Thursday, April 30, 2009
Judicial Function or Administrative Function?
If the role of the Chief Justice in appointing arbitrators is categorized as a judicial function, he must enter into questions of validity of the arbitration agreement at the time of appointment of arbitrators. This was the understanding accepted by the Supreme Court in the Patel Engineering case. The arguments against this typically revolve around (a) the kompetenz-kompetenz principle, which allows arbitral tribunals to decide on their own jurisdiction; and (b) the fact that the 1996 Act specifically uses the words “Chief Justice” and not “Court” as used in the earlier enactment. Presumably, this indicates that the function is intended to be an administrative one and not a judicial one.
It is noteworthy; however, that “Chief Justice” could well have been intended because of the eminence of the post – not because of an intention to make the function a purely administrative one. At a pragmatic level, does it make sense to hand to a constitutional functionary such as the Chief Justice a purely ministerial function involving practically no application of mind? Would the better course be to construe the function as a judicial one, allowing the Chief Justice to adjudicate on the validity of the arbitration agreement prior to appointing arbitrators? Again, the Indian Act allows appeals against an arbitrator’s decision on jurisdiction only when the arbitrator declines jurisdiction. If the arbitrator assumes jurisdiction, a challenge will be possible only after the arbitral proceedings are over – unlike under the UNCITRAL model law which allows appeals against both types of jurisdictional decisions immediately. Does it make any sense to expect a party to go through arbitration, spend time and money, and then come back to Court after the proceedings? Given the structure of domestic arbitrations in India, it is an extremely exceptional case where an arbitrator declines jurisdiction. Is it not practically better to allow the judiciary to adjudicate the issue at the outset itself, in terms of saving both time and money? Is it necessarily to strictly adhere to doctrinaire considerations in these matters?
The arguments against setting aside awards based on an expansive reading of “public policy” turn on questions of the importance of party-autonomy and minimal judicial interference. It is on this basis that the decision in ONGC v. Saw Pipes has been heavily criticized.
However, Mr. Gourab Banerji put forth strong pragmatic arguments in favour of the decision in ONGC. At the outset, it is essential to consider that parties are not allowed to contract out of statute; or to enter into contracts for illegal objects. If that is the case, will not a refusal to set aside an illegal award under the guise of party autonomy effectively mean that parties are doing indirectly what they cannot do directly? Mr. Banerjee’s argument may be seen through the following extract from the paper which he presented:
"The general assumption is that arbitral awards should be final and binding, and open to limited challenge before the Court. The key question is: why should this be so? The theoretical answer is that arbitration is a manifestation of party autonomy. The theory is that arbitration is a consensual process, being the subject matter of agreement. The theory is that two parties have got together and mutually decided to resolve the dispute outside the Court system. In such a case it is thought that the Courts should not interfere in such consensual arrangements. The theory is that once two parties have chosen to appoint a third person by consent, an award by such a person should be final and binding and should not be challenged except in very rare circumstances. This is the basis for a limited challenge, whether it be under the 1940 Act or under the 1996 Act.
Unfortunately, the reality does not always match the theory. The reality is that in the vast majority of purely domestic arbitrations, where there is no foreign element, the government or its agencies are parties. The reality is that due to various circumstances, such as economic duress, one-sided arbitration clauses are imposed upon the party with lesser bargaining power. The reality is that in many cases of named arbitrators, they are government employees who are likely to be biased for one reason or another. The reality is that most arbitrations are not institutional but ad-hoc, and there are no trained arbitrators who can facilitate fast and summary disposal while maintaining the confidence of both parties. The reality is that many arbitrations end up being conducted as if they are mini trials, with pleadings, issues, admission and denial, oral and documentary evidence, cross-examination etc.
Thus, where there is a disconnect between the theory and the reality of arbitration, not unnaturally the Courts would wish to intervene when they are faced with injustice. It is on this basis that the decision in Saw Pipes (and those following) must be understood."
Separate standards for domestic and international commercial arbitration?
