The Ins and Outs: Mines and Minerals Development and Regulation

India is well endowed with natural resources, particularly minerals, which serve as raw materials for many industries, paving the way for rapid industrialisation and infrastructural development. This, in turn, is set to facilitate the economy’s ascent along the road of sustained growth and a five trillion-dollar economy. In order to realise the mineral wealth of the country, extensive amendments have been made to the Mines and Minerals (Development and Amendment) Act, 1957 (‘MMDR Act’) by the MMDR Amendment Act, 2021 and the corresponding Rules with the objectives of generating employment and investment in the mining sector, increasing revenue to the States, improving the production and time-bound operationalisation of mines, etc. 

Further, to facilitate State Governments in identifying more blocks for auction and increase the availability of minerals across the country, the Ministry of Mines had introduced a series of amendments to ramp up the auction of mineral blocks for composite licencing.  To this effect, recently, the Government notified the Mineral (Auction) Amendment Rules, 2022 that allowed global positioning system for the identification and demarcation of the area where a composite licence is proposed to be granted. The Union Cabinet had also approved the amendment to the Second Schedule of the MMDR Act in March, 2022 to specify the royalty rates of certain minerals, including potash, emerald and platinum group of metals to ensure better participation in the auction of Mines.

This Article studies the series of amendments made to the MMDR Act and related Rules while analysing their impact on the developmental activities of the sector.

Analysis of the Amendments

 

Removal of the Distinction Between Captive and Non-captive Mines

Earlier, the Act empowered the central government to reserve any mine (other than coal, lignite, and atomic minerals) as a captive mine which would be used for a specific purpose only. The present Amendment removes this distinction between captive and non-captive mines. Now, the mines will not be limited to just a specific purpose/industry/sector. Thus, no mine will be reserved for a particular end-use. All future auctions will be without any end-use restrictions. The amendment would “facilitate an increase in production and supply of minerals, ensure economies of scale in mineral production, stabilise prices of ore in the market and bring additional revenue to the States…”

 

Sale of Minerals by Captive Mines

Earlier, as per the Act, the ores extracted from captive mines were only used by captive industries. The present Amendment provides that captive mines (other than atomic minerals) may sell up to 50% of their annual mineral production in the open market after meeting their own needs. The central government may increase this threshold through a notification. The lessee will have to pay additional charges for minerals sold in the open market. The sale of minerals by captive plants will aid and expedite growth in mineral production and supply, leading to commercial viability in mineral production and, as a result, additional revenue for the states. 

Transfer of Statutory Clearances

Earlier, the Act provided that upon expiry of a mining lease (other than coal, lignite, and atomic minerals), mines are leased to new parties through auction. The statutory clearances issued to the previous lessee are transferred to the new lessee for a period of two years. The new lessee is required to obtain fresh clearances within two years. The present Amendment replaces this provision and instead provides that transferred statutory clearances will be valid throughout the lease period of the new lessee. This amendment ensures continuity of mining operations, even with the change of the lessee and helps to avoid the repetitive process of obtaining clearances again for the same mine, which would facilitate the early commencement of the mining operations. 

 

Auction by the Central Government in Certain Cases

Under the Act, states conduct the auction of mineral concessions (other than coal, lignite, and atomic minerals). Mineral concessions include mining leases and prospecting license-cum-mining leases. The present Amendment empowers the central government to specify a time period for completion of the auction process in consultation with the state government. If the state government is unable to complete the auction process within this period, the auctions may be conducted by the central government. This amendment ensures that no mine is left idle and increases mining in the country.

 

Allocation of Mines with Expired Leases

The Amendment adds that mines (other than coal, lignite, and atomic minerals) whose lease has expired may be allocated to a government company in certain cases. This will be applicable if the auction process for granting a new lease has not been completed, or the new lease has been terminated within a year of the auction. The state government may grant a lease for such a mine to a government company for a period of up to 10 years or until the selection of a new lessee, whichever is earlier. This Amendment increases revenue for the states.

