DIPP’S MAJOR IMPETUS TOWARDS EASE OF DOING BUSINESS IN INDIA

The Department of Industrial Policy and Promotion (“DIPP”) has vide Press Note No. 1 – 2018 Series (“Press Note 1”) sought to review the extant Foreign Direct Investment (“FDI”) policy on various sectors and has sought to incorporate several amendments to the Consolidated FDI Policy Circular of 2017 as amended from time to time (“FDI Policy”). These amendments will come into effect from the date they have been notified under the Foreign Exchange Management Act, 1999.

Policy Level changes to the FDI Policy sought to be brought about vide Press Note 1 are enumerated below

1. Schedule 3 – Provisions Relating to Issue/Transfer of Shares – Conversion of External Commercial Borrowings (“ECB”)/Lump sum Fee/Royalty etc. into Equity  

Under the FDI Policy, subject to certain conditions, issue of equity shares under the government route is allowed for import of capital goods/ machinery/ equipment (excluding second-hand machinery) and pre-operative/pre-incorporation expenses (including payments of rent etc.). However, vide the Press Note 1, DIPP seeks to allow issue of equity shares under the government approval route towards the aforementioned, only for sectors requiring government approval under the FDI Policy. Further, a new general condition has been sought to be incorporated, that, for sectors under automatic route, issue of equity shares against the import of capital goods/ machinery/ equipment (excluding second-hand machinery) and pre-operative/pre-incorporation expenses (including payments of rent etc.), shall be permitted under the automatic route subject to compliance with respective conditions mentioned above and reporting to RBI in form FC-GPR as per procedure prescribed under the FDI Policy.  

2. Single Brand Product Retail Trading 

One of the major changes sought to be brought about by DIPP vide the Press Note 1 is, 100% FDI to be allowed in Single Brand Retail Trading (“SBRT”) under the automatic route. Currently, FDI is allowed under the automatic route only up to 49% and beyond 49%, government approval is required.

In respect of proposals involving FDI beyond 51%, the requirement towards sourcing from India (preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors), 30% of the value of goods purchased by such entities, shall continue to apply. However, it is now sought that the SBRT entity be permitted to set-off its incremental sourcing of goods from India for global operations during the initial 5 years (beginning 1st April of the year of the opening of first store) against the mandatory sourcing requirement of 30% of purchase from India. It also seeks to clarify that, incremental sourcing will mean the increase in terms of value of such global sourcing from India for that single brand in a particular financial year from India over the preceding financial year, by the non-resident entities undertaking single brand retain trading, either directly or through its group companies.

After completion of this 5 years period, the SBRT entity shall be required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis.

All the other conditions as enumerated in the FDI policy, towards FDI in SBRT, shall continue as is.

3. Simplification of extant policy oFDI into an Indian company engaged only in the activity of investing in the capital of other Indian company(ies) (“Investing Company(ies)”) 

Vide Press Note 1, DIPP has sought that, FDI into Investing Company(ies), registered as Non-Banking Financial Companies (NBFC) with Reserve Bank of India (being overall regulated), should now be 100% under automatic route. Such investments are currently permitted only under government approval route.

Further, Press Note 1 seeks that, FDI in Investing Company(ies) which are:

  1. Core Investment Companies (CIC) and other investing Companies, engaged in the activity of investing in the capital of any other Indian Company/ies/LLP; and
  2. following RBI regulatory framework policy for CICs,

should now be permitted under government approval route.

4. Power Exchanges  

As per the FDI Policy, FDI upto 49% is currently permitted under the automatic route and Foreign Institutional Investor (“FII”) / Foreign Portfolio Investment (“FPI”) purchases are restricted to secondary market stands only. However, vide the Press Note 1, DIPP has sought that the restriction of FII / FPI towards purchasing only via the secondary market be done away with.

5. Prohibition of restrictive conditions regarding audit firms 

In the event that, towards the audit of an Indian investee company, a foreign investor wishes to specify a particular auditor/audit firm having an international network, then, Press Note 1 seeks that, such audit should be carried out as a joint audit wherein both the auditors should be part of different networks.

This proposed amendment to the FDI Policy is very ambiguous. Firstly, the terms ‘international network’ and ‘different networks’ have loosely used and may be widely interpreted. For e.g.: Would it also include to mean a foreign firm having an Indian subsidiary. Secondly, it provides that a ‘joint audit’ has to be carried out. However, it is not clear from the language of the amendment as to who shall be conducting the audit. Further, the rationale for the Indian resident auditor is not known.

Sectoral changes to the FDI Policy sought to be brought about vide Press Note 1 are enumerated below: 

1. Pharmaceuticals 

As per the FDI Policy, FDI up to 100%, under the automatic route is currently permitted for manufacturing of medical devices. The definition of “Medical Device” includes – “a device which is reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment or system whether used alone or in combination thereof intended to be used for examination and providing information for medical or diagnostic purposes by means of in vitro examination of specimens derived from the human body or animals.” However, vide the Press Note 1, DIPP seeks to amend the aforementioned part to the effect that such a device shall have to be an in-vitro diagnostic device for medical or diagnostic purposes by means of any examination (not specifically ‘in-vitro’ examination) of specimens derived from the human body or animals.

Through this proposed amendment, DIPP has also sought to de-link the FDI Policy from the drugs related laws in India and therefore seeks to specify the category of medical devices under the larger ambit of medical devices where 100% FDI is permitted under the automatic route.

