The Great Indian Asset Monetisation Dream: Infrastructure Investment Trusts

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

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

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

 

Asset Monetization: The Apprehensions and Options

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

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

 

InvITs: Structure, Advantages and Risks

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

 

 

Advantages of InvITs

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

 

Risks of InvITs

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

InvITs in India – The Scenario Thus Far

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

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

Refernces:

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

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

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

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

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

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

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

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

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

[10]

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

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

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

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

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

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

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

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

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

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

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

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

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

Image Credits: Photo by Fivesouls Faisol

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

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Public Interest Litigation: A Knight in Shining Armour

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

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

 

Public Interest Litigation: Origin and Constitutional Aspects 

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

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

 

Judicial Interpretation of Public Interest Litigation

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

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

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

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

 

Public Interest Litigations sans the Public Interest 

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

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

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

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

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

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

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

The Court has to be satisfied with:

(a) the credentials of the applicant;

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

(c) the information being not vague and indefinite.

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

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

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

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

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

References: 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[16] AIR 1980 SC 1535.

[17] AIR 1980 SC 1622.

[18] AIR 1982 SC 149.

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

[20] AIR 1983 SC 378.

[21]  1983 (2) SCC 308.

[22] AIR 1984 SC 177.

[23]  (1996) 7 SCC 20.

[24] AIR 2002 SC 350.

[25] AIR 1982 SC 149.

[26] AIR 1990 SC 2060.

[27] AIR 2007 SC 758.

[28] AIR 1997 SC 272.

[29] AIR 2005 SC 2841.

[30] (2005) 1 SCC 590.

[31] AIR 1984 SC 309.

[32]  (1999) 1 SCC 53.

[33] AIR 2008 SC 913.

[34] (1992) 4 SCC 305.

[35] (2003) 7 SCC 546.

 

Image Credits: Image by Sasin Tipchai from Pixabay 

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

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The Best Time to Enact Data Protection Laws was 20 Years Ago; The Next Best Time is Now!

The road to personal data protection in India has been rocky. In 2017, India’s Supreme Court upheld the right to privacy as a part of our fundamental right to life and liberty. A panel chaired by retired Justice B N Srikrishna was given the task of drafting a Bill. In 2018, this panel submitted its draft to the Ministry of Electronics & Information Technology. The Personal Data Protection Bill that was eventually tabled in parliament in December 2019 proposed restrictions on the use of personal data without the explicit consent of citizens and introduced data localization requirements. It also proposed establishing a Data Protection Authority.

However, the bill was widely seen as a diluted version of what was originally envisioned by the Srikrishna panel in terms of its ability to truly protect the data/privacy of individuals. The bill was seen to place a significant regulatory burden on businesses and thus viewed as an impediment to the “ease of doing business” in India. A major bone of contention was the bill granting the government a blanket right to exempt investigative agencies from complying with privacy and data protection requirements. Understandably, there was pushback from BigTech, global financial services players as well as activists; even startups were unhappy with the proposed regulatory burdens.

In December 2021, after a number of extensions spanning over two years, the Joint Parliamentary Committee (JPC) that was set up to examine the draft bill submitted its report to the Lok Sabha. The JPC report has reportedly highlighted areas of concern and proposes a number of amendments/recommendations such as:

  • a single law to cover both personal and non-personal datasets;
  • using only “trusted hardware” in smartphones and other devices;
  • treating social media companies as content publishers, thus making them liable for the content they host.

In early August 2022, the government withdrew the Personal Data Protection Bill, 2019, with the promise to introduce a new one with a “comprehensive framework” and “contemporary digital privacy laws”.

 

India needs New Regulations to Plug the Data Protection Gap

That India needs robust data protection and privacy regulations which should be enacted soon is beyond debate. With digitalization becoming ever more pervasive by the day, the longer we are without clear regulations, the greater the risk is to our citizens. Each of the major trends below has the potential to infringe on individual privacy and can give rise to large-scale risks of user data (including personally identifiable information) being leaked/breached and misused:

  • The growth in digital banking, payment apps and other digital platforms.
  • The potential for Blockchain-based apps (in education- e.g., degree certificates, mark sheets; in health care – medical records; in unemployment benefits; KYC, passports etc.).
  • The growing popularity of crypto assets (and the attendant risk of them being used for money laundering, funding terror/anti-national activities etc.).
  • The rise of Web 3.0.
  • The increase in the use of drones for civilian purposes (e.g., delivery of vaccines, food to disaster-hit areas etc).
  • The emergence of the Metaverse as a theatre of personal/commercial interactions.

According to a news report, IRCTC had sought the services of consultants to help them analyze the huge amount of customer data they have and explore avenues to monetize the information. Given that the existing bill has been withdrawn, they have deferred this plan till new legislation is in place. Delays in enacting new data protection legislation thus also can impact revenue growth and profitability of various businesses- which is another reason for quickly coming up with new legislation.

 

The New Data Protection Law should be Well-defined and Unambiguous

While “consent” must be a cornerstone of any such legislation, the government must also ensure that users whose data need to be protected, fully understand the implications of what they are consenting to. For example, each time an individual downloads an app on his/her smartphone, the app seeks a number of permissions (e.g., to mic, contacts, camera etc.). As smartphones become repositories of larger slices of personally identifiable information as well as financial data (such as bank/investment details), and authentication details such as OTPs, emails etc., the risks of data breaches and misuse that cause serious harm increase. There are a number of frauds and digital scams to which citizens are falling prey. Commercial and other organizations that build and manage various digital platforms must be held accountable for what data they capture, how they do so, why they need the data, how/where they will store such data, who will have access to them etc.

Just as important is for the new law to define unambiguously terms like “critical data”, “localization”, “consent”, “users”, “intermediaries” etc. Many companies are establishing their Global Captive Centres (GCCs) in India, to take advantage of the large talent pool and process maturity. Strong laws will encourage more layers to consider this route seriously, thereby adding to jobs and GDP growth. Such investments also make it easier for India to be a part of emerging global supply chains for services (including high-value ones such as R&D and innovation).

It must address the risks of deliberate breaches as well. For instance, if hybrid working models are indeed going to remain in place, who should be held responsible for deliberate data leaks by employees working remotely? Or by their friends/relatives/others who take screenshots (or otherwise hack into systems) and share data with fraudsters?

While fears of an Orwellian world cannot be overstated, India’s new data privacy/protection legislation must be sufficiently forward-looking and flexible to give our citizens adequate safeguards. If the government fails to do so, our aspirations to become one of the top three nations on earth will take much longer – worse, they main only remain on paper as grandiose but unfulfilled visions.

Picture Credits: Photo By Fernando Arcos: https://www.pexels.com/photo/white-caution-cone-on-keyboard-211151/ 

While fears of an Orwellian world cannot be overstated, India’s new data privacy/protection legislation must be sufficiently forward-looking and flexible to give our citizens adequate safeguards. 

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In Focus: Why Is It Important to Bridge the Gender Inequality Gap in India

The Global Gender Gap Index of 2022[1], released by the World Economic Forum, in July placed India at the 135th position out of 146 countries. Contrastingly, in 2021, India was placed in the 140th position out of 156 countries. The Global Gender Gap Index benchmarks the current state and evolution of gender parity across four areas of concern- economic participation and opportunity; educational attainment; health and survival, and political empowerment. At present, India fares the worst in the health and survival category.