 

Lapse and Extension of Mining Lease

The erstwhile Act provided that where the mining operation is not commenced by the lessee within 2 years of the grant of a lease or the mining operation has been discontinued for two years, the mining lease shall be deemed to have expired for such period. The new amendment substituted the earlier provisions of Section 4A with a new provision stating that the mining lease will not lapse at the end of the said period if a concession is granted by the State Government upon an application by the lessee. It also provides for the extension of the mining lease by declaring that the State Government can extend the threshold period of lapse of the lease only once and up to one year. This ensures continuity in mining operations.

 

Removal of Non-Exclusive License Regime

In the earlier act, companies had a non-exclusive licence for the reconnaissance of the area to find out mineral potential. The amendment removes the non-exclusive licence permit.

 

Simplification of Exploration Regime

As per the new amendment:

  • Mineral Blocks for Composite Licences can be auctioned at the G4 level of exploration instead of the G3 level as per the earlier standard.
  • Mineral Blocks for surficial minerals can be auctioned for the grant of a mining lease at G3 level instead of G2 level.
  • Private entities may be notified under Section 4(1) of the Act to conduct exploration.

 

Transfer of Mineral Concessions

Restrictions on the transfer of mineral concessions have been removed and now mineral concessions can be transferred without any transfer charge.

 

District Mineral Foundation (DMF)

It is a non-profit body established to work for the interest and benefit of people and areas affected by mining or mining-related operations. State governments were tasked with establishing DMFs in each mining district of their respective states, as well as prescribing the composition and operation of DMFs, including the use of funds. The new Amendment Act, 2021, empowers the Central Government to direct the composition and utilisation of the funds from the District Mineral Foundation. This ensures the optimization of funds for the development of mining areas. 

 

Conclusion 

Present amendments in the Mines and Minerals (Development and Amendment) Act, 1957 (‘MMDR Act’) and the corresponding Rules do nullify several restrictive and covert provisions that existed in the erstwhile Act of 1957. The new regime will be instrumental in increasing mineral production, improving the ease of doing business in the country, and increasing mineral production’s contribution to GDP.

The amendments have also successfully capacitated the State governments to notify 40 mineral blocks of G4 level of exploration for grant of composite license, out of which 6 mineral blocks have been successfully auctioned, as of April 2022.  [1]

However, like any other public policy and legislation, implementation of the Act and Rules with proper coordination among central and state governments is the key to achieving reforms in the mining sector and sustainable development. 

References: 

[1] https://pib.gov.in/PressReleasePage.aspx?PRID=1814233#:~:text=The%20Mineral%20(Auction)%20Amendment%20Rules%2C%202022%20were%20notified%20on,to%20be%20granted%20through%20auction.

 

Image Credits: Image by Анатолий Стафичук from Pixabay

Present amendments in the Mines and Minerals (Development and Amendment) Act, 1957 and the corresponding Rules do nullify several restrictive and covert provisions that existed in the erstwhile Act of 1957. The new regime shall be instrumental in boosting mineral production, improving the ease of doing business in the country and increasing contribution of mineral production to Gross Domestic Product (GDP).

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Voluntary Liquidation Process Under IBC: An Update

The Insolvency and Bankruptcy Code, 2016 read with, the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2020, establish a procedure for the voluntary liquidation of solvent corporate persons.

However, in practice, it can be observed that the majority of voluntary liquidation processes are getting delayed. As per the Discussion Paper released by IBBI, as on December 31st, 2021, 1105 voluntary liquidation processes have been initiated. Of which, the liquidators have submitted final reports to the Adjudicating Authority (AA) in 546 cases only. In other words, more than 50% (i.e., 559 cases) of the voluntary liquidation processes are still ongoing. On closer perusal of the ongoing cases, it is found that 293 cases (around 52%) of them have crossed the one-year time mark. In this background, the Voluntary Liquidation Process (Amendment) Regulations, 2022 have been introduced on April 5th 2022 by the IBBI.

