No Conclusion To Doha In 2010

            World Trade Organization members committed last year to concluding the Doha Development Round in 2010. Although senior trade officials have engaged in discussions several times during the first half of the year, the only consensus that appears to have emerged is that a conclusion this year is not feasible.

The primary impasse continues to be between the United States on one hand, and India, Brazil, and China on the other, with each side blaming the other for not being fully committed to the negotiations. India has stated that it is ready to complete a deal based on the draft texts currently on the table. However, the United States argues that current proposals require it to make cuts in agricultural subsidies and manufacturing tariffs without receiving any substantial market access concessions from India and other major emerging markets, especially in industrial goods, agriculture, and services. The United States particularly insists that Brazil, India, and China accept sectoral agreements on chemical products, electronic goods, and industrial machinery. U.S. Trade Representative Ronald Kirk also has rejected the notion that it must “prepay” additional concessions in order to engage in negotiations on industrial tariffs, services or antidumping and subsidy rules.

In March of this year, WTO members participated in a week long “stocktaking” meeting to assess the progress on Doha. Expectations for the meeting were high, as the meeting was mandated during the G-20 meeting in Pittsburgh in September 2009. However, officials left the meeting largely frustrated by the lack of progress, abandoning hopes for a 2010 conclusion. WTO Director-General Pascal Lamy stated in his March 26, 2010 remarks to the Trade Negotiations Committee that the “stocktaking” week resulted in a “clear catalogue of gaps” but what was less clear was the size of the gaps. He noted that the gaps were clear in the reports on agriculture and trade facilitation, but less clear in areas such as non-agricultural market access (“NAMA”) and fishery subsidies. He further noted that where the gaps were clear, political decisions needed to be made and where the gaps were less defined, more technical work needed to be done before a political consensus could be achieved. Lamy stated that delegations agreed upon the following principles:

  • The multilateral nature of the negotiations should not be diminished. However, other avenues for making progress should not be discouraged.
  • There is general agreement among the membership to build on what is already on the table.
  • The development dimension remains central to the outcome of the Round.

Lamy further noted that the process of the negotiations would be a “cocktail” of the following approaches:

  • Chair-led discussions within the negotiating groups.
  • Meetings led by Lamy to ensure that the negotiations are transparent and inclusive.
  • Small groups and bilateral meetings.

Senior officials from the United States, Brazil, China, and India met in Paris on April 27-28 for an initial round of meetings. No consensus was achieved, however, and several countries complained at being excluded from the discussions. On May 27, 2010, trade ministers and senior officials from 20 countries and the European Union met on the sidelines of the Organization for Economic Cooperation and Development’s ministerial meeting in Paris, and trade ministers from the Asian-Pacific Economic Cooperation (“APEC”) forum engaged in informal discussions again on June 6, 2010 in Sapporo, Japan. Lamy noted in his remarks to the Trade Negotiations Committee on June 11, 2010 that work was underway in all of the negotiating groups, under the “cocktail” method agreed by members in March. Despite the differences between India and the United States, the two countries issued a Joint Statement on June 4, 2010 following the U.S.-India Strategic Dialogue, calling for a balanced and ambitious conclusion to the Doha Development Round. A similar commitment was expressed in the Framework for Cooperation on Trade and Investment signed on March 17, 2010.

U.S. and India sign the Framework for Cooperation on Trade and Investment

USTR Kirk and India’s Minister of Commerce and Industry Anand Sharma signed a “Framework for Cooperation on Trade and Investment” on March 17, 2010. The Framework affirmed the U.S. – India Trade Policy Forum as the primary bilateral mechanism to pursue shared trade and investment objectives of India and the United States. The Trade Policy Forum is co-chaired by the U.S. Trade Representative and India’s Minister of Commerce, while the Deputy U.S. Trade Representative and India’s Secretary of Commerce serve as deputy chairs overseeing the work of the Trade Policy Forum’s Focus Groups on Agriculture, Innovation and Creativity, Investment, Services, and Tariff and Non-Tariff Barriers.

           Specifically, India and the United States agreed to use the Trade Policy Forum to achieve the following goals:

  • Increase opportunities for small and medium-sized enterprises in India and the United States to expand ties, enhance participation in global value-chains, and export to and invest in each other’s economies.
  • Promote inclusive economic growth that includes the empowerment of women and disadvantaged groups, and the observance of labor rights.
  • Create opportunities for private sector cooperation in the development and deployment of clean energy and environmental technologies and services.
  • Improve understanding on each country’s approaches to government procurement.
  • Engage with the respective private sectors of each country on a regular basis and to accomplish the objectives set forth by the U.S.-India Private Sector Advisory Group and CEO Forum.
  • Accomplish a balanced and ambitious outcome in the Doha Development Round.

Ron Kirk and Anand Sharma also announced on March 17 the launch of an initiative to integrate U.S. and Indian small and medium-sized businesses into the global supply chain, directly in support of President Obama’s National Export Initiative and Prime Minister Singh’s budget objectives.

Kavita Mohan is an attorney based in Washington D.C. She is a co-editor of India Law News and can be contacted at kavita.mohan@gmail.com.

 

 

by Kavita Mohan

 

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Additional Case Notes

By Ranjan Jha, Bhasin & Co., Advocates

Arbitration Agreement Not Enforceable By Party Where It Was Not Incorporated At Time Agreement Executed.   

In Andhra Pradesh Tourism Development Corporation vs Pampa Hotels Ltd., the Supreme Court held that an arbitration agreement executed before a company is formally registered under the Companies Act, 1956 may not be enforced by the company.  Andhra Pradesh Tourism Development Corpn. (APTDC) and Pampa Hotels Ltd (Pampa) entered into two agreements, a Lease Agreement and a Development & Management Agreement on 30 March, 2002.  Both agreements contained arbitration clauses. Pampa was incorporated under the Companies Act, 1956 on 9 April, 2003.  In April 2004, disputes arose between the parties and APTDC terminated the agreement and took possession of the property that formed the subject of the transaction. Pampa filed an application before the Andhra Pradesh High Court under the Arbitration and Conciliation Act, 1996 (“Act”) for appointment of arbitrators.  APTDC objected asserting, inter alia, on the ground that there was no contract, and therefore no arbitration agreement, between the parties because Pampa had not come into existence as of the date of the two agreements.  The Chief Justice of the Andhra Pradesh High Court appointed an arbitrator to the case, referring all disputes between the parties, including the existence of the agreement, under Section 11 of the Act.

Shortly thereafter, the Supreme Court, in SBP & Co. v. Patel Engineering, held that issues regarding the validity of an arbitration agreement raised in an application for appointment of arbitrator under Section 11 are to be decided by the Chief Justice, or his designee, under Section 11 of the Act.  Accordingly, APTDC filed a Special Leave Petition challenging the decision of the appointment of the arbitrator.  The main questions before the Supreme Court were whether:  (a) an arbitration agreement is enforceable where the party seeking arbitration was a not a company in existence at the time the contract containing the arbitration agreement was executed, and (b) the question of the enforceability of the arbitration agreement must be decided by the Chief Justice or his designee, or by the Arbitrator.

The Supreme Court concluded that if one of the two parties to the arbitration agreement was not in existence when the contract was made, then there was no valid contract.  If the agreements had been entered into by the promoters of the company, stating that the agreements were entered into by the promoters on behalf of a company to be incorporated, and that the terms of the incorporation authorized such action, the agreements would have been valid, and the arbitration clause would have been enforceable.  On the second issue, the Court held that whether there is an arbitration agreement and whether the party who has applied under section 11 of the Act is a party to such an agreement, is an issue that must be decided by the Chief Justice or his Designate under Section 11 of the Act before appointing an arbitrator.  However, because the arbitral tribunal already had been appointed in this case, the Court did not interfere with the appointment of the arbitral tribunal, and left the issue for the arbitrator to decide.

This judgment has a wide range of implications for companies that enter into pre-incorporation contracts – in particular, contracts providing for arbitration.  In light of this judgment, a pre-incorporation contract must be entered into by the promoters of a company on behalf of the company proposed to be incorporated and such contract should be specifically provided for in the terms of the company’s incorporation to fall within the ambit of Section 15(h) of Specific Relief Act, 1963.  The contract entered into by the promoter must also be duly ratified by the company upon its incorporation to avoid ambiguity and legal scrutiny in the future.

