Share on facebook
Share on twitter
Share on linkedin

Bad Bank in India: A Concept Note

The Indian banking system has been grappling with the ballooning Non-Performing Assets (NPAs) crisis on its balance sheets for decades now. The pandemic marked a further downward spiral for the Indian economy; proving specifically detrimental to individual borrowers and large corporates across sectors, who were adversely affected by the cash flow in businesses which led to defaults in outstanding obligations. The consequential increase in the NPAs revived the discussions for institutionalizing an independent entity that would exclusively deal with the bad loans and help in cleaning up the NPAs off the balance sheets. As of March 2021, the total NPAs in the banking system amounted to Rs 8.35 lakh crore (approx). According to the Reserve Bank of India’s (RBI) financial stability report, the gross NPAs ratio for the banking sector could rise to 9.8% by March 2022.

Following India’s first-ever Bad Bank announcement in the 2021-22 Union Budget by the Finance Minister; India, Debt Resolution Company Ltd (“IDRCL”), an Asset Management Company (“AMC”) has been set up that shall work in tandem with the National Asset Reconstruction Company Ltd (“NARCL”) to streamline and square away bad loans as per the documents and data available with the Registrar of Companies (“RoC”).

Proposed Mechanism of Bad Bank in India

  • The Government of India (“GOI”) has primarily set up two entities to acquire stressed assets from banks and then sell them in the market.
  • The NARCL has been incorporated under the Companies Act, 2013. NARCL will buy stressed assets worth INR 2 lakh crore from banks in phases and sell them to buyers of distressed debt. NARCL shall also be responsible for the valuation of bad loans to determine the price at which they will be sold. Public Sector Banks (PSBs) will jointly own 51% in NARCL.
  • The IDRCL will be an operational entity wherein 51% ownership will be of private-sector lenders / commercial banks, while the PSBs shall own a maximum of 49%.

NARCL will purchase bad loans from banks and shall pay 15% of the agreed price in cash, and the remaining 85% in the form of Security Receipts. If the bad loans remain unsold, the government guarantee shall be invoked; a provision worth INR 30,600 crore has been structured for the same.

Benefits of Bad Bank in India

Since non-performing assets have majorly impacted Public Sector Banks, the institutionalization of a Bad Bank shall equip PSBs in selling / transferring the NPAs, while simultaneously improving and promoting credit quality, strategically minimizing efforts in loan recovery and enhancing the macroeconomy.

Additionally, the profits of the banks were mostly utilized to cut losses. With the NPAs off their balance sheets, the banks will have more capital to lend to retail borrowers and large corporates.

The issues faced by Asset Reconstruction Companies (ARCs) relating to the governance, acceptance of deep discount on loans, and valuation may not concern the Bad Bank, owing to the government’s initiative and support that engages appropriate expertise.


Challenges of Bad Bank

As per the operational structure, bad banks shall buy bad loans, that have been recorded in the books of the PSB’s or private lenders. If the institution fails to secure buyers and record appropriate prices for the assets, the entire exercise shall prove to be futile.

In India, 75% of the bad loans are defaulted corporate loans, including a consortium of banks that had loaned corporations to finance major infrastructure and industrial projects. Countries such as Mexico, Greece, South Korea, Argentina, and Italy have portrayed that bad banks rarely yield positive outcomes in settings dominated by industrial, corporate, and conglomerate-level bad loans. Hence, structural and governance issues at various levels with state governments, judiciary, and political interests shall have to be streamlined and implemented efficiently to steer away from making them a repository of bad loans and for cleaning up the books of the PSBs.

Bad Bank: A One-Time Exercise?

The Government of India will have to undertake appropriate reforms/lending norms to reduce the number of NPAs. Setting up Bad Bank is most likely to tackle only the existing NPAs problem and should be a one-time exercise.

The concept of Bad Bank has been a success in certain European countries and the United States of America, however, it is pertinent to understand that they were structured to tackle home loans and toxic mortgages, unlike in India. Hence, in-depth analysis of the experiences of these countries should be utilized and intricately be revamped in alignment with key differences to ascertain the role of Bad Bank in the near future in the country.

Banks will get a huge financial boost with the transfer of the NPAs off their books and help in credit growth in the country. The success of Bad Bank is also crucial in restoring the faith of the taxpayer in the banking system. With the existence of the Insolvency and Bankruptcy Code, 2016 and Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, it remains to be seen how a Bad Bank will be a complement in the resolution of the bad loans.


Image Credits: Photo by Visual Stories || Micheile on Unsplash

The concept of Bad Bank has been a success in certain European countries and the United States of America, however, it is pertinent to understand that they were structured to tackle home loans and toxic mortgages, unlike in India. Hence, in-depth analysis of the experiences of these countries should be utilized and intricately be revamped in alignment with key differences to ascertain the role of Bad Bank in near future in the country.


Share on facebook
Share on twitter
Share on linkedin

Force Majeure: Evolution of Jurisprudence in India Post COVID-19

The extraordinary outbreak of the Covid19 pandemic has had staggering effects on the economy, health and commerce of about 110 nations across the globe. Even after almost a year, the situation is far from normal. In addition to the massive pressure on the health and medical segments, several other unprecedented factors played crucial part in the whole system, economy, commerce, or business. Given the present situation of disruption of supply chaindisruption of assured manpower, uncertainty of future planning, inadequacy of security as well as the forced restraints in free commercial activities, numerous commercial contracts have either been interrupted, delayed or cancelled. The present situation has thrown light on several important questions with respect to the jurisprudence of the force majeure clause in various commercial contracts or frustration of contracts 


Force Majeure Typically in Law


The term force majeure which seems to have been borrowed from the Code Napoleon had received interpretation in several decisions of the English Courts in earlier years. In Matsoukis v. Priestman and Co.[i] . Justice Bailhache opined that force majeure would include strikes and break-down of machinery but not bad weather, or football matches, or a funeral. In Lebeeaupin v. Crispin[ii] Justice McCardie had observed: “A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument.”

In the Indian context, the Supreme Court has considered, interpreted and decided the events of force majeure in various judicial precedents, inter-alia from Satyabrata Ghosh vs Mugneeram Bangur[iii] to Energy watchdog vs CERC[iv] The Court has maintained a strict yet flexible approach towards the concept of force majeure and frustration of contracts. In the case of Alopi Prashad and Sons vs. UOI[v] the Supreme court had observed that commercial hardship shall not be a just and reasonable ground to support frustration of contract and excuse performance.

As we find in the commercial world, contracting parties have generally been incorporating the force majeure clause in their contracts since ages, to absolve themselves of any liability arising out of events beyond their reasonable control. However, in this discussion we would focus the force majeure arising out of Covid-19 pandemic.


COVID 19 and Application of Force Majeure


There was a difference of opinions and questions were raised over the fact that some contracts though having a force majeure clause, do not stress on the word ‘pandemic’, ‘epidemic’, ‘disease’ etc. , while majority of the contracting parties rely on the general phrase ‘any other unforeseeable event, not under the control of either of the parties.’

Executive Interpretation:

Alike the private sector, the Government contracts and the Public Sector transactions also started suffering on account of the pandemic and declaration of lockdown throughout the country. To address the situation fairly, the Ministry of Home Affairs came out with Notification No. F. 18/4/2020 PPD dated 19-02-2020 with respect to Manual for Procurement of Goods, 2017 declaring that the interruptions in supply chain due to Covid 19 from China or any other country shall be covered under the ambit of force majeure, and that force majeure shall be invoked whenever considered appropriate following the due process of law.

While the power of the Ministry to bring certain events within the ambit of force majeure under clause 9.7.7 of the Manual for Procurement of Goods, 2017 by a simple notification, may be a different issue, but as it appears, by this notification the Corona Pandemic was brought within the meaning of force majeure as defined in the Manual for Procurement of Goods, 2017 and tacitly, this event certainly becomes applicable in respect of all government and/or public sector contracts irrespective of application of the Manual for Procurement of Goods, 2017.  It may be noted that this Memorandum of 19th February 2020 was issued prior to Covid-19 affecting operations in India, recognizing the difficulty faced by the contracting parties regarding import of materials from other countries which were impacted by the pandemic.

Similarly, on account of various representations and submissions made by various Renewable Energy (RE) Developers and RE Associations, and considering the prevailing situation, the Ministry of New and Renewable Energy vide Office Memorandum No. 283/18/2020-GRID SOLAR dated March 20, 2020 declared Covid-19 as a force majeure event. The Ministry vide the said order granted time extensions in scheduled commissioning date of RE projects, in light of disruption of supply chain due to the pandemic.

The Ministry of Roads Transport and Highways also in its Circular dated 18.05.2020 inter-alia classified the pandemic as a force majeure event. In addition, the Ministry of Home Affairs by its Order no. 40-3/2020(D) dated 24 March 2020 expressed that the country was threatened with the spread of Covid 19 virus and therefore has considered to take effective measures to prevent its spread across the country and therefore in exercise of powers under section 10(2)(I) of the Disasters Management Act 2005 issued various guidelines for immediate implementation. Subsequently, by Office Memorandum dated 13 May 2020 the Ministry of Finance, Department of Expenditure referred to its earlier memorandum dated 19 February 2020 and also referred to the Manual of Procurement and recognized inter-alia that in view of the prevailing restrictions, it may not be possible for the parties to the contract to fulfill contractual obligations. Therefore, after fulfilling due procedure and wherever applicable, parties to the contract could invoke force majeure clause for all construction / works contracts, goods and services contracts, and PPP contracts with Government Agencies up to a certain period and subject to certain conditions. Therefore, officially the Government of India recognized Covid-19 Pandemic as an event of force majeure applicable in relation to contracts with Government Agencies, in effect resulting inclusion of Public Sector Undertakings also.

