order to regulate the entire data industry. However, a comprehensive framework specifically aimed at regulating the construction and operation of data centers is still needed.

 

Concept of Data Centres

 

A data centre is a physical facility that houses all virtual activities and is used to store applications and data, for edge computing, hosting content, and delivering cloud-based services. Data centres cover the three sectors of property, energy, and technology, and thus, various segments such as real estate and construction, hardware equipment, utilities (power, water, cooling), networking, and software services all come within their ambit.

 

National and Global Context

 

The last few years have seen rapid growth in the digital industries such as gaming, Edtech, OTT platforms, e-commerce, etc., in India. These industries are heavily dependent on data centre support. Further, the fast growth in cross-border transactions and the digitisation of transactions has impelled the Indian government to implement data localization mandates in order to ensure data protection and sovereignty. Consequently, global players are now looking to invest in establishing data centres in India, which makes it important to examine the facilities offered to the data centre industry by leading nations in this sector.

 

United States

Different states in the US provide different incentives to investors for setting up data centres. For example, Alabama exempts data centres from sales and property taxes, Hawaii offers job creation incentives, Florida offers industry tax refunds through the Florida Enterprise Zone, and so on.

 

China

China is the world leader in internet consumption; hence, data centres have grown there rapidly. At present, it is placed in the second position in the market capacity of data centres, right after the US. The Chinese Government has incentivised the construction of data centres through the allocation of land for the same and making it available at favourable prices. China’s National Development and Reform Commission has launched a project called “Eastern Data Western Calculation,” which aims to move the data collected from developed regions of the country to less developed ones.  Apart from this, several local governments in the central and western regions of the country offer tax benefits for setting up data centres.

 

Singapore

Singapore has several facilities, such as a country-wide fibre network, a corporate tax exemption for a data centre company under the Pioneer Certificate Incentive, a concessionary tax rate of 5% or 10% for a company under the Development and Expansion Incentive, on-site power plants, dual power feeds, etc. to incentivise the setting up of data centres.

 

Regulatory Framework in India

 

The size of the digital economy in India is estimated to grow from $ 200 billion in 2017-2018 to $ 1 trillion by 2025.

Currently, there is no single legal framework regulating the construction and operation of data centres in India. Several guidelines have been issued from time to time by various government departments relating to the data centre industry. One such draft guideline named “Data Centre Policy 2020” was published by the Ministry of Electronics and Information Technology and proposed to give the status of “infrastructure” to data centres, putting the data centre industry on the same pedestal as roads, railways, and power, which would enable them to avail long-term credit from domestic and international lenders at easier terms. Some of the other salient features proposed by this policy are:

  • Data centres are to be declared an Essential Service under “The Essential Services Maintenance Act, 1968” to enable continued service during calamities or crises.
  • Data centres are to be recognised as a separate category under the National Building Code of India 2016 as they require different norms than other commercial spaces.
  • Four Data Centre Economic Zones (DCEZ) are proposed to be set up by the Government of India, which will host an eco-system of both non-IT and IT infrastructures such as hyper scale data centres, cloud service providers, IT companies, and R&D units.
  • Incentives for setting up data centres will be available to both private sector and public sector Data Centre Parks/Data Centre Developers and Data Centre Operators.

The Telecom Regulatory Authority of India (TRAI) had also published a consultation paper on “Regulatory Framework for Promoting Data Economy Through Establishment of Data Centres, Content Delivery Networks, and Interconnect Exchanges in India,” which provides a list of clearances required to build a data centre, some of which are listed below:

  • Environment Clearance from the Ministry of Environment, Forestry and Climate Change
  • Consent to Establishment from the Metropolitan Development Authority and Central Pollution Control Board
  • Provisional Fire No Objection Certificate (NOC) from the State Fire and Rescue Services/National Fire Protection Association
  • Storm Water Permits and Sewage Discharge Approval from the State Pollution Control Board
  • Tree Cutting NOC from the Central Pollution Control Board: Forest Department
  • Drainage/Garden NOC from the Metro Water Supply and Sewage Board
  • Building Permit/Approvals, and Commencement Certificate from the Metropolitan Development Authority
  • Telecom Permit from the state’s Service Provider/Controller of Communication Accounts
  • Water Supply from Metro Water Supply and Sewage Board
  • Power Connection Feasibility, Design, and Sanction from the State Electricity Board
  • Traffic Approval NOC from the Commissioner of Traffic
  • NOC for High-Rise Structure from Airport Authority of India
  • Registration with DIC from the Director of Industry
  • IEM Registration with the Ministry of Commerce
  • 220kV power connection cable laying from a substation to project premises and 220kV power connection substation testing and charging from the State Electricity Board
  • Form V Approval (Labour) from the Labour Department: State Government
  • Plinth Checking Certificate from the Metropolitan Development Authority
  • Electricity Safety License from the Central Electricity Authority/Chief Electrical Inspector to the Government/Public Works Department Electrical Inspector
  • Elevator Permits and Certification from the Central Electricity Authority/Chief Electrical Inspector to the Government/Public Works Department (PWD) Electrical Inspector
  • Diesel Generator System Approval from the Central Electricity Authority/Chief Electrical Inspector to Government/PWD Electrical Inspector
  • High Speed Diesel (HSD) License from the Petroleum and Explosives Safety Organization/Chief Controller of Explosives Department/PWD: Electrical Inspector
  • Lift Operating Permits from the PWD Lift Inspector
  • Occupancy Certificate from the Metropolitan Development Authority
  • Completion Certificate from the Metropolitan Development Authority
  • Consent to Operate Certification from the Central Pollution Control Board
  • Preliminary Explosive License and Final Explosive License for HSD from Petroleum and Explosives Safety Organization/Chief Controller of Explosives Department

Several states have promulgated their own data centre policies, such as Maharashtra, through its IT/ITES Policy of 2015; Telangana, through its Telangana Data Centre Policy of 2016; Uttar Pradesh, through the Uttar Pradesh Data Centre Policy of 2021; Tamil Nadu, through the Tamil Nadu Data Centre Policy of 2021; Karnataka, through the Karnataka Data Centre Policy, 2022-27 and West Bengal, through the West Bengal Data Centre Policy of 2021.

 

Regulatory Framework in West Bengal

 

On September 6, 2021, the Department of Information Technology and Electronics, Government of West Bengal, introduced the “West Bengal Data Centre Policy 2021,” which will be valid for a period of five years from the date of the notification.

The nodal agency for the proper implementation of this policy is WBEIDC Limited (WEBEL), and they will promote it at both a national and international level.

