PREVENTION OF OPERATION AND MISMANAGEMENTOPPRESSIONOppression is
the exercise of authority or power in a burdensome, cruel, or
unjust manner.[1] It can also be defined as an act or instance of
oppressing, the state of being oppressed, and the feeling of being
heavily burdened, mentally or physically, by troubles, adverse
conditions, and anxiety.
The Supreme Court in Daleant Carrington Investment (P) Ltd. v.
P.K. Prathapan[2], held that increase of share capital of a company
for the sole purpose of gaining control of the company, where the
majority shareholder is reduced to minority , would amount to
oppression. The director holds a fiduciary position and could not
on his own issue shares to himself. In such cases the oppressor
would not be given an opportunity to buy put the oppressed.
Circumstances Which Amount To OppressionLooking at the judicial
pronouncements a few acts which amount to oppression are listed
below:Attempt to force new and more risky objects upon an unwilling
minority may in circumstances amount to oppression. This can be
best illustrated with the case of Hindustan Coop Insurance Society
Ltd, Re.[11]Here, a life insurance business of a company was
acquired by Life Insurance Corporation in1956 on payment of
compensation. Directors, who had majority voting powers, refused to
distribute this amount among share holders. Rather, they passed a
special resolution changing the objects of the company and use
compensation money for new objects. This was held to be an
oppression. Here the majority forced the minority shareholders to
invest money in different kind of business against their
will.[12]An attempt to deprive a member of his ordinary membership
rights is oppression, as in the case of Mohan Lal Chandumall v.
Punjab Co. Ltd[13]. In the instant case, a public company doing
forward contract business amended its articles of association under
statutory directions, so as to deprive its non-trading members
their right to vote, to call meetings, to elect directors and
receive dividends. Court held that the company in doing so trampled
upon valuable rights of such members by unjust exercise of its
authority and power, and this amounted to oppression within Section
377.Suppressing notices of meetings to some of the members amounts
to oppression. Casual omission may not be oppression, but
systematic elimination of notices to some of the members is serious
deprivation of their most important right.[14]Continuous refusal by
company to register shares with an ulterior motive of retaining
control over the affairs of the company. Though the refusal once by
the company may not be oppressive, but a continuous refusal by the
company to register the shares with an ulterior motive of retaining
the control over the affairs of the company where CLB will have to
grant relief under Sec 397.- Kumar Exporters (P) Ltd v. Naini
Oxygen and Acetylene Gas Ltd.Failure to distribute the amount of
compensation received on nationalization of business of company
among members, where requires to be distributed. Hindustan Co-op
Insurance Society Ltd, In re[15]- Here, the insurance business of
the company was nationalized and compensation was received. The
directors did not call any AGM. After three years the board
resolved to call a GM and pass a resolution to continue the company
and carry on other businesses authorized by memorandum with
compensation money received. Sec 39 of the Life Insurance Act
envisaged distribution of compensation to shareholders and
dissolution of the company. The court held that the resolution and
persistent conduct of the respondent in the affairs of the company
shows that they never intended to distribute the compensation money
amongst the shareholders, who were entitled thereto. This conduct
was held to be oppressive to the company and the applicants
minority shareholding company.Other instances of oppression may
include- issue of further shares benefiting a section of the
shareholders; registration of transfers in violation of articles;
irregularity in allotment and transfer of shares; denial of
inspection of books to shareholder etc.There is nothing to limit
equity shareholdings only. Applicants may be partly or wholly
preference share holders too. Any member or members having obtained
the consent in writing of requisite number of members may apply.
Right to apply is not confined to oppressed minority alone even
oppressed majority can apply.
Prevention of oppressionSection 397(1) of the Companies Act
provides that any member of a company who complains that the affair
of the company are being conducted in a manner prejudicial to
public interest or in a manner oppressive to any member or members
may apply to the Tribunal for an order thus to protect his /her
statutory rights.
Sub-section (2) of Section 397 lays down the circumstances under
which the tribunal may grant relief under Section 397, if it is of
opinion that :-
(a)the companys affairs are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any
member or members ; and
(b) to wind up the company would be unfairly and prejudicial to
such member or members , but that otherwise the facts would justify
the making of a winding up order on the ground that it was just and
equitable that the company should be wound.