2. Construction Development: Townships, Housing, Built-up Infrastructure and Real Estate Broking 

A new clarificatory note has been sought to be incorporated vide the Press Note 1 stating that, real-estate broking services does not amount to real estate business and 100% foreign investment is allowed in real-estate broking services activity under the automatic route.

3. Civil Aviation 

FDI Policy provided a specific exclusion wherein, foreign airlines were allowed to, up to the limit of 49% of their paid of capital and subject to certain conditions, invest in the capital of all Indian companies operating scheduled and non-scheduled air transport services, except for Air India Limited.

However, vide the Press Note 1, DIPP has sought that:

  1. this specific exclusion carved out for Air India Limited be done away with; and
  2. along with the other conditions already enumerated under the FDI Policy, the following conditions be applicable for FDI in Air India Limited:
    • FDI in Air India Limited including that of foreign airline(s) to not exceed more than 49% directly or indirectly; and
    • Substantial ownership and control of Air India Limited to continue to be vested in Indian Nationals.

Other changes sought to be brought about 

Currently, applications involving FDI from Countries of Concern, i.e., Pakistan and Bangladesh (“CoC”) require certain security clearances in the manner provided in extant policies and guidelines (“CoC Applications”), irrespective of the route of investment which are being processed by the Ministry of Home Affairs.

However, vide the Press Note 1, DIPP provides that:

  1. CoC Applications falling under automatic route sectors/activities be processed by the DIPP; and
  2. CoC Applications falling under the government approval route sectors/activities be processed by the Nodal Administrative Ministries/Departments.

CONCLUSION  

From the aforementioned changes sought to be brought about in the FDI Policy it can be noted that, vide Press Note 1 the government of India has very early on in this year, taken long strides, towards liberalising the extant FDI Policy and promoting ease of doing business in India.

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NOMINATION vs SUCCESSION

Several controversies have been witnessed in the High Courts of India on the subject of nomination.

Black’s Law Dictionary defines “Nomination” as an appointment or designation of a person to fill an office or discharge a duty and “Nominee” as a person who has been nominated or proposed for an office. A nominee is a person that is appointed to receive an asset or investment in the event of one’s death. A nominee may not necessarily be a legal heir or a relative.

The ownership of a property of a deceased person is distributed on the basis of the Will, in the absence of which, succession laws come into effect. The classification of heirs and who gets how much is different in different succession laws. The nominee holds the asset until the family members or dependants establish their claim on the same. But if a Will states otherwise, then it would discard all the nominations

Types of Succession

There are two types of successions, one is intestate succession and the other is testamentary succession.

Intestate succession: Intestate means when a person dies without making a Will, the property gets disposed between the family and relatives according to the law concerning the religion of the deceased. It will be according to Hindu succession, if a deceased is Hindu, similarly according to Muslim Personal Law, if a person is Muslim and if the deceased is of any other religion, then according to Indian Succession Act,1925.

Testamentary succession: Testamentary succession is a succession where a person can dispose of a property according to his own wish, and the disposition of the property generally occurs after death. Testamentary succession is based on two basic principles. Firstly, the testator must have a degree of understanding of what he is doing, along with the power to choose and secondly, he should not be forced to accept others opinion while making Will.  Every religion allows testamentary succession, and anything which the testator holds such as the property, shares etc., can be provided to the intestate by the Will. Rules of testamentary succession are also prescribed on the basis of religion and contained in the Indian Succession Act.

Rationale Behind Nomination

Nomination is essentially a temporary arrangement so that property do not remain ownerless during the period where succession issues are resolved. Nomination is only a means and not an end. If nomination is not done, legal heirs may face complications in proving their right. Till that time, all the assets and investments, like mutual funds or insurance will remain with the respective companies. However, the rationale behind having a nominee is to have a person, who, in the event of death, will become a guardian of the assets and distribute it to the legal heirs.

A nomination saves many hassles and reduces formalities when, for example, payment of funds outstanding in a closed bank account of any deceased person is to be made. If there is a nomination in the account, the bank gets a perfectly valid discharge of liability if it makes the payment to the nominee. The other successors can then have no legal recourse against the bank under succession laws and they will get their share, if any, from the nominee. People are encouraged to make nominations in financial assets, and they are increasingly making such nominations, to reduce the complications and court cases arising in a situation where there are several claimants to a financial asset.

Legal Heir v Nominee

The legal position of the nominee has been a debated issue in India for a long time. Many instances arise, wherein an individual nominates a nominee, like while purchasing an Insurance Policy or Shares or while creating a fixed deposit in a bank. The role of the nominee in these instances are highlighted below:

HEADING

NOMINATION VS. SUCCESSION
Insurance

The apex court in the case of Smt. Sarbati Devi vs. Smt. Usha Devi[1] held that, a mere nomination made under section 39 of the Act does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The amount; however, can be claimed by the heirs of the assured in accordance with the law of succession governing them.

Now the situation under the Insurance Laws (Amendment) Act 2015 (hereinafter “Act”) has changed, where a holder of a life insurance policy nominates his parents, or his spouse, or his children, or his spouse and children or any of them, the nominee or the nominees shall be beneficially entitled to the amount payable by the insurance company to him or them. Further, where the nominee or nominees so elected above, dies after the person whose life is insured, but before the amount is received, then the legal heirs of the nominee or the nominees (as the case may be) shall be beneficiary entitled to such, to the amount which represents the share of the nominee or nominees so dying.