In 2022, it was announced that the Bengal Silicon Valley Tech Hub being developed at New Town, Rajarhat, is expected to become the main area for the development of the data centre units in the state. The biggest advantage for West Bengal is that the new submarine cable landing station is being developed at Tajpur in West Bengal and ancillary units will be created in the two electronics manufacturing clusters at Kalyani and Falta for supporting the data centres.

Data centre organisations will be classified as “Essential Services,” as has also been proposed in the National Policy.

In order to attract data centre companies to set up data centres in West Bengal, various other incentives have been proposed in the policy. The companies setting up data centres in West Bengal will be entitled to a hundred per cent exemption of stamp duty and registration fees for any transaction relating to the setting up of data centres in the state, and there will also be a waiver of electricity duty from the commencement of commercial activities up to five years.

Among the non-financial incentives, the data centres will also be entitled to:

  • Dual-power grid networks to ensure electricity supply without interruption
  • “Industrial” status is given to electricity supplied to data centres
  • Affordable power backup infrastructure
  • Companies who wish to establish captive firms will get single-window approvals and permits
  • Quality power and internet facilities are to be provided to Edge Data Centres being set up at various IT parks or industrial parks
  • Uninterrupted Power Supply and Internet Connectivity
  • Uninterrupted and high-speed water supply
  • A support system to be provided to set up captive water treatment plants for the Data Centre Parks
  • Extra FAR for data centre buildings.

West Bengal is becoming a lucrative option for setting up new data centres, and various corporate houses such as Reliance Jio, Adani Enterprises, and Hiranandani Group are also in the process of setting up data centres in the state. Several factors need to be taken into account before setting up a Data Centre and real estate is a significant one among them because data centres are one of the most expensive real estate investments. Extensive due diligence should be performed on the project site to ensure that it has a clear title and easy access to transportation and other utilities. In addition to this, all the relevant licenses and permissions should be obtained from the competent authorities to avoid legal issues in the future. Considering the progressive policies implemented by governments at both the central and state levels, it will be interesting to see how the data centre industry develops and how these policies affect it. 

Image Credits: Photo by Akela999 from Pixabay 

West Bengal is becoming a lucrative option for setting up new data centres, and various corporate houses such as Reliance Jio, Adani Enterprises, and Hiranandani Group are also in the process of setting up data centres in the state. Several factors need to be taken into account before setting up a Data Centre and real estate is a significant one among them because data centres are one of the most expensive real estate investments. Extensive due diligence should be performed on the project site to ensure that it has a clear title and easy access to transportation and other utilities.

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The Great Indian Asset Monetisation Dream: Infrastructure Investment Trusts

The Indian government in recent years has introduced a spate of initiatives with the sole objective of improving India’s infrastructure. Some of the initiatives introduced are the National Infrastructure Pipeline,[1] National Monetisation Pipeline,[2] PM Gati Shakti – National Master Plan for Multimodal Connectivity,[3] Bharatmala Pariyojana,[4] the increased impetus on the use of electric vehicles, and robust electric vehicle charging infrastructure,[5] just to name a few.

Although all of the above schemes are equally important, one key initiative that will unlock the potential of others is the National Monetisation Plan, which involves the monetisation of India’s public infrastructure assets, so as to fund various other infrastructure initiatives. As of April 2022, the government has generated INR 96,000 crores under the scheme, exceeding the target of INR 88,000 Crore set for FY22.[6]

India has over 58,97,671 kilometres of the road network,[7] with 12 major ports and 212 non-major ports,[8] total trackage of 1,26,366 kilometres of railways,[9] a total of 136 airports under the ownership of the Airports Authority of India,[10] and a total of 20,236 kilometres of navigable inland waterways.[11] This is besides the length of water and sewerage networks owned by several state governments, and other existing public utilities that constitute public infrastructure owned by the government or the Public Sector Undertakings (“PSUs”). Hence, it is pertinent that these public infrastructures at the disposal of the Indian government are optimally monetised. According to a recent announcement by the Government of India, a total of INR 6 trillion in public assets are sought to be monetised by leasing the assets to private operators for a fixed term, unlocking a value of INR 111 trillion.[12]

 

Asset Monetization: The Apprehensions and Options

Most countries are sceptical about fully privatising their public infrastructure assets, although this is not necessarily unheard of in the past.[13] Asset monetisation in the context of the infrastructure sector in India involves the limited offer of public infrastructure to institutional investors and other private sector investors, through certain structured mechanisms in order to generate more value from the same assets.[14] Some mechanisms include the Toll Operate Transfer (“TOT”) model, which awards concessions for completed road projects to entities that have experience running toll roads. Here the concessionaire (a private entity) shall win the right to operate and maintain the road and collect toll from the roads for a particular period in consideration of a lump sum amount paid to the government or the PSU. The government shall, in turn, use this money to fund other infrastructure projects.

Another model for monetizing public infrastructure assets is the use of infrastructure investment trusts (“InvITs”) and real estate investment trusts (“REITs”), in which the underlying infrastructure or real estate assets are transferred to a trust, which then operates similarly to a mutual fund, attracting investors while securitizing the proceeds from the underlying infrastructure or real estate assets. For the purpose of this article, we shall focus on InvITs.

 

InvITs: Structure, Advantages and Risks

 
 
InvITs:  Structure, Advantages, and Risks
InvITs:
Structure, Advantages, and Risks

 

 

Advantages of InvITs

 
  • Long, stable and predictable cash flows: The SEBI (Infrastructure Investment Trust) Regulations, 2014 (“InvIT Regulations”) and its attendant notifications mandate that 90% of the cash flows from the underlying infrastructure assets shall be distributed to the investors of the InvIT Net Distributable Cash Flows (“NDCFs”). Some of the concession agreements governing the underlying infrastructure assets have long concession periods of 15 to 20 years, sometimes even 50 or 60 years. If the InvIT is well managed, then there would be an assured 50 to 60 years of stable and predictable cash flows, depending on the tenure of the underlying concession agreement.
  • Infusion of Public Funds: Traditionally infrastructure projects have only attracted funding from syndicated banks, investments from developers, and the government. With this unique model, not only are institutional investors allowed an opportunity to invest money into these projects, but the general public can also own a stake in the development of the infrastructure sector by holding units in InvITs.
  • The professionalisation of Infrastructure Management: The InvIT Regulations mandate a minimum number of years of experience in handling certain volumes of transactions or projects for the key stakeholders of an InvIT, such as the Sponsor, the Trustee, the Investment Manager, the Project Manager, and even the auditors.
  • High-Quality Underlying Assets: The InvIT regulations have very specific norms on what kind of infrastructure assets can be rolled over into the InvIT framework. The regulations specify that only those projects that have started generating revenues after completion of construction or achieved commercial operations date (“COD”) or at the pre-COD stage of the project with almost 80% of the construction work complete, or those projects that have received all requisite approvals and certifications (non-PPP projects), can be rolled over into the InvIT framework.
  • Special Tax Recognition: The Finance Act, 2014, added a new definition of “Business Trust,” which applies to InvITs and REITs, under which these types of entities enjoy certain benefits. The most recent amendment in the Finance Act of 2020 included unlisted InvITs and REITs under the umbrella of business trusts. Prior to the above amendment, only listed InvITs and REITs enjoyed this recognition. Some of these advantages include the pass-through mechanism, wherein any dividends earned from an InvIT are not taxed at the InvIT level, but in the hands of the unit holder. Similarly, interests from debt provided to the underlying infrastructure assets are also taxed only at the level of the unitholders, thus avoiding double taxation. There is also a push by Niti Aayog to introduce Section 54EC capital gains exemption status under the Income Tax Act, 1961, to InvIT units,[15] similar to the bonds issued by the National Highway Authority of India, Power Finance Corporation Limited, Indian Railways Finance Corporation Limited, and Rural Electrification Corporation Limited.