Delhi High Court Comes to the Rescue of Low Priced Books

The Delhi High Court analyzed issues of infringement of copyright and the applicability of the first sale doctrine in John Wiley & Sons Inc. & Ors v. Prabhat Chander & Ors.  The court had to decide whether exporting books whose sale and distribution was subject to territorial restrictions could amount to copyright infringement.  The Delhi High Court answered in the affirmative, and rejected an application by the defendants to set aside an earlier ex-parte injunction operating in favour of the copyright owner.  The court held that India follows the principle of national exhaustion and not international exhaustion.

The plaintiffs, international publishing houses, published special low price editions of text books for school and college students in India.  These low price editions (LPEs) were published with the rider that they were meant for sale/re-sale only in the Indian sub-continent and not in any other parts of the world.  The plaintiffs contended that they published LPEs so that the same international level books that otherwise are quite costly might be made available to Indian and other Asian students at prices befitting the Asian markets.  The defendants, a company and its directors, were engaged in the business of selling books online.  The defendants were offering LPEs for sale worldwide in breach of the territorial notice.  The plaintiffs filed suit before the Delhi High Court to restrain the defendants from infringing the copyright of the plaintiffs by exporting the books of the plaintiffs to the countries outside of prescribed territories.  The plaintiffs also filed an application seeking temporary injunction against the defendants, which came up for hearing with the main suit when the court entered an ex parte order against defendants.

Arguing that the earlier ex-parte injunction was erroneous, the defendants contended that the nature of its activities, i.e., export of the books outside the Indian sub-continent, was not tantamount to infringement of copyright.  The defendants invoked the first sale doctrine as a defense, arguing that once the plaintiffs sold a particular copy of the LPE, they could not control its further re-sale.  The defendants also submitted that their act of exporting LPE’s was not prohibited by the Indian Copyright Act, 1957 (the Act).  They submitted that the Act only prohibited the import of infringing articles into India, the Act was silent about exports, and the court should not add words to the legislation.

The Delhi High Court, examining various provisions of the Act, stated that the Act gives a copyright owner the right to exploit his copyright by assignment and licensing.  Such an assignment or license could be limited by way of time period or territory, and could be exclusive or non-exclusive.  Therefore, a copyright owner could exhaust its rights in some territories while protecting its right in others.  Accordingly, the plaintiffs could prevent the defendants from re-selling and exporting their LPEs to territories where their right of distribution and sale had not been exhausted.  The court held that the defendants’ acts were prima facie infringing in nature and the defenses put forth by the defendants to defend their usage were not tenable.  Thus, a temporary injunction was warranted until the case was resolved.

The importance of this decision arises from the fact that the Indian courts have now begun to recognize and protect the right of copyright owners to control the distribution channels of their copyrighted articles in order to obtain maximum royalties.  The courts are respecting the divisions of rights along territorial lines by publishers – a form of division which is supported by Sections 19(2), 19(6) and 30A of the Act – and have held that as far as literary works are concerned, the exhaustion of rights occurs on the first legal sale of a copy of a work only within the territory in which the copyright owner intended the work to be sold.  Thus, the copyright owner would continue to enjoy the right of resale in all other territories.

ICICI Bank Ordered to Pay Rs. 13 Lakh to NRI in Phishing Scam

Believed to be India’s first legal adjudication of a dispute raised by a victim of a cyber crime in phishing case, the adjudicating officer at Chennai, Govt. of Tamil Nadu (“TN”), in Umashankar Sivasubramanian vs. Branch Manager, ICICI Bank and others, recently directed ICICI Bank to pay Rs 12.85 lakh to an Abu Dhabi-based non-resident Indian (“NRI”) within 60 days for the loss suffered by him due to a phishing fraud.  Phishing is a form of internet fraud through which sensitive information such as usernames, passwords, and credit card details are obtained by masquerading as a trustworthy entity.

The ruling was passed under the Cyber Regulations Appellate Tribunal Rules, 2000, with TN IT secretary PWC Davidar acting as the adjudicator under the Information Technology Act, 2000.  The application was filed before Adjudication Officer for the State for adjudication under Section 43 read alongwith section 46 of the Information Technology Act, 2000.  Sivasubramanian, an NRI employed in Abu Dhabi, maintained a bank account with ICICI Bank, and had Internet banking access for his savings bank account.  The Bank sent him periodic statements.  In September 2007, Sivasubramanian received an email from “customercare@icicibank.com” asking him to reply with his internet banking username and password or else his account would become non-existent. Assuming it to be a routine mail, he complied with the request.  Later, he found that Rs 6.46 lakh were transferred from his account to Uday Enterprises, an account holder in the same bank in Mumbai, which withdrew Rs 4.6 lakh by self cheque from an ICICI branch in Mumbai and retained the balance in its account.  When ICICI Bank tried to contact the firm, it found that Uday Enterprises had moved on from the address it had provided two years earlier.

Sivasubramanian contended that the bank had violated the “know your customer” (KYC) norms.  When he didn’t get his money back, Sivasubramanian filed a criminal complaint and also appealed to the State Government’s IT Secretary, Mr. P.W.C. Davidar,  the Adjudicating Officer under the IT Act.  The bank claimed that Sivasubramanian had negligently disclosed his confidential information, such as his password, and as a result became a victim of phishing fraud.

Mr. Davidar stated in his order that a list of instructions the bank had put up on its Web site and which it sends to customers were of a “routine nature” and did not help a customer distinguish between an e-mail from the bank and an e-mail sent by a fraudster.   He observed that the bank had not provided additional layers of safeguard such as due diligence, KYC norms, and automatic SMS alerts.  He rejected the bank’s effort to take shelter behind routine instructions on phishing and stated that the bank failed to take steps to prevent unauthorized access to its customers’ accounts.  Mr. Davidar also observed that the bank’s actions indicated it had “washed its hands” of the customer and that the bank’s branch had been indifferent to the customer’s plight.

The judgment, though likely to be appealed, is significant as it is apparently the first verdict in a case filed under the IT Act awarding damages in a phishing case.

New Minimum Public Shareholding Requirements For Indian Companies

On 4 June 2010, the Indian government revised the minimum public shareholding requirements applicable to listed Indian companies through an amendment to the Securities Contracts (Regulations) Rules, 1957 (”Amendment”). Henceforth, all listed companies are required to have a minimum public shareholding of 25%. The amendment also makes it mandatory for all companies intending to get listed on Indian stock exchanges to offer at least 25% of their paid up capital in an initial public offering (“IPO”), except for companies with a post issue paid up capital of over Rs. 4,000 crores (approximately USD 900 million), which may offer at least 10% of their paid up capital in an IPO and increase public shareholding to 25% over a three year period. Prior to the Amendment, while most Indian companies offered 25% of their share capital in an IPO, some companies benefitted from an exemption in the Securities Contracts (Regulations) Rules, 1957 (“the Rules”), which allowed them to issue (and maintain on a continuous basis post listing) 10% of their share capital subject to compliance with certain conditions. This exemption is no longer available.

The proposal to increase the minimum public shareholding requirement to 25% was first circulated by the Ministry of Finance in February 2008. The Amendment is expected to bring greater liquidity in the Indian stock markets, particularly benefiting small investors. The Amendment also is expected to check price manipulation by entities a holding majority stake in a company with low public shareholding. The greater the number of shares and shareholders, the less the opportunity for price manipulation. Lastly, reducing the concentration of ownership in listed Indian companies is expected to result in ancillary benefits, such as enhanced corporate governance the increased presence of minority shareholders.

“Public” is defined in the Amendment to mean persons other than promoters, promoter group, subsidiaries, or associates of the company. The terms ‘promoter’ and ‘promoter group’ are in turn defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 ( “ICDR Regulations”). “Promoter Group” is defined in the ICDR Regulations to include promoters of the company, immediate relatives of the promoters, any subsidiary or holding company of the promoter, and any company in which the promoter holds more than 10% of the equity share capital or any company that holds 10% of the equity share capital of the promoter, provided that any financial institution or foreign institutional investor would not be deemed to be a promoter merely because such investor holds ten percent or more of the company.

“Public Shareholding” is defined in the Amendment to mean equity shares of the company held by the “public” and excludes shares held by a domestic custodian against depositary receipts issued overseas. Thus, shares issued by listed Indian companies to depositories in connection with the issue of global depositary receipts (“GDRs) or American depositary receipts (“ADRs”) will not be taken into account while computing the total public shareholding in a company. The rationale for this appears to be management control over voting rights on shares issued to depositories. A recent working paper issued by the Securities and Exchange Board of India (“SEBI”) shows that several Indian companies that issued GDRs/ ADRs to foreign investors have retained voting rights on shares issued to depositories.