The Act clearly specifies that, a nominee shall only get such beneficial interest, where the nominee or the nominees so elected are the parents of the person so insured, or his spouse, or his children, or his spouse and children or any of them.

Fixed Deposits and Employees Provident fund

Vide notification dated June 09, 2005, RBI has notified that in case of deposit accounts where the depositor had utilized the nomination facility and made a valid nomination clause, the payment of the balance in the deposit account to the nominee of a deceased deposit account holder represents a valid discharge of the bank’s liability provided that nominee would be receiving the payment from the bank as a trustee of the legal heirs of the deceased depositor, i.e., such payment to him shall not affect the right or claim which any person may have against the nominee to whom the payment is made. In case where the deceased depositor had not made any nomination, the repayment is made to the legal heirs.

Employees Provident Fund: Employee provident fund, the nominee inherits the funds, according to EPF rules, one needs to appoint his family member as nominee unless he has no family, then only he can appoint someone else. If he acquires a family his old nomination becomes invalid and he needs to make new nomination.

Shares and Securities

There is no decision of the Apex court which conclusively answers the question vis-à-vis a nomination of shares per se.

Considering the case of Dayagen Private Limited v Rajendra Dorian Punj and Anr[2] 2008, the Hon’ble Delhi High Court, giving a strict interpretation to article 109A of the Companies Act, made it abundantly clear that the intendment of the legislature is to override the general law of succession and to carve out an exception in relation to nomination made in respect of shares and debentures. The procedural requirements laid down in the said section, for such overriding effect to be given, have to be strictly adhered to i.e. the nomination should be made in the prescribed manner. In the present case, the nomination was not properly attested by any witness, hence invalid.

Subsequently in the year 2010, in the case of Harsha Nitin Kokate vs. The Saraswat Co-operative Bank Limited & Ors[3] the Hon’ble Bombay High court held that, Section 109A of the Companies Act and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed, as has been done in this case. So, the nomination made shall be valid and the legal heirs of the deceased shall have no claim on the deceased.

This has further been abundantly clarified by the provisions of Section 72 of the Companies Act, 2013, that, notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, where a holder of securities of a company or joint holders of the securities (as the case may be) appoints a nominee in a prescribed manner, then in the event of the death of the holder or all such joint holders, the nominee so appointed shall be entitled to all the rights in the securities, of the holder or, as the case may be, of all the joint holders, in relation to such securities, to the exclusion of all other persons, unless such nomination is varied or cancelled in the prescribed manner.

Real Estate

Property or Real Estate of the testator can be divided into 4 parts, self-acquired, inherited ancestral property, jointly owned and property under the Society Act.

The Hon’ble Supreme Court, in the case of Smt. Sarbati Devi vs. Smt. Usha Devi[4], which was decided in 1983, held that the nominee is a trustee of the property and is liable to hand it over to the legal heirs. The High Court while following Sarbati Devi case held that it is well settled that mere nomination made in favour of a person does not have the effect of conferring on the nominee any beneficial interest in property after the death of the person concerned. The nomination indicates the hand which is authorized to receive the amount or manage the property.

Following the above case, the Hon’ble High Court of Delhi in the case of Rampali v.State Govt of NCT(Delhi) where appellant was the sister of the deceased who had filed an appeal to revoke the succession certificate granted to the daughter and husband of the deceased on the ground that the deceased had not been residing with the defendant for over 35 years and had named the appellant as the nominee as per official government records.

The Hon’ble Delhi High court held that nomination is not a Will in law and in the absence of any Will, only legal heirs (as per the Hindu Succession Act) shall be entitled to inherit the property of the deceased. Hence, the appeal was dismissed.

Talking about the ancestral property, the Apex court in the case of U.R.Virupakshaiah vs Sarvamma & Anr[5] held that rights of successors overrides every  other mode including the Will. All family members get equal share of ancestral property in accordance with law, thus a nominee cannot exercise his right on ancestral inherited property. But in case of joint ownership of a property, the remaining owner becomes the sole owner. The legal requirement is that the co-owners need to take the title at same time, in the same agreement, with equal interest.

The Hon’ble Supreme court got another twist in March 2016 in the case of Indrani Wahi v. Registrar of Cooperative Societies & Ors, wherein it stated that, “a cooperative society cannot challenge the transfer of property to the nominee, if she is a relative of the deceased. The nominee of a deceased member is entitled to ownership by transfer, if she is a relative of the deceased person, who made the nomination in her name, according to the record of the cooperative society and the co-operative society cannot challenge the right of nominee.”

Conclusion

From the instances stated above, it is not clear whether nomination should be given preference over testamentary/non-testamentary succession or vice-versa. One should always ensure that, for smooth flow of assets/wealth to the heirs, a Will made by the person should be in line with the nomination or the Will so made should specifically override nominations so that the basic object of the nomination made for a particular subject matter is not defeated. This will avoid any potential conflicts amongst the beneficiaries and the legal heirs. 

[1] (1984) 1 SCC 424  

[2] INDLAW DEL 1105 40

[3] 2010(112) BomLR2014

    [4] (1984) 1 SCC 424  

[5] 1998 (4) Bom CR 506

SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881

First published on Lawyered.in

The term ‘Negotiable’ means ‘transfer by endorsement or delivery’ and the term ‘Instrument’ means ‘any legal document in writing, which is created in favour of any person. Therefore, Negotiable Instruments are written statements implying payment of money, either on demand or within a particular time period with the drawer’s/payer’s name on it.