Discrimination affects many aspects of the lives of women, from career development and progress to mental health disorders. While Indian laws on rape, dowry and adultery have women’s safety at heart, these highly discriminatory practices are still taking place at an alarming rate.

What is Gender Inequality?

Gender inequality is a social phenomenon in which men and women are not treated equally. The treatment may arise from distinctions regarding biology, psychology, or cultural norms prevalent in society. Some of these distinctions are empirically grounded, while others appear to be social constructs. It has serious and long-lasting consequences for women and other marginalised genders. Exposure to violence, objectification, discrimination and socioeconomic inequality can lead to anxiety, depression, low self-esteem, and PTSD. Gender inequality in education has a direct impact on economic growth by lowering the average quality of human capital. In addition, economic growth is indirectly affected by the impact of gender inequality on investment and population growth.

In many developing countries, the disparity in access to quality education between girls and boys adversely impacts the girls’ ability to build human and social capital, narrowing their job opportunities and reducing their entitled wages in labour markets. Often women and girls are confined to fulfilling roles as mothers, wives, and caretakers. Gender norms position girls as caretakers, which leads to discrimination with respect to the distribution of domestic duties. 47% of the Indian population is female, out of which only 19% of the population actively contributes to the country’s GDP.[2]If India were to bridge this gap, it could expand the GDP by a third by 2050, equating to $6 trillion.

Rural households that are headed by women suffer more from poverty than those headed by men. Social and cultural barriers, a lack of kindergartens, as well as the burden of unpaid housework, prevent women from developing their skills and from generating an income.

Within the context of population and development programs, gender equality is critical because it will enable women and men to make decisions that impact more positively on their own sexual and reproductive health as well as that of their spouses and families.

 

Gender Inequality in the Workplace

Men and women alike may face issues regarding gender inequality in the workplace, although women typically deal with it more often than men. Gender inequality occurs in the workplace due to traditional gender roles and persistent gender bias. Traditional gender roles may be indicative of how much extra time and effort an individual can put into their jobs since employees are usually expected to go above and beyond to prove their worth. There are gender biases that may inadvertently give the advantage to one gender over the other in the workplace, such as the idea that men have more physical capability or that women are better in nurturing roles.

Gender equality in the workplace is very important for one to grow and develop a business.

When a business proactively takes steps to resolve gender discrimination, it automatically enables them to increase productivity, alleviate conflict, and reduce the chances of legal issues. Gender equality is the key to capturing skills, ideas and perspectives that each gender has to offer. People prefer to work at companies that prioritise equality, diversity, and inclusion. Gender inclusion in the workplace varies depending on the business. However, excluding an individual from team projects, company outings, meetings and necessary decision-making because of gender falls within the realm of gender inequality. When an individual is not included in tasks or events, it can prevent them from becoming productive workers.

Gender equality in the workplace means employees of all genders have access to the same rewards, opportunities, and resources at a company, including:

  • Each gender can fully participate in the workplace.
  • Equal opportunities for each gender for promotions, and career progression to achieve leadership positions.
  • Equal pay and benefits for equal work.
  • Equal consideration of needs.
  • Acceptance rather than discrimination against those who have caregiving and family responsibilities.

There are several benefits for companies who maintain gender equality in the workplace, including the following:

  • Positive company culture A gender-equal work environment where all employees feel respected and valued creates an overall more positive workplace for all your employees. When you have a gender-diverse environment, your employees will likely notice that their co-workers have talents and strengths they don’t possess themselves. The appreciation for these differences will help promote an environment of respect among the team.
  • More innovation and creativity People of different genders bring unique talents, strengths and skills into the workplace, which can improve collaboration and result in a stimulating and creative environment. In fact, companies often find that gender diversity can lead to greater innovation within the workplace.
  • Build a great reputation – By promoting gender equality in the workplace, a business can foster a great company reputation with the outside world. People who have similar values will want to work for them, and with happy employees, the business will have a positive and productive workforce.
  • Improved conflict resolution – Strong communication skills among employees are essential for company-wide success. People of different genders naturally communicate differently, with some preferring to communicate problems directly and others working as peacemakers. When you combine these different communication styles in one work environment, you can more easily achieve conflict resolution.

 

The Legal View

A look at some of the decisions court has taken over the years, championing women’s rights in the workplace, at home, and in public spaces to give women their due:

 

Daughters’ Rights in Hindu Undivided Family Property (HUF)

A landmark judgment in protecting women’s rights in the context of the family is the SC judgment in Vineeta Sharma v. Rakesh Sharma (August 2020) where the court held that daughters would have equal coparcenary rights in Hindu Undivided Family property (HUF) by virtue of their birth and could not be excluded from inheritance, irrespective of whether they were born before the 2005 amendment to the Hindu Succession Act, 1956.

Before the 2005 amendment, there was marked discrimination in determining the rights of a son and daughter in claiming the inheritance. A son could claim a share in HUF property “as a matter of right,” however, a daughter did not have any rights after marriage as she was considered to be a part of her husband’s family. Even after the amendment, judgments of various courts and the Supreme Court itself in Prakash v. Phulvati (2016) held that a daughter could be eligible to be a co-sharer only if the daughter and the father were alive as of September 9, 2005 (the date of the amendment). The Supreme Court, by virtue of the Vineeta Sharma judgment, extended the benefit of the 2005 amendment and legitimised the position of women as an integral part of their father’s families.

 

Protection at the Workplace

The court has also sought to provide for the safety of women in the workplace by protecting them from sexual harassment. In the case of Vishakha v. State of Rajasthan [1997 AIR 3011 (SC)], the court framed detailed guidelines for employers to follow to provide for a mechanism to redress the grievances of their female employees. The court felt the need to develop guidelines to “check the evil of sexual harassment of working women at all workplaces” in the “absence of domestic law occupying the field.” These guidelines were eventually formalised as legislation with the passing of The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, a vital law to protect millions of women who enter the country’s workforce every year.

 

Participation in Defence

The Supreme Court also held in its 2021 judgement in the case of The Secretary, Ministry of Defence v. Babita Puniya & Ors. that all women army officers are eligible for permanent commissions, allowing them to be in commanding roles in the defence forces. Women officers are now on par with their male counterparts when it comes to promotions, rank, benefits and pensions, thereby fortifying their position in the defence sector, an institution with rigid gender norms.

The court also slammed the Indian Army on August 18, 2021, for disallowing women to appear in National Defence Academy (NDA) examinations. The Supreme Court ordered that women can also sit for National Defence Academy (NDA) examinations. It allowed women candidates to take the examination and said the army’s policy for women was based on “gender discrimination.” The Supreme Court told the Centre that women candidates must be allowed to sit for the entrance exam to the National Defence Academy in November 2021. It cannot defer for one year. Further, medical standards should be tentatively notified and UPSC to issue a corrected notification for the November exam.

 

Acid attack

The Supreme Court, in the case of Laxmi v. Union of India (2014), a PIL brought about by Laxmi, an acid attack survivor, issued guidelines for the welfare of acid attack survivors, besides imposing a country-wide restriction on the sale of acid and compensation to the victims. The judgement led to an amendment in the criminal law, making acid attacks a specific offence and framing a victim compensation scheme for the survivors.