 

Risks of InvITs

 
  • Regulatory Risks: The concept of InvITs is very unique to India, and therefore SEBI’s InvIT Regulations are one of a kind in the world. Since the introduction of the InvIT Regulations in 2014, there have been regular changes to the laws so as to make them effective for on-the-ground rollouts of InvITs. Some risks connected with these changes still need to be accounted for.
  • Credit Rating Risks: Many credit rating agencies have difficulty appropriately valuing the returns that can be generated from the underlying infrastructure assets. Since the disaster of IL&FS, there have been several attempts to introduce different rating methodologies that apply uniquely to the infrastructure sector, as opposed to the standard rating processes that are used for manufacturing and other service industries. In fact, vide its July 2021 circular, SEBI introduced the “expected loss” model for rating infrastructure assets. As this is an evolving sector, considerable revisions can be expected in the methodology of rating infrastructure assets, which can pose a potential risk.
  • Operational Risks: The pandemic has been the biggest disruptor of the infrastructure sector in recent times. Similar force majeure incidents, along with other risks associated with the operation of assets, such as erratic usage of the operating assets, for example, inadequate traffic in a road project or increased operational costs due to lack of availability of raw materials in solar-powered power generation and transmission plant leading to increased operational costs in the subsequent supply-chain and many similar issues can decrease the value provided by the underlying infrastructure assets.
 

InvITs in India – The Scenario Thus Far

India is witnessing a boom in the number of InvITs that are getting established. Currently, there are 18 InvITs registered with the SEBI. With increased impetus provided to the National Monetisation Pipeline, the NHAI has offered 3 additional road projects totalling 247 kms to its InvIT, attracting international pension funds such as the Canada Pension Plan Investment Board and the Ontario Teacher’s Pension Plan Board as anchor investors.[16] The profitable returns provided by the initially established InvITs, such as the India Grid Trust and IRB InvIT, touched 56% and 83% in 2021.[17] Therefore, it is not surprising that there is an increased interest in investing in infrastructure development by such pension funds and sovereign funds. For example, the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan each took 25% equity in the INR 6,000 crore issue of NHAI’s InvIT as anchor investors.[18] Similarly, the private InvIT, IRB Infrastructure Trust, recently completed INR 243 crores worth of fund raising with IRB holding 51% and the Singapore-based sovereign fund GIC holding 49% in the InvIT.[19] Other InvITs looking to raise funds include the Canadian pension fund CDPQ-owned Indian Highways Concessions Trust[20] and Tata Powers intending to reduce debt from its renewable energies business by hiving off the same into an InvIT.[21] The railways sector, similarly, has a mandate to monetise its assets via the InvIT route.[22]

All of these are indicative of increased activity in the infrastructure funding space via InvITs. The Government of India’s push for increased asset monetisation, combined with the regulatory body, SEBI’s proactive approach to reducing the risks associated with investments in InvITs, is providing more assurances to foreign investors. However, the returns provided by the initially established InvITs in the country have proven to be a decisive attraction factor for investors.

Refernces:

[1] https://dea.gov.in/sites/default/files/Report%20of%20the%20Task%20Force%20National%20Infrastructure%20Pipeline%20%28NIP%29%20-%20volume-i_1.pdf

[2] https://www.niti.gov.in/national-monetisation-pipeline

[3] https://www.india.gov.in/spotlight/pm-gati-shakti-national-master-plan-multi-modal-connectivity

[4] https://www.india.gov.in/spotlight/bharatmala-pariyojana-stepping-stone-towards-new-india

[5] https://www.niti.gov.in/e-mobility-national-mission-transformative-mobility-and-battery-storage

[6] https://economictimes.indiatimes.com/news/economy/policy/asset-monetisation-government-beats-fy22-target-with-rs-96000-crore/articleshow/90807193.cms

[7] See generally, Morth’s Basic Road Statistics of India, 2016-17, available at https://morth.nic.in/sites/default/files/Basic%20_Road_Statics_of_India.pdf, Last visited on July 15, 2022

[8] See generally https://www.statista.com/statistics/686447/india-total-number-of-ports/, Last visited on July 15, 2022

[9] See generally the website of Indian Railways Civil Engineering Portal, https://ircep.gov.in/AboutUs.html, Last visited on July 15, 2022

[10]

See generally https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1779817, Last visited on July 15, 2022

[11] See generally https://iwai.nic.in/waterways/new-waterways/106-new-waterways, Last visited on July 15, 2022

[12] See https://www.ideasforindia.in/topics/macroeconomics/india-s-asset-monetisation-plan.html#:~:text=In%20August%202021%2C%20Government%20of,used%20for%20new%20infrastructure%20investment. Last visited on July 15, 2022

[13] The Australian model of the Asset Recycling Initiative which involved the sale of public assets for funding public infrastructure projects was one such endeavour. See https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201415/InfrastructureGrowth. Last visited on July 19, 2022.

[14] See https://www.business-standard.com/about/what-is-asset-monetisation#collapse . Last visited on July 19, 2022

[15] See generally https://www.business-standard.com/article/economy-policy/niti-aayog-suggests-tax-incentives-for-investment-in-invits-121083000870_1.html. Last visited on July 22, 2022.

[16] See https://www.business-standard.com/article/current-affairs/nhai-offers-three-additional-roads-to-its-invit-totalling-247-km-122060300921_1.html

[17] See https://economictimes.indiatimes.com/markets/stocks/news/with-invits-get-returns-of-8-10-and-good-diversification/articleshow/85468305.cms

[18] See https://www.business-standard.com/article/markets/cppib-and-ontario-teachers-pension-plan-bag-nhai-s-maiden-invit-121110301236_1.html and https://www.business-standard.com/article/current-affairs/nhai-offers-three-additional-roads-to-its-invit-totalling-247-km-122060300921_1.html. Last visited on July 20, 2022.