The Impact on Indian companies

The Amendment impacts Indian companies, listed and unlisted, as follows:

Companies intending to list on Indian stock exchanges

The Amendment requires companies planning to list on Indian stock exchanges to offer at least 25% of each class or kind of equity shares or debentures convertible into equity shares in an IPO to the public. However, where the post issue share capital of the company (calculated at the IPO price) is more than Rs. 4,000 crores (approximately USD 900 million), the company may offer at least 10% of its share capital to the public in an IPO provided that the company increases its public shareholding to 25% within three years from the date of listing the shares on a stock exchange by offering at least 5% share capital to the public per annum. Further, such annual increase in public shareholding may be for less than 5% if it brings its public shareholding to 25% in the relevant year.

Companies that have filed a draft offer document with SEBI

In an Indian IPO, a company is required to file a draft red herring prospectus (“DRHP”) with SEBI, for comment. Typically SEBI takes between one to three months to provide its observations on the DRHP. Once all SEBI observations have been incorporated into the DRHP, the company can file the red herring prospectus with SEBI and the Registrar of Companies and open the IPO. The Amendment allows unlisted companies, which have filed the DRHP with SEBI on or before the date of the Amendment, to offer at least 10% of their share capital in an IPO provided (i) a minimum of two million securities are offered to the public (excluding reservations and promoter contribution); (ii) the minimum issue size is Rs. 100 crores (approximately USD 22 million); and (iii) the issue is made through the book building method with 60% of the issue size allocated to qualified institutional buyers (i.e., mutual funds, scheduled commercial banks, foreign institutional investors). Again, such companies are required to increase the minimum public shareholding to 25% within three years from the date of listing of such shares on a stock exchange by offering at least 5% share capital to the public per annum, provided that such annual increase in public shareholding may be for less than 5% if it brings its public shareholding to 25% in the relevant year.

Listed companies

Post Amendment, all listed companies are required to maintain a minimum public shareholding of 25% of their share capital. Listed companies with less than 25% public shareholding are required to increase the public shareholding to 25% by offering at least 5% share capital to the public per annum, provided that such annual increase in public shareholding may be for less than 5% if it brings its public shareholding to 25% in the relevant year. Press reports indicate that there are about 180 listed Indian companies with less than 25% public shareholding.

Increasing Public Shareholding

Listed companies may increase minimum public shareholding to 25% in several different ways, including any of the following:

  • Further public offer (“FPO) – a further public offer is defined in ICDR Regulations to mean an offer of shares or securities convertible into equity shares by a listed company to the public. FPOs include a rights issue made under the ICDR Regulations. In order to comply with the revised minimum public shareholding norms, listed companies may opt to issue fresh shares to the public through a further public offer under the ICDR Regulations.
  • Qualified institutional placement (“QIP”) – listed companies may allot shares or securities convertible into equity shares to qualified institutional buyers on a private placement basis pursuant to ICDR Regulations. Allotments through the QIP route can be made to less than 50 qualified institutional buyers only. Listed companies may make a fresh issue of equity shares to public shareholders to increase the minimum public shareholding to 25%.
  • Direct sale by promoters to public – promoters may sell their shares in a listed company to public shareholders either (i) on a stock exchange through a block deal (minimum sale of 500,000 shares or shares worth approximately USD 1.1 million through a single transaction) or a bulk deal (sale of more than 0.5% of the number of equity shares of a company in one or more transactions executed during the day), or (ii) through negotiated off-market sale. A sale by promoters may trigger disclosure requirements for the purchaser/ acquirer under the SEBI (Prohibition of Insider Trading) Regulations, 1992, and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Code”), if the acquirer’s shareholding crosses specified thresholds. Purchase of shares from promoters may also trigger open offer requirements under the Takeover Code if an acquirer exercises more than 15% voting rights in the company. Promoters also may opt to make an offer for sale of their shareholding to the public in accordance with the ICDR Regulations.

Conclusion

While the proposal for revising minimum public shareholding norms was first suggested in 2008, the Amendment came as a surprise to many listed companies. It is expected that as a result of the Amendment several further public offers may be launched in the coming years by listed companies in order to increase the minimum public shareholding to 25% of their share capital, even though markets may not have the appetite to absorb additional offers. A glut of public offers also may adversely impact valuations because companies may be required to issue more shares at lower prices. Lastly, shares issued to a custodian of depositary receipts are excluded from the definition of “public shareholding.” Thus, listed companies that do not comply with the 25% public shareholding norms have little incentive to issue ADRs/ GDRs. Any such issuance will only increase non-public shareholding in the company.

Ajit Sharma is a Senior Associate in the International Capital Markets practice at Trilegal’s Mumbai office. Prior to joining Trilegal, Ajit was an associate in the International Capital Markets practice at Dorsey & Whitney’s London office. Vardaan Ahluwalia is an Associate in the Banking and Finance practice at Trilegal’s Mumbai office. Vardaan is a graduate of National University of Juridical Sciences, Kolkata. Ajay and Vardaan can be contacted at ajit.sharma@trilegal.com and vardaan.ahluwalia@trilegal.com, respectively.

 

 

by Ajit Sharma and Vardaan Ahluwalia

Indo-U.S. Ties and the Next Generation of Law Teachers

By Jane E. Schukoske

India faces a shortage of qualified law teachers.  According to the proposed legal education reform agenda, national law schools are due to open in each state and the standards at the existing 900+ law schools will undergo review. Indian law teachers will seek training on participatory learning and on skills teaching. They will seek guidance on research strategies. They will develop new courses of study. The new Indian law pedagogy and research culture will evolve in the Indian context with values shared by U.S. legal educators.

India Committee members with knowledge and interest in both Indian and U.S. legal culture can play a supportive role in developing law teacher training resources as India undertakes legal education reform. Among us are attorneys who negotiate Indo-U.S. business deals and represent families with Indo-U.S. ties.  There are faculty who teach international and comparative law and who focus on India as they design student projects and conduct research. Attorneys who supervise legal process outsourcing to India have a vested interest in knowing what Indian law students learn about professional ethics, legal writing and research.  This article recaps key features of Bachelor of Laws education in India, identifies certain reforms being planned, and suggests several types of resource development to support the work of the next generation of Indian law teachers.

Likewise, India Committee members can inspire U.S. law faculty to further develop India-relevant curriculum, legal research topics, internships and service projects. The article describes the limited ways in which U.S. law schools presently engage their students with India and raises the question of what more should be done to prepare U.S. law graduates to handle the growing number of legal interactions between India and the U.S.

Indian legal education today

Currently, the Bar Council of India (BCI), the regulatory body over legal practice and legal education pursuant to the Advocates Act, 1961, defines the curriculum at Indian law schools. The BCI recognizes two types of courses for first degrees in law, the three-year Bachelor of Law (LL.B.) degree for graduates holding an initial Bachelor’s degree in any discipline, and the five-year joint Bachelor of Arts, Bachelor of Law (B.A., LL.B.) degree after 12th standard (grade). For each of these degree programs, BCI mandates that students take not less than 28 law subjects, 18 compulsory substantive law subjects and four compulsory clinical papers (Drafting, Pleading and Conveyancing; Professional Ethics and Professional Accounting System; Alternative Dispute Resolution; and Moot Court Exercise and Internship).  LL.B. students take six optional papers from three or more groups of elective topics, and for a specialized and/or honors course, a student takes an additional eight papers from one group. The list of elective course groups that may be offered is robust, including Constitutional Law, Business Law, International Trade Law, Crimes and Criminology, International Law, Law and Agriculture, and Intellectual Property Law. A university/school may add to these subjects and groups, but Indian law schools often limit the number of electives to less than a dozen in a given semester in view of constraints in faculty expertise and other resources.

This high degree of control over the curriculum likely arises from the fact that India has relied solely on a person’s degree in law from a recognized University to insure minimum competence for admission and enrollment of advocates by the State Bar Councils. The introduction of an All-India Bar Examination in 2010 provides another check on competence for practice and may lead to more flexibility in the law curriculum. The highly mandated curriculum has placed Indian law schools at a competitive disadvantage in responding to the fast-changing profession of law and global trends in legal education. Indian law graduates have typically specialized by pursuing LL.M. study and/or post-LL.B. diploma courses.

Indian university policies often limit freedom in syllabus creation and student assessment in a course. Presently, a syllabus usually is created by a group of professors who teach the same subject. Grading of examinations involves external examiners besides the professor of the subject. This context results in examination-driven courses and constrains an individual teacher from experimentation in teaching a course.  Formal teacher training (“refresher courses”), funded by the University Grants Commission, are required for promotion, and cover only substantive law topics, rather than types of pedagogy.