 

Triple Talaq

In the case of Shayra Bano v Union of India [2017 SCC 963 (SC)], the court declared that the practice of instant triple talaq (talaq-e-bidat) is against the basic tenets of the Quran. Talaq-e-bidat is a practice that gives a man the right to divorce his wife by uttering ‘talaq’ three times in one sitting, without his wife’s consent. The court directed the Centre to pass legislation in this regard, which led to the Muslim Women (Protection of Rights of Marriage) Act, 2019. As per the Act, any Muslim husband who pronounces triple talaq on his wife shall be punished with imprisonment which may extend up to three years and a fine. The judgement also saw a heartening departure from the conservative approach taken by the court in Mohd. Ahmed Khan v. Shah Bano Begum (1985). The court also departed from its traditional reluctance to issue judgments in matters of faith while passing its verdict in the Sabrimala (2019) issue. The court held that devotion cannot be subjected to gender discrimination and permitted the entry of women of all ages into the Sabarimala Temple despite a centuries-old custom banning the entry of menstruating women.

The expanding sphere of women in civil society, politics and the armed forces in India has been marshalled and punctuated by various judgments of the court. These judgements have slowly but surely chipped away at some of the anachronistic customs and norms that have long kept women on the sidelines and have paved the way for the executive and the legislature to take up steps to uphold women’s rights in the country.

As the importance of women’s rights in the public and private spheres continue to grow, it is imperative that the law too continues to evolve, accommodating their aspirations and desires.

In March, 2021, in the case of Lt. Col. Nitisha and Ors. v. Union of India, the Supreme Court issued a judgement declaring that the Army’s criteria on Permanent Commissions indirectly discriminated against women. In this case, 86 Army officers had approached the SC alleging gender-based discrimination in the Indian Army. The army officers were women who had a Short Service Commission (SSC) and were applying for a Permanent Commission (PC) in the army. Although the criteria adopted to select women PC officers were nearly identical to the ones used for men, some sub-criteria imposed an unfair burden on women. The Court held that the Army’s criteria indirectly discriminated against women officers. The Bench stated that invisible forms of discrimination must be eliminated to achieve substantive equality.

 

SC Gets Three New Women Judges

On October 31, 2021, nine new Chief Justices were appointed by the Supreme Court. Out of the total, three are female judges, a first in the Indian judicial appointments history. This decision was historic because for the first time these many women judges have been appointed and another reason was for the first-time camera was allowed inside the swearing-in room. The newly appointed judges are Justices Hima Kohli, BV Nagarathna and Bela M. Trivedi. Justice Nagarathna is going to be the first female Chief Justice of India in 2027.

 

Conclusion

 

According to Swami Vivekananda, “That nation which doesn’t respect women will never become great now and nor will it ever in the future.” A concerted effort and the support of everyone can and shall pave the way for a truly equal society.

However, skewered gender roles do not provide enough opportunities to improve access to education for women. As a first step, actively breaking the gender bias on the domestic front is the key. Only when women are seen as more than caregivers and housekeepers, will their individuality and potential be truly respected. In this mission, parents play a crucial role, they should teach their child to be respectful towards all genders and refrain from typecasting genders into specific roles. Many other developmental schemes and initiatives for improving the status of women havealso been implemented, but the law and the judiciary can only extend assistance to a certain limit. Real change will only ensue when we as a community and society take conscious initiatives to break the age-old biased practices embedded in our culture.

Skewered gender roles do not provide enough opportunities to improve access to education for women. As a first step, actively breaking the gender bias on the domestic front is the key. Only when women shall be seen as more than caregivers and housemakers, will their individuality and potential be truly respected. In this mission, parents play a crucial role, they should teach their children to be respectful towards all genders and refrain from typecasting genders into specific roles. Many developmental schemes and initiatives for improving the status of women also have been implemented, but the law and the judiciary can only extend assistance to a limit. A real change shall only ensue when we as a community and society take conscious initiatives to break the age-old biased practices embedded in our culture.  

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Legal Implications of Offering Gifts to Public Servants

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

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

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

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

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

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

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

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

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

Image Credits: Photo by Shameer Pk from Pixabay 

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

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Foreign Funding: Guide to FCRA Regulations

The Foreign Contribution (Regulation) Act (“the Act” or “FCRA”) was first enacted in the year 1976 to regulate the utilisation of foreign contributions or hospitality to maintain strict control over voluntary organisations and political associations that received foreign funding. The Act aims to prevent foreign organisations from influencing electoral politics, social, political, economic, or religious discussions in India for wrong purposes and activities detrimental to the public interest. The Act falls under the purview of the Ministry of Home Affairs (MHA) since it is a law relating to internal security and not under the Reserve Bank of India (RBI) despite it being a financial legislation.

In 1984, an amendment was made to the Act requiring all non-governmental organisations to register themselves with the MHA. In 2010, the Act was repealed, and a new Act was enacted with stricter provisions. The Act was further amended in the year 2020 by the Foreign Contribution (Regulation) Amendment Act, 2020 (“FCRA Amendment Act”).

The FCRA is applicable to the whole of India and its citizens outside India and to the associated branches or subsidiaries outside India of companies or bodies corporate, registered or incorporated in India.

 

Prohibition on Accepting Foreign Contributions

The FCRA prohibits the following persons from accepting any foreign contributions:

  1. Candidate for election;
  2. Correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper;
  3. Public servant, Judge, Government servant or employee of any entity controlled or owned by the Government;
  4. Member of any Legislature;
  5. A political party or office bearers thereof;
  6. Organisations of a political nature as may be prescribed;
  7. Associations or companies engaged in the production or broadcast of audio news or audio-visual news or current affairs programmes, through any electronic mode or form, or any other mode of mass communication;
  8. Correspondent or columnist, cartoonist, editor, owner of the association or company referred to in (g) above.

However, the above-mentioned persons can accept foreign contributions in the following situations:

  1. from their relatives;
  2. by way of salary, wages or other remuneration in the ordinary course of business;
  3. by way of a gift as a member of any Indian delegation, provided the gift was accepted in accordance with relevant rules made by the Central Government in this regard;
  4. by way of any scholarship, stipend or any payment of like nature;
  5. by way of remittance received in the ordinary course of business.

 

Meaning of Foreign Contributions

‘Foreign Contribution’ means the donation, delivery or transfer made by any foreign source of any:

  1. article (not being an article given to a person as a gift for his/her personal use, the market value of which is not more than one lakh rupees);
  2. currency (whether Indian or foreign);
  3. security. 

Contributions made by a citizen of India living in another country (e.g. a Non-Resident Indian (NRI)) from his/her personal savings, through the normal banking channels, will not be treated as foreign contributions. However, it is advisable to obtain the passport details of such an NRI to ascertain that he/she is actually an Indian citizen.

Donations from an Indian-origin person who has acquired foreign citizenship will be treated as a foreign contribution. This will also apply to Person of Indian Origin [PIO]/ Overseas Citizen of India [OCI] cardholders as they are foreigners.

Foreign remittance received from a relative shall not be treated as a foreign contribution. However, any person receiving a foreign contribution in excess of ten lakh rupees or equivalent thereto in a financial year from any of his/her relatives is required to inform the Central Government on Form FC-1 within thirty days from the date of receipt of such contribution.