On a broader level, the Symposium presented some key issues, which are only likely to be debated even more, particularly as there are indications that the apex Court could be willing to reconsider the position of law emerging from Bhatia and Satyam. In particular, an issue which must deserve consideration is this – should the Indian judiciary necessarily adopt – in all cases – an attitude which seeks to be in consonance with the Model Law? As Mr. Banerjee noted, the Model Law was meant to operate only in respect of international commercial arbitration. Unfortunately, the Indian Parliament seems to have copy-pasted the model law into the 1996 Act, without keeping in mind the practical distinction between domestic arbitration and international commercial arbitration. Is it time for the judiciary to step in and draw a line, applying different principles for the two? Should India prefer a model such as the Singapore model, where two different standards of judicial interference exist for domestic and international commercial arbitrations?
It appears in sum that given the ground realities noted by several of the leading practitioners who attended the Symposium, it might well be essential to create a dichotomy in the treatment of domestic and international commercial arbitrations. This dichotomy appears to be essential in the interests of substantive justice, at least until domestic arbitrations can be made procedurally as sound as international commercial arbitrations. The recent decision of the London Court of International Arbitration to open a centre in India must therefore be welcomed, as it might well be the first step toward ensuring an institutional approach even in domestic arbitrations. But unless that institutional approach gets cemented, it might be a better option to allow for greater judicial interference, at least in domestic arbitrations.
Wednesday, April 29, 2009
The Qatar Law Forum will take place in The provisional programme is available here. Among the host of topics being covered at the conference, the following may be of interest given the focus of this Blog:
- Islamic Finance;
- The Legal Profession Today: Local and International Practice;
- Redefining Global Governance;
- International Organisation and the Economic Crisis: The Contribution of Global and Regional Cooperation in Trade and Finance;
- In a Time of Financial Stress: Regulatory Law and the Credit Crunch; and
- International Dispute Resolution: Mediation and Arbitration and the Place of Law and Economics.
Sunday, April 26, 2009
- A uniform procedure has been created for dealing with shares that lay unclaimed after public issues;
- The notice period for all corporate actions such as dividend, bonus, etc. has been uniformly reduced for all scripts, whether in demat or physical, whether in futures & options segment or not. The notice period for record date has been reduced to 7 working days and for board meeting to 2 working days;
- The declaration of dividend by companies is now mandated on a per-share basis. This is to avoid inconsistencies created due to differences in par value of shares issued by companies; and
- The format for disclosure of shareholding pattern under Clause 35 of the listing agreement has been amended to reflect distinct patterns for each class of shares separately.
Thursday, April 23, 2009
It may be recalled that in the cases of Bhatia International and Satyam, the Supreme Court had held that Part I of the Arbitration Act could be made applicable even to international arbitrations. This, in turn, meant that domestic law could be used, among other things, to set aside international arbitral awards. These decisions, which go against the worldwide trend favouring autonomy of international commercial transactions, and minimizing domestic interference with international commercial transactions, had caused much concern in the international arbitration community.
In the present case, the judgments in Bhatia International and Satyam were approved and applied directly by the Court (although upon the facts of the case, the Court held Part I to be inapplicable to the award in question). The Court was, of course, bound by the apex Court’s judgment in Bhatia International. In this context, it is important to note however, that Satyam is currently up for review. It is to be hoped that this somewhat insular trend, first established by Bhatia International, which is well on its way towards becoming judicially entrenched by decisions such as Videocon, is soon reversed in favour of an interpretation of the Arbitration Act that is more in line with the concerns of the international commercial community.
- Gautam Bhatia & Venugopal Mahapatra
Experts in the area of corporate social responsibility (CSR) have argued that CSR is not just philanthropy by companies. It should involve the right combination of enhancing long-term shareholder value and protecting the interests of various other stakeholders (such as employees, creditors, consumers and the society in general).
In a recent article in the Wall Street Journal, R. Venugopal and Nachiket Mor set out some key principles for CSR in
It is a sign of bad corporate governance when managers donate to causes that their companies are in no way better positioned to address than individuals are.
As trustees of corporate assets, are managers not exceeding their brief when they divert resources in this fashion and pursue personal passions with corporate resources?