[19] See https://www.business-standard.com/article/companies/private-invit-irb-infrastructure-trust-completes-rs-243-crore-fundraising-122042200552_1.html. Last visited on July 20, 2022.

[20] See https://www.business-standard.com/article/companies/indian-highway-concessions-looks-to-raise-rs-910-cr-via-private-placement-122061300932_1.html. Last visited on July 20, 2022.

[21] See https://www.business-standard.com/article/companies/tata-power-s-plan-to-reduce-debt-through-invit-gets-delayed-122041200035_1.html. Last visited on July 20, 2022

[22] See https://www.business-standard.com/article/economy-policy/centre-may-noty-be-able-to-monetise-railways-rs-18-000-cr-assets-via-invit-122070600307_1.html. Last visited on July 20, 2022.

Image Credits: Photo by Fivesouls Faisol

The Government of India’s push for increased asset monetisation, combined with the regulatory body, SEBI’s proactive approach to reducing the risks associated with investments in InvITs, is providing more assurances to foreign investors. However, the returns provided by the initially established InvITs in the country have proven to be a decisive attraction factor for investors.

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Validity of an Arbitration Clause: No Strait-Jacket Formula

On September 7, 2022, the Hon’ble Supreme Court issued a significant ruling in the case of Babanrao Rajaram Pund v. Samarth Builders & Developers[1], holding that no strait jacket formula can be made under the Arbitration and Conciliation Act, 1996, to determine the particulars of an arbitration clause. It further held that an arbitration clause must be treated as final and binding even if specific words like “final” or “binding” are not used in such a clause.

Babanrao Rajaram Pund v. Samarth Builders & Developers

The case related to one Babanrao (the Appellant), who was the owner of a property situated in Aurangabad. The Appellant intended to build residential and commercial complexes on this property. Samarth Builders & Developers (Respondent No. 1), a company specialising in the building of homes and commercial buildings, learned of the Appellant’s intention to build such a residential and commercial complex and approached him. A “Development Agreement” (DA) was subsequently signed by the Appellant and Respondent No.1. The Appellant, thereafter, signed a General Power of Attorney (GPA) in favour of Respondent No. 1.  Respondent No. 2, in the civil appeal was the partner of Respondent No. 1.

According to the DA, Respondent No.1 had to build “Amay Apartments” on the property within 15 months. However, this deadline could have been extended with the payment of a penalty. Respondent No. 1 accepted the conditions of the DA and stated that he would build 45 percent of the constructed space before or on the deadline of the 15-month period, retaining the other 55 percent of the developed section for himself.

Respondent No.1 was, however, unable to finish the work within the allotted time. Aggrieved by this act, the Appellant gave notice to terminate the DA and to cancel the GPA. On 11.07.2016 the cancellation of the agreement and GPA were also publicised in a newspaper by the Appellant. Since, Respondent No.1 did not respond to the notice of the Appellant issued under Clause 18 of the DA, which carried an arbitration clause, the Appellant was constrained to approach the High Court.

Clause 18 of the DA reads as follows:

“18. All the disputes or differences arising between the parties hereto as to the interpretation of this Agreement or any covenants or conditions thereof or as to the rights, duties, or liabilities of any part hereunder or as to any act, matter, or thing arising out of or relating to or under this Agreement (even though the Agreement may have been terminated), the same shall be referred to arbitration by a sole arbitrator mutually appointed, failing which, two arbitrators, one to be appointed by each party to the dispute or difference, and these two Arbitrators will appoint a third Arbitrator and the Arbitration shall be governed by the Arbitration and Conciliation Act, 1996 or any re-enactment thereof.”

The Arbitration Clause

Before the Hon’ble High Court of Bombay, the Appellant had filed an application pursuant to Section 11 of the Arbitration Act, 1996, after receiving no response from the Respondents. The Respondents claimed that clause 18 of the DA could not be enforced because it lacked the precise phrase “to be bound by the decision of the Arbitral Tribunal.” The Hon’ble High Court ruled in favour of the Respondents and determined that the clause lacked necessary components of a legitimate arbitration agreement and did not expressly specify that the arbitrator’s ruling would be binding. Aggrieved by the order of the High Court, a Special Leave Petition was filed by the Appellant before the Hon’ble Supreme Court.

The Issue Before the Hon’ble Supreme Court

If an arbitration clause lacks specific language like “binding” or “final,” should it still be considered a valid agreement for the purpose of invoking powers under Sec. 11 of the Arbitration and Conciliation Act, 1996?

While analysing the issue, the Hon’ble Supreme Court made it clear that there is no precise form of an arbitration clause, and that Section 7 of the Arbitration Act of 1996 does not provide a specific form of arbitration agreement. The Hon’ble Supreme Court critically analysed Clause 18 of the DA and concluded that the terms of the agreement were clear. It made it clear that the term “disputes shall be” referred to arbitration, meant that the reference to arbitration was clear in the DA. Additionally, it was also observed that the contract contained clear instructions for choosing a third arbitrator and that the parties would be subject to the Arbitration and Conciliation Act, 1996. The Hon’ble Supreme Court further opined that the requirement and purpose of the parties to be bound by the arbitral tribunal are mandated by Clause 18 of the DA. The arbitral clause was held to be not invalidated by the omission of the phrases “final” and “binding.” The decision of the Hon’ble High Court of Judicature of Bombay was thus set aside by the Hon’ble Supreme Court and a sole arbitrator was appointed to resolve the dispute.

Key Takeaway

Though, the decision by the Hon’ble Supreme Court gives considerable breathing room for an arbitration clause, it is imperative to consider that an insufficiently written arbitration clause does hinder the process of arbitration. The only solution in such a scenario is to fix the deficiency in the arbitral clause. The parties must ensure that the arbitration agreement is well drafted so that there are no errors and the intention of the parties to refer the dispute to arbitration can be easily inferred. This will also ensure that the parties will not be forced to approach the courts to determine the validity of the clause.

References: 

[1] 2022 SCC OnLine SC 1165.

The only solution in such a scenario is to fix the deficiency in the arbitral clause. The parties must ensure that the arbitration agreement is well drafted so that there are no errors and the intention of the parties to refer the dispute to arbitration can be easily inferred. 

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Public Interest Litigation: A Knight in Shining Armour

The Preamble of our Indian constitution envisages ‘Justice for all’, amongst other tenets. Indian judiciary in the recent past has traversed an unbeaten road. From being the guardian of the interests of an individual, to enabling the recognition of public interest as mode of entrusting locus standi on an individual for securing fundamental rights entrenched in the constitution, the seventy-two odd glorifying years of the judiciary are marked by many momentous instances.