 

Who can Receive Foreign Contributions?

Any person* can receive foreign contribution provided:

  1. The person has a definite cultural, economic, educational, religious, or social programme;
  2. The person must have obtained FCRA registration/prior permission from the Central Government; and
  3. The person must not be a prohibited person under Section 3 of the FCRA (Persons prohibited are already discussed above).

*Person includes –

  • an individual;
  • a Hindu Undivided Family;
  • an association;
  • a company registered under Section 8 of Companies Act, 2013 (earlier Section 25 of Companies Act, 1956).

There is a prohibition on the transfer of foreign contributions to any other person.

The foreign contribution received has to be utilised only for the purpose for which it has been received and not more than 20% of the foreign contribution received in a financial year can be utilised to defray administrative expenses.

 

Registration/Prior Permission under FCRA

Section 11 of FCRA mandates that unless a person having a definite cultural, economic, educational, religious or social program obtains a certificate of registration [COR] or prior permission from the Central Government, such person cannot accept any foreign contribution.

This means that a person should either obtain a COR or obtain prior permission before accepting any foreign contribution.

 

Eligibility to Obtain Registration 

For grant of registration under FCRA, the association should:

  • be registered either under the Societies Registration Act, 1860 [SRA] or the Indian Trusts Act, 1882 [ITA] or under section 8 of the Companies Act, 2013 [Co. Act] etc,
  • has undertaken reasonable activities in its chosen field for the benefit of society, for which the foreign contribution is proposed to be utilised;
  • normally be in existence for at least three years and has spent a minimum of INR 15 lakhs (excluding administrative expenditure) on its core activities for the benefit of society during the last three financial years;
  • submit audited statement of accounts and activity report for the last three years.

 

COR: Form of Application and Period of Validity

  • An application for COR has to be filed electronically on Form FC-3A.
  • COR is ordinally granted within ninety days from the date of receipt of the application.
  • COR is valid for a period of five years and can be renewed within six months of its expiry.

 

Eligibility for Grant of Prior Permission

An association in its formative stages would not be eligible for COR. Such an association can apply for a grant of prior permission, which may be granted for the receipt of a specific amount from a specific donor, for the carrying out of specific activities/projects.

For this purpose, the association should:

  • be registered under the SRA or the ITA or Section 8 of the Co. Act, etc.;
  • submit a specific commitment letter from the donor indicating the amount of foreign contribution and the purpose for which it is proposed to be given; and
  • have prepared a reasonable project for the benefit of the society for which the foreign contribution is proposed to be utilised.

 

Form of Application and Period of Validity of the Grant of Prior Permission 

  • An application for the grant of PP must be filed electronically in Form FC-3B.
  • Grant of PP is ordinally be granted within ninety days from the date of receipt of application.
  • Its validity shall expire once the foreign contribution is fully utilized, for which the PP was/is granted.

 

Opening an FCRA Account

Every person who makes an application for the grant of COR or PP shall be required to open an ”FCRA Account” in a designated bank account with State Bank of India, – Main Branch, New Delhi [the designated FC account].

 

Conditions for Obtaining a Registration/Grant of PP

The applicant:

  1. should not be fictitious or benami;
  2. should not have been prosecuted or convicted for indulging in activities aimed at conversion through inducement or force, either directly or indirectly, from one religious faith to another;
  3. should not have been prosecuted for or convicted of creating communal tension or disharmony;
  4. should not have been found guilty of diversion or misutilization of funds;
  5. should not be engaged or likely to be engaged in the propagation of sedition or advocate violent methods to achieve its ends;
  6. should/is not likely to use the foreign contribution for personal gains or divert it for undesirable purposes;
  7. should/has not contravened any of the provisions of the FCRA;
  8. should/has not been prohibited from accepting foreign contributions.

 

Maintenance of Accounts

  • Every person who has been granted a COR or given a PP is required to maintain a separate set of accounts and records exclusively for the foreign contribution received and submit an annual return, duly certified by a CA, giving details of the receipt and purpose-wise utilisation of the foreign contribution.
  • The annual return is to be filed for every financial year within a period of nine months from the end of the year i.e., by 31st December each year. It is mandatory to submit a ‘Nil’ return even if there is no receipt/utilization of foreign contribution during the year.
  • The annual return is to be submitted online on Form FC-4, duly accompanied by the balance sheet and statement of receipt and payment, which is certified by a CA.
  • The annual return must be filed on a yearly basis, till the amount of foreign contribution is fully utilised.

 

Recent Update: Noel Harper v. Union of India

The Hon’ble Supreme Court has, in the case of Noel Harper v. Union of India[1] upheld the constitutional validity of the Foreign Contribution (Regulation) Amendment Act, 2020 which had placed restrictions on the way foreign contributions are raised and used by organisations in India. It held that the amendments were intended to remedy the mischief of an endless chain of transfers of the foreign contributions that create a layered trail of money making it difficult to trace the flow and legitimate utilisation thereof. Further, the Hon’ble Delhi High Court in the case of Advantages India[2] had also held that provisions of FCRA do not violate Articles 14 and 21 of the constitution and are not arbitrary, unreasonable and ultra vires.

 

Concluding views

FCRA is an internal security law aimed at ensuring that foreign contributions/organisations do not affect the sovereignty of India and its public interest. The provisions under FCRA are quite strict and it is seen that the government is proactively monitoring the compliance relating to the acceptance and use of foreign contributions. It is therefore important for organisations covered under FCRA to follow the law in its true letter and spirit.

References: 

[1] Writ Petition (Civil) Nos. 566, 634 And 751 Of 2021

[2] Writ Petition (Crl) Nos. 3595 Of 2017

 

 

Image Credits: Photo by Nehal Patel on Unsplash

FCRA is an internal security law aimed at ensuring that foreign contributions / organisations do not affect the sovereignty of India and its public interest. The provisions under FCRA are quite strict and it is seen that the Government is proactively monitoring the compliances relating to the acceptance and use of foreign contributions.

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The DESH Bill 2022 has the Potential to Change Our “Desh”

After India enacted the Special Economic Zones (SEZ) Act in 2005 and the rules governing SEZs came into effect in 2006, about 378 SEZs were notified. However, as of March 2022, only 268 of these were operational; the government has de-notified those SEZs that were not functional. In her last budget speech, Finance Minister Nirmala Sitharaman announced the government’s intention to revise the legislative architecture relating to SEZs. She cited lack of demand as a reason and also the fact that significant changes to taxation and incentive regimes in the past decade have made the existing notion of SEZs much less attractive. Further, a couple of years ago, the WTO ruled that the tax-related incentives given to SEZs violated global agreements on subsidies.

The Context of the DESH Bill 2022

 

The biggest reason why India’s SEZ regime needs a relook is because the business environment has changed substantially in recent years. The SEZ regime was originally intended to promote exports so that we could earn valuable foreign exchange. The existing SEZ regime has undoubtedly benefited the Indian IT industry, and this has contributed hugely to building our foreign currency reserves. However, with IT/ITES company business and delivery models changing to include greater on-site delivery capabilities, the sheen has worn off. Also, the manufacturing sector has not been able to leverage SEZs to deliver as much export-based economic benefit as was expected. Change was therefore needed, and this is why the government has been planning a thorough revamp of the existing SEZ system.

