2010 – Summer

No Conclusion To Doha In 2010

abaindialawnews 2010 - Summer, ALL

            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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New Minimum Public Shareholding Requirements For Indian Companies

abaindialawnews 2010 - Summer, ALL

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

Additional Case Notes

abaindialawnews 2010 - Summer, ALL

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.

Case Notes

abaindialawnews 2010 - Summer, ALL

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.

abaindialawnews 2010 - Summer, ALL

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

abaindialawnews 2010 - Summer, ALL

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

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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

Revisiting The Law After Suspended Sentences Imposed In The Bhopal Gas Tragedy

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In the recent hyperbole surrounding the failure to bring to justice the persons responsible for the Bhopal gas tragedy, scant attention has been paid to the legal requirements to convict corporate executives of criminal conduct. On June 7 of this year, the Magistrate Court in Bhopal imposed suspended sentences of two years jail time and modest monetary penalties to eight former directors of Union Carbide India Limited (“UCIL”). Given the enormity of the tragedy, the sentences were met with widespread national outrage. The court did not rule on the liability of Warren Anderson, the chairman of Union Carbide Corporation (“UCC”) at the time of the incident, and the focal point of public outrage in India. Absent from the discourse is any discussion of the legal doctrines that underlie corporate and individual culpability for the tragic events of that December night twenty six years ago. An appreciation of this is essential for meaningful discussion of the legal reform required to prevent what is perhaps the real tragedy- the failure to adequately compensate the poor and powerless victims of the Bhopal incident.

First, to put things in context, some facts which are not in dispute. The Bhopal plant was owned by UCIL, an Indian company, publicly listed on the Calcutta Stock Exchange. Its shares were held 50.9% by UCC, a New York corporation, another 22% was held by Indian public financial institutions, and the rest by roughly 23,000 small shareholders. At the time of the Bhopal incident, UCIL was celebrating its 50th anniversary in India. Following the incident, the Government of India (“GOI”) enacted the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, appointing itself as the sole representative of the people injured by the gas leak. Two days after the incident Warren Anderson accepted moral responsibility for the Bhopal incident. But the question of his and UCC’s legal (civil and criminal) liability was left open, and to this day has yet to be established by a court of law.

Bringing Warren Anderson and UCC “to justice” requires an examination of substantive legal doctrines, as well as the requirements of due process of law. Substantive law makes clear that:

  • Officers and directors of a corporation may be held criminally liable for offenses by the corporation only in very narrow circumstance, and that any criminal action against Warren Anderson, a U.S. citizen, must be in accordance with international law, including the US India Treaty on Mutual Legal Assistance in Criminal Matters;
  • As separate legal entities, UCC may not be held liable for UCIL’s malfeasance unless the court “pierces the corporate veil” or adopts some other theory of enterprise liability to make UCC liable.

In addition, in any future man-made mass disaster it will be essential that the courts and investigative agencies in India function in an expeditious and thorough manner, so that there is no doubt that justice will be served. Doubts had previously been expressed including by none other than the GOI itself, regarding adequacy of the court system in India.

Imposing Criminal Liability on Directors is Not Straightforward

In much of the popular discourse, the criminal liability of Warren Anderson, chairman of UCC at the time of the Bhopal incident, has been taken as a given. Scant attention has been paid to the legal requirements for imposing such liability.

Officers and directors, such as Warren Anderson, are liable for the criminal offenses of a company in very narrow circumstances; certainly not as a matter of course. Their liability rests on the principles of vicarious liability, which itself is based on principles of agency law or imposed by statute. In India, to support a finding of vicarious liability in a criminal matter, there must be a provision in the underlying statute fixing liability on the directors. In the absence of such a provision, criminal liability can be imposed on a director only if he aided and abetted the violation by the corporation through specific conduct or if it is proved that he at the time of the violation was “in charge of” and responsible to the corporation for the conduct of its business. The Supreme Court of India has interpreted these words to require that the accused be in overall control of the day to day business of the entity. This requirement is not met merely by the accused having a right to participate in the business of the entity.