The tribunal with the view to end the matters complained of, may
make such order as it thinks fit.
Who can applySection 397 of the Companies Act states the members
of a company shall have the right to apply under Section 397 or 398
of the Companies Act. According to Section 399 where the company is
with the share capital, the application must be signed by at least
100 members of the company or by one tenth of the total number of
its members, whichever is less, or by any member, or members
holding one-tenth of the issued share capital of the company. Where
the company is without share capital, the application has to be
signed by one-fifth of the total number of its members. A single
member cannot present a petition under section 397 of the Companies
Act. The legal representative of a deceased member whose name is
again on the register of members is entitled to petition under
Section 397 and 398 of the Companies Act.[3]Under Section 399(4) of
the Companies Act, the Central Government if the circumstances
exist authorizes any member or members of the company to apply to
the tribunal and the requirement cited above, may be waived. The
consent of the requisite no. of members is required at the time of
filing the application and if some of the members withdraw their
consent, it would in no way make any effect in the application. The
other members can very well continue with the
proceedings.Conditions for Granting ReliefsTo obtain relief under
section 397 the following conditions should be satisfied:-1. There
must be oppression- The Punjab and HaryanaHigh Courtin Mohan Lal
Chandmall v. Punjab Co. Ltd[4] has held that an attempt to deprive
a member of his ordinary membership rights amounts to oppression.
Imposing of more new and risky objects upon unwilling minority
shareholders may in some circumstances amount to
oppression.[5]However, minor acts of mismanagement cannot be
regarded as oppression. The Court will not allow that the remedy
under Section 397 becomes a vexatious source of litigation.[6] But
an unreasonable refusal to accept a transfer of shares held as
sufficient ground to pass an order under Section 397 of the
Companies Act, 1956.[7]Thus to constitute oppression there must be
unfair abuse of the powers and impairments of the confidence on the
part of the majority of shareholders.
2. Facts must justify winding up- It is well settled that the
remedy of winding up is an extreme remedy. No relief of winding up
can be granted on the ground that the directors of the company have
misappropriated the companys fund, as such act of the directors
does not fall in the category of oppression or mismanagement.[8]To
obtain remedy under Section 397 of the Companies Act, the
petitioner must show the existence of facts which would justify the
winding up order on just and equitable ground.
3. The oppression must be continued in nature It is settled
position that a single act of oppression or mismanagement is
sufficient to invoke Section 397 or 398 of the Companies Act. No
relief under either of the section can be granted if the act
complained of is a solitary action of the majority. Hence, an
isolated action of oppression is not sufficient to obtain relief
under Section 397 or 398 of the Act. Thus to prove oppression
continuation of the past acts relating to the present acts is the
relevant factor , otherwise a single act of oppression is not
capable to yield relief.
4. The petitioners must show fairness in their conduct-It is
settled legal principle that the person who seeks remedy must come
with clean hands. The members complaining must show fairness in
their conduct. For ex-Mere declaration of low dividend which does
not affect the value of the shares of the petitioner ,was neither
oppression nor mismanagement in the eyes of law.[9]5. Oppression
and mismanagement should be specifically pleaded- It is settled law
that , in case of oppression a member has to specifically plead on
five facts:-a) what is the alleged act of oppression ;b) who
committed the act of oppression;c) how it is oppressive;d) whether
it is in the affairs of the company;e) and whether the company is a
party to the commission of the act of
oppression.[10]MISMANAGEMENTThe present Company Act does provide
the definition of the expression mismanagement. When the affairs of
the company are being conducted in a manner prejudicial to the
interest of the company or its members or against the public
interest, it amounts to mismanagement.