History and background

In India, Negotiable Instruments Act, 1881 (“Act”) codifies the law governing transactions involving negotiable instruments. As can be seen, this is a law passed during the British Era which continues till date to govern economical transactions.

There are various negotiable instruments; such as cheques, promissory notes, bills of exchange, bank notes, etc. However, for day to day transactions, cheque is the most widely used negotiable instrument in businesses today.

Cheques

Definition

Section 6 of the Act defines a ‘cheque’ as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of ‘a truncated cheque’ and ‘a cheque in the electronic form’[1].

Parties to a ‘cheque’

Drawer – Is the maker of the cheque.

Drawee – Is the person thereby directed to pay.

Payee – Is the person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid.

Holder – Of the cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.

Dishonour of cheque

Section 138 was inserted into the Act vide amendment of 1988. This section covers the provision for dishonour of cheques for insufficiency etc. of funds in the account of drawer. The drawer pays off his lability to the payee through cheque and when bank returns the cheque unpaid due to insufficient balance on the account held by the drawer, the liability/debt remains due to the drawer and the amount remains unpaid. The return of cheque can be because of insufficient funds in the account or due to exceeding the limit of the amount which was agreed to be paid by the bank. Such a default by any person, creates a liability under the said provision. Section 142 of the Act deals with the cognizance of offences in compliance with the provision of Code of Criminal Procedure, 1973 (“CrPC”).

Prior to 1988, in case a cheque was not honoured on presentment, the only remedy available under the Act was to file a civil suit in the court against the offender. However, this remedy did not have a desired deterrent effect on offenders and cheques started losing their credibility. Hence, the Act was amended several times to incorporate more stringent provisions to deal with dishonour.

The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 amended the Act to make dishonour of cheques a criminal liability and offenders were liable to be punished by imprisonment for a term which may extend to 1 (one) year, or with fine which may extend to twice the amount of the cheque, or with both. The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 further extended the term of imprisonment to up to 2 (two) years.

Filing a complaint under Section 138 of the Act

For filing a complaint, the complainant needs to follow these steps;

1. Dishonour of Cheque(s):

The complainant should have deposited the cheque drawn in his/its favour, which cheque(s) has been returned unpaid or has been dishonoured due to:

  • Insufficiency of fund in the account of the drawer;
  • Issuance of stop payment instructions by the drawer to the drawer bank;
  • Amount of cheque exceeding the arrangement with the drawer bank.

2. Notice asking for payment of dues:

This Act provides that, once the cheque has been dishonoured, a notice needs to be issued (by registered A.D.) to the drawer within 30 days of the receipt of memo from drawee bank that the cheque is dishonoured. The notice to be sent should mention the following points;

  • The cheque issued was presented for payment in bank;
  • The cheque was subsequently dishonoured for the reason provided by the drawee bank (which should be any of the three reasons provided in Para 1 above);
  • Asking for payment for sum written on cheque within a period of 15 days from the date of receipt of notice.

3. Filing complaint:

Where on the receipt of notice, if the drawer of the cheque remains silent or refuses to pay the money within 15 days from the date of receipt of notice, then a criminal complaint should be filed against the drawer (“Accused”) within next 30 days from the expiry of time period provided to the drawer.

4. Place of filing the complaint:[2]

The place for filing the complaint shall be determined based on any of the following;

  • Place of the bank on which the cheque is drawn;
  • Place where cheque is presented to the bank and the same is dishonoured;
  • Place of residence/business of the complainant;
  • Place of residence/business of Accused;
  • Place from where the notice is sent to the drawer of the cheque demanding the cheque amount.

5. Contents of Criminal complaint:

A complaint should contain complete details about the complainant, Accused, details of the transaction, details of the notice sent to Accused, jurisdiction clause, limitation clause, prayers asking for compensation and punishment for the Accused. The complaint should also be accompanied with all the important attachments i.e. the list of witnesses, list of all original documents and copies, board resolution giving authority to a person to file complaint on behalf of the company (if applicable) etc.

6. Issuance of summons:

Upon filing of complaint and completion of all procedural aspects, the Magistrate before whom the complaint is filed shall verify the documents and upon subsequent verification, shall issue summons against the Accused.

7. Post – Issuance of summons:

On issuance of summons, the Accused may appear or may not appear.

On appearance of the Accused; the plea of the Accused shall be recorded and the

proceedings shall be conducted as per Section 262 and 265 of CrPC.

Where Accused fails to appear; A Bailable warrant shall be issued against the Accused. Even after this, where the Accused fails to appear, a Non-Bailable warrant will be issued. If the Accused appears, the procedure will be the same as in the case of issuance of summons.

However, If the Accused fails to secure his attendance, then by courts order, Accused shall be declared absconding and a notice shall be issued in local newspaper in respect of the same. Properties of the Accused will be attached and will be sold by public auction. Complainant can recover his dues out of the sale proceeds.

8. Orders:

Upon hearing the parties, the court may pass any of the following orders;

(a) The Accused may be acquitted of all the charges; or

(b) The Accused may be held guilty of the offence committed under Section 138 of the Act and shall be penalized as follows;

  • imprisonment up to two years; or
  • monetary fine which may extend to twice the amount of cheque; or
  • both imprisonment and fine; or
  • paying off the dishonored cheque amount to the complainant.