Brief Analysis of the Voluntary Liquidation Process Amendments

The new changes seek to complete the voluntary liquidation process in a quick and efficient manner and ensure that the company does not lose value on its remaining assets since the asset value falls drastically with time. Further, the amendment seeks to clarify the date of the commencement of the liquidation process.  Now, the liquidator shall complete the liquidation process and ensure the submission of final reports within 270 days, 90 days earlier as compared to the statutory time period of 12 months. As per the Discussion Paper released by IBBI, Voluntary Liquidation, being non-adversarial in nature, can be completed in 270 days. Further, the liquidator is directed to distribute the proceeds from realization within 30 days from the receipt of the amount to the stakeholders, as compared to the earlier mandated time period of 6 months.

For the past few years, the government has been promoting several initiatives focusing on “ease of doing business” for corporates. However, it is essential to observe that “ease of doing business” does not only include ensuring a seamless start of a business but also includes a quick and easy structure for the exit.

In this backdrop, in the Union Budget 2022-2023, the Honourable Finance Minister announced that “Now the Centre for Processing Accelerated Corporate Exit (C-PACE) with process re-engineering, will be established to facilitate and speed up the voluntary winding-up of these companies from the currently required 2 years to less than 6 months[1].”

Further, in a Discussion Paper released in February 2022[2], IBBI identified the following problems plaguing the voluntary insolvency process:

  1. It was pointed out that the values of assets fall drastically, and hence a quick and efficient liquidation process is pertinent. However, the Code has failed to stipulate a time limit for such a voluntary liquidation process.
  2. It was also observed that more than 50% of the voluntary liquidation cases had been ongoing as per the data presented to the Board (as of December 31st, 2022). Further, 52% of the ongoing cases had crossed the one-year mark.

The relevant stakeholders also observed that one of the aspects that prolong the voluntary liquidation process is the practise of seeking a ‘No Objection Certificate’ (NOC) or ‘No Dues Certificate’ (NDC) from the Income Tax Department by liquidators during the process, even though the Code and the Voluntary Liquidation Regulations have not mandated the issuance of NOC/NDC. In this regard, the Board issued a Circular in November 2021, clarifying that “an insolvency professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.”[3]

In alignment with the intention of the legislation, the Board has introduced the following amendments to optimize the voluntary insolvency process:

Section 10 (2) (r): Corporate Debtor shall be substituted by Corporate person

The amendment states that the liquidator shall maintain such other registers or books as may be necessary to account for transactions entered by the corporate debtor with the corporate person. This ensures holistic coverage of all financial transactions of the corporate debtor for the purpose of liquidation.

Section 30 (2): timeline for preparation of the list of stakeholders in case where no claims are received is reduced

 

Section 30 (2) requires the liquidator to compile a list of stakeholders within 45 days from the last date for receipt of claims. The amendment inserts the following provision; “Provided that where no claim from creditors has been received till the last date for receipt of claims, the liquidator shall prepare the list of stakeholders within fifteen days from the last date for receipt of claims.”

Previously, no differentiation between the timelines was prescribed in cases where there were no claims from creditors. This timeline was introduced because if no such claims were received till the last date, then it must not take much time for the preparation of a list of stakeholders as the list of shareholders/partners is available with the liquidator at the time of commencement.

Section 35: Timeline for distribution of the proceeds from realization reduced

The amendment reduces the period for distribution of proceeds from realisation to the relevant stakeholders to a period of thirty days from the receipt of the amount, from the earlier mandated six months.

The reason for the reduction of this timeline is that the liquidator remains in close contact with the corporate person and hence should be able to distribute the proceeds quickly.

Further, in cases where there are creditors, since the resolution regarding the commencement of the process is approved by the creditors representing two-thirds of the value of the debt of the corporate person, distribution to the creditors should also take much less time than is currently stipulated.

Section 5(2): Timeline for intimation of appointment as liquidator to the Board enhanced.