While the specific acceptance of force majeure in relation to Government sector contracts may not have any binding effect on the contracts outside the scope of the explicit instances or in relation to purely private contracts between two private parties, they probably offered an explanatory value to bring Covid 19 and the forced restraints imposed on account of lockdowns, within the ambit of force majeure.  

Judicial Interpretation:

In the Indian judicial scenario the court would rely on the terms of force majeure clause in the contracts or on principles of frustration under section 56 of the Contract Act. This means, unless there is compelling evidence for non-performance of contract the courts do not favor parties resorting to frustration or termination of contract. On account of the enormous devastative effects the Pandemic created on the commercial and economic environment in the country, different Courts had to come forward and grant relief to different contracting parties who were severely affected by the Pandemic.

The Delhi High Court considered the matter in June 2020 in the case of MEP Infrastructure Developers Ltd vs. South Delhi Municipal Corporation and Ors[vi]. The court essentially relied on the Ministry of Roads Transport and Highways (MORTH) circular and observed that:

27(i) The respondent Corporation itself referred to Circular dated 19.02.2020 which notified that the COVID-19 pandemic was a force majeure occurrence. In effect, the force majeure clause under the agreement immediately becomes applicable and the notice for the same would not be necessary. That being the position, a strict timeline under the agreement would be put in abeyance as the ground realities had substantially altered and performance of the contract would not be feasible till restoration of the pre-force majeure conditions.” 

The court also expounded on the continuous nature of the force majeure event and held that the subsequent lockdown relaxations given by the central government and the state government shall not amount to abatement of the force majeure event, at least in respect to major contracts such as road construction projects. The court also identified the distinct effects of the lockdown, independent of the effects of the pandemic and its implications on various contracts which many be affected by the force majeure conditions.  

In the case of Standard Retail vs G.S Global Corp Pvt. Ltd[vii] steel importers had approached the Bombay High Court seeking restraint on encashment of letters of credit provided to Korean exporters in view of the COVID-19 pandemic and the lockdown declared by the Central/State Government citing that the contracts between the parties were unenforceable on account of frustration, impossibility, and impracticability. The Bombay High court by its order dated 8 April 2020 rejected the plea inter-alia on the grounds: 

  1. The Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the buyers and the sellers.
  2. The Force Majeure clause in the present contracts is applicable only to one respondent and cannot come to the aid of the Petitioners.
  3. The contract terms are on Cost and Freight basis (CFR) and the respondent had complied with its obligations and performed its part of the contracts and the goods had already been shipped from South Korea. The fact that the Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent.

The court also observed that:  

“The Notifications/Advisories relied upon by the respondent suggested that the distribution of steel has been declared as an essential service. There are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services. The Notification of the Director General of Shipping, Mumbai, states that there would be no container detention charges on import and export shipments during the lockdown period.

In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with the Respondent No. 1 of making payments”.

Therefore, even if the event is a force majeure, contracts may not be avoided if the event does not affect performance of the entire contract or affect every aspects of any contract. The event has to be specific to the failure.

In the Halliburton case[viii] , decided on May 29, 2020, the Delhi High court was of an unequivocal opinion that:

“62. The question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non- performance due to the epidemic/pandemic”.

Further, while discussing the scope of the force majeure clause in contracts it was observed by the court that:

“Para 63. It is the settled position in law that a Force Majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations. As observed in Energy Watchdog it is not in the domain of Courts to absolve parties from performing their part of the contract. It is also not the duty of Courts to provide a shelter for justifying non- performance. There has to be a ‘real reason’ and a ‘real justification’ which the Court would consider in order to invoke a Force Majeure clause”.

The Madras High Court in the case of Tuticorin Stevedores’ Association vs The Government of India[ix], dated 14 September 2020, observed that the question as to whether on account of the pandemic outbreak of Covid-19, the parties can invoke the principle of force majeure need not detain us. The calamitous impact and disruption caused by Covid-19 on the economic front has been recognized by the Government itself.

In Confederation for Concessionaire Welfare & Ors. vs Airports Authority of India & Anr[x] the Hon’ble Delhi High Court observed on 17 February 2021 inter-alia that the court has perused the clauses relating to Force Majeure. There can be no doubt that the pandemic is a force majeure event. Since the Petitioners wish to terminate/exit from their respective agreements, while directing completion of pleadings and while the issues are under examination by this Court, there is a need to reduce the risk to both parties as simply postponing the exit by the Petitioners would also make it impossible for the AAI to re-allot the spaces to willing concessionaires and the outstanding against the Petitioners would continue to mount. Accordingly, as an interim measure the Hon’ble Court directed certain processes to be followed.

In another case of Ramanand vs. Dr. Girish Soni RC.[xi], an application came under consideration of the Delhi High Court which raised various issues relating to suspension of payment of rent by tenants owing to the COVID-19 lockdown crisis and the legal questions surrounding the same. By order dated 21-5-2020 the Delhi High court while determining whether lease agreements are covered under the ambit of section 32 and section 56 of the Act and even though it was held that suspension of rent on the grounds of force majeure is not permissible under the circumstances, the court allowed relaxation in the schedule of payment of the outstanding rent owing to the lockdown.

The Hon’ble Supreme Court in the case of Parvasi Legal Cell and Ors. Vs Union of India and Ors., observed that the pandemic was an ‘unusual’ situation, that had impacted the economy globally. This case revolved around the liability of the airlines to compensate passengers who faced cancellation of flights due to government-imposed lockdowns and restrictions on inter-state and international travels. The court relied on the office memorandum issued by the Ministry of Civil Aviation dated 16th April 2020 to dispose of the petition.

In the case of Transcon Iconia Pvt. Ltd v ICICI Bank[xii], the Bombay High Court while determining whether moratorium period would be excluded for NPA classification observed inter alia as under:

‘38… the period of the moratorium during which there is a lockdown will not be reckoned by ICICI Bank for the purposes of computation of the 90-day NPA declaration period. As currently advised, therefore, the period of 1st March 2020 until 31st May 2020 during which there is a lockdown will stand excluded from the 90-day NPA declaration computation until — and this is the condition — the lockdown is lifted’.

Yet, in another judgment passed in R. Narayan v. State of Tamil Nadu & Ors.[xiii] the Madras High Court directed the Municipal Corporation to waive the license fee for running a shop at a bus stand, and observed that:

“…this Court would be justified in treating the “lock down” as a force majeure event which will relieve the licensee from performing his obligation to the corresponding extent.” The Court also observed that … “The respondents (The Government of Tamil Nadu & Ors.) themselves have chosen to treat the lock down restrictions as a force majeure event. But they have relieved the licensees from the obligation to pay the fees only for two months. The reason for granting waiver for the months of April and May would equally hold good for the entire “total lockdown” period.”

Therefore, as it appears, most of the High Courts relied on the government orders that classified pandemic as force majeure, although the relief granted in each case has been subjected to restraint based on the accompanying facts and circumstances. The common observation however remained that the Covid-19 pandemic is a force majeure event.


Key Takeaways


Hence, it can be summarized that, commercial hardship shall not be a just and reasonable ground to support frustration of contract and excuse performance. The Courts have no general inclination to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events. Parties are at an obligation to complete their part of the contract against all odds, within a reasonable and practical limit. However, where the contract itself either impliedly or expressly contains a term according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.

The following preliminary conditions are emerging to be sine quo non to invoke covid-19 as a valid defense for non-performance:

  1. The contract is rendered impossible to perform: To establish pandemic as a force majeure occurrence de hors the contract the parties must demonstrate how the pandemic has disturbed the fundamental basis on which the obligations and agreements of the parties rested [Naihati Jute Mills Ltd. Vs Khayaliram Jagannath[xiv]]. This principle was also adequately elaborated upon by the Bombay High Court in Standard Retail vs G.S Global Corp Pvt. Ltd. A mere invocation of the force majeure clause in light of the pandemic does not absolve the parties from discharging their contractual obligations. A prima facie case has to be built justifying the reason for inability and seeking such an exemption.
  1. Prior conduct of the parties: While pleading the defense of force majeure, it is highly pertinent for the concerned party to ensure that, prior to the outbreak of the pandemic, the party was discharging its functions in a bona fide manner within the stipulated conditions of the contract. Additionally, as enumerated in the Halliburton case by the Delhi High Court, the concerned party should have demonstrated a bona fide attempt at undertaking all reasonable measures to execute its obligations in light of the situation and was genuinely prevented to act upon the same due to the collateral effects of the pandemic.
  1. Collection of documents capable of corroborating the claim of force majeure: It is crucial for the party invoking the force majeure clause to corroborate their claims with valid documents applicable to the specific instance, given the unusual and unprecedented situation. In the present scenario, these documents can include the abovementioned government circulars and guidelines, local medical reports, news reports, announcements etc. It needs to be kept in mind that generic documents howsoever crucial they may be, might not be enough in any specific case. While citing such documents, the affected party also has a duty to carry out a due diligence to ensure such exemptions and relaxations are strictly applicable to their case as observed in Standard Retail vs G.S Global Corp Pvt. Ltd.


No Straitjacket Formula                     


As can be summarized, different Courts in India have upheld the defense of frustration of contract and the defense of force majeure sparingly in every case. Even though the Covid 19 pandemic and its consequent lockdown can be generally covered under the ambit of force majeure, but there can’t be any straitjacket formula and its invocation strictly and solely shall depend upon the facts of each case, previous conduct of the parties and the prevailing circumstances in the specific scenario. If there are alternate modes of performing contractual obligations, the liable party shall not have the luxury to hide behind the comfort of doctrine of frustration or the doctrine of force majeure and absolve themselves of their duties. Accordingly, it would need a very careful examination of the whole situation before any ground is taken for avoidance of obligations under a concluded contract.


[i] (1915) 1 K.B. 681

[ii] (1920) 2 K.B. 714

[iii] [1954 SCR 310]

[iv] [(2017)14 SCC 18].