Lawyering skills (“practical training”) and clinical legal education in India are affected by the fact that full-time law faculty cannot practice law, though a law teacher may seek permission to appear in a particular case. A practicing advocate may teach law but teaching is restricted to three hours per day. This effectively bans law practice by full-time faculty, preventing a teacher’s ability to supervise legal aid by students.

Faculty research to produce new knowledge has been optional at many Indian law schools.  In some institutions, heavy teaching loads inhibit research.

Calls for Reform

Over the last decade, Indian legal educators have recommended reforms including modernizing pedagogy; including practical training, clinical legal education and its social justice mission into the curriculum; teaching critical thinking and analytical writing skills; providing global perspectives; and enhancing faculty research capabilities.  While national law schools and certain other highly reputed law schools in India address these issues, the vast majority of law schools in India lack resources to accelerate reform.

At the National Consultation on Second Generation Reform in Legal Education held in Delhi on May 1 – 2, 2010, the Union Minister for Law and Justice Dr. M. Veerappa Moily presented a Vision Statement to the Prime Minister of India Dr. Manmohan Singh that called for, inter alia, the following innovations to improve Indian legal education:

  • Establishment of four national level Institutes of Advanced Legal Studies and Research, to focus on research and an upgrade of faculty skills,
  • Establishment of a National Law University as a school of excellence in every state,
  • Evaluation of each of the 913 existing law schools for the purpose of upgrading the colleges and providing opportunities to the students,
  • Creation of opportunities for students to specialize in various aspects of the law during their education, and
  • Continuous focus on social responsibility and professional ethics, including response to the unmet needs of the rural poor and other deprived sections of the Indian population.

To staff the planned new national law universities, upgrade the existing law colleges, and add specialized courses, India will need to recruit and train a substantial number of law teachers. The four Institutes for Advanced Legal Studies and Research will train law teachers in pedagogy and research.

Law Teacher Training Resources Needed

There are several core resources less readily available to Indian law teachers than to legal educators in the U.S.  Development of such resources could significantly advance the Indian reform agenda.

  1. Broad selection of law textbooks with cases, problems, and other materials, supported by teachers’ manuals

Textbooks on core legal subjects with case excerpts, readings, questions, and problems help new and experienced law teachers prompt class participation.  A fine model is the co-authored textbook by Shyam Divan and Armin Rosencranz, Environmental Law and Policy: Cases, Statutes and Materials (2nd ed., Oxford University Press 2004).

A teacher’s manual is particularly helpful to someone teaching a course for the first time.  A manual raises key points, and suggests analysis of problems, topics to omit if short of time, and ways to structure a class.

  1. Availability of materials and training for the teaching of legal analysis, research and writing

There is wide agreement that India-relevant materials for the teaching of legal analysis, research and writing are needed to improve LL.B. student legal writing.  A legal writing course that emphasizes critical thinking and reasoning would complement the BCI- mandated clinical course on Drafting, Pleading and Conveyancing. Education on proper attribution to sources would help reduce the frequency of plagiarism by law students.

  1. Materials for community development and poverty law work, such as practice manuals and web resources, to support the work of legal aid clinics.

Systematic development and dissemination of high quality resources for rural community development and for representing the urban poor and other disadvantaged groups would be a way to model good legal practice and encourage performance of pro bono work. Such materials would greatly aid lawyers and law teachers supervising student work in communities. They could be developed through a joint project of law schools and the practicing bar.

  1. Strong institutional support for faculty research and writing for publication

Creating a culture of legal research includes research training programs of various types (socio-legal, jurisprudential, etc.) for junior scholars, mentoring of faculty on scholarship, and opportunities for securing feedback on works-in-progress.

  1. Strong associations of law teachers to engage in regular sharing of ideas, teaching and research strategies, and resource development.

The absence of a national association of law schools or of law teachers, akin to the American Association of Law Schools and its Sections, is noticeable in India.  Legal educators have repeatedly discussed the idea, but it has not taken root.

As Indian legal educators set priorities for resource development, there may be opportunities for India Committee members to contribute ideas, materials and other support to the efforts.  Collaborations drawing out Indian and U.S. perspectives can build legal education resources both informed by U.S. teaching and research strengths and well-suited to Indian contexts. Collaborations may take the shape of co-authoring, co-training and participating on planning committees and advisory boards.

Building Knowledge of India among U.S. Law Students and Faculty

While individual U.S. law faculty members and students have taught, conducted research and studied in India on grants (see box)  since India’s independence in 1950, few institutional programs have emerged to bring U.S. law students to India. Touro College Jacob D. Fuchsberg Law Center, Central Islip, New York, conducts the longest running summer study abroad program for U.S. law students.  Directed and partly taught by U.S. law faculty, the program held in Shimla and in Dharamsala features Indian guest lecturers.

A new collaborative study abroad program on human rights has been developed by the University of Nevada, Las Vegas, William S. Boyd School of Law in partnership with the Indira Gandhi National Open University School of Law in Delhi. The International & Comparative Human Rights Law Practicum will be held for twelve days in December 2010 – January 2011 in New Delhi.

Indo-U.S. law student exchange and internship programs are now on the rise in face of law school internationalization efforts. Typically law students pay tuition to their home institution. They intern or study abroad at the host institution and transfer credits to the home institution.  Here are a few examples. In 2009 and 2010, Harvard Law School offered three-week Linklaters Winter Term India Internships. Students proposed paper topics and spent 2 ½ weeks at a Mumbai law firm and the last half-week visiting a law school in New Delhi. Indiana University’s Maurer School of Law India Initiative sent six law students who were selected as Milton Stewart Fellows in the law school’s Center on the Global Legal Profession to participate in internships in Delhi in summer 2010.  Jindal Global Law School arranged the internships.  National Law School of India University has exchange programs with law schools at Duke, Columbia, Indiana University and the University of Wisconsin. The National Academy of Legal Studies and Research in Hyderabad has exchange programs with University of Illinois College of Law, University of Oklahoma and Santa Clara University. National Law School, Delhi, has exchange programs with Lewis & Clark Law School, University of Alabama Law School and George Washington University.

Other India-U.S. law school collaborations have grown around specialized topics.  George Washington University Law School has conducted an India Project since 2004 with the Rajiv Gandhi School of Intellectual Property Law at the Indian Institute of Technology, Kharagpur.  The project has sponsored several international conferences on patent law. American University Washington College of Law and Indian women law teachers established the Gender and the Law Association (GALA) with grant support from the U.S. Department of State.  The grant funded GALA conference activities and travel.  Faculty and students of B.P.S. Mahila Vishwavidyalaya (Women’s University) Department of Laws and the Center on Applied Feminism at University of Baltimore School of Law have commenced a series of videoconferences on family law and other topics of mutual interest.

U.S. law school courses on India are offered occasionally. For example, Professor William J. Lockhart of the Wallace Stegner Center for Land, Resources and the Environment at S.J. Quinney College of Law, University of Utah, conducted an “International Environmental Practicum,” working with students in preparing litigation handled by cooperating attorneys in India.  Professor Vikramaditya S. Khanna, University of Michigan Law School, teaches a course on Law & Economic Development: India.  Comparative Law courses and courses on Gender, Law and Development sometimes have substantial components on India.

Overall, the volume of U.S.- India legal education interactions lags behind those of U.S. and Indian business schools.  Business faculty seized the opportunity to show and engage U.S. students in India’s robust economy and to collaborate with Indian colleagues.

However, in view of India’s global importance and the growing ties between the U.S. and India, more attention should be devoted to India-related issues in study, research and service work of U.S. law schools.  India Committee members have the expertise, insight and networks to nurture further collaborations.

Jane E. Schukoske directs and teaches in the Master of Laws program on the Law of the United States, Center for International and Comparative Law, University of Baltimore School of Law, Baltimore, Maryland, USA and is a member of the Governing Body of O.P. Jindal Global University in Sonipat, Haryana, India. 

Jane directed the Fulbright Commission in Delhi, India, from 2000-2008. Her article Legal Education Reform in India: Dialogue Among Indian Law Teachers, 1 JINDAL GLOBAL L. REV.  251 (2009) is posted at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1452888.

 

Bridges between the U.S. and India in Legal Education

The Fulbright Program, the American Institute of Indian Studies, and the Ford Foundation in India have supported important legal education exchanges between the U.S. and India since independence.  In addition, many Indian lawyers have made their way to the U.S. for LL.M. or other advanced law degree study. Alumni of these programs may provide valuable advice to prospective applicants.