5(2) provides that an insolvency professional shall notify the Board about his appointment as liquidator within 3 days of such appointment.  As per the amendment, the regulation has changed the timeline for the intimation from 3 days to 7 days.

Section 37: Timeline to complete the liquidation process reduced.  

The amended provides that if the creditors approve the resolution, the liquidator shall complete the liquidation process and submit the final report to the registrar, board, and adjudicating authority within 270 days from the date of the commencement of the liquidation and within 90 days from the liquidation commencement date in all other cases (where there are no creditors for the company). Previously, the time period for completion of liquidation was one year and no such bifurcation of the time period for completion of liquidation on the basis of the presence or absence of creditors was enumerated. The reason for this reduction in the timeline for completion is that the liquidation estate of the corporate person undergoing the voluntary liquidation process is non-adversarial and also generally straightforward both in terms of the size and heterogeneity of the assets involved. Therefore, the realisation of the assets involved during the voluntary liquidation process takes less time as compared to the liquidation process.

Section 38(3): Final Report and Compliance certificate shall be submitted in Form-H.

Section 38 directs the liquidator to submit the final report to the adjudicating authority along with the application. The amendment has specified Form H for submission of the final report. Such specifications were not provided previously. A compliance certificate provides a summary of actions taken by the liquidator during the voluntary liquidation process. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

Section 39(3): Form H substitutes Form I

As per the amended Rules, Section 39 (3), the stakeholder claiming entitlement to any amount deposited into the Corporate Voluntary Liquidation Account, may apply for an order for withdrawal of the amount to the Board on Form H and not Form I.

Date of Commencement of Liquidation

The amendment clarified that for the corporate person who has creditors representing two-thirds of the debt of the corporate person, the date of liquidation commencement is the date on which such creditors approve the declaration passed for the initiation of the liquidation.

Note: In order to curb delays in liquidation, the Board had recently issued a circular clarifying that an Insolvency Professional handling a voluntary liquidation process is not required to seek any NOC/NDC from the Income Tax Department as part of compliance in the said process.

Conclusion

The amendments effectually fall in line with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived as an initiative in the right direction. The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining a No-Objection Certificate from the Income Tax office) may ensure the early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person. Further, the proposed reduction in the time taken for distribution of proceeds would result in an early distribution to the stakeholders and thereby, promote entrepreneurship and the availability of credit. It will assist the Adjudicating Authority in expediting the adjudication of dissolution applications.

References: 

[1] https://www.timesnownews.com/business-economy/budget-proposed-c-pace-for-accelerated-corporate-exit-process-article-89283883

[2] https://ibbi.gov.in/webfront/Discussion-Paper-on-Voluntary-Liquidation-process-Jan-2022.pdf

[3] https://www.ibbi.gov.in/uploads/legalframwork/cc881169aad7ee239aea7954505a76ab.pdf

 

Image Credits: Photo by Melinda Gimpel on Unsplash

The amendments effectually fall in alignment with the Board’s intention to substantiate a streamlined and quick voluntary insolvency procedure, which certainly can be perceived an initiative in the right direction.  The proposed amendments by curtailing the unwarranted time spent on various activities (such as obtaining No-Objection Certificate from the Income Tax office) may ensure early completion of the voluntary liquidation process, thereby, providing a quicker exit for the corporate person.

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Recent Relaxations On Debenture Issuance Related Compliances Under The Companies Act, 2013

The provisions of the Companies Act, 2013 (the “Act”) relating to the issuance of debentures, stipulate various requirements which the issuing company has to comply with, which includes maintaining a Debenture Redemption Reserve (DRR) account and in case of a secured debenture, filing of charge-related documents.

The outbreak of COVID-19 and the related regulatory lockdowns have affected business inflows and administrative functioning of many organizations. On one hand, some of the companies are facing financial difficulties in meeting their repayment obligations under the debentures issued, while on the other hand, these companies are unable to meet the statutory requirements stipulated under the Act. Considering the request of various stakeholders, the Ministry of Corporate Affairs, India (“the MCA”) has brought out several relaxations relating to the compliance requirements for debenture issuance under the Act.