[v] [1960 (2) SCR 793]

[vi] W.P.(C) 2241/2020

[vii] Commercial Arbitration Petition (l) no. 404 of 2020

[viii] Halliburton Offshore Services Inc. v. Vedanta Ltd. O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020

[ix] WP(MD)No.6818 of 2020 and WMP(MD)No.6217 of 2020

[x] W.P.(C) 2204/2021 & CM APPL.6421-22/202

[xi] REV447/2017

[xii] 2020 SCC OnLine Bom 626

[xiii] Case No.19596 of 2020 and W.M.P.(MD)Nos.16318 & 16320 of 2020

[xiv] AIR 1968 SC 552

Image Credits: Photo by Medienstürmer on Unsplash

The Courts have no general inclination to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events. Parties are at an obligation to complete their part of the contract against all odds, within a reasonable and practical limit.


Share on facebook
Share on twitter
Share on linkedin

Intensifying Social Accountability of Corporates in India

In a bid to make companies progressively accountable in the social panorama, the government has been modifying the provisions of Corporate Social Responsibility (“CSR”) ever since its introduction. Amendments have been made in section 135 of the Companies Act, 2013 (“the Act”), The Companies (Corporate Social Responsibility) Rules (“the Rules”) and Schedule VII (“Schedule”) of the Act by the Ministry of Corporate Affairs (“MCA”), from time to time.

While the earlier amendments to section 135 of the Act and the Rules were mostly clarificatory in nature or were relating to the inclusion of certain activities relating to COVID – 19 as the contribution made towards  CSR, the amendments to section 135 of the Act inserted by the Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020 and notification of The Companies (Corporate Social Responsibility) Amendment Rules, 2021 (“the Amended Rules”), both effective from January 22, 2021, has brought about a radical change in the treatment of unspent CSR amount, among other amendments, which is dealt with in this write-up.

  1. CSR applicability extended to newly incorporated companies as well:

Sub-section (5) of section 135 provides that every company crossing the threshold limits prescribed in section 135(1) has to necessarily spend at least 2% (two percent) of the average net profits of the company made during the immediately preceding three financial years. By way of inclusion to section 135 (5), newly incorporated companies that cross the threshold limits prescribed under section 135(1) of the Act have also been brought within the ambit of compliance with CSR provisions.

  1. Compliance in respect of unspent CSR amount:

A brief outline of the amendments relating to the treatment of unspent amount is provided below:


  1. Penalty for non-compliance of sub-sections (5) or (6) of section 135 of the Act:

The newly-inserted sub-section (7) of section 135 of the Act deals with a penalty for non-compliance of provisions of sub-section (5) or (6). It is pertinent to note that the provisions of Companies (Amendment) Act, 2019 had prescribed for imprisonment for a term extending to three years, apart from a fine that may be imposed, on the failure of a company to comply with the provisions of sub-sections (5) or (6) which relates to transfer of unspent amount other than ongoing project and transfer of amount towards ongoing project respectively.

Understandably, there were apprehensions over the proposed implementation of penal provision with imprisonment for CSR activity, and after deliberations, the provision was replaced with a provision in the Companies (Amendment) Act, 2020 which provides only for penalty without imprisonment for non-compliance of sub-section (5) or (6) of section 135 of the Act.

Penalty for the company – twice the amount required to be transferred by the company to the Fund specified in Schedule VII / unspent CSR account (or)

INR 1,00,00,000/- (Indian Rupees One Crore only), whichever is less.

Penalty for every officer of the company who is in default –

one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII / unspent CSR account (or) INR 2,00,000/- (Indian Rupees Two Lakhs only), whichever is less.

  1. Power to give general or special directions:

As per sub-section (8) which has been inserted, the Central Government may give general or specific directions to a company or a class of companies, as necessary, which are required to be followed by such company/class of companies.

  1. Constitution of CSR Committee:

CSR committee is not required to be constituted by a company, where the amount it has to spend towards CSR activities is not more than INR 50,00,000/- (Indian Rupees Fifty Lakhs only) and the functions of the CSR committee shall be discharged by the Board of Directors of the company.

  1. Other notable changes in Amended Rules:
  • Registration under sections 12A and 80G of the Income Tax Act, 1961 has been made mandatory for CSR implementation entities (Rule 4(1) of the Amended Rules).
  • Every CSR implementation entity has to file Form CSR – 1 and obtain CSR registration number compulsorily from April 01, 2021 (Rule 4(2) of the Amended Rules).
  • Chief Financial Officer or any person responsible for financial management shall certify that the funds disbursed have been utilized for the purposes and manner as approved by the Board (Rule 4(5) of the Amended Rules).
  • In case of ongoing project(s), the Board shall monitor its implementation and shall make necessary modifications, as required (Rule 4(6) of the Amended Rules).
  • The CSR Committee shall formulate and recommend an annual action plan in pursuance of its CSR policy to the Board comprising the particulars as specified in Rule 5(2) of the Amended Rules, which may be altered at any time during the financial year, based on a reasonable justification.
  • Surplus earned from CSR activities shall be ploughed back into the same project or transferred to the “unspent CSR account” and spent as per the CSR policy and annual action plan or shall be transferred to the Fund specified in Schedule VII of the Act but shall not form part of the business profit of a company (Rule 7(2) of the Amended Rules).
  • The CSR amount may be spent by a company for the creation or acquisition of a capital asset, which shall be held by a CSR implementation entity specified in Rule 4, which has CSR registration number, or beneficiaries of the CSR project or a public authority (Rule 7(4) of the Amended Rules).
  • Annual report on CSR to be in the format specified in Annexure-II of the Rules, in respect of board’s report for the financial year commencing on or after April 01, 2020 (Rule 8 (1) of the Amended Rules).
  • Companies having an average CSR obligation of INR 10,00,00,000/- (Indian Rupees Ten Crores only) or more in the three immediately preceding financial years has to undertake an impact assessment of CSR projects, having an expenditure of INR 1,00,00,000/- (Indian Rupees One Crore only) or more and which have been completed not less than one year before undertaking the impact study, through an independent agency (Rule 8(3) of the Amended Rules).

Ambiguities in the recent amendments:

  1. Whether unspent amounts of previous years have to be transferred?

Although, it has been specifically provided in some of the Amended Rules (viz., implementation of CSR provisions through specified entities, reporting of CSR as provided in Annexure provided in the Amended Rules) that the said amendments are applicable on or after April 01, 2021, the time period from which the provisions relating to the transfer of unspent CSR amount to “unspent CSR account” / Fund is applicable, i.e. whether the unspent CSR amounts relating to the past financial years (from the date of applicability of the CSR provisions to the company) are required to be transferred to the “unspent CSR account” / Fund or only the CSR amount remaining unspent as on March 31, 2021, has to be transferred, has not been explicitly provided in the Act or the Amended Rules.

  1. Whether the outstanding amount of provision created for the unspent amount must be transferred?

The amended provisions do not stipulate whether unspent CSR amounts of the previous financial years have to be transferred to the designated account / Fund in case a company has created a provision in the books of accounts for such unspent amount for the relevant financial years.

The foregoing matters require suitable redressal by the MCA in the form of clarifications or FAQs or amendments to the existing provisions, which will offer a much-needed clarity on these matters.


With the recent amendments, the CSR provisions have undergone a paradigm shift from “Comply or Explain” to “Comply or Pay” regime as they provide for penalties on failure to transfer unspent CSR amount to the specified account / Fund, whereas earlier, providing reasons for not spending CSR amount was considered adequate compliance. Hence, the said amendments have placed additional responsibilities on corporates.  Having introduced the concept of penalty, it is only appropriate that the MCA addresses the obscurities arising from the amendments at the earliest so that corporates are not caught off-guard in complying with the CSR provisions.

Image Credits: Photo by Tim Marshall on Unsplash

the CSR provisions have undergone a paradigm shift from “Comply or Explain” to “Comply or Pay” regime as they provide for penalties on failure to transfer unspent CSR amount to the specified account / Fund, whereas earlier, providing reasons for not spending CSR amount was considered adequate compliance.


Share on facebook
Share on twitter
Share on linkedin

5 Ways Law Firms Can Ensure Client Value in the Emerging Environment

For us lawyers, the bulk of our interactions with clients and other stakeholders such as the courts, lawyers representing the other parties, the police, government officials etc. are now largely virtual as a direct result of the pandemic. In turn, this has increased our dependence on technology, reflected in terms of the quality of connectivity as well as familiarity with the digital platforms used. Naturally, all this impacts the quality of discussions and therefore, our ability to assist clients.

But the real change that has unfolded over the past few years (even before the pandemic started unfolding) has been around how clients perceive the “value” that lawyers and law firms add. To be fair, even before the pandemic hit us all, there have been rumblings about the billing models used, paying for time spent on activities not directly related to the matter, high lawyer fees and so on. All this will now come into focus even more sharply as clients become even more conscious of costs. 

The bottom line “value” that lawyers deliver to clients is the ability to obtain decisions in favour of their clients in various courts and/or quasi-judicial bodies. This in turn primarily depends on the lawyer’s knowledge and expertise- including the ability to study relevant case laws. Depending on the nature of the matter, court craft- the ability to present information and raise questions about the other side in ways that persuade the bench- also comes in. In many cases, the lawyer’s prior experience of arguing matters in front of a certain judge is also an element of value because it provides him/her with insights into the judge’s way of thinking. Just as critical is the lawyer’s ability to anticipate what the other side might do and take timely measures to mitigate the risk of such actions. In the Indian context, all this unfortunately often culminates in lawyers seeking and obtaining adjournments ad nauseam.

Taking a step back from how lawyers conventionally operate and dispassionately examining the notion of “value” to their clients, it is fair to say that law firms have plenty of room to change the manner in which they function.