Fulbright

The J. William Fulbright Scholarship program, supported by the U.S. Departments of State and of Education, has funded academic exchanges between India and the U.S. in many disciplines, including law, since 1950. Fulbright scholar grants are administered in the U.S. by the Council for the International Exchange of Scholars, http://www.cies.org/Fulbright/india/  and in India by the U.S.-India Educational Foundation, http://www.usief.org.in/.  In 2008, the Government of India agreed to match the U.S. funding for exchanges with the result that the program has significantly expanded.  On Fulbright grants, Indians and U.S. citizens teach, conduct research, or study. The Fulbright Senior Specialists program, a short-term (14 to 42 days) program, funds visits of U.S. experts in many fields, including law. Details are posted at http://www.cies.org/specialists/.

Eminent Fulbrighters in legal education include National Law School of India University (NLSIU) founder Dr. N.R. Madhava Menon and Vanderbilt University law Professor Frank Bloch. Professors Ved Kumari and Poonam Saxena of Delhi University are Fulbright alumni who taught law at Vanderbilt University and University of Baltimore, respectively. Professor Bloch, in conjunction with the Fulbright Commission in India, established the Fulbright-Vanderbilt Masters Degree Scholarship in Clinical Legal Education, which has supported LL.M. study for several Indian law teachers.  Fulbright has had a big impact and many more examples could be given.

American Institute of Indian Studies

The American Institute of Indian Studies (AIIS), www.indiastudies.org, a consortium of 64 universities headquartered at University of Chicago with its Indian research center in Gurgaon, supports language study, performing arts projects, and dissertation and post-doctoral research in India. Professor Emeritus Marc Galanter of University of Wisconsin Law School conducted research as an AIIS Fellow.

Ford Foundation in India

The Ford Foundation office in India, www.fordfoundation.org/regions/india-nepal-sri-lanka, has supported numerous projects related to law and legal education over the years, including law school clinics and book projects.  Since 2000, the Ford Foundation has sponsored the International Fellowships Program (IFP), under which Indian students from disadvantaged backgrounds were fully funded for graduate study abroad.  Some students pursued Masters study in law in the U.S. IFP has selected its last cohort of students.

Indian Alumni with Advanced Degrees in Law

Significant numbers of Indian lawyers have studied in LL.M. and other graduate degree programs in the U.S. on their own.  Indian lawyers returning home after study and, in some cases, practice abroad, have brought U.S. legal education pedagogy and perspectives into the Indian legal community.  U. S. and Indian law school alumni networks provide ways to reach them.

 

Case Notes

by B.C. Thiruvengadam, Thiru & Thiru, Advocates

A technical member of the National Company Law Tribunal and National Company Appellate Tribunal should have expertise in company law.

A constitutional bench of the Supreme Court of India in Union of India vs. R.Gandhi, President, Madras Bar Association, 2010 (5) SCALE 514, upheld the creation of the National Company Law Tribunal and the National Company Appellate Tribunal, and vested in them the powers and jurisdiction exercised by the High Court with  regard to company matters that are constitutional in nature.  Moreover, the Court held that members of these tribunals should be persons of rank, capacity, and status as nearly equal as possible to the rank, capacity, and status of High Court judges.  While deciding this case, the Supreme Court endorsed the view of the Eradi Committee that company law jurisdiction should be transferred from High Courts to tribunals on account of inordinate delay in the disposal of cases by the High Courts.  The Companies (Second Amendment) Act, 2002 had provided for appointment of members from the bureaucracy as technical members of the tribunal.  The Supreme Court held that merely because a person has served in the cadre of the Indian Company Law Service, he cannot be considered an expert qualified to be appointed as a technical member, unless he has expertise in corporate law.

The Supreme Court emphasized that persons having ability, integrity standing, special knowledge, and professional experience in industrial finance, industrial reconstruction, investment, and accountancy may be considered as persons having expertise and may be appointed as technical members.  The Supreme Court further stated that the selection committee should be comprised of the Chief Justice of India or his nominee as its chairperson, a senior judge of the Supreme Court or a Chief Justice of a High Court as member, and a secretary from the Ministry of Finance and Company Affairs, or Ministry of Law and Justice as members.  The Supreme Court noted that, to function effectively, tribunals should appoint younger members who have a reasonable period of service rather than persons who have retired.  The Supreme Court mandates that every bench shall have a judicial member.  The Government of India has agreed before the Supreme Court to implement the order effecting the necessary amendments.

May a member of the public, on the basis of a letter of authorization, appear on behalf of a party before the National Tax Tribunal?

The Supreme Court of India addressed  this question in Madras Bar Association vs. Union of India, [2010] 324 ITR 166 (SC).  The Madras Bar Association had challenged the constitutional validity of the National Tax Tribunal Act, 2005 (Act) before the Supreme Court of India on the basis that:

(i) Section 13 of the Act permitted “any person” duly authorized to appear before the National Tax Tribunal.  The Bar Association claimed that the right to appear should be exclusively restricted to advocates.

(ii) Section 5(5) of the Act provides for the Central Government to transfer a member (the presiding officer of the tribunal) from one bench in one state to another bench in another state.  This was challenged on the ground that it would restrict the independence of the tribunal.

(iii) Section 7 of the Act provides for a selection committee comprised of the Chief Justice of India, or a judge of the Supreme Court nominated by him, a  Secretary from the Ministry of Law and Justice, and a Secretary from the Ministry of Finance, and that the secretaries forming the majority may override the selection of the Chief Justice or of his nominee.

Initially, this matter had come up before a three judge bench, wherein the Government of India agreed to implement an amendment that would ensure that only lawyers, chartered accountants, and the parties themselves would be permitted to appear before the National Tax Tribunal, and that the opinion of the Chief Justice or his nominee would prevail in the selection of members to the tribunal or the transfer of members from one state to another.  However, the case was referred to a constitutional bench, which determined that the matter should be addressed separately because the petitioner also had challenged Article 323B of the Constitution of India.

Art. 323B was added to the Indian Constitution under the Constitution (75th Amendment) Act, 1963.  It authorizes the legislature to create and constitute tribunals, and supplements Art. 323A, which empowers the parliament to create tribunals for matters relating to the Union list.

By this case, the court will determine whether the exclusivity granted to advocates to appear before any court prevails over legislation diluting such rights.

May the Central Government seek the removal of managerial personnel of a company who conduct the affairs of the company in a manner prejudicial to the interest of the members, creditors, the company and the general public?

In Union of India  vs. Design Auto Systems Ltd., [2010] 156 Comp cas 272 (CLB), the Principal Bench of the Company Law Board ruled that the power of the Board to remove managerial personnel of a company under Sec. 408 of the Companies Act was wide enough to cover present and past acts of mismanagement.  In this petition by the Central Government under Sections 388B, 397, 398, along with Sections 401, 406 and 408 against the Company and its managerial personnel, the Company Law Board held that the language “being conducted” in Section 408 of the Act, cannot be interpreted so as to restrict its scope to the present acts of the managerial personnel.  Rather the expression is wide enough to cover enquiries related to past conduct whose impact continued or would reasonably be assumed to continue to operate in a manner prejudicial to the interest of the company or the public interest.  The Court further observed that the power of the Central Government under Section 408 is preventive in nature, exercised to ensure that the affairs of the Company are conducted in a manner that is not prejudicial to the interests of the company, its members, or to the public interest.

 

 

Withholding Tax on Service Fees Remitted to the U.S.

by H. Jayesh and Freddy Daruwala

After 14 years of protracted negotiations, evocative of the duels between Errol Flynn and Basil Rathbone in old Hollywood swashbucklers, India and the United States have finally reached agreement on avoiding double taxation.  The last obstacle to the USA Double Tax Avoidance Agreement (the “Agreement”) was over taxation of fees for technical services (“FTS”) in India.  The Agreement sets forth a test to determine whether these service fees are subject to taxation in India.  Under the Agreement, taxes must be withheld on service fees paid to a taxpayer who does not have an address or assets in India, or is generally located outside the territorial jurisdiction of India.  In the event that the Agreement conflicts with the Income Tax Act 1961 (“Act”), the Agreement controls and the taxpayer may seek the more beneficial treatment of the two.

FTS has been addressed differently in various Indian double tax avoidance treaties.  For example, reference is made to Fee for Included Services (“FIS”) in the Agreement, as in the agreements between India and Singapore and India and the United Kingdom.  The agreement between India and Japan the Act’s definition of FTS is employed.  In the agreements between India and France and India and Germany, the Act’s definition of FTS is also employed, but is subject to a most favored nation (“MFN”) clause to modify its scope in line with other more beneficial, future Indian double tax treaties.  Some agreements, such as the one between India and Mauritius, do not contain an FTS clause.