“Public interest” denotes the interest of the people of the land. These interests can be allied in varied directions. All in all, one that integrates itself with the obligations and rights laid out in the grundnorm, represents the public interest. With changing times, fluidity in the interpretation of the term “public interest” has also been under continuous deliberation and interpretation. Since an issue of public interest, denotes a collective representation of opinions, concerns and beliefs; one citizen or person, belonging to the aggrieved class, should not be made a sole party to the dispute. A blow to the public interest hits each and every class of citizens.[1] Therefore, representation by one, as a sentry for the protection of the public interest, denotes a new form of litigation, conceptualised as “public interest litigation”.[2]

 

Public Interest Litigation: Origin and Constitutional Aspects 

A result of outstanding debt, Public interest litigation was envisaged under the Constitution with a vision of bringing the people of India at parity with each other.[3] The marginalised sections of society have always dithered before striking the portals of the court for the establishment of their rights and obligations.[4] In such a scenario, the conventional rules of locus standi were appropriately bent by the Indian Courts to pursue the cause of justice for all and sundry.[5] Justice is not only essential for pursuing the entrenched precepts of the Indian Constitution, but also for harmonization and integration of the streams of human rights, which have latterly enveloped the course of rights-based litigation in India.[6] Therefore, an increase in the panoply of human rights, provides yet another rationale for the growth of public interest litigation in India. The executives and the legislature have been endowed with a quintessential role in the Indian Constitution. Article 12 of the Indian Constitution requires them not to pass laws that impede the attainment of fundamental rights. Recourse to the judiciary in achieving the mandates of the constitution and upholding the status of fundamental rights is in itself qualified as a fundamental right. Such being the case, the Indian judiciary introduced the concept of public interest litigation to provide an answer to the conundrum facing the ailing state functionaries.

With a spurt in these lawsuits, Indian courts have cautiously attempted to lay out guidelines for how such litigation can be pursued. Not every lis draws public interest. As a result, under the guise of public interest, lis fails to provide a suitable remedy to the needy. The Supreme Court under Article 32 of the Constitution and the High Court under Article 226 of the Constitution have held that they have the power to entertain public interest litigation.[7] So much so that Courts under Articles 32 and 226 have, in furtherance of the public interest, treated a private interest case as a public interest case.[8] Both Article 32 and Article 226, vouch for an inquiry into locus standi.[9] This conventional rule of standing has been diluted to give way to class actions.[10] In public interest litigation, unlike a traditional dispute resolution mechanism, there is no determination of individual rights.[11] The compulsion for the judicial innovation of the technique of public interest litigation arises out of the constitutional promise of a social and economic transformation to usher in a welfare state.[12] 

 

Judicial Interpretation of Public Interest Litigation

Article 32 of the Constitution represents the heart and soul of this foundational document. The Indian Supreme Court has made a concerted effort to improve judicial access for the masses by relaxing the traditional rule of locus standi.[14], and it has allowed human rights organizations to intervene on behalf of victims, where it has determined that questions of broader public interest necessitate such intervention.[15] In Prem Shankar Shukla v. Delhi Administration,[16] a prisoner sent a telegram to a judge complaining of forced handcuff on him and demanded implicit protection against humiliation and torture. The court gave necessary directions by relaxing the strict rule of locus standi. 

In Municipal Council, Ratlam v. Vardhichand & Others,[17] Krishna Iyer, J. while relaxing the rule of locus standi, the Apex Court held that “ The truth is that a few profound issues of processual jurisprudence of great strategic significance to our legal system face us and we must zero-in on them as they involve problems of access to justice for the people beyond the blinkered rules of ‘standing’ of British Indian vintage. If the center of gravity of justice is to shift, as the Preamble to the Constitution mandates, from the traditional individualism of locus standi to the community orientation of public interest litigation, these issues must be considered… Why drive common people to public interest action? Where Directive Principles have found statutory expression in Do’s and Don’ts the court will not sit idly by and allow municipal government to become a statutory mockery. The law will be relentlessly enforced and the plea of poor finance will be poor alibi when people in misery cry for justice.” Justice Bhagwati of the Supreme Court in his judgment in S.P. Gupta v. President of India & Others,[18] altogether dismissed the traditional rule of standing and in its place, the Court prescribed the modern rule on standing while holding that “where a legal wrong or a legal injury is caused to a person or to a determinate class of persons by reason of violation of any constitutional or legal right or any burden is imposed in contravention of any constitutional or legal provision or without authority of law or any such legal wrong or legal injury or illegal burden is threatened and such person or determinate class of persons is by reason of poverty, helplessness or disability or socially or economically disadvantaged position, unable to approach the Court for relief, any member of the public can maintain an application for an appropriate direction, order or writ, in the High Court under Article 226, and in case of breach of any fundamental right, in this Court under Article 32.”

Indian Courts have become so inclined towards accepting litigation involving public interest that they have maintained relaxed procedural norms to entertain writs for continuing such litigations.[19] In Sheela Barse v. State of Maharashtra,[20] Sheela Barse, a journalist, complained of custodial violence against women prisoners in Bombay. Her letter was treated as a writ petition and the directions were given by the court. In Dr. Upendra Baxi (I) v. State of Uttar Pradesh & Another,[21] two distinguished law Professors of the Delhi University addressed a letter to this court regarding inhuman conditions that were prevalent in the Agra Protective Home for Women. The court heard the petition for a number of days and gave important directions by which the living conditions of the inmates were significantly improved in the Agra Protective Home for Women. 

In Labourers Working on Salal Hydro Project v. State of Jammu & Kashmir & Others,[22] on the basis of a news item in the Indian Express regarding the condition of the construction workers, the Court took notice and observed that construction work is hazardous employment and no child below the age of 14 years shall be employed in such work by reason of the prohibition enacted in Article 24. It also held that this constitutional prohibition must be enforced by the Central Government. In Paramjit Kaur (Mrs.) v. State of Punjab & Others,[23] a telegram was sent to a Judge of the Apex Court which was treated as a habeas corpus petition. The allegation was that the husband of the appellant was kidnapped by some people in police uniform from a busy residential area of Amritsar. The Court took serious note of it and directed that the investigation of the case be handled by the Central Bureau of Investigation.

 

Public Interest Litigations sans the Public Interest 

Though, the Indian Courts have entertained public interest litigation in the recent past, in a plethora of cases they have also shut the portals of the Courts to those who have come with unclean hands to avenge themselves in the guise of public interest litigation. In BALCO Employees’ Union (Regd.) v. Union of India & Others[24], the Court recognized that there have been, in recent times, increasing instances of abuse of public interest litigation. Accordingly, the Court has devised a number of strategies to ensure that the attractive brand name of public interest litigation is not used for suspicious products of mischief. 