 

This is the Right Time for Change

With a number of disruptive events accelerating global shifts in supply chains, investment-intensive manufacturing capabilities in new sectors are becoming critical for India. It is also important to boost trading and other services beyond IT. It has become even more important to look at new ways of attracting capital to complement our demographic strengths. Also, rather than continue to cluster economic activity in certain urban areas, what India needs is more broad-based activity across various states. Only strategies that enable all this will accelerate job creation and hence socio-economic growth and development in India.

This is the context in which the government of India plans to introduce the Development of Enterprise and Service Hubs (DESH) Bill in the ongoing monsoon session of Parliament.

 

Broad Contours of the DESH Bill 2022

The DESH Bill seeks to encourage the creation of two types of hubs: one for services and the second for other enterprises. The former will have requirements for built-up areas and allow a broad range of services-related activities (including R&D), while the latter (which can house manufacturing and/or services), will have land-based area requirements. Both types of hubs can be created by the government (Centre/States), jointly, or by any registered goods and services provider. The idea is to encourage private sector investments to serve the domestic market and not just exports. The expectation is that greenfield or brownfield projects will encourage the creation of infrastructure in non-urban areas.

The Bill proposes to simplify ease of doing business by enabling single window clearances (both central and state). The bill will also make the hubs WTO compliant (tax incentives will be delinked from exports). However, some indirect tax benefits are expected to be provided. It is also likely that businesses operating from these hubs will be allowed to utilize idle capacity to service domestic customers (unlike SEZs that could only export).

What is known about the DESH Bill 2022 so far indicates that the central government is keen to use it as an instrument to activate three key levers of economic growth:

  • Creating infrastructure of the scale needed to become a global manufacturing and services hub – especially as western countries are looking at alternatives to China and other countries (even smaller ASEAN nations and some in Latin America and Africa) are positioning themselves as viable destinations at least in niche sectors. (Some of China’s hubs are more than 250 sq km in area, while Indian SEZs are hardly ever more than 2.5 sq km. Chinese hubs are fully integrated towns with well-developed infrastructure and linkages to ports, airports etc. This explains the huge difference in scale between Chinese hubs and those anywhere else in the world – a gap that India is keen to bridge).
  • Leveraging India’s scientific/technical talent to innovate and leapfrog competition in areas that will become key not just for self-reliance (e.g., pharma, energy, electronics etc.) but also critical to our security (e.g., drones, space technology, composite materials, semiconductor chips etc.)
  • Fostering better cooperation and greater alignment between central and state governments (and inter se) so that outcomes such as employment generation and optimal resource utilization are not sacrificed on the altar of petty political differences or short-term gains.

Let’s hope the DESH Act will achieve all that it seeks to, and not become just another legislation that did not deliver to its potential.

*”Desh” is the Hindi word for “country”. It is interesting that many acronyms coined by the government are easy to remember because they mean something related in Hindi.

Image Credits: Photo by Jesper Giortz-Behrens on Unsplash

The Bill proposes to simplify ease of business by enabling single window clearances (both central and state). The Bill will also make the hubs WTO compliant (tax incentives will be delinked from exports). However, some indirect tax benefits are expected to be provided. It is also likely that businesses operating from these hubs will be allowed to utilize idle capacity to service domestic customers (unlike SEZs that could only export).

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Gems vs James Bond: Delhi High Court Rules in Favour of Cadbury

In a long-pending case of trademark infringement dispute between Mondelez Indian Foods Pvt. Ltd, formerly Cadbury India Limited (Plaintiff) and Neeraj Food Products (Defendants), the Delhi High Court issued a permanent and mandatory injunction against the Defendant for trading “James Bond”- a chocolate product which bore deceptive similarity to Cadbury’s trademark “Gems”. The Court also imposed a fine of INR 15 Lakhs on the defendant for the copyright infringement.

The lawsuit was filed in August 2005 against the defendant, the sole proprietorship of Mr. Charan Das. Plaintiff 1– Cadbury India Ltd. and Plaintiff 2– Cadbury Schweppes Overseas Limited claimed ownership of the mark ‘CADBURY GEMS’ or ‘GEMS’. The Plaintiffs claim that the defendant launched a chocolate product under the name ‘JAMES BOND’ with the identical colour scheme, layout, and arrangement as the ‘CADBURY GEMS’ or ‘GEMS’ products.

Further, the Plaintiffs also claimed that the product “James Bond” also stood in infringement of the copyright and trademark registration, under its former name, Hindustan Cocoa Products Ltd., bearing registration numbers A-50680/90 and A-49975/89 in respect to a character referred to as “Gems Bond”, often used in various marketing campaigns of their product.

                                           Figure: Packaging of Cadbury Gems and James Bond[1]

Hence, the lawsuit sought a permanent and mandatory injunction and damages for trademark and copyright infringement, passing off, unfair competition and other relief.

The Court observed that the packaging of the Plaintiffs’ ‘GEMS’ product is very unique, with illustrations of colourful button chocolates on a blue/purple base with the mark ‘GEMS’ depicted in a number of colours and a splash in the middle, which is very well known to the young and the old alike.

Numerous “GEMS” advertisements feature the phrase “GEMS BOND,” and some examples have also been made public. The defendant’s packaging features colourful button chocolates and the mark “JAMES BOND”/”JAMEY BOND” with the same blue/purple foundation. The trademark “GEMS” appears on a brown background on both the plaintiff’s and the defendant’s products. The label and packaging for the Plaintiffs’ product share the same colour palette as the Defendant’s product. Additionally, the marks are misleadingly and confusingly similar. Therefore, the court categorised the situation as an instance of res ipsa loquitur.

The Court referred to the Supreme Court’s decisions in Corn Products Refining Co. v. Shangrila Food Products Ltd., (1960) 1 SCR 968 and Parle Products (P) Ltd. v. J.P. & Co., Mysore, in which the contention of the test of infringement and deceptive similarity of competing marks (1972) 1 SCC 618 was settled, wherein it was observed that “the overall structural and phonetic similarity and the similarity of the idea in the two marks is reasonably likely to cause a confusion between them and the Court has to see the similarities and not the dissimilarities.”

The Court also placed reliance on the decision of ITC Ltd. v. Britannia Industries Ltd. 2016 SCC OnLine Del 5004, in which it was observed that “Where the product is eatable like a biscuit, the colour and the colour scheme of the packaging play an important role in the consumer making an initial choice and in enabling a discerning consumer to locate the particular brand of a manufacturer.”

Further, while discussing the concept of ‘initial interest in the same judgment, the Court relied on Baker Hughes Limited v. Hiroo Khushalani, while observing, “In some cases, however, it is also possible that a purchaser, after having been misled into an initial interest in a product manufactured by an imitator, discovers his folly, but this initial interest, being based on confusion and deception, can give rise to a cause of action for the tort of passing off as the purchaser has been made to think that there is some connection or nexus between the products and business of two disparate companies.”

However, that may not be entirely true when it comes to products like biscuits. The packaging of a biscuit does become associated with the manufacturer or brand. The colour of the wrapper would certainly play an important role.