Here are five aspects I believe one should consider while understanding the notion of “value” in the context of clients. 

  1. In an increasingly digital world, why should clients choose a lawyer or law firm from the same city in which the former is based? These days, courts allow documents to be uploaded in electronic format, and hearings are also conducted via digital platforms. A lot of corporate work is already done in a virtual model and this has only increased during the pandemic. In the foreseeable future, travel will only reduce, so consultations can easily be done online. Clients look for the most talented lawyer or law firm irrespective of where they are based. This means law firms should hire the best professionals out there.
  2. What lawyers primarily must do is anticipate potential problems that could arise during the execution of contracts and incorporate clauses to protect their clients. This is akin to ensuring quality at source in the manufacturing or software sectors. The tendency to use “templates” must be minimized, or at best limited to ensuring that the “standard” clauses are included. Commercial awareness and business acumen are key to ensuring that differences do not end up as legal disputes.
  3. A lot of time associated with travel, waiting at courts, etc. will now be saved; therefore, why should billing not more accurately reflect the actual time spent on the client’s case? And it can include the time lawyers and firms spend on research and planning- important activities whose value clients will fully understand.


  1. At least in India, many lawyers look at obtaining repeated adjournments as a strategic weapon. In some cases, it may be a legitimate avenue to help clients, but not always. Why should lawyers not change their mindset so that they focus more on obtaining a solution to their client’s problems instead of just wasting time? The lawyer’s lack of preparation or the desire to extend the case cannot and should not constitute grounds for adjournment. Remember that clients pay for time spent on hearings that simply result in the matter being deferred to another date in the future. But this change will also require a mindset change within the judiciary, which should start more actively questioning why one side is seeking frequent adjournments.
  2. Why should lawyers not develop a “solution” mindset that goes beyond litigation? Other avenues for dispute resolution, such as mediation or arbitration, must also be explored diligently. This is especially true in matters where the parties are amenable and the matter has a high probability of being resolved through alternative dispute resolution mechanisms. Think about it- a client wants a legally binding (and defensible) outcome, and not necessarily a stay, injunction, or an order issued by a court of law.

I would love to hear your views on the above, so please do leave your comments.


Image Credits:  Photo by Andrea Piacquadio from Pexels

Taking a step back from how lawyers conventionally operate and dispassionately examining the notion of “value” to their clients, it is fair to say that law firms have plenty of room to change the manner in which they function.


Share on facebook
Share on twitter
Share on linkedin

Protection of Family Assets in the Trying Times of COVID

When death hits closer to home, it is accompanied by an ancillary ramification apart from emotional and psychological distress – finances. Many families have had to confront this reality as the pandemic left a trail of deaths across the country. Apart from grappling with insurmountable pain, one is often saddled with time-bound financial formalities, asset management and planning.Family businesses have been gravely impacted due to the COVID situation and it has acted for a wake-up call for planning the protection of valuable assets. 

Financial planning is a step-by-step process that is designed to meet fiscal requirements at every milestone of one’s life. For instance, creating a fund for children’s education, investing in retirement planning etc. The aim is to build a corpus of sufficient funds over a period of 15-30 years of continued investment and planning, which enables one to sustain financial responsibilities in these events. Another aspect of asset planning is setting up a contingency fund, which is most relevant and crucial in the present scenario of sudden deaths and unanticipated health emergencies. 

Lack of a structured plan can lead the family into chaos which may further result in litigation, a scenario not alien to many unsuspecting families today. This article aims to assist you through this dilemma by constituting an exhaustive list of tasks and legal measures one can undertake to ease the workload and formalities in such circumstances.

Documents and Immediate Actions for Families

The first step should be the collection of all documents, essential for dealing with various government and financial institutions. If the deceased had conducted a majority of transactions online, it is essential to secure access to their online accounts, with account numbers and login passwords.

The second step is securing the death certificate. In India, all deaths have to be mandatorily registered within 21 days of demise. If the same is done within 21-30 days, a penalty of INR 25 is charged. The certificate has to be certified by the medical officer. After 30 days and up to a year, the joint director of statistics is authorized to issue the certificate. The application has to be filed with a fine of INR 50 and an affidavit. After a year, the certificate is only issued by an order of a first-class magistrate, an application form which has to be accompanied by a “cause of death” certificate, cremation certificate, and an affidavit. The death certificate is vital for every financial task that has to be conducted in pursuance of the asset and financial management of the deceased.

Once all the above-mentioned documents and details are organized and collected, one can move forwards with the following tasks;

  1. Try to find out if the deceased person made a Will while they were living. A Will exponentially eases the process of transfer of assets, since most of the confusion is put to rest.
  1. Next, the efforts must be directed towards assessing the deceased’s liabilities and loans (secured/unsecured). This includes home, vehicles, personal loans or credit card dues. In such cases, the first step should be informing the creditor about the demise. In case the borrower had a co-signor/joint debtor the latter shall repay the loans. In the case of a single borrower; if a Will is in place, the executor shall be responsible for settling the debts, in the absence of a Will, an administrator (typically the   is appointed by the court to repay the liabilities.
  1. The heirs or children of the deceased (if adults) can undertake a mature discussion about the distribution of assets. The family must try to unite to avoid litigation. If possible, appoint a trustworthy person to carry out the necessary legal obligations.
  1. Take stock of all the assets in the name of the deceased and make a list with the valuation. Even if the deceased made a Will but left out a property that they later acquired, the property will be distributed according to intestate laws. i.e., the personal law of the individual.
  1. When it comes to insurance, deposits in banks, and shares of the deceased, in most cases, nominees are appointed. Notify the financial institutions of the death of the person and make inquires for the procedure to be followed by the nominee.
  1. In the event of the demise of both parents, where are minor children involved, it is essential that a guardian be appointed for them. If not appointed by a Will, in the case of Hindus, a guardian may be appointed by the court.
  1. Hire a local attorney to advise you. Keep in mind that laws in India relating to succession are not uniform. Moreover, legal procedures to get the appropriate documentation differ from state to state. Hence, it is recommended to hire someone who is well-versed with the local laws of the state in which the deceased resided or where they owned property.

Future Planning for Protection of Assets of a Family Business

People usually start thinking about protecting their assets only once they reach their late 40’s and 50’s. The ongoing pandemic has been a much-needed reality check which has triggered the families and individuals to structure their assets and finances for unforeseeable circumstances, even young adults.

What can you do to protect your estate in your life so that your assets are distributed according to your wishes?


  1. Will: Having a Will in place would make your life as well as the life of your loved ones quite simple. There is no fixed format for a Will under the law. The only requirements for a valid Will according to the Indian Succession Act, 1925 are; it should be made by a sound adult, signed by them, and attested by two witnesses. It is recommended that an Executor be appointed in the Will to reduce hassles. It is not compulsory to register a Will. Probate is also required only if the Will is made in Bengal, Bihar, Orissa, and Assam and within the local limits of the ordinary original civil jurisdiction of the High Courts of Madras and Bombay or where the property of the deceased is situated in these areas.
  1. Trusts: A trust may be created during the lifetime of a person who is called the author/s It may be created with a written legal document through which the assets of the settlor are placed into a trust and trustees are appointed therein who manage these assets for the benefit of the settlor and the beneficiaries named in the Trust Deed. The settlor can also be one of the trustees or the managing trustee of the trust during their lifetime. This gives them control over their assets while they are still living. The biggest advantage of Trust is that it operates both during and after a person’s life.
  • A provision can also be made in the Trust Deed for the appointment of a guardian for minor children in case both the parents die. The Trust Deed may provide instructions regarding the administration of the property to take care of one’s children.
  • A written Trust Deed is signed by the Settlor, requires a minimum of two trustees and two witnesses. The trust may or not be registered; registration is required only if an immovable property is transferred to the trust.
  • When a settlor dies, the trustee pays the debts, files the tax returns, and distributes the assets of a deceased. Trusts are an effective estate planning tool if one wants to avoid the costs and hassles involved in obtaining probate. It is a quick and quiet procedure, preserving one’s privacy and done without any court interference.
  1. Guardianship: Where minor children are involved, it is very important to make provisions either in a Will or by Trust, for appointing a guardian for minor children in the event of a death. If one parent dies, then the other living parent becomes the guardian. If both parents die, then it is needed to mention who will be accorded guardianship. Failure to do so will involve the intervention of courts and various applicable laws given India’s pluralistic society. The need for an appropriate guardian is to provide for personal needs but to also ensure that any future assets to be inherited are protected during the period of minority.

How does Ownership of Assets Transfer after the Death of a Person?


There are two scenarios that are to be considered while determining the ownership of the assets after the death of a person:

  1. In case a person dies leaving a Will; or
  2. In case a person dies without leaving a Will

Where there is a Will

Leaving behind a validly executed Will is the most uncomplicated mode through which a property can pass to the next owner. If an Executor is appointed in the Will, they should apply for the probate of the Will where Probate is mandatory. Once a Probate is obtained, the Executor is responsible for paying off all the debts of the deceased, managing the expenses for all the properties, and distributing the assets to all the beneficiaries according to the Will of the Testator.

Where there is No Will

The ownership of the property will be determined by intestate succession i.e succession according to the personal law applicable to the deceased individual. The heirs will be determined in accordance with the religion of the intestate for example Hindus, Buddhists, Sikhs and Jains will be governed by the Hindu Succession Act, 1956, Muslims will be governed by the Mohammedan Law and all others will be determined by the Indian Succession Act, 1925.

What are the legal options available to the heirs of the deceased?