 

Debenture Redemption Reserve:

In order to protect the interest of the debenture holders, as per section 71 (4) of the Act, the companies, which have issued debentures, are mandatorily required to create a DRR account and transfer the stipulated sum of money to such account, every year, out of the profits of the company. The amount credited to such account shall be out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilized by the company except for the redemption of debentures.

Pursuant to the Companies (Share Capital and Debentures) Amendment Rules[1], 2019 dated 16th August 2019 (“the Amendment Rules”), the requirements of maintaining DRR account was further relaxed and only certain class of companies are required to comply with the provision to create a DRR account and to transfer money to the said account. In furtherance to the said Amendment Rules, the requirement of the DRR was modified as follows:

  • The requirement of DRR was removed for both privately placed debentures and public issue of debentures both by Non-Banking Finance Companies (NBFCs) (registered with Reserve Bank of India under section 45- IA of the RBI Act, 1934) and Housing Finance Companies (HFCs) (registered with National Housing Bank);
  • The requirement for other listed companies (other than NBFCs and HFCs) to create DRR, both in case of private issuance and public issuance of debentures, has been done away with; and
  • The requirement for DRR was reduced from 25% to 10% of the value of the outstanding Debentures in case of unlisted companies (other than NBFC and HFCs).

Pursuant to the above changes, only unlisted Companies (other than unlisted NBFCs and HFCs) are required to comply with the DRR requirement.

It may be noted that, in addition to the requirement of maintaining the DRR account, every listed company (including NBFCs and HFCs) issuing debentures under public issue and private placement basis and other unlisted companies (excluding NBFCs and HFCs) issuing debentures under private placement basis was required to invest in specified Government securities or deposit with a scheduled bank (as the case may be) a sum of not less than 15%, of the amount of its debentures maturing during the year, ending on the 31st day of March of the next year. Further, the amount so invested shall remain invested or deposited and shall not fall below fifteen percent of the amount of the debentures maturing during the year ending on the 31st day of March of that year. Though there were relaxations provided with respect to maintaining the DRR being brought into effect through the said Amendment Rules, however, the requirement of making such investment was retained to protect the investor sentiment. 

However, in consonance with the above relaxations, the MCA vide its notification dated 5th June 2020 (“Notification of 2020”) has now amended the clause (v) of the sub-rule (7) of Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. As per the Notification of 2020, the requirement of maintaining a deposit or investment to a tune of 15% of the total amount of debentures (maturing as of 31st March of the next year) has been relaxed for listed NBFCs, HFCs and other listed companies undertaking debenture issuance on private placement basis.

 

Compliances towards charge filings:

As per the existing provision of the Act, the company creating a charge over its assets or properties is required to file Form CHG-1[2] and CHG-9[3] with the MCA within 30 days from the date of creation or modification of charges (as the case may be). With the recent changes[4] in the provisions relating to charge filing, a company which fails to file the e-form within the said timeline has the ability to make an application to the Registrar for filing by making payment of additional fees[5] and the additional time period is as follows:

  • in case of charges created before the commencement of the Companies (Amendment) Ordinance, 2019 (“Ordinance”) viz. 2nd November 2018, within a period of 300 days of such creation; or six months from 2nd November 2018 by making payment of additional fees, which is an exposure of a maximum of 12 times of the normal fees; and
  • in case of charges created on or after the commencement of the Ordinance, within a period of a maximum 120 days of such creation (application has to be preferred after the initial 60 days), on payment of ad-valorem fees as may be prescribed subject to the maximum of Rs. 5,00,000/- (Rupees Five Lakhs)[6].

However, considering the request from the various stakeholders towards relaxation in the filing of these charges forms within the stipulated time frame as given under section 71, 77, 78 and Rule 3(1) of the Companies (Registration of Charges) Rules, 2014, the Government vide circular no. 23/2020 dated 17th June, 2020 (“Scheme for relaxation of time for filing forms related to creation or modification of charges under the Companies Act, 2013”, referred to as “the Charge Scheme” hereinafter), has further relaxed timeline for filing of forms related to the creation and modification of charges under the Act.