In the present case, the Court opined, inter alia, that the product- ‘GEMS’ is also usually liked and consumed by small children in both urban and rural areas. Therefore, in such a case, the test shall not be limited to that of absolute confusion, but even the likelihood of confusion shall be deemed sufficient. Hence, the product’s layout and the colour combination of the packaging play a vital role when making a purchase. Moreover, chocolates are not merely sold in retail stores or outlets but also at roadside shacks, paan shops, patri vendors, kirana stores and stalls outside schools, etc. Thus, considering that the class of consumers the product is targeted at is children, the likelihood of confusion stands high.

In conclusion, it can be inferred by the Delhi High Court’s decision that the test for the likelihood of confusion stands on several factors, including the product category in dispute and the consumer demographic it appeals to. As observed by the Court, ‘almost everyone’s childhood is associated with Cadbury Gems’; the product was popular amongst many consumers of all ages and across socio-economic backgrounds. Further, the strikingly similar colour scheme of the packets and layouts and the phonetic sounds of the two products were enough to inspire a “likelihood of confusion” at the point of purchase by the consumer, which led the Court to take a firm stand in favour of the Plaintiff.

It can be inferred by the Delhi High Court’s decision that the test for the likelihood of confusion stands on several factors, including the product category in dispute and the consumer demographic it appeals to. As observed by the Court, ‘almost everyone’s childhood is associated with Cadbury Gems’; the product was popular amongst many consumers of all ages and across socio-economic backgrounds.

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PUFE Transaction Under IBC Vis-À-Vis Real Estate Sector

Since the implementation of the Insolvency and Bankruptcy Code, 2016, (“Code”), the Real Estate Sector has been in turmoil, with many transactions entered into by the Builder(s) undermining and jeopardising the legitimate interests of innocuous creditors. The Code encompasses a collection of transactions that the Interim Resolution Professional (“IRP”) and the liquidator appointed by the National Company Law Tribunal (“NCLT”) for companies in insolvency or liquidation should avoid, as stated below. Preference, Undervalued, Fraudulent, and Extortionate Transactions (“PUFE Transactions”) is how the group of transactions is known. Each of the aforementioned has been examined in relation to the Indian real estate sector in order to advance the conceptual nature.

Understanding PUFE Transactions

 

Preferential Transactions

The factors that may lead to transactions being classified as preferential in character are discussed in Section 43 of the Code. Thus, if specific criteria exist in a set of transactions conducted by the corporate debtor that may be preferential in character, they can only be avoided if the IRP or liquidator files an application with the NCLT.

When a court determines that a transaction was not carried out in the ordinary course of business to create a new value in the corporate debtor’s interest, but instead acted to give preferential advantage to a related party or other parties, the transaction is to be avoided under Section 44 of the Code. Its main goal was to reverse the consequences of preferential transactions by requiring the person who received the preference to refund any profit gained as a result of the preference.

 

Undervalued Transactions

An undervalued transaction occurs when a corporate debtor has the malafide intention of causing a wrongful gain to a linked party or selling assets for a cheap price in a short period of time to boost cash liquidity.

In addition, the time frame for challenging an undervalued transaction has been classified according to whether the party is linked or unrelated. As a result, an undervalued transaction with a ‘related party’ might be called into question two years prior to the start of insolvency proceedings, whilst an undervalued transaction with a ‘unrelated party’ could be called into question one year prior to the start of bankruptcy proceedings.

If the NCLT determines that the transaction was undervalued and that the Resolution Professional (“RP”) or liquidator failed to report it despite having sufficient information or opportunity, the NCLT can order the position to be restored to its pre-transaction state and order the insolvency board to initiate proceedings against the liquidator or RP.

 

Fraudulent Transactions

The Code’s scope and ambit for identifying fraudulent transactions are rather broad in order to protect creditors’ legitimate rights against the corporate debtor. The phrasing used in Section 66(1) of the Code, which deals with deceptive dealing, demonstrates the same. As a result, if the corporate debtor conducted business with the intent to defraud creditors or for any other fraudulent purpose, the NCLT can issue an order directing any individual who was knowingly a party to the corporate debtor’s business conduct to make such contributions to the corporate debtor’s assets as the NCLT deems appropriate during the insolvency process.

While Section 66(2) of the Code covers wrongful trading (i.e., conduct that is not fraudulent but falls short of the standards governing directors’ duty to behave correctly in the case of insolvency), the NLCT has the authority to impose a pecuniary penalty on the director or partner.

 

Extortionate Transactions

Extortionate transactions are covered under Section 50 of the Code, which requires the corporate debtor to make exorbitant payments to any of its creditors in the two years preceding the bankruptcy beginning date. An NCLT order may be used to prevent such transactions. If a person’s debt is in line with the law, this rule does not apply.

The two-year period before the start of bankruptcy is crucial for establishing whether a transaction is excessive.

As a result, before engaging in any transaction, contractual parties and creditors must confirm that they have evaluated the company’s most recent financial status, particularly those involving the transfer of assets or value from such a business, to identify any financial crisis indicators.

 

Analysis

Troubled businesses must be prohibited from engaging in activities that may block creditor recovery if insolvency proceedings were to be commenced. In India, where promoter groups typically control enterprises, such measures are essential. Through opaque arrangements, promoter groups may seek to move income from assets to other group companies for their own benefit. As a result, the NCLT has the jurisdiction under the Code to reverse any such transaction in order to safeguard creditors’ and other stakeholders’ interests.

The case of IDBI Bank Ltd. v. Jaypee Infratech Ltd[1]. (“IDBI”), which was confirmed by the Supreme Court in Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd.[2], is an important precedent for PUFE Transactions.

M/s Jaiprakash Associates (“JAL”) established a special purpose firm, M/s Jaypee Infratech Ltd. (“JIL”), to manage the project design, engineering, development, and construction. JAL controlled 70 percent of JIL’s equity. Significantly, JIL encountered financial difficulties and failed to satisfy contractual deadlines for project completion and debt repayment. As a result, JIL’s account was designated non-performing by the Life Insurance Corporation (“LIC”). Since JIL’s account was deemed non-performing, its financial creditors, including IDBI, filed an application with the NCLT’s Allahabad Bench under Section 7 of the Code, which was granted, and the NCLT appointed an IRP. The IRP filed an application with the NCLT after reviewing the transactions, requesting that they be declared as PUFE Transactions.

According to the NCLT, JIL failed to strive diligently to decrease the creditors’ losses and mortgaged the land without JAL’s counter-guarantee since it completed the series of transactions while in financial distress. JIL had also failed to acquire the essential approvals for the challenged acquisition from the JLF lenders as well as the shareholders. As a result, the NCLT determined that the contested transactions occurred during the relevant period and that they were preferential transactions under Section 43 of the Code.

 

Conclusion

PUFE transactions in the real estate sector have become a threat, and the changes have proven unsuccessful in facilitating the filing of a lawsuit against infrastructure and real estate behemoths. The real estate industry in India is one of the few to have risen at an exponential rate during the previous two decades. It has drawn significant investments from many who have put their life savings into realising their ambitions of buying a home. The most sought-after investment channel, on the other hand, has lost favour owing to stagnation.

On the other hand, a careful examination of the modifications reveals that they are helpful to homebuyers. The amendment to the Code is favourable to buyers who are facing difficulties due to incomplete real estate developments. Homebuyers are affected by project delays since they invest a considerable portion of their cash in a down payment and an EMI on the loan while continuing to pay rent in their current location. This situation has now altered as a result of the recent Code modification.