Would it not be better to distribute profits among the shareholders and employees and leave it to their discretion, as individuals, to contribute to the causes that they deem fit?
Again, CSR is sometimes treated as being no different from image building. But such an approach is short-sighted and therefore not good corporate governance.
Corporate governance reaches its zenith when companies realize that long term business profitability results from business models that address social problems in a sustainable way.
Profits become a-posteriori indicators of business performance rather than as long-term goals; they are viewed as the means to keep companies going concerns and not as ends-in-themselves.
An obsessive focus on the competition gives way to innovation that makes competition irrelevant. The history of business tells us that companies such as these are the ones that thrive in the long run. Ironical as it may sound, the most profitable companies are the ones that are the least profit-minded.
While the prescription above is interesting and consistent with CSR approaches generally, it is not entirely clear whether it is adopted in
If forcing unviable pricing was not enough, the government now wants public sector oil companies to spend 2% of their profits on social programmes. The directive makes a complete mockery of the high standards of corporate governance the government wants India Inc to follow.
The dominant shareholder, the government, has unilaterally taken a decision that has a bearing on the investment and returns of other stakeholders. The government would do well to set a better example. The big four oilcos — ONGC, Bharat Petroleum, Hindustan Petroleum and Indian Oil — are all listed on stock exchanges with public shareholding ranging from near 20% in Indian Oil to 48.9% in Hindustan Petroleum.
The 2% levy on profits for corporate social responsibility (CSR) spending would depress the valuation of these companies and create a handicap vis-a-vis private sector competitors, apart from upsetting their capital investments and dividend plans. Besides, given the political culture we possess, the sort of social spending the government is suggesting for oilcos would degenerate into funding schemes ….
CSR would require a concerted approach with appropriate buy-in from all stakeholders (particularly shareholders) and not a unilateral approach by the controlling shareholder or the management of the company.
Tuesday, April 21, 2009
Press Note 2 of 2005, which deals with foreign direct investment (FDI) in the real estate sector, imposes a three-year lock in foreign investments. It states:
Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB
The question that arises is whether a foreign investor is prohibited altogether from selling its investment during the lock-in period or whether it is prohibited from selling the investment to Indian residents only. Although the provision is not entirely clear, the use of the word “repatriation” would suggest that sales to Indian residents and the consequent outflow of foreign exchange during the 3-year period is prohibited. In that case, there is nothing preventing a foreign investor from selling the investment to another foreign investor during that period as there is no repatriation of foreign exchange from
A report in the Economic Times a few weeks ago suggests some divergence of views among the regulatory authorities:
Foreign investors in Indian real estate cannot sell their stakes to another foreign investor before three years, the Foreign Investment Promotion Board (FIPB), the body that clears such proposals, has said.
With this, FIPB has overruled a provision in FDI policy that exempts foreign players from the rule in cases where fund transfer is from one non-resident to another. Till now, this three-year lock-in was applicable only on foreign investment in real estate and not on investors.
The FIPB view is contrary to the stand taken by the department of industrial policy and promotion (Dipp), the nodal agency that formulates FDI rules in the country. Dipp’s view is that a foreign investor can repatriate funds if it offloads its stake to another foreign investor as the actual investment in a project would remain intact and only its ownership would change. However, FIPB has ruled that an investor can’t sell its investment even to a foreign player before the end of three years.
The FIPB appears to have adopted a conservative view of the provision. In any event, there is always the fallback option of approaching the FIPB for specific approval to waive the lock-in period.
Hat tip to Bhushan Shah for sending in the link to the news report.
Monday, April 20, 2009
The Serious Fraud Investigation Office (SFIO) appears to have given a clean chit to Satyam’s independent directors, as it was found that the board was not involved in the fraudulent conduct and that they were kept in the dark. Much has already been written about the difficulties of placing too much reliance on the role of independent directors in corporate governance. Independent directors spend only a few days in a year on affairs of the company, and they are indeed busy individuals carrying out their regular business and professional activities unrelated to the companies on whose boards they serve. Even where independent directors are generous with their time and effort, their advise and decision-making is based on information provided by the management (or promoters) of the company, who can control the amount, quality and structure of information that reaches the board. It has been said that “power over information flow is virtually equivalent to power over decision”. It is unsurprising then that the independent directors of Satyam were neither aware of the goings on in the company nor were they in any position to prevent it.