 

Harihara Krishnan v. J. Thomas

The Apex court in a recent judgement held that any failure to include the company as an Accused in the complaint, filed under section 138 of the Negotiable Instruments Act, 1881 of dishonour of a cheque issued by a company, would be fatal to the prosecution of such company even if the complaint filed against the signatory of the cheque has been duly complied with.

In the concerned case, the cheque was signed by the appellant, Mr. Harihara Krishnan (“Appellant”), who was authorized to sign on behalf of Dakshin Granites Pvt. Ltd. (“Company”) which is the drawer company. When the cheque was dishonoured, the complainant, Mr. J. Thomas (“Respondent”), lodged a complaint under section 138 of the NI Act against the Appellant. However, he failed to lodge a complaint against the Company. It is important to note that the Appellant  drew the cheque on behalf of the Company, thereby making Company the drawer of the cheque.

Respondent subsequently sought to implead Company in the complaint, which the trial court granted. Against this, Appellant filed an appeal before the High Court stating the application to implead was filed after the expiry of the limitation period, which also ruled in favour of Respondent. Appellant then appealed to the Apex Court, which then overruled both the orders.

The Apex Court relied upon its earlier judgment in Aneeta Hada v. Godfather Travels & Tours Private Limited which had arrived “at the irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an Accused is imperative”. The offence under Section 138 is person specific and therefore there cannot be a prosecution without an Accused being a party to it.

The Apex Court further observed, the decision is embedded largely in the procedural aspects of initiating and maintaining prosecution for offences of cheque dishonour. When a cheque is drawn on behalf of a company, it necessarily has to be signed by an authorised signatory (director, officer or other suitable person), so at the time of initiation of proceedings against the company, it is not sufficient to bring a complaint against the actual signatory, but to bring an action (within the stipulated time) against the company as well. Here in the present case, the Respondent made the Company a party to the suit, but there was a delay of 1211 days. Finally, the Apex Court was concerned with the question of whether the delay on the part of the complainant in impleading the Company can be condoned, which it answered in the negative and subsequently the appeal filed by the Appellant was allowed.

Scenario after 2015 Amendment Act;

Jurisdiction to file cases of cheque bouncing has now been changed by Negotiable Instruments (Amendment) Act, 2015 (“Amendment Act”) which came into effect on 15th June, 2015. As per this Amendment Act, a cheque dishonour case under Section 138 needs to be filed in the court as per provisions of Section 141(1) and 142(2), and even all pending cheque bouncing cases shall also get transferred to the courts as per this Amendment Act. The Amendment Act states that if the cheque is delivered through an account then the court having local jurisdiction over the branch where the payee or the holder maintains the account would try the case. If the transfer is made otherwise, the court having jurisdiction over the drawee bank would entertain the case. The Amendment  Act further requires all the subsequent complaints arising out of Section 138 against the same drawer to be filed in the same court as the first complain, if it is still pending in the court, irrespective of whether those cheques were delivered for collection or presented for payment within the territorial jurisdiction of that court

This Amendment Act superseded the judgement of Supreme court in the matter of Dashrath Rupsingh Rathod v. State of Maharashtra. In this case, a 3-Judge bench of the Supreme Court had held that a cheque bouncing case can be filed only in a court which has the territorial jurisdiction over the place where the cheque is dishonoured by the bank on which it is drawn.

Several people raised difficulties over this because the payee of the cheque had to file a case at the place where drawer of the cheque has a bank account. However, now the legal position has completely changed which can be well understood from the following case;

Bridgestone India Pvt.Ltd. Vs. Inderpal Singh;

In the following case, Bridgestone India Pvt. Ltd. (“Petitioner”) had filed a case against Inderpal Singh (“Respondent”) for dishonour of Cheque drawn on a bank at Chandigarh. The cheque was presented at a bank of Indore where Petitioner resides and was subsequently dishonoured. A petition was filed against the Respondent.  The Respondent prayed to the court that Indore court had no jurisdiction to entertain this aforesaid proceeding, which was eventually accepted by court applying the Dashrath Rupsingh Rathod case which stated that jurisdiction lays only before the court in whose jurisdiction original drawee bank was located, which is Chandigarh in the present case.

An appeal was filed in the Supreme court by the Petitioner challenging the order. The court held that, the new Ordinance vests jurisdiction for initiating proceedings under Section 138, inter alia, in territorial jurisdiction of court where cheque is delivered for collection (through an account of branch of bank where payee or holder in due course maintains an account). Therefore, in the following case, Section 142(1)(a) gives jurisdiction to Indore court to entertain the aforesaid proceedings and the judgement rendered in the Dashrath Rupsingh Rathod case shall not stand in any way of Petitioner insofar as territorial jurisdiction for initiating a proceeding emerging from dishonour is Cheque is concerned.

Conclusion

Section 138 of the Act protects the payee from any illegal act on the part of the drawer. As cheques are commonly used instruments in the business world, banking sector needs to be protected. It not only aims at speedy disposal of cases but also to bring a sanctity to the system by seeking to clamp down on defaults in payments and has empowered the payee against drawer to bring higher virtuousness to cheque transactions.

[1] a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or with electronic signature, as the case may be.