  • Letters of AdministrationSection 273 of the Indian Succession Act, 1925 provides for Letters of Administration which are granted by the court to the individual who volunteers to be the administrator with the consent of the legal heirs for the lawful distribution of assets of the deceased. The purpose of grant of Letters of Administration is only to enable the administrator so appointed by the court to collect/assimilate the properties of the deceased and to deal with the various authorities with whom the properties of the deceased may be vested or recorded and thereafter the same be transferred in the names of the successors in accordance with the law of succession applicable to the deceased. The administrator during the proceedings is required from time to time to file the accounts in the court with respect to the administration of the estate of the deceased.[1]
  • Succession Certificate: Succession certificate entitles the holder to inherit the moveable assets of the deceased and to make payment of a debt or transfer securities to the holder of certificate without having to ascertain the legal heir entitled to it. A Succession Certificate is not granted where Probate or Letters of Administration are mandatory to be obtained. The purpose of a succession certificate is limited in respect of debts and securities such as provident fund, insurance, deposits in banks, shares, or any other security of the central government or the state government to which the deceased was entitled.
  • Family Arrangement: Family arrangement resolves present or possible future disputes among family members ensuring equitable distribution of property among the family members.[2] In a Family arrangement, a member gives up all claims in respect of all the properties in dispute other than the ones falling to their share. The rights of all the others are recognised. Therefore, under a Family arrangement, members of a family may decide amongst themselves about the distribution of the property of the deceased. A Family arrangement would have to be appropriately stamped and registered. However, even oral arrangements are valid in the eyes of law.
  • Administration Suit: Order 20, Rule 13 of the Civil Procedure Code, 1908 deals with an administration suit that is filed by a person seeking administration of the estate of the deceased. It is resorted to when there is no amicable settlement of disputes amongst the family members of the deceased. Under the decree, distribution of the assets of the deceased amongst the heirs can be sought along with the administration. In an administration suit, the court takes upon itself the function of an executor or administrator and administers the estate of the deceased. The suit in its essence is one for an account and for application of the estate of the deceased for the satisfaction of the debts of all the creditors and for the benefit of all others who are entitled.
  • Partition: In the case of Hindus under the Hindu Succession Act, the co-parceners may claim for a partition of the property. Under the Mitakshara law, the partition of a joint estate consists of defining the shares of the coparceners in the joint property. Once the shares are defined there is a severance of the joint status. Therefore, all that is required for a partition to take place is a definite and unequivocal intention by a member of a joint family to separate himself from the family. An actual division of the property by metes and bounds is not necessary. It may be declared orally or by an agreement in writing or by instituting a suit for partition of the property in the court. The difference between family arrangement and partition is that any member of the family can enter a family arrangement, but partition can only take place between co-parceners.


Not only have the consequences of the pandemic made protection of assets a top priority for most individuals but it has also encouraged people to ensure the protection of their assets through a Will or a Trust. The primary reason for this change in approach can be owed to India’s pluralistic society which sets limitations on estate and succession rights and adopts the regime of forced heirship in some cases of intestate succession. Additionally, the time-consuming and tedious process for completing the transfer of assets when the courts get involved has also facilitated this shift in individual priorities.


[1] Ramesh Chand Sharma V/s State & Ors  (High Court of Delhi, Test. Cas. 66/2011, Date of Decision: 20.01.2015, Coram: Indermeet Kaur, J.)

[2] Kale & Others vs Deputy Director of Consolidation 1976 AIR 807

Image Credits: Photo by Matthias Zomer from Pexels

Not only have the consequences of the pandemic made protection of assets a top priority for most individuals but it has also encouraged people to ensure the protection of their assets through a Will or a Trust. The primary reason for this change in approach can be owed to India’s pluralistic society which sets limitations on estate and succession rights and adopts the regime of forced heirship in some cases of intestate succession.


Share on facebook
Share on twitter
Share on linkedin

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.



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.




[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.


Share on facebook
Share on twitter
Share on linkedin

Corporate Social Responsibility (CSR) during Covid-19

The novel coronavirus (“COVID-19”) was declared as a pandemic by the World Health Organization on March 11th, 2020 and subsequently, the Government of India decided to treat it as a notified disaster.  Accordingly, the Government took various steps to curb the spread of the disease as well as minimize the impact on the economy. While businesses were grappling with the new reality of this global uncertainty, their support and participation was considered imperative to manage the current situation. To encourage entities and garner their cooperation, the Government decided to treat funds spent on activities relating to COVID-19 as part of CSR performance. Additionally, the Ministry of Home Affairs of India issued directions to lockdown all the states in India till 20.05.2020 (“Lockdown Period”) and has come up with various notifications with respect to payment of salaries/ wages to employees.

Under section 135 of the Companies Act, 2013 (“Act”), every company having a net worth of Rs. 500 Crores or more, or turnover of Rs. 1000 Crores or more or a net profit of Rs. 5 Crores or more during the preceding financial year shall constitute a CSR Committee. This CSR Committee shall formulate and recommend a CSR policy for the activities to be undertaken by the company, recommend the amount of expenditure to be incurred on the activities and monitor the CSR policy of the company from time to time. The company shall spend, in every financial year, at least 2% of its average net profits made during three immediately preceding financial years or since incorporation, whichever is applicable. Moreover, the CSR expenditure shall include projects and programs specified under Schedule VII of the Act.

Keeping in mind the requirement under the Act, the Ministry of Corporate Affairs (“MCA”) issued a General Circular No. 10/2020 dated 23.03.2020 (“General Circular”) on the spending of CSR funds for COVID-19. The MCA has clarified that spending of CSR funds for COVID-19 is an eligible CSR activity. The MCA through the General Circular has included the promotion of health care including preventive health care and sanitation, and disaster management to the list of CSR activities under Schedule VII. Furthermore, it is pertinent to note here that as per General Circular No. 21/2014 dated 18.06.2014 issued by MCA, the entries in Schedule VII are broad-based and must be interpreted liberally so as to capture the essence of the subjects therein. With this change, Schedule VII now recognizes any contribution to incubators funded by Central or State Government or any Government agency engaged in conducting research in science, technology, engineering, and medicine as falling within the ambit of CSR. 

Moreover, the Government of India has set up a public charitable trust under the name of Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (“PM CARES Fund”) to deal with any kind of emergency or distress situation, like the one posed by the COVID-19 pandemic. In view of this, the MCA issued Office Memorandum F. No. CSR-05/1/2020-CSR-MCA dated 28.03.2020 which provides that any contribution made to the PM CARES Fund shall qualify as CSR expenditure under item No. (viii) of the Schedule VII of the Act, which reads as under:

(viii) contribution to the prime minister’s national relief fund or any other fund set up by the central govt. for socio-economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women

The MCA issued further clarifications vide General Circular No. 15/ 2020 dated 10.04.2020 (“New Circular”) due to several queries on the eligibility of CSR expenditure related to COVID-19 activities. The following are the clarifications issued in the New Circular:

  1. The contribution made to the PM CARES Fund shall qualify as CSR expenditure under item no. (viii) of Schedule VII of the Act as stated above.
  2. Any contribution to ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ is not included in Schedule VII of the Act and therefore, it shall not qualify as CSR expenditure.
  3. As provided in the General Circular, contribution made to State Disaster Management Authority to combat COVID-19 shall qualify as CSR expenditure under item no. (xii) of Schedule VII of the Act which reads as under:

(xii) disaster management, including relief, rehabilitation and reconstruction activities

  1. Funds spent on various activities related to COVID-19 under the items of Schedule VII with respect to the promotion of health care including preventive health care, sanitation, and disaster management shall qualify as CSR expenditure.
  2. The payment of salary/wages to employees and workers during the lockdown period is a moral obligation of the employers, as they have no alternative source of employment or livelihood during this Lockdown Period. Therefore, payment of salary/wages to the employees and workers during the Lockdown Period shall not qualify as admissible CSR expenditure. Moreover, payment of wages to temporary or casual, or daily wage workers during the Lockdown Period shall also not count as CSR expenditure as this forms a part of the contractual or moral obligation of the company and is applicable to all companies irrespective of whether they have any legal obligation for CSR contribution under section 135 of the Act.
  3. In case of any ex-gratia payment made to temporary/ casual workers/ daily wage workers over and above the payment of wages, specifically for the purpose of fighting COVID-19, the same shall be considered CSR expenditure. It is pertinent to point out that this payment shall be admissible as a one-time exception provided there is an explicit declaration to that effect by the Board of the company, which is duly certified by the statutory auditors.


To sum it up, the MCA has clarified that the expenses made by the corporate entities with regard to COVID-19 shall be construed to be part of the CSR responsibilities under the Companies Act, 2013 if the activities and expenses include the following:

  1. Contribution to PM CARES Fund;
  2. The contribution made to State Disaster Management Authority; and
  3. Funds spent on activities relating to the promotion of health care including preventive health care, sanitation, and disaster management.

Further, to put rest to the discussions pertaining to payment of salaries and wages to the employees or contract workers, the MCA has also clarified that payment of salaries and wages are moral obligations of a company irrespective of the CSR contribution. Therefore, payment of salaries and wages do not form part of CSR expenditure. However, MCA has provided a one-time exception for ex-gratia payment to the temporary or casual workers for fighting COVID-19.      

Corporates are opting for a hybrid approach where they are partly contributing to the various funds and simultaneously directly getting involved in the process of fighting the disease by manufacturing equipment, making quarantine facilities, and distributing free rations. The key here is to fight the disease from all possible fronts with the help of all possible avenues. Corporates taking an active part reflects their values and shall positively impact their reputation management efforts. However, had the payment of wages been included in the CSR activity, employees who are losing their job could see some respite. That said, the one-time exception for temporary and casual workers is definitely a positive step that goes a long way in resolving the economic distress that is affecting individuals and businesses alike.