Instances Of MismanagementA very clear illustration of
mismanagement under Section 398 appears in Rajahmundary Electric
Corporation v. Nageshwara Rao[19]. Here, a petition was brought
against a company by certain shareholders on the ground of
mismanagement by directors. Court found that vice-chairman grossly
mismanaged the affairs of the company and had drawn considerable
amounts for his personal purposes, the shareholders outside the
group of chairman were powerless to set matters right. This was
held to be sufficient evidence of mismanagement. The court
accordingly appointed two administrators for management of company
for period of 6 months vesting in them all the powers of the
directorate.Where the managing directors of the Company continued
in office after expiry of their terms, without a meeting being held
to re-appoint them prior to making fresh application to Central
Government under Sec 269, the continuation of office under these
conditions was held to be mismanagement.- Sishu Ranjan v. Bholanath
Paper House[20]Where bank account was operated by unauthorized
person. Kuldip Singh Dhillon v. Paragon Utility Financers Ltd. In
this case, a certified copy of a resolution had been sent to the
bank authorizing certain persons to operate the account. No such
resolution was found recorded in the minutes book; rather the
resolutions passed on the particular date and recorded in the
minutes book; rather the resolutions passed on the particular date
and recorded in the minutes book were different.Sale of assets at
low price and without compliance with the Act- One of the estates
of a tea and rubber plantation company was sold by the direction at
a low price to another tea plantation company without complying
with the requirements of sec 293(1) which demands approval by
shareholders and without giving adequate under Sec 173 and relevant
information, giving delivery of possession before general body
meeting and accepting consideration in instalment. It was held that
all these acts constituted mismanagement of affairs and sale was
set aside. The Board of directors and the purchasers were held
liable for the companys losses and were required to submit an
account of the income of the estate from the date of delivery of
possession to the date of its actual return to the company-
Malayalam Plantations Ltd., Re[21]Violation of statutory provisions
and those of articles- Transferring shares without first offering
them to the existing members in accordance with their rights under
the articles, holding meetings without sending notice to members;
issue of shares for consideration other than cash not represented
by corresponding assets and burdening the company with additional
rental by shifting the companys office- Akbarali Kalveri v. Konkan
Chemicals Ltd.[22]Other instances include Gross neglect of interest
of the company by sale of its only assets and total inattention
thereafter to the affairs of the company[23]; Violation of
conditions of companys memorandum etc.The famous Satyam fiasco is a
very good example of mismanagement of funds of the company and
fraudulent accounting, where the Chairman of Satyam Computer
Services- Ramalinga Raju in his letter to the Board of Directors
confessed to Indias biggest corporate fraud worth Rs 7,000 crore on
the company.[24]Effect of Arbitration Clause[25]- Provisions in the
Articles of Association of a company for reference of disputes
between Company and director, or between directors or between
members cannot oust the jurisdiction of the Court to try petition
by member for winding up or petition against oppression and
mismanagement.Partnership- The Supreme Court has laid down that a
relief cannot be granted under S 397 and 398 on the analogy of
principles applicable partnership and the application of this has
to be confined to rare cases for invoking the jurisdiction under
S.433 for ordering winding up of small private company.[26]Banking-
A banking company can be wound up only under Part III of Banking
Regulation Act and not under the just and equitable clause in Sec
433(f). Consequently no application is maintainable under sec 397
in respect of banking company.
PREVENTION OF MISMANAGEMENTSection 398(1) of the Companies act
provides that any members of a company who complain:-that the
affairs of the company are being conducted in a manner prejudicial
to public interest or in a manner prejudicial to the interests of
the company; or a material change has taken place in the management
or control of the company, whether by an alteration in its Board of
directors, or manager or in the ownership of the company's shares,
or if it has no share capital, in its membership, or in any other
manner whatsoever, and that by reason of such change, it is likely
that the affairs of the company will be conducted in a manner
prejudicial to public interest or in a manner prejudicial to the
interests of the company; may apply to theCompany LawBoard for an
order of relief provided such members have a right so to apply as
given below.
If, on any such application, theCompany LawBoard is of opinion
that the affairs of the company are being conducted as aforesaid or
that by reason of any material change as aforesaid in the
management or control of the company, it is likely that the affairs
of the company will be conducted as aforesaid, the court may, with
a view to bringing to an end or preventing the matters complained
of or apprehended, make such order as it thinks fit.