Accordingly, the criminal liability of Warren Anderson as a director of UCC will be founded on painstakingly making a case that he is vicariously liable and proving that he engaged in conduct that establishes beyond a reasonable doubt his culpability for the acts and omissions of that fateful night. This is a monumental prosecutorial challenge.

UCC’s (Parent Company) Liability Cannot Be Taken for Granted

In holding UCC liable, one basic question is whether and to what extent the separate existence of UCIL should be ignored. The separate existence of a corporation is a fundamental assumption that underlies global commercial transactions, and there must be compelling reasons for a court to ignore that assumption. Generally the existence of a corporation is sought to be disregarded when it has no assets. UCIL was a “going concern” with substantial assets, and there is nothing to suggest that it was undercapitalized.

Piercing the Corporate Veil of UCIL

Generally corporate veil piercing is appropriate only when recognition of the separate corporate existence will lead to injustice or an unfair or inequitable result. This is a necessary but not a sufficient condition for imposing liability on shareholders, such as UCC in this case. While piercing is rare, two factors in the present case favor it: (a) liability is sought to be imposed on another corporate entity rather than an individual; and (b) liability arises in the first instance from tort rather than contract.

Many cases in which shareholder liability has been found concern shareholders that are themselves corporations, as is the case here. Often in such cases a parent corporation is being held liable for the debts of the subsidiary. These cases have a somewhat different flavor than cases in which the shareholder defendant is an individual, and there is a general feeling that disregarding the separate corporate existence of the subsidiary may be easier where another corporate entity is held liable.

Beyond that, the general standards applied in determining whether the shareholders (or parent company) of a corporation should be held liable are quite different in contract cases as compared to tort cases. In a contract case, the third party has usually dealt in some way with the subsidiary and is aware that it lacks substance. In a tort case, on the other hand, there is no element of voluntary dealing. The question in these cases is whether it is reasonable for owners of a business to transfer a risk of loss or injury to members of the general public through the device of a corporation which has limited assets.

Generally corporate shareholders, such as UCC, have been held liable for subsidiary obligations in a number of situations:

  1. When the subsidiary is being operated in an “unfair manner,” e.g., the terms of transactions between parent and subsidiary are set so that profits accumulate in the parent and losses in the subsidiary;
  1. When the subsidiary is consistently represented as being a part of the parent, e.g., as a “division” or “local office” rather than as a subsidiary;
  1. When the separate corporate formalities of the subsidiary are not followed;
  1. When the subsidiary and parent are operating essentially as parts of the same integrated business, and the subsidiary is undercapitalized; and
  1. When there is no consistent clear delineation of which transactions are the parent’s and which are the subsidiary’s.

Enterprise Liability

Besides the doctrine of piercing the veil, the enterprise theory of liability, although not widely accepted, could be a basis for imposing liability on UCC. Enterprise theory views the corporate group as a singular unit, rather than viewing each subsidiary or affiliated corporation as a separate legal entity. Since subsidiaries (especially wholly-owned subsidiaries) at least theoretically act for the benefit of the corporation as a whole, enterprise theory follows the profit and holds the various corporate actors in a given web accountable for the actions of other actors. Enterprise principles thus apply liability according to the patterns of the economic enterprise instead of stopping at the contours of the legal fiction. Adopting this theory would allow claimants of UCIL, one actor in a corporate group, to recover from UCC, another member of the group under ordinary tort circumstances. However, because the Indian courts have not opined on the enterprise theory of liability, this will be new ground.

Absence of Mass Tort Legislation

India has no mass tort legislation that broadens the responsibility for compensation and remediation of harm caused by hazardous activities that may affect the general public and establishes a mechanism to compensate the injured. For example, there is no legislation in India such as the US Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) under which a parent corporation might be liable as an “operator” of the site if it was involved in the operation of the site itself. In the absence of specific legislation, a court will have to rely on common law doctrines to disregard the existence of UCIL (pierce the corporate veil) and hold UCC liable. There is also the separate question of law as to what extent Dow Chemicals, as successor to UCC, could be liable.