Contribution to PM CARES


Contribution to State Disaster Management Authority


Payment of Salaries/Wages


Ex-Gratia Payment Above Wages to Temporary/Casual Workers for Fighting COVID-19

Yes, One Time

COVID-19 Related Activities Under Schedule-VII


Contribution to Chief Minister Relief Fund


Contribution to State Relief Fund for COVID-19’




Image Credits:  Photo by cottonbro from Pexels

Such measures from the Government will certainly create a positive sentiment and a sense of tax certainty amongst the investors and hopefully, help in attracting incremental foreign investment into the country, that will play an important role in promoting faster economic growth and development.


Share on facebook
Share on twitter
Share on linkedin

Undue delay in passing Arbitral Award in violation of Public Policy?

A clause for Alternate dispute resolution (ADR) is incorporated in a contract to ensure avoidance of lengthy and costly legal procedures. Undue delay in arbitration procedure tends to vitiate this essential objective that ADR seeks to achieve.  Further, the ADR process is designed to minimize the interference of courts, however, it is more of fiction as parties unhappy with the outcome of the process take the legal recourse as a dilatory tactic. Therefore, it is essential that arbitral awards are set aside only when there is a grave injustice or is unreasonable on the face of it[I].


Some light was shed on the issue recently by the Hon’ble Madras High Court in the case of Mr. K. Dhanasekar v Union of India and Ors[ii]. The court set aside an arbitral award on an application made to it under section 34 of the Arbitration and Conciliation Act, 2015 holding that undue and/or inordinate delays in passing an award are in fact violative of public policy.


Factual Matrix:


The Petitioner, an engineering contractor, entered into an agreement with the Respondent, Southern Railways, for the collection and supply of 50 mm size machine crushed hard granite ballast for railway track doubling purposes. Certain disputes arose between the parties, and in accordance with the provisions of the contract which provided for settlement of disputes by arbitration, an arbitral tribunal consisting of three arbitrators was constituted. The learned arbitral tribunal dismissed the claim of the claimant in its entirety and allowed the counterclaim of the respondent. Challenging the same, the Petitioner approached the Hon’ble Madras High Court.

The Petitioner, inter alia, contended that there was a severe delay in passing the award. The arbitral tribunal passed the impugned award after a period of 3 years and 7 months which was not a reasonable time period. The Respondent countered that the learned arbitral tribunal, upon hearing the parties at length and upon consideration of all facts and circumstances, had passed the impugned award. Further, the delay in passing the award had not caused any prejudice to anyone and therefore, the award must not be set aside.




Whether inordinate delays in passing an arbitral award was sufficient cause to set aside the impugned award.




The Hon’ble Court observed that the fact that there were delays in passing the impugned award was not disputed. What was disputed was whether such delay warranted the interference of the Hon’ble Court in setting aside the award.

To answer the question, reliance was placed on the decision of the Hon’ble Delhi Court in the case of Harji Engineering Works Pvt. Ltd. v Bharat Heavy Electricals Limited[iii], wherein the Hon’ble Delhi High Court had held that an arbitrator was required to make and publish an award within a reasonable period of time, and in the event that there is a delay, the same had to be adequately explained. The lack of any satisfactory explanation to such delays would be prejudicial to the interests of the parties. The Hon’ble Delhi High Court also held that the parties to an arbitration agreement had the right to be satisfied that the arbitrator was conscious of and had taken into consideration all contentions and claims before adjudicating on the claim. An inordinate delay from the last date of hearing would not provide such satisfaction to the parties.

The Hon’ble Madras High Court, adopting the same rationale found that arbitrators are likely to forget the contentions and pleas raised by parties during the course of arguments. Further, unexplained delay in passing an arbitral award was violative of the public policy of India and therefore liable to be set aside.  




The Hon’ble High Court has proceeded on the assumption that the arbitrators must have forgotten the arguments placed by the parties, despite the fact that written submissions were placed on record by each party. Additionally, Section 29A introduced by the Arbitration Amendment Act, 2015 (further amended in 2019) has prescribed a time limit of 12 months from the date of completion of pleadings, within which period, the Arbitrator must necessarily make the award.  Although the amendment is not applicable to the case at hand (Consequent to the decision of the Supreme Court in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. and Ors[iv] on the retrospective application of the Arbitration Amendment Act, 2015), however, a similar case today would reach the same fate because of these set timelines. The said decision, as well as the amending provision, have the tendency of acting as a tool for the losing party to have the arbitral award set aside on procedural ground rather than on merits. These also increase the interference of the court which might result in unnecessary delays which the amending provision or the decision basically condemns. Further, with the 12 month or 18 months limit (if extended by the parties), the delay might not happen in ADR proceedings but may happen in the legal proceedings which the parties seek to avoid by opting for the ADR mechanism in the first place. In addition, court interference or dependence would hamper the confidentiality that parties seek to achieve through the ADR process. This is violative of the sanctity of arbitral awards and goes against the very fabric of the Arbitration and Conciliation Act itself.

Finally, the Arbitration Council being set up through the 2019 amendment, to undertake necessary measures to promote and encourage the ADR mechanism and to frame policy and guidelines for uniform professional standards, must take cognizance of this. Although provisions for penalizing arbitrators have not been provided in the amendment, the Arbitration Council should consider making regulations on the same to ensure compliance. This might provide an impetus to the overall arbitration process and ensure timely resolution in a fair and equitable manner while avoiding the interference of the court.



[i] Oil and Natural Gas Corporation Ltd., v. Saw Pipes Ltd., [2003 (5) SCC 705]

[ii] O.P. No. 4 of 2015 and O.A. No. 31 of 2015 at

[iii] [2009 (107) DRJ 213]

[iv] (SLP (C.) No. 19545-19546 of 2016)



Image Credits: Photo by Aron Visuals on Unsplash

The Hon’ble High Court has proceeded on the assumption that the arbitrators must have forgotten the arguments placed by the parties, despite the fact that written submissions were placed on record by each party. Additionally, Section 29A introduced by the Arbitration Amendment Act, 2015 (further amended in 2019) has prescribed a time limit of 12 months from the date of completion of pleadings, within which period, the Arbitrator must necessarily make the award.


Share on facebook
Share on twitter
Share on linkedin

Differential Voting Rights – A Boost to Listed Tech Start-ups

Finding a balance between infusion of capital and retaining control are two sides of a scale that every corporate intending to survive and thrive must strive for. Being cognizant of the stress induced by this balancing act, SEBI, the market regulator, decided to relieve the corporate sector by providing a framework[i] for Issuance of Differential Voting Rights (DVR) shares.


Finding a balance between infusion of capital and retaining control are two sides of a scale that every corporate intending to survive and thrive must strive for. Being cognizant of the stress induced by this balancing act, SEBI, the market regulator, decided to relieve the corporate sector by providing a framework[i] for Issuance of Differential Voting Rights (DVR) shares.

DVR is not a new concept in India. It can be traced back by two decades when the Companies Act, 1956 was amended by Companies (Amendment) Act, 2000 to substitute Section 86, which allowed Indian companies to issue DVR Shares.

Issue of DVR can be in two ways:

  1. a) Issue of shares with superior voting rights to founders and/or
  2. b) Issue of shares with lower or fractional or inferior voting rights to raise funds from private/ public investors.

Interestingly, in the year 2009, with the apprehension of possible misuse of the issue of shares with Superior Voting Rights by listed companies, SEBI disallowed and prohibited issue of such shares for listed companies[ii]. However, it permitted issue of shares with inferior voting rights.

Recently, in an apparent reversal of its policy position, SEBI has allowed the issuance of DVR with superior voting rights by listed companies and disallowed any further issuance of shares with inferior voting rights.

The change seems to be a result of the increasing debate on the need to enable promoters/founders of companies, especially technology-based start-ups, to retain decision-making powers and rights vis-à-vis other shareholders while also raising capital.

The framework along with amendments (dated July 29,2019) to the relevant SEBI Regulations[iii] has been notified after considering the recommendations of the Primary Market Advisory Committee (PMAC) and the public comments on the Consultation Paper.  

In this context, we analyse the key aspects introduced by SEBI on DVR for listed companies.

  1. SR shares for listed start up:

Under the new framework, SEBI permitted issue of Superior Voting Rights (“SR shares”) in the ratio of a minimum of 2:1 up to a maximum of 10:1 compared to ordinary shares to the listed companies. However, the market regulator restricted SR shares only to promoters/founders of tech related listed companies.

SEBI has also made it very clear that a company having superior voting rights shares (SR shares) would be permitted to do an initial public offering (IPO) of only ordinary shares to be listed on the Main Board, subject to fulfilment of eligibility requirements of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the following conditions:

  1. The issuer company should be a technology-based company
  1. The SR shareholder should not be a part of the promoter group whose collective net worth exceed Rs 500 Crores. However, the investment of SR shareholders in the shares of the issuer company shall not be considered in the calculation of the collective net worth.
  1. The issue of these SR shares has been authorized by a special resolution passed at a general meeting with notice of specific matters including the size of issues, the ratio of voting rights, differential dividend, sunset clause, and coat tail provisions. Further, the issuer company should have only one class of SR equity shares.
  1. The SR shares should have the following traits:
  • Have been issued only to the promoters/ founders who hold an executive position in the company.
  • Have been held for a period of at least 6 months prior to the filing of Red Herring Prospectus (RHP)
  • Have voting rights in the ratio of a minimum of 2:1 up to a maximum of 10:1 compared to ordinary shares and such ratio shall be in whole numbers;
  • Have the same face value as ordinary shares
  • Should be equivalent to ordinary equity shares in all respects, except for having superior voting rights.
  1. Enabled Corporate Governance

Since there are increasing debates that introduction of DVRs would result in corporate governance issues such as abuse of minority shareholders, weakening of the checks and balances between shareholders and management, etc, the PMAC has recommended measures to mitigate the corporate governance issues that arise with existence of DVR structure.