This article focuses only on FIS.  Article 12(4) of the Agreement provides:

For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

Thus, FIS has two basic components:  (a) fee for technical services made available; and (b) the transfer of knowledge, etc.

A fair amount of controversy has been generated over the meaning and scope of the “make available” clause.  The technical explanation which accompanies the Agreement attempts to clarify the concept of make available by providing examples.  In simplistic terms, if A renders services to B to repair B’s car, such services do not “make available” knowledge unless by virtue of such services B is able to repair a third party’s car.  More close to home, if a U.S. law firm provides a legal opinion to an Indian client the services rendered do not “make available” technical knowledge unless the client is an Indian law firm who will then be able to render an informed opinion on a similar issue to its clients.  In that case, outbound service fees remitted from India to the U.S. will be taxable in India and taxes must be withheld on any such remittance.

The phrase “make available” has also been construed by the courts.   Although the case involving the Federation of Indian Chambers of Commerce and Industry (“FICCI”) (AAR 811 and 812 of 2009), does not constitute binding precedent on future cases involving different parties due advance ruling limitations, it is instructive because it provides an insight into the current judicial thinking on the meaning of “make available.”   FICCI entered into a set of agreements with an Indian technology company and the University of Texas (“UT”) to provide an integrated service comprising of technology, assessment, training, programme management, and business development for a consolidated service fee.  The individual components of the contract were not severable.   The main questions before the Authority for Advance Rulings (“AAR”) were:  (a) whether UT, as a tax exempt entity in the U.S., may claim benefits under the Agreement; (b) whether payments by FICCI to UT constituted FIS; and (c) whether taxes had to be withheld on such payments.  The AAR ruled in the affirmative on the first question and in the negative on the second and third questions.  It stated that while integrated services have some component of training that may fall under the FIS category, it did not amount to FIS as a whole.  Thus, the service fee was not subject to taxation or the requirement to withhold taxes.  It also ruled that a non-profit entity under U.S. law is entitled to claim benefits of the Agreement.  Another recent decision was given by the Chennai special bench of the Income Tax Appellate tribunal in the case of Prasad Productions.  The court analyzed whether the payer had a bona fide belief that the income remitted to the payee was not taxable in India.  It also discussed whether funds could be paid suo-motu without withholding taxes and not  following the procedure of applying to the payer’s assessing officer to determine the issue of taxability when the payer had such a bona fide belief.  These two decisions have clarified the meaning of the law to a large extent.

If the recipient of a service fee is deemed to constitute a permanent establishment (“PE”) in India, the service fee will not be taxed as FIS or FTS income but will be taxed as business income of the PE.  In addition, if the fees are paid to an “associate enterprise,” under the Act, the “arms length” nature of the transaction must be examined, similar to the requirements of Section 482 of the U.S. Internal Revenue Code.

Withholding taxes on payments to non residents are generally covered by Section 195 of the Act.  Taxes must be withheld on all payments to a non resident which are taxable in India before remittance.  A failure to withhold taxes may have serious consequences, such as penalties, interest, disallowance of a deduction for the amount paid, and prosecution. Therefore if the remittance is deemed to be taxable in India, taxes should be withheld using the following procedure:

  1. The payee first applies for an identifying permanent account number (“PAN”). This is to ensure that taxes are withheld at the prescribed rate.  In absence of a PAN, taxes must be withheld at a minimum of 20% (or at a higher rate if applicable).
  2. The payer then deducts the tax and issues a withholding taxes certificate in the prescribed format (Form 16A) identifying the payee and the payer’s PAN.
  3. The payer then uploads the information onto the Income Tax website. The payer will receive an acknowledgement on the website.  This hard copy will have to be certified by a practicing chartered accountant and transmitted to the remitting bank. Only upon receipt of this document may the remitting bank in India transmit the funds to the overseas recipient.

If there is any doubt as to the taxability of the remittance or the remitter believes that the amount of tax to be withheld should be less than the prescribed rate, then the remitter should apply to its Assessing Officer for an adjudication on the taxability of the amount or for permission to withhold less taxes, respectively.  The tax authorities generally take an aggressive stance.  An alternative is to upload the information regarding the remittance on the revenue website and obtain a certification by a practicing chartered accountant that the payment is not taxable in India and that the remittance may be made without withholding taxes.  This certification may then be transmitted to the remitting bank, which in turn would remit the funds without withholding taxes.  To avoid litigation with revenue authorities at a later date, the accountant certification option should be resorted to where the service fee is clearly not taxable.

The tax landscape in India is expected to be considerably altered when the impending Direct Taxes Code (a revised discussion paper on which was released on 15th June 2010) becomes effective.  Nevertheless, the Agreement provides much needed relief and guidance to the remitter of service fees to the U.S.

 

Mr. H. Jayesh is the founder partner of Juris Corp and specializes in mergers and acquisitions, joint ventures, derivatives, structured finance, and restructuring.  He also has significant experience in arbitration and tax-related matters.  He is also a Chartered Financial Analyst and may be contacted at h_jayesh@jclex.com

Mr. Freddy Daruwala is a partner in Juris Corp and specializes in cross-border taxation matter.  He is also a Chartered Accountant.  He may be contacted at f.daruwala@jclex.com

 

 

 

Re-evaluating Indian Pharma in Light of the Abbott – Piramal Deal

by Rina Pal

Traditional markets for big pharma, including North America, Europe, and Japan, are under pressure from slowed growth, patent expirations, and policy changes promoting the use of more affordable generic drugs.  While big pharma and makers of generic have long been rivals in emerging markets, a new appreciation for affordable drugs is now bringing these two together in cost-conscious markets like India.  In 2008, Japan’s Daiichi Sankyo paid $4.2 billion for a majority stake in India’s Ranbaxy Laboratories.  GlaxoSmithKline acquired exclusive rights to the pipeline of India’s Dr. Reddy’s Laboratories, which sells over 100 generics in emerging markets.  The most recent example of the emerging relationship between big pharma and generics makers is Abbott Laboratories’ recent acquisition of the domestic healthcare business of India’s Piramal Healthcare Ltd., a leading branded generics company, for $3.72 billion.

India became a leader in generics after Prime Minister Indira Gandhi decided in 1972 not to recognize patents on drug products.  This allowed Indian companies to copy expensive branded drugs as soon as they came to market, so long as the drugs were manufactured in a novel way.  India eventually ended its copycat generics market edge in 2005, when it adopted a World Trade Organization condition to guarantee twenty-year patents on new drugs, except for exceptional cases.  This provision brought India’s patent laws in compliance with the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which sets the minimum criteria for its signatory countries.  The recognition of product patents has provided global companies with better intellectual property rights  and, as a result, has opened up a new segment for the Indian pharmaceutical industry in contract research and manufacturing services.  Today, India continues to produce roughly one-fifth of the world’s generics.

The Abbott – Piramal Deal

Abbott, based in North Chicago, Illinois, has been operating in India for 100 of its 122 years, and has popular pharmaceutical brands including the antacid Digene and painkiller Brufen.  Piramal’s pharmaceutical products span dermatology, anti-infectives, and nutritional drugs, while Abbott India is focused on gastroenterology, pain, neurosciences, and metabolic disorders.  A McKinsey study predicts that drugs for diabetes and cardiovascular disease will see the fastest growth among all therapeutics in India during the next two years.

Abbott will pay $2.12 billion up front, plus $400 million annually for four years, for Piramal’s domestic healthcare business.  Abbott said it plans to fund the Piramal acquisition with cash from its balance sheet and does not expect it to impact earnings.  The deal will put Abbott ahead of market leaders Cipla and Ranbaxy, giving it a 7% market share in India’s fast growing market.  Abbott expects pharma sales in India, which are on track to hit $8 billion this year, to more than double by 2015.  “With this deal, the combined Healthcare Solutions and Abbott businesses will become the clear market leader in India,” said Piramal Group Chairman, Ajay Piramal.

What Lies Ahead

Previous pharmaceutical acquisitions have been targeted at buying Indian generics to serve Western markets, but the Abbott-Piramal deal is primarily focused on the domestic market, according to Business India.  “Big pharma will stay big only by selling its wares in India and China.”  India offers a large and growing market with rising incomes and increasing health insurance coverage, although the potential to expand to very high priced specialty products is seriously limited.

“Emerging markets represent one of the greatest opportunities in health care,” Abbott chief executive Miles White said in a statement.  “It’s a race,” he stated in a conference call after announcing the deal.  One appeal of emerging markets is that individuals, and not governments, pay for a big portion of health-care costs. Because 70% of the Indian market is self-pay, Abbott’s business there won’t be as vulnerable to the budget restraints seen in European health programs.