[2] Section 143 of the Act clearly states that all the offences under Section 138 of the Act shall be tried by Judicial Magistrate of First class or Metropolitan Magistrate in accordance with the summary trial provisions of Section 262 and 265 of the CrPC

ONE PERSON COMPANY

First published on Lawyered.in

Introduction

One Person Company (“OPC”) has been conceptualized by the Ministry of Corporate Affairs (“MCA”) to help fill-in the gap between a proprietorship and a private company set-up and was introduced in India through the Companies Act, 2013 (“Act”). This type of entity encourages an individual to start his own business, especially an individual who has low risk capacity and such a structure is ideal to set up a small enterprise. Moreover, there are minimum compliance requirements for incorporating an OPC and, if required, OPC can easily get converted in to any other form of company. Section 2(62) of the Act defines OPC as a company which has only 1 (one) person as a member. It gives the said single member, full control over the company by permitting him to be the only director and shareholder. OPC is treated as a separate legal entity from its member and the requirement to raise equity fund or offer employee stock options is deemed to have been waived.

Paid-up capital / Turnover

A sole member can incorporate an OPC as specified in Section 3(1)(c) of the Act and the OPC shall be treated as a private company. However, as per Rule 6 (1) and (2) of the Companies (Incorporation) Rules, 2014 (“Rules”), if an OPC’s average turnover exceeds Rs. 2,00,00,000/- (Rupees Two Crores Only) or the paid-up capital exceeds over Rs. 50,00,000/- (Rupees Fifty Lakhs only) then it shall cease to exist as an OPC and has to be converted into a private limited company or a public limited company within 6 (six) months of the date on which its paid up share capital or average turnover exceeded the prescribed limit for OPC. OPC cannot be voluntarily converted into a private or a public limited company before the expiry of 2 (two) years, except in the event, an OPC exceeds the prescribed limit of paid up capital or average turnover.

Compliance

The sole member of OPC must subscribe his name to a memorandum and comply with all the terms and conditions prescribed under the Act. Further, as per Section 3 (1) (c), the sole member must nominate a nominee in the prescribed form. In the event of death or incapacity of the sole member, the nominee shall become the member of the OPC and shall be entitled to all shares of OPC and bear all liabilities of OPC. The written consent of such nominee to act as nominee must be obtained and filed with the Registrar of Companies (“ROC”) at the time of incorporation along with the Memorandum of Association and Articles of Association of the OPC. Appointed nominee, can withdraw his consent by giving a notice in writing to the sole member and to the OPC. The sole member shall then nominate any other person as a nominee of OPC within 15 (fifteen) days of the receipt of the notice of withdrawal by the original nominee. All the documentations towards this effect shall be required to file with ROC within 30 (thirty) days of receipt of the notice of withdrawal of consent from the original nominee. Further, the sole member can appoint a new nominee at any point of time by providing a notice to the ROC.

Further, as per Rule 3 (1) and (2) of the Rules the member / nominee of the OPC must be:

  1. a naturally born Indian citizen i.e. who is a resident of India, having stayed in India for at least 182 (one hundred and eighty-two) days during the immediately preceding financial year; and
  2. shall be eligible to incorporate an OPC or be a nominee for the sole member of the OPC. However, one such person cannot form more than 1 (one) OPC.

Restrictions

A member / nominee of the OPC should not be a minor. Further, a member or nominee can incorporate or become a nominee of only 1 (one) OPC.

Moreover, an OPC cannot be incorporated as or converted into a company for non-profit, charitable purpose, etc. as specified under Section 8 of the Act and it cannot carry out non-banking financial or investment activities including investment in securities of any body corporate. 

Section 152(1) of the Act mentions that the sole member of OPC is considered as the first director of the OPC. Further, as per 149(1) OPC can have a maximum of 15 (fifteen) directors and if required, OPC can appoint more directors after passing a special resolution to that effect.

An OPC is required to mention the words ‘One Person Company’ below the name of the company, wherever the name is affixed, used or engraved.

Types of OPC

As per Section 3, OPC can be of the following types:

  1. limited by shares; or
  2. limited by guarantee with share capital; or
  3. limited by guarantee without share capital; or
  4. an unlimited company with share capital; or
  5. an unlimited company without share capital.

An OPC limited by shares should have a minimum paid up capital of INR 1,00,000/- (Rupees One Lakhs only) and the shares cannot be opened for public offer.[1]

Advantages

  1. Section 122 (1) and Section 122 (3) of the Act specifically provides that the provisions of Section 98 and Section 100 to Section 111 (both inclusive), which are related to quorum for meetings, extraordinary general meeting, the notice of meeting, restriction on voting rights, voting through show of hands, by electronic means, postal ballot, circulation of member’s resolution, etc. are not applicable to OPC. In the event, an OPC is required to pass a special or ordinary resolution, it shall be sufficient if the resolution is communicated by the member of the company and entered in the minutes book which is required to be maintained as per Section 118 and signed and dated by the member and such date shall be deemed to be the date of meeting for the purposes of the Act.
  2. As per Section 173 (5) of the Act, OPC shall be deemed to have complied with the requirements of conducting board meetings, if at least 1 (one) meeting of the board of directors has been conducted in each half of a calendar year and the gap between 2 (two) meetings is not less than 90 (ninety) days. Further, the requirement of quorum is waived-off for an OPC, if there is only 1 (one) director on its board.
  3. Further, preparation of cash flow statement for the financial statement of OPC is not mandatory. Financial statements of OPC have to be approved by the Board and needs to be signed by only 1 (one) director for submission to the auditor. As per Section 137 of the Act, the copy of such financial statement along with other documents etc. must be filed with the ROC within 180 (hundred and eighty) days from the closure of the financial year.
  4. Further, the liability of the member in OPC is limited to the extent of the value of shares held by such member in OPC.
  5. OPC being a separate legal entity has a perpetual succession and the ownership of the OPC can be transferred to another person unlike the proprietorship or the partnership entities.