Firstly, the Supreme Court has limited standing in public interest litigation to individuals “acting bonafide”. Secondly, it has sanctioned the imposition of “exemplary costs” as a deterrent against frivolous and vexatious public interest litigations. Thirdly, instructions have been issued to the High Courts to be more selective in entertaining public interest litigations. 

In S.P. Gupta v. President of India & Others,[25] the Court has found that this liberal standard makes it critical to limit standing to individuals “acting bona fide”. To avoid entertaining frivolous and vexatious petitions under the guise of public interest litigation, the Court has excluded two groups of persons from obtaining standing in public interest litigation petitions. First, the Supreme Court has rejected awarding standing to “meddlesome interlopers.” Second, it has denied standing to interveners bringing public interest litigation for personal gain. Further, the court cautioned that important jurisdiction of public interest litigation may be confined to legal wrongs and legal injuries for a group of people or a class of persons. It should not be used for individual wrongs because individuals can always seek redressal from legal aid organizations. This is a matter of prudence and not a rule of law. 

In Chhetriya Pardushan Mukti Sangharsh Samiti v. State of U.P & Others[26], the Court withheld standing from the applicant on grounds that the applicant brought the suit motivated by enmity between the parties. The Court again, in this case, emphasized that Article 32 is a great and salutary safeguard for the preservation of the fundamental rights of the citizens. The superior Courts have to ensure that this weapon under Article 32 should not be misused or abused by any individual or organization.  In Neetu v. State of Punjab & Others[27], the Court concluded that it is necessary to impose exemplary costs to ensure that the message goes in the right direction and that petitions filed with an oblique motive do not have the approval of the Courts. In S.P. Anand v. H.D. Deve Gowda & Others[28], the Court warned that it is of the utmost importance that those who invoke the jurisdiction of this Court seeking a waiver of the locus standi rule must exercise restraint in moving the Court by not plunging into areas wherein they are not well-versed. 

In Sanjeev Bhatnagar v. Union of India & Others[29], this Court went a step further by imposing a monetary penalty of Rs10,000/- against an Advocate for filing a frivolous and vexatious petition. The Court found that the petition was devoid of public interest, and instead labelled it as “publicity interest litigation”.. In Dattaraj Nathuji Thaware v. State of Maharashtra & Others[30], the Supreme Court affirmed the High Court’s monetary penalty against a member of the Bar for filing a public interest litigation petition on the same grounds. The Court found that the petition was nothing but a camouflage to foster personal dispute. Observing that no one should be permitted to bring disgrace to the noble profession, the Court concluded that the imposition of the penalty of Rs. 25,000 by the High Court was appropriate. Evidently, the Supreme Court has set a clear precedent validating the imposition of monetary penalties against frivolous and vexatious public interest petitions, especially when filed by Advocates. The Court expressed its anguish on misuse of the forum of the Court under the garb of public interest litigation and observed that public interest litigation is a weapon which has to be used with great care and circumspection and the judiciary has to be extremely alert in ascertaining the true intentions behind the beautiful veil of social justice.  

The Court must not allow its process to be abused for oblique considerations. In Charan Lal Sahu & Others v. Giani Zail Singh & Another[31], the Supreme Court observed that “we would have been justified in passing a heavy order of costs against the two petitioners” for filing “a light-hearted and indifferent” public interest litigation petition. However, to prevent “nipping in the bud a well-founded claim on a future occasion” the Court opted against imposing monetary costs on the petitioners. In this case, this Court concluded that the petition was careless, meaningless, clumsy and against the public interest. Therefore, the Court ordered the Registry to initiate prosecution proceedings against the petitioner under the Contempt of Courts Act. Additionally, the court forbade the Registry from entertaining any future public interest litigation petitions filed by the petitioner, who was an Advocate in this case.

In J. Jayalalitha v. Government of Tamil Nadu & Others[32], the Court laid down that public interest litigation can be filed by any person challenging the misuse or improper use of any public property including the political party in power for the reason that interest of individuals cannot be placed above or preferred to a larger public interest. In Holicow Pictures Pvt. Ltd. v. Prem Chandra Mishra & Others[33], the Court observed that “It is depressing to note that on account of such trumpery proceedings initiated before the Courts, innumerable days are wasted, the time which otherwise could have been spent for disposal of cases of the genuine litigants. Though we spare no efforts in fostering and developing the laudable concept of public interest litigation and extending our long arm of sympathy to the poor, the ignorant, the oppressed and the needy, whose fundamental rights are  infringed and violated and whose grievances go unnoticed, un-represented and unheard; yet we cannot avoid but express our opinion that while genuine litigants with legitimate grievances relating to civil matters involving properties worth hundreds of millions of rupees and criminal cases in which persons sentenced to death facing gallows under untold agony and persons sentenced to life imprisonment and kept in incarceration for long years, persons suffering from undue delay in service matters -government or private, persons awaiting the disposal of cases wherein huge amounts of public revenue or unauthorized collection of tax amounts are locked up, detenu expecting their release from the detention orders etc. etc. are all standing in a long serpentine queue for years with the fond hope of getting into the Courts and having their grievances redressed, the busybodies, meddlesome interlopers, wayfarers or officious interveners having absolutely no public interest except for personal gain or private profit either of themselves or as a proxy of others or for any other extraneous motivation or for glare of publicity break the queue muffing their faces by wearing the mask of public interest litigation and get into the Courts by filing vexatious and frivolous petitions and thus criminally waste the valuable time of the Courts and as a result of which the queue standing outside the doors of the Courts never moves, which piquant situation creates frustration in the minds of the genuine litigants and resultantly they lose faith in the administration of our judicial system.”

The Court has to be satisfied with:

(a) the credentials of the applicant;

(b) the prima facie correctness or nature of the information given by him;

(c) the information being not vague and indefinite.

The information should show the gravity and seriousness involved. Court has to strike balance between two conflicting interests;

(i) nobody should be allowed to indulge in wild and reckless allegations besmirching the character of others; and

(ii) avoidance of public mischief and avoid mischievous petitions seeking to assail, for oblique motives, justifiable executive actions.

The Courts also have to practice great caution in ensuring that while redressing a public grievance, it does not encroach upon the sphere reserved by the Constitution to the Executive and the Legislature, while maintaining a balance while dealing with imposters and busybodies or meddlesome interlopers impersonating as public-spirited holy men. In Janata Dal v. H.S. Chowdhary & Others[34], the court rightly cautioned that the expanded role of courts in the modern `social’ state demands greater judicial responsibility. In Guruvayur Devaswom Managing Committee & Another v. C.K. Rajan & Others [35], it was reiterated that the Court must ensure that its process is not abused. Therefore, the Court would be justified in insisting on furnishing of security before granting an injunction in appropriate cases. The Courts may impose heavy costs to ensure that the judicial process is not misused.