References:

[1] Company Petition NO.(IB)77/ALD/2017

[2]  Civil Appeal NOS. 8512-8527 OF 2019

Photo by: Tierra Mallorca on Unsplash

PUFE transactions in the real estate sector have become a threat, and the changes have proven unsuccessful in facilitating the filing of a lawsuit against infrastructure and real estate behemoths. The real estate industry in India is one of the few to have risen at an exponential rate during the previous two decades. It has drawn significant investments from many who have put their life savings into realising their ambitions of buying a home. The most sought-after investment channel, on the other hand, has lost favour owing to stagnation.

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Organizing the Unorganised: The Indian Construction Industry

The Indian construction industry has been a propellor of economic growth and foreign direct investment in India. It is expected to register a CAGR greater than 10% during 2022 – 2027, while also contributing approximately 13% to our country’s GDP by 2025. In acknowledgement of the sector’s significant contribution to the country’s development, the Indian government has also stepped up its support in form of policies such as establishing the National Bank for Financing Infrastructure and Development (NaBFID) which works towards funding construction and infrastructure projects in India. 

Unregulated Indian Construction Industry: Cause for Concerns

Following are some of the key factors that contribute to a general lack of optimization and chaos in the sector: 

 

One-Sided Construction Contract

 

Construction contracts have been defined by Indian Accounting Standard[1] as a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. It also includes agreements for real estate development to provide services together with construction materials in order to perform the contractual obligation to deliver the real estate to the buyer.” 

There are multiple parties involved in a construction contract, such as an employer, contractor, sub-contractor , vendor, project manager, independent engineer/s , Project Management Consultant (PMC) and others. Among these parties, employer, contractor, independent engineer/s and the PMC play a crucial role.

Numerous institutions, such as the International Federation of Consulting Engineers (“FIDIC”), the Institute of Civil Engineers (ICE), and the Association of Consultant Engineers (ACE) have drafted standard forms of construction contracts. However, common parlance witnessed across the industry is that they do not adhere to/do not want to adhere to such set standards. The employers and contractors draft the construction contracts which cater to their specific requirements. Further, numerous government organisations involved in the construction industry draft contracts that suit their specific needs, exposing a glaring lack of uniformity and fairness with respect to the terms and conditions of the contract.

Under the construction contracts, numerous unfair terms can be seen –

 
No-claim provision:

The provision stipulates that in circumstances of extension of time clauses under the contract, any claims of compensation made by the contractor towards the employer for causing disruption and delay leading to such extension are prohibited.

In the case of R.L Kalathia vs. The State of Gujrat (2011) 2 SCC 400 the Supreme Court observed that,

(i) Merely because the contractor has issued “No Due Certificate“, if there is an acceptable claim, the court cannot reject the same on the ground of issuance of “No Due Certificate“.

(ii) In as much as it is common that unless a discharge certificate is given in advance by the contractor, payment of bills is generally delayed, hence such a clause in the contract would not be an absolute bar to a contractor raising claims which are genuine at a later date even after submission of such a “No-claim Certificate“.

A similar observation was afforded by the Supreme Court in Union of India vs Master Construction Company (2011) SCC 12 349, wherein it was held that if the claimant successfully establishes that the “no claim certificate” had been obtained by fraud/ coercion, then the Court shall have to determine whether the contention is prima facie credible. If not, then it shall be not necessary to send it for arbitration.

The issue has been further clarified in the case of Payan Reena Saminathan vs Pana Lana Palanippa Civil Appeal No. 7970 of 2010, “the receipt given by the appellants and accepted by the respondent, and acted upon by both parties, proves conclusively that all the parties agreed to a settlement of all their existing disputes by the agreement formulated in the receipt. It is a clear example of what used to be well known as common law pleading as ” Accord and Satisfaction ” by substituted agreement. No matter what the respective rights of the parties were, they were abandoned in consideration of the acceptance of all of the new agreement. The consequence is that when such an accord and satisfaction takes place the prior rights of the parties are extinguished. They have in fact been exchanged for the new rights, and the new agreement becomes a new departure , and the rights of all the parties are fully represented by it.

 
Time bar clauses:

The provisions stipulate difficult time periods under which damages and relief enshrined under the contract can be claimed by the contractor towards the employer.

In the case of Muni Lal vs The Oriental Fire and General Insurance Company Limited (1996) 1 SCC 90, the Apex Court clearly held that, “ ….. It is true, as rightly pointed out by Shri Rakesh Khanna, that Section 28 of the Contract Act prohibits the prescription of a shorter limitation than the one prescribed in the Limitation Act. An agreement which provides that a suit should be brought for the breach of any of the terms of the agreement within a time period shorter than the period of limitation prescribed by law is void to that extent.

The Courts have, from time to time, reached to the conclusion that any agreement which seeks to curtail the period of limitation of a party to enforce their right, if shorter than as prescribed by law, then such an agreement shall stand void on account of Section 28 of the Indian Contracts Act.

 
One-sided arbitration clause:

The arbitration clause under these contracts is one-sided since it enables the employer to appoint the sole arbitrator and the panel of arbitrators without a say from the contractor. There is also no uniformity in deciding which arbitration forum/institution one should choose (like SIAC of Singapore ).

In the case of Emmsons International Ltd. Metal Distributors, the Delhi High Court held that when an arbitration clause is conceptualised to deprive the other party of local courts/tribunals or initiate arbitration, then it shall run in violation of section 28 of the Indian Contract Act, which establishes that agreements that restrain legal proceedings are illegal and cannot be enforceable.

However, in the case of Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2001) 6 SCC 356, the Supreme Court upheld the validity of a one-sided arbitration clause that allowed only one party to initiate arbitration in the UK. The judgement has been interpreted as per the English laws, hence the validity of such agreements still lies in the grey area at present in India.

At present, it can only be concluded that one-sided arbitration agreements are not completely invalid in India unless and until their terms and conditions are prima facie against public policy. One such example is the appointment of a sole arbitrator by the employer which has been invalidated by the Supreme Court.

 
Non-payment of Award:

In the majority of contracts in the industry, the authority fails to honour the award passed by the arbitration tribunal and it takes years for the contractor to realise the award. But the contractor has to spend a huge amount of money towards conducting arbitration proceedings and realising the award.

 
Exclusion clauses:

Under such clauses, the employers evade their liability for the delays caused on their part and further exclude them from the damages caused due to the delays on their part.

 
Variation/Additional Works:

In some of the construction contracts, the variation/additional works have not been properly addressed, which has lead not only to a delay in the completion of the project but also to payment for these additional/variation works. There is no lack of formula to decide whether the particular work falls under variation/additional work till it is decided how the other project will proceed.

 
Negative scope of work:

Some of the earlier concession agreements do not provide the formula for arriving at the value of negative scope. In one of the concession agreements, the concessionaire has been asked to pay 80 % of the sums saved in respect of the negative scope of work, but the term “sum saved“ had not been defined under the concession agreement, which led to the dispute. However, this has been addressed in the subsequent concession agreement. But the dispute continues irrespective of the earlier concession agreement.