Conclusion

As of September 2016, there have been a total of 9174 OPC’s incorporated in India, out of which, 7185 OPC’s are currently functioning, 20 OPC’s are under process of striking off, 7 OPC’s have already been struck-off and 3 OPC’s have been declared dormant under Section 455 of the Act.

Due to easy incorporation process and the feature of limited liability, OPC is a viable option for many budding entrepreneurs. It permits an individual to operate the company singularly to the exclusion of others. The benefits of ease of compliance outweigh the issues of joint operation. However, from the perspective of professional services incurred for the incorporation, the cost of incorporation of an OPC and a private limited company is often the same. The advantage is, of course, having a limited liability corporate legal entity versus an unlimited liability proprietorship until the business operations reach a threshold. The real trick is to have a sustainable business model wherein a reasonable threshold is set (not as low as the present one) and real benefits are offered in terms of ease of incorporation etc. Until then, regular businesses cannot use this structure effectively. 

[1] Section 193 of the Companies Act, 2013.

MAHARASHTRA RERA RULES, 2017

Government of India has enacted the Real Estate (Regulation and Development) Act 2016 (“Act“) and all the sections of the Act shall come into force with effect from May 1, 2017. Under this Act, Government of Maharashtra vide notification dated April 20th, 2017 notified the Maharashtra Real Estate (Regulation Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, Rates, of Interest and Disclosure on Website) Rules, 2017 (“Rules”) and established Maharashtra Real Estate Regulatory Authority (“MahaRERA”), for regulation and promotion of real estate sector in the State of Maharashtra.

Brief Overview of Maharashtra RERA 

Maharashtra is the first state to implement the Act with an objective to protect homebuyers from any discrimination by real estate players (“Developers”). The MahaRERA was established with the objective to allow homebuyers to approach the authority for any lapses on part of the Developers.

Some key features of MahaRERA are:

Sale on Carpet area

Before the implementation of the MahaRERA, Developers sold property based on the built-up area i.e. the carpet area plus the outer walls of the apartment and other common areas. However, after implementation of MahaRERA, Developers have to sell the property on the basis of the carpet area i.e. area which is enclosed within the four walls of the apartment and exclude the area of balcony and gallery of the building. This will help customers to pay only the amount for the area they will be occupying.

Definition of Parking Space

The Rules have notified the definition of the Parking space which was not present under the earlier Act or Rules. Now, the Developer needs to disclose the charges for parking area in the official agreement separately.

Benefits for homebuyers

MahaRERA introduced several provisions with an objective to increase transparency. Some of the benefits are:

  • Citizens shall be able to view, on MahaRERA website, all disclosures pertaining to registered projects. This shall enable data driven and informed decision making.
  • Developer cannot make any additions and alterations in the sanctioned plans, layout plans and specifications and the nature of fixtures, fittings and amenities etc. without the previous consent of at least two-thirds of the allottees, other than the Developer, who have agreed to take apartments in such building.
  • If the Developer fails to complete or is unable to give possession of an apartment, plot or building, in accordance with the terms of the agreement for sale, he shall be liable to pay interest for every month of delay. Further, in case the allottee wishes to withdraw from the project, without prejudice to any other remedy available, to return the amount received by him with interest.
  • Developer to enable formation of Legal Entity like Cooperative Society, Company, Association, Federation etc. within three months from the date on which sixty per cent of the total number of buyers in such a building or a wing, have booked their apartment.
  • Developer shall execute a registered conveyance deed in favour of the allottee within three months from date of issue of occupancy certificate or sixty per cent of the total number of Purchasers in such a building or a wing, have paid the full consideration to the promoter, whichever is earlier.
  • In recent past, homebuyers are denied purchasing flats based on their religion, caste and gender etc. Now, builders will not be able to bring the issue based on religion, caste, food preference or cultural. The Rule restricts Developers from discriminating homebuyers on any basis.
  • To keep customers safe from estate agent’s fleecing, it is now mandatory for every estate agent to get himself registered with the Government.

Mandate on the Developer(s)

MahaRERA include several mandates to secure the safety of the buyers. Some key mandates are:

  • As per Rule 3 (8) of the Rules, the Developer has to disclose land cost, cost of construction and estimated cost of the real estate project as required under the Act. Since penalty is levied on the cost of the project this information is necessary.
  • The onus of completing a project within a particular time frame lies on the real estate Developer, failing which the Developer would face penalty and also be sentenced to 3 (three) years in jail making it a cognizable offence.
  • As per Rule 4 (2) of the Rules, status of ongoing projects needs to be disclosed as per the last sanctioned plan and also about the status of development of common areas along with the expected period of completion to be disclosed. Chartered accountant (“CA”) needs to certify the number of receivables in respect of sold/allotted apartments and estimated receivables calculated on ASR rates for unsold apartments.
  • As per Rule 5 (1) (b) of the Rules, amounts deposited in separate account can be withdrawn by the Developer on the basis of certificate issued by the engineer, architect and CA on the extent of project completed vis-à-vis the estimated cost of the project.
  • Registration period includes the period where actual work could not be started due to specific orders from any court of law, Competent Authority, Tribunal etc. or such circumstances as may be decided by the Authority.
  • As per proviso to Rule 4 (4) of the Rules, a Developer cannot sell apartments if such Developer has not registered the concerned project within 90 days from the date of the notification.
  • As per Rule 3 (6) of the Rules, the registration of project is necessary for the Developer. However, registration of the project may not be required if the project is for renovation or repair or redevelopment purpose and which does not involve marketing, advertisement and selling of apartments.