The bandwagon of public interest litigation has attained new heights in the recent past. With all the parameters drawn by Courts to adjudge what constitutes litigation related to the public interest, still, with blindfolded certainty; it cannot be said that a strait jacketed formula would serve as a panacea for all vexatious litigants to sieve through. With the Courts, always loaded with backlogs, the utopian dream of ‘justice for all” and in the “interest of all,” might straddle.

References: 

[1] (Traditionally used to the adversary system, we search for individual persons aggrieved. But a new class of litigation public interest litigation- where a section or whole of the community is involved (such as consumers’ organisations or NAACP-National Association for Advancement of Coloured People-in America), emerges in a developing country like ours, this pattern of public oriented litigation better fulfils the rule of law if it is to run close to the rule of life…The possible apprehension that widening legal standing with a public connotation may unloose a flood of litigation which may overwhelm the judges is misplaced because public resort to court to suppress public mischief is a tribute to the justice system.) Bar Council of Maharashtra v. M. V. Dabholkar & Others, 1976 SCR 306.

[2] (Our current processual jurisprudence is not of individualistic Anglo-Indian mould. It is broad-based and people-oriented, and envisions access to justice through `class actions’, `public interest litigation’, and `representative proceedings’. Indeed, little Indians in large numbers seeking remedies in courts through collective proceedings, instead of being driven to an expensive plurality of litigations, is an affirmation of participative justice in our democracy. We have no hesitation in holding that the narrow concepts of `cause of action’, `person aggrieved’ and individual litigation are becoming obsolescent in some jurisdictions.) Akhil Bharatiya Soshit Karamchari Sangh (Railway) v. Union of India & Others, AIR 1981 SC 298.

[3] (Public Interest Law is the name that has recently been given to efforts to provide legal representation to previously unrepresented groups and interests. Such efforts have been undertaken in the recognition that ordinary market place for legal services fails to provide such services to significant segments of the population and to significant interests. Such groups and interests
 include the proper environmentalists, consumers, racial and ethnic minorities and others.) M/s Holicow Pictures Pvt. Ltd. v. Prem Chandra Mishra & Ors., AIR 2008 SC 913.

[4] (Public interest litigation is a cooperative or collaborative effort by the petitioner, the State of public authority and the judiciary to secure observance of constitutional or basic human rights, benefits and privileges upon poor, downtrodden and vulnerable sections of the society.) People’s Union for Democratic Rights & Others v. Union of India & Others, (1982) 3 SCC 235. 

[5] (Public interest litigation is part of the process of participative justice and `standing’ in civil litigation of that pattern must have liberal reception at the judicial doorsteps.) Fertilizer Corporation Kamagar Union Regd., Sindri & Others v. Union of India & Others, AIR 1981 SC 844.

[6] (Public interest litigation is for making basic human rights meaningful to the deprived and vulnerable sections of the community and to assure them social, economic and political justice.) Ramsharan Autyanuprasi & Another v. Union of India & Others, AIR 1989 SC 549.

[7] (The Court has all incidental and ancillary powers including the power to forge new remedies and fashion new strategies designed to enforce the fundamental rights.) M. C. Mehta & Another v. Union of India & Others, AIR 1987 SC 1086.

[8] Indian Banks Association v. Devkala Consultancy Service, AIR 2004 SC 2815.

[9] (Any person claiming of infraction of any fundamental right guaranteed by the Constitution is at a liberty to move to the Supreme Court, but the rights that could be invoked under Article 32 must ordinarily be the rights of the person who complains of the infraction of such rights and approaches the Court for relief.) Narinderjit Singh Sahni v. Union of India, AIR 2001 SC 3810; see also Ruqmani v. Achuthan, AIR 1991 SC 983; see also Delhi Administration v. Madan Lal Nangia, AIR 2003 SC 4672.

[10] (The law as to locus standi has been diluted by the advent of the doctrine of public interest litigation.) Bangalore Medical Trust v. Muddappa, AIR 1991 SC 1902.

[11] (The traditional rule is flexible enough to take in those cases where the applicant has been prejudicially affected by an act or omission of an authority, even though he has no proprietary or even a fiduciary interest in the subject-matter. That apart, in exceptional cases even a stranger or a person who was not a party to the proceedings before the authority, but has a substantial and genuine interest in the subject-matter of the proceedings will be covered by this rule.) Jasbhai Motibhai Desai v. Roshan Kumar, Haji Bashir Ahmed & Others, (1976) 1 SCC 671.

[12] (The old doctrine of only relegating the aggrieved to the remedies available in civil law limits the role of the courts too much as protector and guarantor of the indefeasible rights of the citizens. The courts have the obligation to satisfy the social aspirations of the citizens because the courts and the law are for the people and expected to respond to their aspirations.) Smt. Nilabati Behera alias Lalita Behera v. State of Orissa & Others, AIR 1993 SC 1960.

[13] (Today, unfortunately, in our country the poor are priced out of the judicial system with the result that they are losing faith in the capacity of our legal system to (sic) about changes in their life conditions and to deliver justice to them. The poor in their contact with the legal system have always been on the wrong side of the line. They have always come across ‘law for the poor & rather than law of the poor’. The law is regarded by them as something mysterious and forbidding–always taking something away from them and not as a positive and constructive social device for changing the social economic order and improving their life conditions by conferring rights and benefits on them. The result is that the legal system has lost its credibility for the weaker section of the community.) Hussainara Khatoon & Others v. Home Secretary, State of Bihar, Patna AIR 1979 SC 1369.

[14] The Mumbai Kamgar Sabha, Bombay v. Abdulbhai Faizullabhai Others, AIR 1976 SC 1455.

[15] Sunil Batra v. Delhi Administration & Others, AIR 1978 SC 1675.

[16] AIR 1980 SC 1535.

[17] AIR 1980 SC 1622.

[18] AIR 1982 SC 149.

[19] (public interest litigation should be encouraged when the Courts are apprised of gross violation of fundamental rights by a group or a class action or when basic human rights are invaded or when there are complaints of such acts as shock the judicial conscience that the courts, especially this Court, should leave aside procedural shackles and hear such petitions and extend its jurisdiction under all available provisions for remedying the hardships and miseries of the needy, the underdog and the neglected.)Shri Sachidanand Pandey & Another v. The State of West Bengal & Others, (1987) 2 SCC 295.

[20] AIR 1983 SC 378.

[21]  1983 (2) SCC 308.

[22] AIR 1984 SC 177.

[23]  (1996) 7 SCC 20.

[24] AIR 2002 SC 350.

[25] AIR 1982 SC 149.

[26] AIR 1990 SC 2060.

[27] AIR 2007 SC 758.

[28] AIR 1997 SC 272.