An outcome of the Satyam episode is that it seems to have instilled fear in the minds of independent directors in
Singapore Exchange Ltd (SGX) will be launching a new announcement template on SGXNET for notice of resignation of directors and key officers with effect from 1 October 2007. This will be applicable to all listed companies in
One of the findings of the study highlighted the importance of listed companies providing detailed information on the resignations of their directors and key officers to investors and the marketplace. The new easy-to-use announcement template will facilitate listed companies disclosing in detail the reasons for the resignations. The resignation of one director or a succession of them, particularly of independent directors, may indicate something untoward in terms of corporate governance or commercial developments. Investors should be made aware of these changes.
This is not to suggest that there is something untoward in every Indian company where independent directors have resigned in the past. That would be too rash a conclusion to draw. It could also be the fear of potential liability. Independent directors are often fearful about this issue (and understandably so) for two reasons: (i) they are not involved in the day-to-day activities of the company although they may bear some responsibility for the actions of management; and (ii) there are myriad directions from which liability could strike since directors are responsible (subject to exceptions) for violation of various statutes by companies, particularly for the so-called socio-economic offences. There is “fear of the unknown” on both these counts.
Having said that, the past track-record of directors being held liable for actions of the company favours independent directors. In an influential series of studies carried out across several countries (though not including India), it was found that the risk of liability on independent directors is far lower than what commentators and directors themselves believe. Even in a litigious society such as the
Although the studies above are generally optimistic, it can be even starker issue in the Indian context where the litigation process tends to be prolonged and cumbersome, and a closure on the issue being unlikely within a short time frame. Further, the number of socio-economic legislation in
(The global financial crisis is now at a stage where the debate is transcending from one of decline in bottomlines of companies, falls in stock markets, tightening of credit and the like to wider issues that have greater social ramifications. If these issues are not dealt with appropriately, it could lead to disastrous consequences. In this behalf, one our readers Courtney Phillips sends us the following post that reminds us of the need to look beyond the realm of pure finance, business, commerce and the law and to other equally important issues)
The financial crisis that’s currently affecting people all over the world could go on to have more serious ramifications than just the loss of jobs and the slowing down of markets on a global scale. In fact, it could result in food scarcity and higher levels of starvation in developing countries, according to the Food and Agriculture Organization (FAO) of the United Nations.
The global meltdown has made people tighten their belts, and it’s no different with governments worldwide. The FAO is concerned that agricultural aid to developing nations from developed nations could be stopped, and as a result worsen the plight of people who are poor and cannot afford food. Countries whose agricultural produce is affected by the vagaries of the weather and/or their unstable political climates are in need of continuous aid, no matter what the global financial status.
But when recession hits, nations are forced to undertake conservative measures and this may lead them to stop honoring their commitment of aid to nations that do need them. And when this happens in relation to agriculture, there’s the risk of:
- An international food crisis
- People starving and being driven to poverty
And for those who argue that commodity prices are bound to go down because of the recession and the slowing economy, this situation also poses a significant threat. When prices go down, there’s no incentive to plant new crops, and this means that there are reduced harvests. When countries who are major exporters of food crops reduce their agricultural growth, it spells a crisis for food on a global scale.
Besides this, the financial crisis lends itself to other drawbacks in the way people live by affecting interest rates, borrowings, savings, salaries and job security. All these factors affect people who live in poverty. They are forced to adjust to a vicious cycle of hunger, malnutrition and disease. And stopping financial aid to these countries, even though the financial crisis is all too real, is only going to make things worse.