In fact, 10 days before the Piramal acquisition, Abbott announced a licensing and supply deal with Indian pharmaceutical company Zydus Cadila.  It allows Abbott to commercialize Zydus Cadila drugs in emerging markets.  The Piramal and Zydus Cadila deals are consistent with Abbott’s purchase in September 2009 of Belgian drug company Solvay, for roughly $7 billion. Abbott bought Solvay in its quest to enter emerging markets in Asia and Eastern Europe.

Abbott is not alone in pursuing growth in places that large pharmaceutical companies once feared to tread. Almost all big pharma companies have predicted that emerging markets will constitute 30-40% of growth in the next decade.

Indian companies can only hope to become truly global pharmaceutical companies through drug discovery, says Piramal, and, “No Indian company has done that in the last 60 years.  Now, Piramal has that opportunity.”  There are a limited number of countries with the required capabilities for the development of new pharmaceuticals, namely, the United States and a few western European nations.  Still, Piramal already has 400 scientists working on 14 molecules in cancer, diabetes, inflammation, and infectious disease research.  In addition, the cost of clinical trials in India is cheap.  “It takes globally about a billion and a half dollars, they say, to develop a new drug, in India you could do it probably at one-tenth the cost,” Piramal says.  India offers global pharma companies both quality and cost advantages.  Already, India has the largest number of U.S. Food and Drug Administration-approved plants outside the U.S., with over 100 facilities.  The key domestic players are Biocon, Serum Institute of India, Intas Biopharmaceuticals, Bharat Serums, Orchid Pharmaceuticals, Panacea Biotech, and Torrent Pharmaceuticals.  Apart from these, there are five government-owned companies in the Indian public sector, including, Indian Drugs and Pharmaceuticals, Hindustan Antibiotics Limited, Bengal Chemicals and Pharmaceuticals Limited, Bengal Immunity Limited, and Smith Stanistreet Pharmaceuticals Limited.

Protecting Intellectual Property and Other Rights

The Piramal Group has agreed not to enter the generic pharma products business in India or other emerging markets for eight years.  Instead, it will continue research in new drugs through an affiliate, Piramal Healthcare.  Big pharma companies are facing intense competition from generic players, and many existing top-selling drugs are facing patent challenges and thus competition from generic players.  In order for the Abbott’s acquisition of Piramal and future pharma acquisitions to be successful, key intellectual property matters must be addressed at the outset.  Intellectual property assets that are currently active must be evaluated and trade secrets must be studied to see if the seller has an active and documented program.  Unregistered intellectual property assets must also be analyzed.  Of course, the acquirer should confirm in its due diligence that it has a complete accounting of all intellectual property assets from the target.  The acquirer also needs to confirm if there are any non-disclosure and non-competition agreements in place with current officers and employees.  While transactional attorneys need to be aware of regulations unique to India, it is especially important to follow the Department of Chemicals & Petro-Chemicals’ Pharmaceutical Policy, which updates priorities for pharmaceuticals in India.

The pharmaceutical industry today faces challenges worldwide.  Alliances between big pharma and generics in India appear to be part of the new business plan to address these challenges.  While this will change access and prices in emerging markets, it remains to be seen how this will affect the model for how drugs are sold in the U.S.

Case Notes – Summer 2010

A technical member of the National Company Law Tribunal and National Company Appellate Tribunal should have expertise in company law.

A constitutional bench of the Supreme Court of India in Union of India vs. R.Gandhi, President, Madras Bar Association, 2010 (5) SCALE 514, upheld the creation of the National Company Law Tribunal and the National Company Appellate Tribunal, and vested in them the powers and jurisdiction exercised by the High Court with regard to company matters that are constitutional in nature. Moreover, the Court held that members of these tribunals should be persons of rank, capacity, and status as nearly equal as possible to the rank, capacity, and status of High Court judges. While deciding this case, the Supreme Court endorsed the view of the Eradi Committee that company law jurisdiction should be transferred from High Courts to tribunals on account of inordinate delay in the disposal of cases by the High Courts. The Companies (Second Amendment) Act, 2002 had provided for appointment of members from the bureaucracy as technical members of the tribunal. The Supreme Court held that merely because a person has served in the cadre of the Indian Company Law Service, he cannot be considered an expert qualified to be appointed as a technical member, unless he has expertise in corporate law.

The Supreme Court emphasized that persons having ability, integrity standing, special knowledge, and professional experience in industrial finance, industrial reconstruction, investment, and accountancy may be considered as persons having expertise and may be appointed as technical members. The Supreme Court further stated that the selection committee should be comprised of the Chief Justice of India or his nominee as its chairperson, a senior judge of the Supreme Court or a Chief Justice of a High Court as member, and a secretary from the Ministry of Finance and Company Affairs, or Ministry of Law and Justice as members. The Supreme Court noted that, to function effectively, tribunals should appoint younger members who have a reasonable period of service rather than persons who have retired. The Supreme Court mandates that every bench shall have a judicial member. The Government of India has agreed before the Supreme Court to implement the order effecting the necessary amendments.

May a member of the public, on the basis of a letter of authorization, appear on behalf of a party before the National Tax Tribunal?

The Supreme Court of India addressed this question in Madras Bar Association vs. Union of India, [2010] 324 ITR 166 (SC). The Madras Bar Association had challenged the constitutional validity of the National Tax Tribunal Act, 2005 (Act) before the Supreme Court of India on the basis that:

(i) Section 13 of the Act permitted “any person” duly authorized to appear before the National Tax Tribunal. The Bar Association claimed that the right to appear should be exclusively restricted to advocates.

(ii) Section 5(5) of the Act provides for the Central Government to transfer a member (the presiding officer of the tribunal) from one bench in one state to another bench in another state. This was challenged on the ground that it would restrict the independence of the tribunal.

(iii) Section 7 of the Act provides for a selection committee comprised of the Chief Justice of India, or a judge of the Supreme Court nominated by him, a Secretary from the Ministry of Law and Justice, and a Secretary from the Ministry of Finance, and that the secretaries forming the majority may override the selection of the Chief Justice or of his nominee.

Initially, this matter had come up before a three judge bench, wherein the Government of India agreed to implement an amendment that would ensure that only lawyers, chartered accountants, and the parties themselves would be permitted to appear before the National Tax Tribunal, and that the opinion of the Chief Justice or his nominee would prevail in the selection of members to the tribunal or the transfer of members from one state to another. However, the case was referred to a constitutional bench, which determined that the matter should be addressed separately because the petitioner also had challenged Article 323B of the Constitution of India.

Art. 323B was added to the Indian Constitution under the Constitution (75th Amendment) Act, 1963. It authorizes the legislature to create and constitute tribunals, and supplements Art. 323A, which empowers the parliament to create tribunals for matters relating to the Union list.

By this case, the court will determine whether the exclusivity granted to advocates to appear before any court prevails over legislation diluting such rights.

May the Central Government seek the removal of managerial personnel of a company who conduct the affairs of the company in a manner prejudicial to the interest of the members, creditors, the company and the general public?

In Union of India vs. Design Auto Systems Ltd., [2010] 156 Comp cas 272 (CLB), the Principal Bench of the Company Law Board ruled that the power of the Board to remove managerial personnel of a company under Sec. 408 of the Companies Act was wide enough to cover present and past acts of mismanagement. In this petition by the Central Government under Sections 388B, 397, 398, along with Sections 401, 406 and 408 against the Company and its managerial personnel, the Company Law Board held that the language “being conducted” in Section 408 of the Act, cannot be interpreted so as to restrict its scope to the present acts of the managerial personnel. Rather the expression is wide enough to cover enquiries related to past conduct whose impact continued or would reasonably be assumed to continue to operate in a manner prejudicial to the interest of the company or the public interest. The Court further observed that the power of the Central Government under Section 408 is preventive in nature, exercised to ensure that the affairs of the Company are conducted in a manner that is not prejudicial to the interests of the company, its members, or to the public interest.

ADDITIONAL CASE NOTES

By Ranjan Jha, Bhasin & Co., Advocates

Arbitration Agreement Not Enforceable By Party Where It Was Not Incorporated At Time Agreement Executed.