As such, in view of disproportionate voting rights conferred to promoters vis-à-vis their economic holding, the new framework adopted following measures to make the companies having SR shareholders subject to enhanced corporate governance:

  1. All companies with SR Shares to have independent directors making up at least half of their total directors and two-thirds of their board committees (other than the audit committee). The audit committee is required to comprise only independent directors.
  2. The framework also provides for additional safeguards for ordinary shareholders by way of ‘Coat-tail provisions. The framework enlists the circumstances where SR shares are considered as ordinary shares. The list covers circumstances like winding up of the company, appointment/ removal of independent, related party transactions etc. In these circumstances, SR shareholders will vote on a ‘one share one vote’ basis.
  3. SR shareholder shall be entitled to SR shares in case of bonus, split or rights issues, however, rights cannot be renounced, and ratio shall remain the same as initially adopted by the company.
  4. The SR equity shares shall be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions.
  5. The total voting rights of SR shareholders (including ordinary shares) in the issuer upon listing, pursuant to an initial public offer, shall not at any point of time exceed 74%.
  6. The SR share shall be converted into ordinary voting rights after five years of listing or resignation, demise, merger or demerger where the control would be longer with him.





  1. No more inferior voting rights


Prior to the amendment and framework, inferior voting rights were allowed. Now with the new framework disallowing issuance of inferior voting rights, the watchdog has taken away the investors chance to get benefits like bonus, split etc. PMAC committee and SEBI Board is of opinion that such shares should not be encouraged as they attract less investor interest, trade at discount and therefore negatively impact retail shareholders attracted to such shares. Further, lower fractional rights would likely result in existing ordinary shares to trade at premium resulting in lower returns for institutional investors.


Amendment to the Companies Act, 2013

In line with amendments to the SEBI Regulations, the Ministry of Corporate Affairs has amended the Companies (Share Capital & Debentures) Rules, 2014 relating to issue of DVRs vide notification dated August 16, 2019[iv]. Brief changes made are:

  • The requirement of distributable profit for three years as an eligibility to issue shares with DVR has been removed.
  • The existing cap of 26% of the total post issue paid up equity share capital has been revised to a cap of 74% of total voting power in respect of shares with Differential Voting Rights of a company.
  • The time period for issuance of Employee Stock Options (ESOPs) to promoters or Directors holding more than 10% has been enhanced from 5 years to 10 years from the date of their incorporation.

Section 43(a)(ii) of the Companies Act, 2013, provides that a company incorporated under the laws of India and limited by shares is permitted to have equity shares with differential voting rights as part of its share capital. 


DVRs in Other Jurisdictions


Internationally, the listing of shares with differential voting rights, i.e, DVRs is known as Dual Class Shares or DCS which is permitted in many countries. However, in countries like Australia, Spain, Germany and China, they do not permit Issuers with DCS structure for listing.

In US, issuers with pre-existing DCS structures are permitted to list on the NYSE and NASDAQ. Once listed, issuers with one share one vote structure are not permitted to implement a DCS structure that would reduce or restrict the interest of existing shareholders. Founders of companies like Google, Facebook, Alibaba have adopted this DCS structure in one form or another to retain control over their entity.  However, there are investor activists who are widely against such concentrated voting rights with few founders/ managements. Also, there is ongoing debate in the U.S. Securities & Exchange Commission (SEC) about the continuation of DCS.

When we analyse UK, we can see that DCS structures were used in the 1960s to protect corporations from hostile takeovers or for the Queen to have ‘golden share’. However, now with the emergence of institutional investors, who strongly support one share one vote, DCS shares have become unpopular. Supporting the same, the market regulator there has prohibited DCS for companies listing on the UK’s premium Listing.

On the other end of the spectrum, Singapore and Hong Kong have recently permitted DCS structures with the intent to encourage new technology firms. However, considering the cons of such shares, these countries have adopted detailed checks and balances.  




DVR is widely accepted as a defense mechanism for hostile takeover and dilution of interest in a company. Nevertheless, a highly evolving entrepreneurial community in India that is desperately starving for capital will welcome this initiative that could help pitch their companies on a higher scale. Further, it is in consonance with the government’s strategy for ease of doing business and propelling the start-up environment.

However, only time would tell how effective superior DVR shares would be in achieving the desired objective since fractional shares had been brought in place with similar intent but failed to deliver. Moreover, when the voting interest is separated from economic interests, there are always chances of misuse by promoters. It may also lead to other externalities such as misalignment of interests among shareholders, excessive compensation of management, reduced dividend pay-out, management entrenchment, and expropriation. Finally, it remains to be seen whether the checks and balances put in place to curb misuse are effective or need overhauling.



[ii] SEBI circular no. SEBI/CFD/DIL/LA/2/2009/21/7 dated July 21, 2009

[iii] SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI (Buy-Back of Securities) Regulations, 2018, and SEBI (Delisting of Equity Shares) Regulations, 2009.





Image Credits: Photo by Image by <a href=” /AbsolutVision-6158753/?utm_source=link- attribution&amp;utm_medium=referral&amp;utm_campaign=image&amp;utm_content=2656028″>Gino Crescoli</a> from <a href=”;utm_medium=referral&amp;utm_campaign=image&amp;utm_content=2656028″>Pixabay</a>

DVR is widely accepted as a defence mechanism for hostile takeover and dilution of interest in a company. Nevertheless, a highly evolving entrepreneurial community in India that is desperately starving for capital will welcome this initiative that could help pitch their companies on a higher scale. Further, it is in consonance with the government’s strategy for ease of doing business and propelling the start-up environment.


Share on facebook
Share on twitter
Share on linkedin

The Messi Exit: A Legal & Financial Perspective

With around 65% of GDP in the organized sector coming from family businesses[1], their status as the ‘engines’ of India’s ever-growing economy cannot be underscored. Globally, 35% of Fortune 500 companies are family owned businesses[2]. However, it is startling to note that 70% of the family businesses globally are sold before the second generation gets a chance to take over while only 10% of family businesses are able to survive till the third generation.[3] Further, a study by BAF consultants reveals that 97% of family-run businesses in India don’t have succession plan documents.[4]

An effective family business succession planning not only establishes a smooth transition of leadership in the business between generations, but it also ensures that the control over the business is retained in the family. In addition, adequate wealth planning could also help prevent unwarranted long and expensive legal disputes between heirs in multiple jurisdictions.

Family business succession planning can be achieved through various structures depending upon parameters like the degree of control over the purpose for which the wealth can be used, the manner in which it may be used and the like. One of the most common structures to manage family wealth is “Private Family Trust”.

The fact that a private trust offers numerous advantages, (safeguarding against possible losses due to family-related liabilities which may arise from unforeseen events divorce, death, re-introduction of estate duty in India, etc. to mention a few ) and the ease and flexibility of formulating the mechanics to ensure that the needs, requirements and the objective of the entire family are met, makes it a popular arrangement while planning the transition of family business.

Structuring a Private Family Trust – Key Considerations


A trust may be created through a non-testamentary or by way of a testamentary document (like will)[5]. Pursuant to the Indian Trust Act, 1882, (“Trust Act”) there are four important components of a valid trust one should consider while structuring a family trust for business succession:

  1. The person who creates a trust (settlor/author) should make an unequivocal declaration of an intention on his part which must be manifested through an external expression of it (by written or spoken words or by conduct) as opposed to an undisclosed intention.
  1. The settlor must clearly define and specify the objects. Since the purpose has to be accomplished by a trustee (person/entity on whom trust is reposed), who may not always be the author/ settlor himself, it is necessary that the purpose is clearly declared so that the trustee can faithfully accomplish the author’s purpose, for which the author has reposed confidence in the trustee.
  1. The settlor must specify the beneficiaries. Where there is no transfer of ownership, there is no trust[6]. The settlor gives up the ownership of the property thus resulting in transfer of legal ownership of the property to the trustee and transfer of beneficial ownership to the beneficiaries of the trust.
  1. The settlor must transfer an identifiable property under an irrevocable arrangement and totally divest himself of the ownership and the beneficial enjoyment of the income from the property.

Once the nature and type of private family trust (i.e. discretionary/determinate, revocable/irrevocable) is finalized, amongst others, following key considerations with respect to the structuring of the trust should be kept in mind:

  • Registration and Stamp Duties


A trust deed may be created in a detailed manner, stating the above, preferably with the help of a legal practitioner. The deed should be registered if the transfer of immovable property is involved. However, no formal deed is necessary for recognition of trust created by a will.

Stamp duty would be levied on any such settlement of immovable property to a trust. Although in a few states the stamp duty on gifts to specified relatives is minimal, the same does not apply to trusts and for this reason, transfer through a will is preferred. To minimize the amount of stamp duty, properties are often held through entities, the ownership of which is then transferred to the trust.


  • Appointment of Trustee


A trustee has a fiduciary obligation under law to hold the trust property for the sake of the beneficiaries and is empowered to manage the affairs of the trust. Accordingly, it becomes important to choose the most suitable type of trustee (i.e. a trustee may be an individual, either a trusted family advisor or a member of the family itself). The Settlor or one of the beneficiaries may act as the trustee so long as they operate in that capacity.

Alternatively, the services of an institutional trustee may be employed, especially in instances where neutral decision-making is a primary concern. The family may also consider setting up a Private Trust Company (“PTC”) with family members appointed as directors of the PTC to make decisions with respect to the trust.

While the choice of trustee depends upon the commercial requirements of the family business, a few important parameters listed below need to be considered while making the decision: 

  1. the level of control the family would like to maintain in day to day operations;
  2. neutrality of the trustee;
  3. objective and term of trust;
  4. expertise with respect to the discharge of various fiduciary duties;
  5. annual costs.
  • Powers of a Trustee


The powers of the trustees are defined in the trust deed and the same vary depending upon the structure of the trust and the requirements of the family business. Generally, a trustee has wide-ranging powers that allow him to manage the daily operations of the trust and make distributions to beneficiaries. In order to balance the powers of the trustee, the trust deed may provide for the appointment of a Protector. The role of the Trust Protector is advisory in nature, however, making a provision in the Trust Deed that the trustee must consult the Protector before making key decisions would help to ensure that the decisions by the Trustee are made in the best interest of the family.  