Establishment of Tribunal

To address the grievances of property buyers, the law mandates formation of a Maharashtra Regulatory Authority Board as a tribunal. The tribunal will comprise of the Chief Justice of the High Court, the law and judiciary secretary and the housing secretary.

Complaint Procedure

The fees for filing a complaint against Developers is Rs. 5000/- (Rupees Five Thousand only) (as per Rule 9 of the Rules) via NEFT or RTGS or any other digital transaction mode. A buyer can file complain online or at MahaRERA Desk in “Form A” provided by MahaRERA. In case the person is not satisfied with the decision made by RERA tribunal or its officer, he may file an appeal before RERA Appellate Tribunal within a period of 60 (Sixty) days from the date of the decision of the Tribunal. If a buyer is not satisfied with the decision of the Appellate Tribunal then he can file an appeal to High Court within 60 (Sixty) days from the date of Appellate Tribunals decision. The complaints received will be probed by the team of 25 officials and once it will get verified, a suitable action, which may include a fine up to 10% of the project cost, will be taken against the builder.

Registration of the Project

Developers were required to compulsorily register their projects with RERA on or before July 31st, 2017, failing which all unregistered works would be deemed unauthorized. Further Section 85 of the Act (notified) mandates that every real estate project with an area over 500 sq. mtrs. will have to register with RERA within 3 (three) months of the notification.

However, Government has issued a clarification via notification dated July 4th 2017, wherein the Government has noticed that promoters are committing some common mistakes while filing the project registration which thereby caused delay in registration process. MahaRERA in their above dated notification clarified that the documents should be legible and not blurred, in case the document is uploaded and if the field is not applicable then a self-declaration to that effect has to be uploaded with the document. It is further clarified that, a mere grant of registration by MahaRERA does not mean that the contents and documents are in conformity with the provisions of the Act and Rules. Even after registration, if it is bought to the notice of MahaRERA that the documents are misleading or incorrect then action shall be taken against such respect.  This notification also clarifies that the period of 30 (thirty) days shall start from the day on which the application for registration, complete in all respect is received in the office of MahaRERA.

Online Project Update Facility

As per the circular dated July 18th, 2017, the software application for updating the details of project, in the MahaRERA portal, has been launched by the Government. As per MahaRERA Order vide MahaRERA/Secretary/Order dated 17th April 2017, annual fees of Rs.500/- (Rupees Five Hundred only) shall be levied on promoters for online project update facility. This fees shall be valid for 1 (one) year from the date of payment of fees.

Criticism 

  1. The state rules have a provision for ‘phases of real estate project’. It seems to notify a set of buildings and even a wing of building as a project. While the Act allows for large projects that are spread over 100 acres to be completed in phases, it does not allow for dividing a project into buildings.
  2. Maharashtra rules have a new nomenclature called ‘proposed plans’ as per the RERA Act notified by the Centre, only sanctioned plans can be submitted and not proposed plans.
  3. It also has a provision of ‘last approved sanctioned plan’. RERA clearly states that consent from two-third allottees is required for changes in approved sanctioned plans shared at the time of booking a house. Considering only the last approved sanctioned plan is a clear indication to legalize all changes made by the promoter in the plan subsequent to booking.
  4. MahaRERA also provides discretionary power to the Authority, to withhold any information or document from uploading on the website for public viewing. RERA does not provide for any such power to be given to the Authority. Providing for such discretionary powers completely defeats the objective of the Act.
  5. In the absence of an express close shops till registration rule, Developers can continue marketing and sales activities for their ongoing projects till the end of the three-month timeline.
  6. The nature of prohibition under MahaRERA only prohibits sales and marketing of unregistered projects, it is safe to conclude that sold-out projects pending grant of possession until issue of completion certificate, need not register under MahaRERA.
  7. Despite the State rules providing templates of the agreements to sell, RERA as well as most of the State rules do not specify whether re-executing transactions with the existing allottees of ongoing projects is mandatory or not. Therefore, without an express provision, such a requirement can also be safely assumed to not apply.

 Recent update on MahaRERA

After implementation of the MahaRERA Rules, the Government has issued its first show-cause  vide notice to a property broker Sai Estate Consultants for violating provisions of the Act and the Rules. The Government issued a notice for advertising about multiple residential projects that have not been registered under the MahaRERA. The property broker Sai Estate Consultants, however, has already registered itself with the authority. The Act requires brokers to sell or facilitate such activity in registered projects only. “Even though ongoing projects have a 90-day window to advertise, sell and also get registered with the authority, if any broker has got registered during this period, he as per the Rules can facilitate the sale only in such projects that are registered. “The broker has violated Sections 9 and 10 of the Act and Rule 14 of the registration regulation and was imposed with the fine of Rs. 1.20 lakhs.

Conclusion

MahaRERA is a step towards reforming the real estate sector in India, encouraging greater transparency, citizen centricity, accountability and financial discipline. We hope it will soon be implemented in other Indian states too.