In Andhra Pradesh Tourism Development Corporation vs Pampa Hotels Ltd., the Supreme Court held that an arbitration agreement executed before a company is formally registered under the Companies Act, 1956 may not be enforced by the company. Andhra Pradesh Tourism Development Corpn. (APTDC) and Pampa Hotels Ltd (Pampa) entered into two agreements, a Lease Agreement and a Development & Management Agreement on 30 March, 2002. Both agreements contained arbitration clauses. Pampa was incorporated under the Companies Act, 1956 on 9 April, 2003. In April 2004, disputes arose between the parties and APTDC terminated the agreement and took possession of the property that formed the subject of the transaction. Pampa filed an application before the Andhra Pradesh High Court under the Arbitration and Conciliation Act, 1996 (“Act”) for appointment of arbitrators. APTDC objected asserting, inter alia, on the ground that there was no contract, and therefore no arbitration agreement, between the parties because Pampa had not come into existence as of the date of the two agreements. The Chief Justice of the Andhra Pradesh High Court appointed an arbitrator to the case, referring all disputes between the parties, including the existence of the agreement, under Section 11 of the Act.

Shortly thereafter, the Supreme Court, in SBP & Co. v. Patel Engineering, held that issues regarding the validity of an arbitration agreement raised in an application for appointment of arbitrator under Section 11 are to be decided by the Chief Justice, or his designee, under Section 11 of the Act. Accordingly, APTDC filed a Special Leave Petition challenging the decision of the appointment of the arbitrator. The main questions before the Supreme Court were whether: (a) an arbitration agreement is enforceable where the party seeking arbitration was a not a company in existence at the time the contract containing the arbitration agreement was executed, and (b) the question of the enforceability of the arbitration agreement must be decided by the Chief Justice or his designee, or by the Arbitrator.

The Supreme Court concluded that if one of the two parties to the arbitration agreement was not in existence when the contract was made, then there was no valid contract. If the agreements had been entered into by the promoters of the company, stating that the agreements were entered into by the promoters on behalf of a company to be incorporated, and that the terms of the incorporation authorized such action, the agreements would have been valid, and the arbitration clause would have been enforceable. On the second issue, the Court held that whether there is an arbitration agreement and whether the party who has applied under section 11 of the Act is a party to such an agreement, is an issue that must be decided by the Chief Justice or his Designate under Section 11 of the Act before appointing an arbitrator. However, because the arbitral tribunal already had been appointed in this case, the Court did not interfere with the appointment of the arbitral tribunal, and left the issue for the arbitrator to decide.

This judgment has a wide range of implications for companies that enter into pre-incorporation contracts – in particular, contracts providing for arbitration. In light of this judgment, a pre-incorporation contract must be entered into by the promoters of a company on behalf of the company proposed to be incorporated and such contract should be specifically provided for in the terms of the company’s incorporation to fall within the ambit of Section 15(h) of Specific Relief Act, 1963. The contract entered into by the promoter must also be duly ratified by the company upon its incorporation to avoid ambiguity and legal scrutiny in the future.

Delhi High Court Comes to the Rescue of Low Priced Books

The Delhi High Court analyzed issues of infringement of copyright and the applicability of the first sale doctrine in John Wiley & Sons Inc. & Ors v. Prabhat Chander & Ors. The court had to decide whether exporting books whose sale and distribution was subject to territorial restrictions could amount to copyright infringement. The Delhi High Court answered in the affirmative, and rejected an application by the defendants to set aside an earlier ex-parte injunction operating in favour of the copyright owner. The court held that India follows the principle of national exhaustion and not international exhaustion.

The plaintiffs, international publishing houses, published special low price editions of text books for school and college students in India. These low price editions (LPEs) were published with the rider that they were meant for sale/re-sale only in the Indian sub-continent and not in any other parts of the world. The plaintiffs contended that they published LPEs so that the same international level books that otherwise are quite costly might be made available to Indian and other Asian students at prices befitting the Asian markets. The defendants, a company and its directors, were engaged in the business of selling books online. The defendants were offering LPEs for sale worldwide in breach of the territorial notice. The plaintiffs filed suit before the Delhi High Court to restrain the defendants from infringing the copyright of the plaintiffs by exporting the books of the plaintiffs to the countries outside of prescribed territories. The plaintiffs also filed an application seeking temporary injunction against the defendants, which came up for hearing with the main suit when the court entered an ex parte order against defendants.

Arguing that the earlier ex-parte injunction was erroneous, the defendants contended that the nature of its activities, i.e., export of the books outside the Indian sub-continent, was not tantamount to infringement of copyright. The defendants invoked the first sale doctrine as a defense, arguing that once the plaintiffs sold a particular copy of the LPE, they could not control its further re-sale. The defendants also submitted that their act of exporting LPE’s was not prohibited by the Indian Copyright Act, 1957 (the Act). They submitted that the Act only prohibited the import of infringing articles into India, the Act was silent about exports, and the court should not add words to the legislation.

The Delhi High Court, examining various provisions of the Act, stated that the Act gives a copyright owner the right to exploit his copyright by assignment and licensing. Such an assignment or license could be limited by way of time period or territory, and could be exclusive or non-exclusive. Therefore, a copyright owner could exhaust its rights in some territories while protecting its right in others. Accordingly, the plaintiffs could prevent the defendants from re-selling and exporting their LPEs to territories where their right of distribution and sale had not been exhausted. The court held that the defendants’ acts were prima facie infringing in nature and the defenses put forth by the defendants to defend their usage were not tenable. Thus, a temporary injunction was warranted until the case was resolved.

The importance of this decision arises from the fact that the Indian courts have now begun to recognize and protect the right of copyright owners to control the distribution channels of their copyrighted articles in order to obtain maximum royalties. The courts are respecting the divisions of rights along territorial lines by publishers – a form of division which is supported by Sections 19(2), 19(6) and 30A of the Act – and have held that as far as literary works are concerned, the exhaustion of rights occurs on the first legal sale of a copy of a work only within the territory in which the copyright owner intended the work to be sold. Thus, the copyright owner would continue to enjoy the right of resale in all other territories.

ICICI Bank Ordered to Pay Rs. 13 Lakh to NRI in Phishing Scam

Believed to be India’s first legal adjudication of a dispute raised by a victim of a cyber crime in phishing case, the adjudicating officer at Chennai, Govt. of Tamil Nadu (“TN”), in Umashankar Sivasubramanian vs. Branch Manager, ICICI Bank and others, recently directed ICICI Bank to pay Rs 12.85 lakh to an Abu Dhabi-based non-resident Indian (“NRI”) within 60 days for the loss suffered by him due to a phishing fraud. Phishing is a form of internet fraud through which sensitive information such as usernames, passwords, and credit card details are obtained by masquerading as a trustworthy entity.

The ruling was passed under the Cyber Regulations Appellate Tribunal Rules, 2000, with TN IT secretary PWC Davidar acting as the adjudicator under the Information Technology Act, 2000. The application was filed before Adjudication Officer for the State for adjudication under Section 43 read alongwith section 46 of the Information Technology Act, 2000. Sivasubramanian, an NRI employed in Abu Dhabi, maintained a bank account with ICICI Bank, and had Internet banking access for his savings bank account. The Bank sent him periodic statements. In September 2007, Sivasubramanian received an email from “customercare@icicibank.com” asking him to reply with his internet banking username and password or else his account would become non-existent. Assuming it to be a routine mail, he complied with the request. Later, he found that Rs 6.46 lakh were transferred from his account to Uday Enterprises, an account holder in the same bank in Mumbai, which withdrew Rs 4.6 lakh by self cheque from an ICICI branch in Mumbai and retained the balance in its account. When ICICI Bank tried to contact the firm, it found that Uday Enterprises had moved on from the address it had provided two years earlier.

Sivasubramanian contended that the bank had violated the “know your customer” (KYC) norms. When he didn’t get his money back, Sivasubramanian filed a criminal complaint and also appealed to the State Government’s IT Secretary, Mr. P.W.C. Davidar, the Adjudicating Officer under the IT Act. The bank claimed that Sivasubramanian had negligently disclosed his confidential information, such as his password, and as a result became a victim of phishing fraud.

Mr. Davidar stated in his order that a list of instructions the bank had put up on its Web site and which it sends to customers were of a “routine nature” and did not help a customer distinguish between an e-mail from the bank and an e-mail sent by a fraudster. He observed that the bank had not provided additional layers of safeguard such as due diligence, KYC norms, and automatic SMS alerts. He rejected the bank’s effort to take shelter behind routine instructions on phishing and stated that the bank failed to take steps to prevent unauthorized access to its customers’ accounts. Mr. Davidar also observed that the bank’s actions indicated it had “washed its hands” of the customer and that the bank’s branch had been indifferent to the customer’s plight.

The judgment, though likely to be appealed, is significant as it is apparently the first verdict in a case filed under the IT Act awarding damages in a phishing case.

 

by B.C. Thiruvengadam, Thiru & Thiru, Advocates