 

Provisions of the Scheme:

With the introduction of the Charge Scheme, the MCA has given relaxation in the filing of the Forms towards charge creation and modification and for this, the applicability of the scheme is considered on two-levels, as provided below:

  1. Where the date of creation and modification of charge is of a date prior to 1st March 2020, but the timeline for filing such form had not expired under section 77 of the Act as on 1st March 2020:

In such cases, it has been clarified that the period beginning from 1stMarch 2020 and ending on 30th September 2020 (“exempted period”) shall not be reckoned for the purpose of counting the number of days under section 77 and 78 of the Act. In case, the form is not filed within such period, the first day after 29thFebruary 2020 shall be reckoned as 1st October 2020 for the purpose of counting the number of days within which the form is required to be filed under the relevant provisions of the Act.

 

Put in other words, the exempted period will not be considered for computing the maximum period of 120 days for filing of CHG-9 for creation and modification of charges. Hence, the forms for which the timeline for filing has not expired as on 1st March 2020, can be filed without paying any additional fees towards the exempted period. As such, the companies can benefit from the Scheme by paying only the fees as applicable on 29.02.2020, only if the company manages to file their pending forms within the relaxation period i.e. from 01.03.2020 to 30.09.2020. Otherwise, the benefit to the company is that it will be entitled to make the filing of the form, however, by paying the additional fees for the days beginning from 01.10.2020 till the date of filing of such form. It is to be noted that the filing has to be done still within the maximum permissible time limit of 120 days by paying additional fees or ad valorem fees as the case may be.

 

 

  1. Where the date of creation or modification of charge falls on any date between 1st March 2020 to 30th September 2020 (both days inclusive):

In case the due date of filing the form for creation or modification of charges falls between the relaxation period and the Company fails to file the form within 30.09.2020, the first day after the date of creation or modification of charge shall be reckoned as 01.10.2020 for the purpose of counting the number of days within which the form is required to be filed under section 77 or section 78 of the Act.

 

It is pertinent to note that, if the form is filed before 30.09.2020, normal fees shall be chargeable under the Fees Rules. However, if the form is filed thereafter, the first day after the date of creation or modification of charges shall be reckoned as 01.10.2020 and the company will have to complete the filing within the maximum number of additional days permitted by paying the additional fees or ad valorem fees as the case may be.

 

Conclusion:

The exemptions provided last year towards the requirement of maintaining DRR was a big step to ease the compliance requirements for companies especially for those companies which are facing a financial crisis, however, it had affected the sentiments of investors in the debt market as the protection provided to the investor was being diluted. Now, with further relaxation in the requirement of maintaining the 15% deposit for listed companies undertaking debenture issuance on a private placement basis, the regulator needs to consider providing an adequate safety net to encourage investor protection.

The introduction of the Charge Scheme is yet another move by the authority to help ease India Inc. which could be welcomed by the investors as well. But again, the Charge Scheme also aims favours India Inc. whereby companies are provided extension of the time period to complete the filing of charge creation or modification.

Keeping aside the monetary exposure, wherein the maximum exposure towards the additional fees is the ad-valorem value (that too to an extent of Rs.5,00,000/-), the only benefit in terms of an investor especially in case of debenture issuances, is that the Charge Scheme enables the company to complete the pending filings. Moreover, the Act provides that a liquidator appointed under the Insolvency and Bankruptcy Code, 2016 has to take into account the charge created by a company and such charge has to be registered. This allows the investor to ensure that companies can rectify the filings and adequately reflect the charge with the Registrar.

However, it must be noted that the benefit will not be applicable if the timeline for filing of the form has expired, even after excluding the exempted period. Further, the contractual right of the investor to enforce the repayment of the obligation (which is secured by the charge) would still remain. While these recent changes are a small breather to India Inc., regulators should not forget to protect the interest of investors, especially in these testing times.