[29] AIR 2005 SC 2841.

[30] (2005) 1 SCC 590.

[31] AIR 1984 SC 309.

[32]  (1999) 1 SCC 53.

[33] AIR 2008 SC 913.

[34] (1992) 4 SCC 305.

[35] (2003) 7 SCC 546.

 

Image Credits: Image by Sasin Tipchai from Pixabay 

The bandwagon of public interest litigation has attained new heights in the recent past. With all the parameters drawn by Courts to adjudge what constitutes litigation related to the public interest, still, with blindfolded certainty; it cannot be said that a strait jacketed formula would serve as a panacea for all vexatious litigants to sieve through.

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Legal Implications of Offering Gifts to Public Servants

Offering gifts to Public Servants is an act which might call for interference with the provisions of the Prevention of Corruption Act, 1988 (“Act”). Many companies grapple with whether they should be offer gifts to Public Servants as a gesture of celebration during festivals. It is pertinent to note that the concern involved might be looked at from different perspectives. The leitmotif of this piece is to only provide a picture from the standpoint of the Act.

The Act was enacted to eradicate corruption. Section 2 (c) of the Act provides for an elaborate definition of the term “Public Servant”. The definition of the term “Public Servant” has time and again been under wide judicial interpretation. Interestingly, the Act does not define the term bribe, gift or gratification. Instead, the it uses the terminology ‘undue advantage’. The term ‘undue advantage’ is defined under section 2(d) which means “any gratification whatever, other than legal remuneration”. The term “gratification” is not limited to pecuniary gratifications or to gratifications estimable in money. The expression “legal remuneration” is not restricted to remuneration paid to a public servant but includes all remuneration that the public servant is permitted by the Government or the organisation, which he serves, to receive. Therefore, any gift to a Public Servant can qualify as an undue advantage given to him.

Section 7 of the Act provides for punishment to a Public Servant for accepting bribe. The Section provides that obtaining or accepting or attempting to obtain “undue advantage” from any person as a reward or with an intention to perform or cause performance of a public duty improperly or dishonestly or to forbear the performance of any such duty would amount to a punishable offence. It further provides that if a public servant abets any other public servant to perform the aforesaid acts, the said public servant would be liable under the provisions of Section 7. The explanation to Section 7 provides that the act of obtaining or accepting or attempting to obtain any “undue advantage” shall by itself constitute an offence, even if the performance of the public duty by the public servant is not or has not been improper. Thus, the explanation makes it clear that, whether the public servant has discharged the duty improperly or not, he can be prosecuted, if he has obtained or attempted to obtain any undue advantage for the discharge of his official duty.

The Act further provides for the punishment of any person who commits the offence of bribing a public servant. Section 8 of the Act states that any person who gives or promises to give an undue advantage to other person/persons with an intention to induce a public servant to perform improperly, a public duty or to reward such public servant for such improper performance shall be punished with imprisonment or with fine or with both. Further, Section 9 of the Act deals with an offence relating to bribing a public servant by a commercial organization. Under the Section, a commercial organization not only includes a company or partnership incorporated in India and carrying on business in India or outside India, but also a body or partnership incorporated or formed outside India but carrying on business in India. Moreover, Section 9 makes the commercial organization guilty and punishable with a fine if any person(s) associated with them gives/promises to give any undue advantage with the intent to:

  • Obtain/retain any business, or
  • Obtain/retain an advantage in the conduct of business for such a commercial organization.

It is pertinent to note that, under Section 9, it shall be a defence for the commercial organization to prove that it had in place adequate procedures for the compliance of such guidelines as may be prescribed to prevent persons associated with it from undertaking such conduct.

Section 10 of the Act provides that a person in charge of a commercial organization who has committed an offence under section 9 of the Act shall be guilty of the offence and shall be liable to be proceeded against. That is to say that when an offence under Section 9 of the Act is committed by a commercial organization and such offence is proved in the Court to have been committed with the connivance of any director, manager, secretary or another officer of the commercial organization; such director, manager, secretary or another officer shall be guilty of the offence and shall be liable to be proceeded against and shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to a fine.

Having understood the conspectus of sections, it is pertinent to note that gifts given to a public servant might be considered as “undue advantage” under Section 2 (d) of the Act. The term “undue advantage” has been defined in a broad manner under the Act to mean any gratification, other than the entitled legal remuneration. Therefore, gifts which do not form part of the legal remuneration of a Public Servant could be held as an “undue advantage”. In such a case, both the person giving such undue advantage and the Public Servant accepting such undue advantage might be booked under the provisions of the Act. Therefore, in this regard that when it comes to criminal prosecution, both mens rea and actus reus are important to be established. Even if the intention of the person giving such gifts was not to gain any undue benefits from the Public Servant, in deviation of his duty, that would have to be established before a Court of law. Lack of intention would not stop the State authorities to initiate an action under the provisions Act.

Therefore, both people giving gifts to Public Servants and Public Servants accepting gifts are to be cautious of its legal implications.

Image Credits: Photo by Shameer Pk from Pixabay 

The term “undue advantage” has been defined in a broad manner under the Act to mean any gratification, other than the entitled legal remuneration. Therefore, gifts which do not form part of the legal remuneration of a Public Servant could be held as an “undue advantage”. In such a case, both the person giving such undue advantage and the Public Servant accepting such undue advantage might be booked under the provisions of the Act. Therefore, in this regard that when it comes to criminal prosecution, both mens rea and actus reus are important to be established.

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Starting a Print Newspaper in India: A Guide

The primary statute that governs and regulates the publication of books, newspapers and magazines is the Press and Registration of Books Act, 1867. In addition, the Newspaper (price and Page) Act, 1956 regulates, governs and endeavors to prevent unfair competition among newspapers so that newspapers generally and in particular, newspapers with smaller resources and those published in Indian languages, may have fuller opportunities of freedom of expression.

The term “newspaper” is defined in the Newspaper (Price and Page) Act, 1956[1] as any published periodical work containing public news or remarks on public news appearing at intervals of not greater than a week. The main function of the Ministry of Information and Broadcasting is to control the office of the Registrar of Newspapers for India (“RNI”) and frame the rules under the Press and Registration of Books Act, 1867. Therefore, anybody who is inclined to start a newspaper, magazine or journals, will have to seek prior approval from RNI. Headquartered in New Delhi, the regional branches of RNI are in Mumbai, Kolkata and Chennai.

The RNI is entrusted with assembling and maintaining a Register of Newspapers; issuing Certificates of Registration to the newspapers (“RNI Registration”); Verifying claims; and various non-statutory functions and rules.

 

RNI Registration

 

 

                                                                    Photo: Who requires RNI Registration [2]

 

Steps to Obtain an RNI Registration 

 

Title Verification