This post was contributed by Courtney Phillips, who writes about the worlds best university list. She welcomes your feedback at CourtneyPhillips80 at gmail.com
Wednesday, April 15, 2009
Very often, we come across interesting pieces of information pertaining to topics covered on this Blog that may not necessarily require in-depth analysis or discussion. At the same time, such information may be of relevance to some of our readers. In order to bridge this gap, we have provisionally included a section on this Blog (please see the right hand side of the page) titled Bits of Interest, which will be periodically updated. This is initially being run on a trial basis. Depending on the acceptability of this feature over a period of time, its future continuance will be determined. Reader suggestions are most welcome.
Although the Competition Commission is expected to become functional soon, it appears from press reports that its role pertaining to merger control will commence only in due course and not immediately. The draft of the Competition Commission of India (Combinations) Regulations (discussed earlier on this Blog) is still subject to discussion and finalisation. Until then, M&A transactions, whether local or global (having an impact on
The swiftness with which the sale of Satyam was effected has made headlines (please see links below). At stake were not only the interests of the company and its stakeholders (including shareholders, employees, customer, and so on) but also the credibility of
The following are links to some recent press reports and editorials:
While the task of finding a buyer for Satyam may have been accomplished, it is necessary to bring the accused in the fraud to book with equal zeal, failing which there could be a moral hazard problem. While the investigations by regulatory authorities have met with several hurdles along the way, they too have acted with unprecedented speed. Satyam’s sale decision coincides with the conclusion of the probe by the Serious Fraud Investigation Office (SFIO), whose “report runs into 12,000 pages in 30 volumes”. Earlier this month the Central Bureau of Investigation (CBI) filed its charge sheet in the case.
It seems that considerable progress has been accomplished within 100 days since the revelation of the fraud at Satyam, but there is still a long way to go before the saga can reach its logical end.
Saturday, April 11, 2009
The most significant outcome of the recently concluded G20 summit is perhaps its resolve to crack down on tax havens – unprecedented as it is, its implications are not entirely clear.
In the communiqué of April 2, the G20 promises to “take action against non-cooperative jurisdictions, including tax havens” and declares that it stands “ready to deploy sanctions to protect our public finances and financial systems”, since the “era of banking secrecy is over”. The sudden concern is not surprising – for example, recent reports have suggested a clear link between tax havens and the financial crisis, and France for example is reported to have seen money worth several times its GDP disappear to these financial institutions. French President Nicolas Sarkozy reportedly threatened to walk out of the Summit unless strong action was promised against tax havens. The OECD has been for a few years publishing a list of “non-cooperative jurisdictions”, and the worst offenders have been Costa Rica, Malaysia, the Philippines and Uruguay in terms of sharing information.
Following the pledge at the G20 summit, all nations, including the four mentioned above, have been taken off the ‘non-cooperative’ list. This now entails a commitment for several nations to share information that was hitherto undisclosed, bringing with it the distinct possibility that these States will no longer attract the sums of money that they have been. While India is not directly affected by this decision, since it is not a tax haven, it is important to note that India’s biggest source of FDI is Mauritius, a tax haven. Mauritius accounted for two-fifths of India’s FDI in 2007, with investment of $11 billion.
What counts in Mauritius’ favour is that its recent OECD-compliance record has been improving, and it is now classified in the ‘least-risky’ category. Furthermore, given that this move applies equally to competing tax havens as well, it is possible that Mauritius’ investments do not dip as drastically as one might expect. This, of course, remains to be seen.
The communiqué released by the summit is available here. This report carries an excellent analysis of the summit in general, and HT examines the implications of the summit for India. Other comments on the summit and tax havens are available here and here.
An earlier post highlighted the implications of the decision of the Supreme Court in Dharmendra Textiles (306 ITR) on penalty proceedings under the revenue laws, including the Income Tax Act. The Court there overruled its earlier decision in Dilip Shroff, and concluded that there is no requirement of mens rea in the case of penalty proceedings. Thus, it does not need to be shown that the assessee deliberately concealed income to avoid tax, as long as it is shown that some income escaped assessment.