 

 

References

[1]  Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014

[2] Refer section 71, 77, 78 and 79 of the Companies Act, 2013 along with Rule 3(1) of the Companies (Registration of Charges) Rules, 2014.

[3] Refer section 77, 78 and 79 of the Companies Act, 2013 along with Rule 3 of the Companies (Registration of Charges) Rules, 2014.

[4] Companies (Amendment) Ordinance,2019

[5] Refer the Companies (Registration of Offices and Fees) Rules, 2014 (“Fees Rules”)

[6] For ease of reference, we have considered fees structure applicable for non-small companies.

 

 

Image Credits: Photo by Austin Distel on Unsplash

The exemptions provided last year towards the requirement of maintaining DRR was a big step to ease the compliance requirements for companies especially for those companies which are facing a financial crisis, however, it had affected the sentiments of investors in the debt market as the protection provided to the investor was being diluted. Now, with further relaxation in the requirement of maintaining the 15% deposit for listed companies undertaking debenture issuance on a private placement basis, the regulator needs to consider providing an adequate safety net to encourage investor protection.

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Impact of Supreme Court ruling pertaining to calculation of Provident Fund contribution on Allowances

  • 16 August, 2019
  • Kaamya Ramanan

The Hon’ble Supreme Court, in a recent judgement, answered the question of whether “special allowances” would fall within the expression “basic wages” for Provident Fund (PF) contribution in the affirmative. Interpreting the provisions of Employees Provident Funds and Miscellaneous Provisions Act, 1952 (“PF Act”) as a beneficial social welfare legislation, the Court affirmed the PF authorities’ factual conclusion that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution to the provident fund account of the employees.

In essence, the Court reiterated the principle laid down in prior rulings that where the wage is universally, necessarily and ordinarily paid to all across the board, such emoluments are basic wages and employers had to expressly prove the special treatment in the special allowance for it to be kept out of the purview of calculations for PF purposes.

 

Background

The PF Act is a social security legislation enacted to help ensure that both employees and employers contributed towards a superannuation fund for the purpose of retirement benefits. Per the PF Act, all employees are required to contribute 12% of their basic wages, dearness allowance, cash value of any food concession and retaining allowance, if any with the employer contributing a matching 12%.

 

Basic Wages under Section 2(b)(ii) read with Section 6 of the PF Act is defined as “all emoluments which are earned by an employee while on duty or [on leave or on holidays with wages in either case] in accordance with the terms of employment and which are paid or payable in cash to him, but does not include:

  • the cash value of any food concession;
  • any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus, commission or any other similar allowances payable to the employee in respect of his employment or of work done in such employment;
  • any presents made by the employer.”

The phrase “or any other similar allowance” has not specifically been defined in the PF Act or related schemes and has thus been a subject of litigation for several decades. Over the year, companies have been structuring the salary paid to employees to include various allowances, including special allowance. However, in all instances per the understanding of the PF Act, employers have only been paying contribution on Basic Salary, Dearness Allowance and Retaining Allowance or such equivalent components. The PF authorities have usually contended that ‘special allowances’ should be included for the purpose of calculation of contribution. The Hight Courts in India have taken varying views on the subject matter pertaining to contribution on allowances which had resulted in various appeals pending before the Supreme Court of India.

 

Supreme Court Decision on 28th February, 2019[1]

Various appeals[2] were preferred before the Supreme Court questioning whether various types of allowances such as special allowance, travel allowance, HRA, food allowance, etc. were to be construed as ‘basic wages’ for the purpose of calculation of contribution. The petitioners/employers had used the argument that the term ‘basic wages’ had certain specific exceptions and only such payment that had been earned by the employee in accordance with the terms of the employment was to be included for calculation of provident fund. The PF authorities, on the other hand used the principle of ‘universality’, stating that only incentive payments linked to output could be excluded from the calculation of provident fund.