Adequacy of Legal Infrastructure in India

It is often said that perception is reality. This is all the more true in this case, where the functioning of the Indian legal system will be critically examined internationally. To be credible, judicial proceedings and criminal investigations in this matter will not only have to meet the highest standards of law, but should also be so perceived by all observers. The GOI itself had serious misgivings on this account at the time of the Bhopal incident. In 1986, the Union of India acting on behalf of the victims of the Bhopal incident is reported to have argued before the federal district court in New York that “the courts of India are not up to the task of conducting the Bhopal litigation . . ., “that the Indian judiciary has yet to reach full maturity due to the restraints placed upon it by British colonial rulers who shaped the Indian legal system to meet their own ends” . . . and “that the Indian justice system has not yet cast off the burden of colonialism to meet the emerging needs of a democratic people.” Dismissing the case on forum non conveniens grounds, federal district judge John F. Keenan wrote:

The Court thus finds itself faced with a paradox. In the Court’s view, to retain the litigation in this forum, as plaintiffs request, would be yet another example of imperialism, another situation in which an established sovereign inflicted its rules, its standards and values on a developing nation. This Court declines to play such a role. The Union of India is a world power in 1986, and its courts have the proven capacity to mete out fair and equal justice. To deprive the Indian judiciary of this opportunity to stand tall before the world and to pass judgment on behalf of its own people would be to revive a history of subservience and subjugation from which India has emerged. India and its people can and must vindicate their claims before the independent and legitimate judiciary created there since the Independence of 1947.

In re Union Carbide Corporation Gas Plant Disaster at Bhopal, India in December, 1984, 634 F. Supp. 842, 867 (S.D.N.Y. 1986). That was then. We do not know if the GOI still holds the same view. Leading members of the Indian bar, including senior advocate N.A. Palkhivala and J.B. Dadachanji, had disagreed and took a contrary view before the court.

Has history disproven Judge Keenan’s determination that the Indian courts are up to the task? We think not. To blame solely the Indian courts for the delay would assume that the parties involved, the GOI and UCC, moved expeditiously in litigating this case. As the parties and not the court alone set the legal “pace” of a trial in India, the saga of this twenty six year old case cannot be entirely attributed to the court alone.

Conclusion

            Justice requires that specific legal criteria be satisfied for the imposition of criminal liability upon the officers and directors of UCC. To impose criminal liability without evaluating whether the facts of Bhopal fall into the limited circumstances under which criminal liability may be imposed would itself be a denial of justice. To prevent what happened in the aftermath of the Bhopal incident, we as lawyers must press the government to pass comprehensive legislation providing for proper compensation to victims of mass torts and for criminal liability if the circumstances allow. The disaster of Bhopal “gnaws at the conscience” of the Indian people according to Prime Minister Manmohan Singh and represents a true human tragedy. There are many legal lessons to be learned in the wake of the Bhopal tragedy. Perhaps the most important is that the law and courts must be better equipped to address any future Bhopal-like mass tragedy.

Anand S. Dayal is a partner with Koura & Company, Advocates and Barrister, based in New Delhi, India. Anand received his J.D. cum laude (1992) from Cornell Law School, and is admitted to the bar both in India and the US (NY and DC). He was previously Of Counsel with White & Case and an associate with Chadbourne & Parke and Pillsbury Madison & Sutro. Anand is chairman of the Anti-Corruption Committee of the American Chamber of Commerce in India. He can be contacted at dayala@vsnl.com or adayal@kouraco.com.

Jonathan Wolff is a second year law student at Washington University in Saint Louis and is currently interning for Koura & Co. His research interests include international corporate law as well as international and United States water law. He can be contacted at jswolff@wulaw.wustl.edu.

 

 

by Anand S. Dayal and Jonathan Wolff