This decision was widely perceived as being unduly harsh on assessees, by making penalty proceedings possible even in cases of innocent mistakes on the part of assessees. Not only did the decision mean that income inadvertently not declared by the assessee would result in penalty proceedings, but also resulted in the possibility that if deductions claimed by the assessee were subsequently disallowed, the amount of the disallowance would be subject to penalty. Given the complicated issues of law involved in the case of some deductions, this had the potential of resulting in grossly inequitable results.
It was this very issue that was considered recently by the Mumbai ITAT in ACIT v. VIP Industries. The case involved cross appeals from an order of the Commissioner of Income Tax (Appeals), the relevant one dealing with a deleted penalty. The assessee had claimed a 100% deduction for scientific research expenditure under section 35 of the Income Tax Act, and had included the cost of a car in the computing the amount of the deduction. The Assessing Officer had concluded that the car had not been used for scientific or research purposes, and thus disallowed the deduction to that extent. On this addition, a penalty had been imposed by him, which was deleted by the CIT(A).
In appeal before the ITAT, the Revenue placed reliance on the decision in Dharmendra Textiles, contending that penalty can be imposed even when income remains undisclosed without the conscious act of the assessee. However, the Tribunal rejected this contention, drawing a distinction between income which is not disclosed, and income which is declared to be tax-free. There are two ways in which the income declared by an assessee to be taxable can be lesser than that actually sought to be taxed by the AO. One is if the amount disclosed is lesser than the amount actually earned, and second is if the amount taxable is reduced by a deduction, which is subsequently disallowed. In the second case, the taxable income is increased not due to the discovery of undisclosed income, but because of a disallowed deduction. The Tribunal held that in such a case, since there is no ‘undisclosed’ income, the decision in Dharmendra Textiles could not be interpreted to require the imposition of a penalty.
While this part of the decision does seem to narrow the scope of Dharmendra Textiles, a closer reading also lends support to the possibility that this discussion of the Supreme Court decision is, in fact, obiter, and cannot really be said to be of much legal relevance. This is because in the portion of the judgment immediately preceding the discussion of Dharmendra Textiles, the tribunal examined in detail section 271 (dealing with penalty proceedings), and concluded that the explanation given by the assessee was sufficient for the purposes of section 271. Thus, even if the broad interpretation of Dharmendra Textiles was followed, it would have sufficed for the facts before the Tribunal. However, inspite of this red herring in the decision, the decision does provide a much needed rallying point for assessees seeking a way around the Apex Court dictum.
Friday, April 10, 2009
The Satyam episode has led to debates about inadequacies in corporate governance norms in
In this backdrop, there is an interesting report in the Business Standard that refers to the efforts of certain institutional investors in
“The main idea is to reduce/stop investments in companies that do not provide correct information to investors. Also, we are looking at ways to make our decision public, so that other investors are also aware of the company’s standing with fund houses,” said a leading fund manager.
Fund houses could take stern steps in case of an errant company. For one, the name of the company could be put up on the website of the Association of Mutual Funds in
Fund managers said it has been decided that each fund house would identify three-to-five companies that did not give adequate financial information and had too many corporate governance issues.”
The basis of this idea is to strike at the reputational incentives of companies and their promoters and thereby motivate them to improve their corporate governance practices. In other words, the fear of being blacklisted would operate in the minds of companies to adhere to high quality practices. It may be an interesting, and perhaps effective, alternative to regulatory or penal sanctions, especially when the enforcement of regulatory sanctions is likely to be time-consuming and uncertain.
Such efforts also have a bearing on corporate law and norms. In his article Shaming in Corporate Law (
While all this is very well, it is not clear if there is sufficient will to put through such proposals. They will surely require acceptance not only by the investor community but also by the corporate sector in general. Further, unless such proposals are facilitated by the regulators (read SEBI in this case), the investor community may run the risk of creating frictions with companies they wish to blacklist. The following observation in the Business Standard report is evident of this:
“However, some analysts said that many fund houses could find it difficult to point fingers at specific companies as there would be fears of management access as well as business denials. “At present, this is just a proposal from some fund managers. To make it a success, we require cooperation from the entire industry and also the regulators. Otherwise, the entire idea could come under pressure from corporate houses,” said a chief investment officer.”