 

The Hon’ble Supreme Court dismissed the appeals by the employers (except the appeal by the RPFC in the Vivekananda Vidyamandir case) and concluded, relying on the principle of universality, that all payments which were made to all employees or categories/classes of employees without discrimination and which are not specifically ‘variable’ in nature and fact or linked to certain incentive for greater output, would be construed as ‘basic wages’ and thus provident fund contribution was to be made on them. For an amount to be construed as variable in nature it would need to be demonstrated that the said amounts were payable on account of employees contributing beyond any normal work that would usually be expected of them; or that it would be payable to employees only if they availed certain opportunities.

 

The Supreme Court relied on some of its previous decisions for its conclusions, namely:

  • “Whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction under Section 6 of the Act. It is only such allowances not payable by all concerns or may not be earned by all employees of the concern, that would stand excluded from deduction.” [3]
  • “Any variable earning which may vary from individual to individual according to their efficiency and diligence will stand excluded from the term ‘basic wages’.”[4]
  • “Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages. Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. Conversely, any payment by way of a special incentive or work is not basic wages.”[5]
  • “That the Act was a piece of beneficial social welfare legislation and must be interpreted as such.”[6]

Impact of Supreme Court Decision

The principles laid out by the Supreme Court, although not new, are a welcome clarification on the position of allowances with respect to the calculation of provident fund contribution. From an employee perspective, employees’ net take home salary is also likely to be impacted by the decision.

 

However, the possibility of the decision having a retrospective effect might exasperate employers. This is on account of the fact that the judgement interprets an existing provision in the law and does not create any new provisions. The retrospective effect may require employer to cover the shortfall in contribution for the past year but additionally pay interest and damages as well.

 

It may also be noted that the Supreme Court decision to include allowances as part of basic wages has primary financial implications in connection to those domestic employees whose salary (on which PF contributions were being paid i.e. basic salary and dearness allowance) is less than INR 15,000 per month, as well as all international workers.

 

Employers are advised to revisit their policies and salary structures and start ensuring that all components of salary which are not discretionary or variable in nature are included for the purpose of PF contributions. Employers are also recommended to conduct audits to ascertain potential past non-compliances / shortfalls in contributions.

 

The matter is also currently sub judice with the management of Surya Roshni Ltd. having filed a review petition before the Supreme Court. It also remains to be seen if the EPFO would take a more lenient stance and allow employers to rectify past non-compliances without incurring the additional cost of interest and damages.

 

References:

[1] In connection with Civil Appeal no. 6221/2011, 3965-66/2013, 3969-70/2013, 3967-68/2013 and Transfer Case no. 19/2019 (arising out of TP(C) no. 1273/2013)

[2] Appeals considered jointly: (i) The Regional Provident Fund Commissioner (“RPFC”), West Bengal v/s Vivekananda Vidyamandir and Others (Kolkata High Court); (ii) Surya Roshni Ltd. vs. Employees Provident Fund and others (Madhya Pradesh High Court); (iii) U-Flex Ltd v/s EPF and another; (iv) Montage Enterprises Pvt. Ltd. v/s EPF and another (Madhya Pradesh High Court); (v) The Management of Saint-Gobain Glass India Limited v/s The RPFC, EPFO (Madras High Court).

[3] (i) Bridge and Roof Co. (India) Ltd. vs. Union of India, (1963) 3 SCR 978

[4] Muir Mills Co. Ltd., Kanpur Vs. Its Workmen, AIR 1960 SC 985

[5] Manipal Academy of Higher Education vs. Provident Fund Commissioner, (2008) 5 SCC 428

[6] The Daily Partap vs. The Regional Provident Fund Commissioner, Punjab, Haryana, Himachal Pradesh and Union Territory, Chandigarh, (1998) 8 SCC 90

Image Credits: Image by Shutterbug75 from Pixabay 

Employers are advised to revisit their policies and salary structures and start ensuring that all components of salary which are not discretionary or variable in nature are included for the purpose of PF contributions. Employers are also recommended to conduct audits to ascertain potential past non-compliances / shortfalls in contributions.

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