In Executive Engineer vs Gangaram Chhapolia (1984)3 SCC 627, the Apex Court observed that “ The general rule that the grammatical and ordinary sense of the contract is to be adhered to unless such adherence would lead to such manifest absurdity or such repugnance or inconsistency, applies also to building and construction contracts. The meaning and intention of the parties have to be gathered from the language used. “

The Supreme Court’s decision in S. Harcharan Sinoh vs Union of India 1990 SCC (4) 647 observed that the validity of the additional work shall depend upon the reasonability and limits placed on the quantity of such work which the aggrieved party is required to execute. For this purpose, consideration can be placed on the prevalent industry practices, correspondence between the relevant stakeholders and authorities.

 

Delays in Payments

According to a report released by the Ministry of Statistics and Programme Implementation in March 2022, 425 projects out of 1579 projects have reported cost overruns of approximately 4.83 Lakh Crores and 664 projects have been delayed. According to the report, “The total original cost of implementation of the 1,579 projects was Rs 21,95,196.72 crore and their anticipated completion cost is likely to be Rs 26,78,365.62 crore, which reflects overall cost overruns of Rs 4,83,168.90 crore (22.01 per cent of the original cost).

Delayed payments plague the construction industry worldwide. Such delays happen at every stage of the construction project, including progress payments, milestone payments, return of retention money, performance guarantee fees, etc, resulting in cost and time overruns of the project, increased disputes, cash flow issues and bankruptcy.

The cash flow in the construction project plays a pertinent role for the contractor[2] since it allows efficient and timely payment to all the labourers and other stakeholders in the project. Section 55 of the Indian Contract Act provides that when one party to the contract promises to fulfil the terms and conditions of the agreement on or before the specified time but fails to do so, the other party is entitled to claim damages for the loss suffered by them. Further, Section 73 of the Indian Contract Act envisages that the party who has suffered damages because of the inability of the other party to fulfil the necessary obligations is entitled to be duly compensated.

So, if there is a delay in payments by the employer, the employee or contractor can recover the money under these provisions. It is necessary that the contractor should record all the delays in the payment incurred by the employer during the course of the construction so that it would be easier to prove the actual loss when claiming the damages.

Section 73 and 74 provide for compensations relating to breach of contracts. Section 73 lays down the route to recover actual damages resulting from the loss or damage caused by the breach of the contract. Section 74 provides for the recovery of money stipulated as payments in the contract due to a breach. Delay in payments may be anticipated by the parties while drawing up the contract and relevant provisions for such delay may be included at the time of entering the contract. In such situations, delay in payments shall be considered a contractual breach and the same can be recovered by the parties under Section 74. In case of any uncertainty in calculating the amount of loss suffered, the aggrieved party shall prove the loss suffered and the Court shall decide the compensation.

 

Construction laws: An International Perspective

The rising pertinence of the construction industry has been noted by numerous countries and in response, they have established efficient legislations to govern the sector. Such legislations have efficiently addressed the issues of delays in payments and unfair terms in construction contracts.

 

United Kingdom

The United Kingdom, after Sir Michael Latham’s report titled “Constructing the Team.”, rolled out the UK’s construction laws by enacting “Housing Grant, Regeneration and Construction Law (HGCRA) 1996”. The Act drew commendations from the construction industry due to its efficient features-

  1. The Act classified construction contracts under a separate category of contracts.
  2. It mandates provisions for time-bound payment schedules under all construction contracts.
  3. Enlists contractors and sub-contractors with the ability to claim interest, suspended performance and even terminate contracts if the employer delays or fails to pay. 
  4. Conditional payment clauses have been prohibited under construction contracts.
  5. The act establishes “default periods of payment” which are to be followed in circumstances where it is not specified under the construction contract.

All construction in the United Kingdom is governed by the Building Act of 1984 and the Building Regulations of 2010, which provide for building regulations, situations which call for exemptions from such regulations, regulations relating to documentation, monitoring of construction work, and other provisions relating to drainage, yards, passages and others.

The Scheme for Construction Contracts (England and Wales) Regulations 1998, contain provisions relating to adjudication (notice of adjudication, appointment of adjudicator, powers of the adjudicator) and payments (dates of payment, notice of amount to be paid).

The Health and Safety at Work Act 1974 establishes the duties of employers towards their employees and the general public, the duties of employees at work and other such regulations.

The Construction (Design and Management) Regulations 2015 is a subset of the Health and Safety aspect which applies exclusively to the construction sector. It includes the duty of the client towards managing the project and the duties of the designers, contractors and other stakeholders with relation to health and safety. This legislation establishes the general requirements at the construction site including the fresh air, lighting, stability of structures, excavations, explosions etc.

The Control of Substances Hazardous to Health Regulations 2002 lays down the duties of employers to provide safety measures relating to hazardous substances at work.

 

Singapore

Singapore is another example of a country that has efficiently regulated its construction industry. [3]The Singapore Building and Construction Industry Security of Payment Act 2004 comprehensively addresses the issue of delayed payments under Section 8, wherein the payment is to be made to the contractor within 14 days. Further, the Act, under Section 9, bans conditional clauses of “pay when paid” under construction contracts. Singapore has also established a successful institution like SICA to address the disputes/difference in the contract within stipulated time. Most of the industries in Asia agree to redress their disputes through SICA, and it works well.

 

Other Countries

Further, countries such as New Zealand and Western Australia have drafted the Construction Contract Act 2002 and Construction Contract Act 2004 under which the payment to the contractor should be within the time period of 20 days and 10 days. Such legislation further bans conditional payment clauses under construction contracts.

 

Conclusion

A central construction legislation which addresses all the abovementioned issues is the key to unlocking the full potential of the sector in India. Further, the setting up of a regulatory authority, for instance like TRAI or IRDEA, to identify opportunities for growth, streamline dispute resolution, etc. is also the need of the hour. 

India’s lack of specific regulations for the construction industry brings forth numerous problems for the stakeholders. To start with, the average time period to resolve construction disputes is around 7-8 years. [4]The majority of such disputes revolve around delayed payment and unfair terms under construction contracts. Therefore, apart from implementing a central law, it is also prudent to acknowledge that documentation and other paper work should also be standardised across the sector as per industry best practices.

Countries such as the United Kingdom have witnessed an increased rate of productivity in the sector after implementing construction laws. The UK’s construction industry witnessed a 30% rise in production, and the rates for construction disputes also drastically dropped.[5]

Enough evidence is present before the Indian legislators to take cogent steps towards drafting a specific legislation for the Indian construction industry. It’s time to break ground!

References:

[1] https://www.mca.gov.in/Ministry/pdf/Ind_AS11.pdf

[2] https://ijpiel.com/index.php/2021/05/06/does-india-need-a-construction-law/

[3] https://sso.agc.gov.sg/Act/BCISPA2004?WholeDoc=1

[4] https://economictimes.indiatimes.com/small-biz/legal/rics-introduces-dispute-resolution-service-services-in-india/articleshow/78165537.cms

[5] https://ijpiel.com/index.php/2021/05/06/does-india-need-a-construction-law/

Photo by: Shivendu Shukla on Unsplash

India’s lack of specific regulations for construction industry brings forth numerous troubles for the stakeholders. To start with, the average time period to resolve construction disputes is around 7-8 years. The majority of such disputes revolve around delayed payment and unfair terms under construction contracts. Therefore, apart from implementing a central law, it is also prudent to acknowledge that documentation and other paperwork should also be standardized across the sector as per the industry best practices. 

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