  • Dispute Resolution


The Supreme Court (“SC”) of India in the case of Vimal Shah & Ors. vs Jayesh Shah & Ors.[7] has held that:

“…all disputes arising out of a trust deed and the Trusts Act are not arbitrable in India.”

This has put an end to arbitration as a form of dispute resolution for trusts. The SC analysed the scheme of the trust act finding that it comprehensively and adequately covers each subject pertaining to trust law, right from the creation of the trust and extending to the management of the trust as well as provisions relating to beneficiaries and trustees, including remedies available to get grievances settled. Specifically, on the point of legal remedies, the SC observed that the trust act provides specifically for the resolution of various disputes and confers jurisdiction for the same on Civil Courts. The SC referred to the principle of interpretation that where a specific remedy is prescribed by statute, the person facing such a grievance is denied of any other remedy. Therefore, the SC concluded that the presence of provisions in the trust act specifically dealing with the forum for dispute resolution reflects the intention of the legislature to impliedly bar arbitration of such disputes. That being said, provisions for alternative dispute resolutions mechanisms like conciliation as governed by the Arbitration Act or mediation may still be provided for under the trust deed subject to legal advice.

It was further held in the said case that:

as beneficiaries are not signatories to a trust deed containing an arbitration clause, any disputes arising between beneficiaries or trustees of a trust cannot be referred to arbitration as such arbitration clause is not an “arbitration agreement” between the trustees inter se, between the beneficiaries inter se or between the trustees and the beneficiaries for the purposes of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”).”

Furthermore, the SC clarified that even if the beneficiaries are considered to have accepted the trust deed vis-à-vis the settlor by accepting the benefits thereunder, such acceptance does not imply that an arbitration agreement exists for the resolution of disputes among beneficiaries, among trustees, or among trustees and beneficiaries.

  • Cross border Trust structure


With the number of high net worth families having members residing in various countries, the probability that a trust structure will have cross-border elements is increasing. Given that the Reserve Bank of India (RBI) has strict rules with respect to foreign exchange and the cross-border transfer of funds / immovable property, it becomes pertinent to consider the residency status of the settlor, trustee and beneficiaries of a trust.

For example, an Indian resident settlor may set up a trust outside of India (“Offshore Trust”). In fact, the Foreign Exchange Management Act, 1999 (“FEMA”) of India has granted general permission to a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such ‘Foreign Currency Assets’ have been acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. Such a person may set up a trust in such jurisdiction or any other jurisdiction to which he could contribute the Foreign Currency Assets. Families generally prefer to have an offshore trust set up in a tax-haven or asset safe jurisdiction as apart from deriving the jurisdictional benefit, it ensures confidentiality and buffers assets from business uncertainties.

However, remitting Indian funds to such Offshore Trust should be subject to India’s Liberalised Remittance Scheme (“LRS”), under which resident individuals are allowed to transfer up to USD 250,000 per person per financial year for permitted current and capital account transactions without prior RBI approval. These transactions include the acquisition of immovable property shares or any other assets outside of India. Funds transferred through LRS may even be used to set up a foreign company[8].

Further, while the Trusts Act does not preclude a non-resident from acting as a trustee to an Indian Trust, it does require that where a trustee is absent from India for a continuous period of six months or leaves India with the intention of residing abroad, then a new trustee may be appointed in his place[9].

Considering that Indian foreign exchange laws do not permit non-residents to directly hold immovable property, the trustee of a trust having immovable property would not be legally capable of holding such property on behalf of the trust and would therefore not be competent to act as trustee. Moreover, in the event that a trustee is non-resident, the trust should not be engaged in activities prohibited for non-residents under India’s foreign exchange regulations.

Taxation of Private Trust

Taxation of private trust in India is governed by the provisions of Income Tax Act, 1961 (“ITA”) which stipulates the provisions with respect to the determination of residence, chargeability to tax, computation of income, etc.

For the purposes of Indian Income Tax, a Private Trust is not treated as a separate taxable unit.  However, under the ITA, the trustee acquires the status of that of a beneficiary and is taxed as a representative of the beneficiaries (“Representative Assesee[10]”). The provisions dealing with the taxation of a Private Trust is stipulated under section 161 to 164 of the ITA and the same is discussed below:

  • Irrevocable Determinate Trust

Given that in such Trust, the beneficiaries are identifiable and the beneficial interest of such beneficiaries have already been determined, the income of the trust can be taxed at the hands of the trustees as  Representative Assesees or the beneficiaries depending on the extent of their interest in the trust, however, in no event there would be double taxation for the same income.

Further, under the provisions of ITA[11], any transfer of a capital asset under a gift or will or an irrevocable trust is exempt from any capital gains taxation as no gains are made by the author of the trust who transfers the property. Similarly, the property received by a trust created or established solely for the benefit of ‘relatives’ (as defined) of the individual is exempt from the purview of tax. Moreover, trusts receiving dividend income will be exempt from the additional 10% tax on dividend income exceeding Rs 10 lakh.

Another issue for consideration with regard to the taxation of a trust is the application of Section 56 of the ITA on a settlement. Section 56(2) of the ITA provides for the taxation of any sum of money and specified properties (value of which exceeds fifty thousand rupees) received without consideration or for inadequate consideration as ‘income from other sources.’ However, the said section does not apply to any sum of money/property received, inter alia, from relatives as defined in the ITA.

Therefore, where money or any property is received without consideration or for inadequate consideration, other than being from a relative, the income would be taxable in the hands of the trustee/beneficiary at the progressive slab rates, the maximum rate being 30% plus applicable surcharge and education cess.

  • Irrevocable Discretionary Trust

As stated earlier, a Discretionary Trust is one which gives the Trustee, the powers to decide which beneficiary receives the fund and to what extent.

In case of a Discretionary Trust, the taxability of the trust in India would depend on whether the income of the trust is the income of the beneficiaries. No income would accrue or arise in the hands of its beneficiaries till such time that the trustee makes a decision regarding the allocation of the trust property or income to one or more of the beneficiaries and the beneficiaries become eligible to receive the property or income. In such a situation, one also needs to consider whether the trustee or the trust could be taxed under the residual category as ‘artificial juridical person’. An artificial juridical person would be subject to tax in India if it is resident in India or it receives income in India, or any income accrues or arises to it in India. Residential status of an artificial juridical person is determined on the basis of the situs of its control and management. If control and management is situated wholly outside India in the relevant year, the artificial juridical person would be treated as a non-resident for the purpose of Indian taxation.

Thus, as long as the trust’s administration and decision making are not exercised by anyone in India even for a part of the year, an offshore trust should not be regarded as resident in India and such a trust should not be taxed in India.

In case of an onshore (in India) discretionary trust having resident and non-resident beneficiaries, a trustee will be regarded as the representative assessee of the beneficiaries and shall subject to tax at the maximum marginal rate.

  • Revocable Trust

Under the ITA, a transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor or it in any way gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. Thus, where a settlement is made in a manner that a settlor is empowered to reassume possession over the assets of the trust or entitled to recover the contributions over a specified period, and is entitled to the income from the contributions, the trust is disregarded for the purposes of tax, and the income thereof is taxed as though it had directly arisen to the settlor. If there are joint settlors to a revocable trust, the income of the trust will be taxed in the hands of each settlor to the extent of assets settled by them in the trust.


Succession planning, although has been around for a long time, the changing legal and business environment has made it multifaceted and therefore complex. With rumors of a reintroduction of estate duty/ inheritance tax doing the rounds and the Bankruptcy Law being active since 2016, it is better succession planning is done well in advance to meet future ambiguities. High net-worth individuals and families need to adequately plan the future of their wealth to avoid family conflicts and weaklings being deprived of affluence they inherited.  Therefore, the creation of a private trust would provide desired flexibility and ensure ease of operation as well as the possibility of correction within the lifetime of the settlor.


[1] Based on an article published by ValuEndow

[2] Study by Conway Center for family business

[3] Data as available on

[4] The Economic Times, August 3, 2018

[5] A Trust intending to hold an immoveable property must be established by a duly registered trust deed.

[6] Refer Section 5 of the Trust Act

[7] Supreme Court of India – Vimal Kishor Shah & Ors vs Jayesh Dinesh Shah & Ors on 17 August, 2016, Bench: J. Chelameswar, Abhay Manohar Sapre

[8] Refer Master Direction – Liberalised Remittance Scheme (LRS) by RBI

[9] Refer section 73 of the Trust Act.


[10] For the purposes of Income Tax Act, the term Representative Assessee shall mean

  • respect of the income of a non-resident specified in sub-section (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163;
  • in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot;
  • in respect of income which the Court of Wards, the Administrator- General, the Official Trustee or any receiver or manager (including any person, whatever his designation, who in fact manages property on behalf of another) appointed by or under any order of a court, receives or is entitled to receive, on behalf or for the benefit of any person, such Court of Wards, Administrator-General, Official Trustee, receiver or manager;
  • in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any wakf50deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees;

[11] Refer to section 47 of the ITA



Image Credits: Photo by John Schnobrich on Unsplash

Succession planning, although has been around for a long time, the changing legal and business environment has made it multifaceted and therefore complex. With rumors of a reintroduction of estate duty/ inheritance tax doing the rounds and the Bankruptcy Law being active since 2016, it is better succession planning is done well in advance to meet future ambiguities. High net-worth individuals and families need to adequately plan the future of their wealth to avoid family conflicts and weaklings being deprived of the affluence they inherited.