Right to Complain mismanagement-1. The following members of a
company shall have the right to apply as above:-a) in the case of a
company having a share capital, not less than one hundred members
of the company or not less than one tenth of the total number of
its members, whichever is less, or any member or members holding
not less than one-tenth of the issued share capital of the company,
provided that the applicant or applicants have paid all calls and
other sums due on their shares;b) in the case of a company not
having a share capital, not less than one-fifth of the total number
of its members.
2. Where any share or shares are held by two or more persons
jointly, they shall be counted only as one number.
3. Where any members of a company, are entitled to make an
application, any one or more of them having obtained the consent in
writing of the rest, may make the application on behalf and for the
benefit of all of them.
4. The Central Government may, if in its opinion circumstances
exist which make it just and equitable so to do, authorize any
member or members of the company to apply to theCompany LawBoard,
notwithstanding that the above requirements for application are not
fulfilled.
5.The Central Government may, before authorizing any member or
members as aforesaid, require such member or members to give
security for such amount as the Central Government may deem
reasonable, for the payment of any costs which the Court dealing
with the application may order such member or members to pay to any
other person or persons who are parties to the application.
6. If the managing director or any other director, or the
manager, of a company or any other person, who has not been
impleaded as a respondent to any application applies to be added as
a respondent thereto, theCompany LawBoard may, if it is satisfied
that there is sufficient cause for doing so, direct that he may be
added as a respondent accordingly.
Notice to be given to Central Government of
applicationTheCompany LawBoard must give notice of every
application made to it as above to the Central government, and
shall take into consideration the representations, if any, made to
it by that Government before passing a final order.
Right of Central Government to applyThe Central Government may
itself apply to the Company law Board for an order, or because an
application to be made to theCompany LawBoard for such an order by
any person authorized be it in this behalf.
Powers of TribunalUnder Section 402 of the Companies Act ,1956
the powers of the Tribunal under Sections 397 and 398 are very wide
.These are :-1. the regulation of the conduct of the company's
affairs in future;
2. the purchase of the shares or interests of any members of the
company by other members thereof or by the company;
3. in the case of a purchase of its shares by the company as
aforesaid, the consequent reduction of its share capital;4.the
termination, setting aside or modification of any agreement,
howsoever arrived at, between the company on the one hand, and any
of the following persons, on the other namely:-a) the managing
director;b) any other director;c) the manager;
Upon such terms and conditions as may, in the opinion of
theCompany LawBoard, be just and equitable in all the circumstances
of the case ;the termination, setting aside or modification of any
agreement between the company and any person not referred to in
clause (d), provided that no such agreement shall be terminated,
set aside or modified except after due notice to the party
concerned and provided further that no such agreement shall be
modified except after obtaining the consent of the party concerned;
the setting aside of any transfer, delivery of goods, payment,
execution or other act relating to property made or done by or
against the company within three months before the date of the
application, which would, if made or done by or against an
individual, be deemed in his insolvency to be a fraudulent
preference. Any other matter for which in the opinion of theCompany
LawBoard it is just and equitable that provision should be
made.
Effect of alteration of memorandum or articles of company by
order:Where an order makes any alteration in the memorandum or
articles of a company, then, notwithstanding any other provision of
this Act, the company shall not have power, except to the extent,
if any permitted in the order, to make without the leave of
theCompany LawBoard, any alteration whatsoever which is
inconsistent with the order, either in the memorandum or in the
articles. The alterations made by the order shall, in all respects,
have the same effect as if they had been duly made by the company
in accordance with the provisions of this Act.A certified copy of
every order altering or giving leave to alter, a company's
memorandum or articles, must within thirty days after the making
thereof, be filed by the company with the Registrar who shall
registrar the same.If default is made in complying with the above
provisions, the company, and every officer of the company who is in
default, shall be punishable with fine which may extend to five
thousand rupees.
Consequences of termination or modification of certain
agreements:Where an order terminates, sets aside or modifies an
agreement:-the order shall not give rise to any claim whatever
against the company by any person for damages or for compensation
for loss of office or in any respect, either in pursuance of the
agreement or otherwise; no managing or other director or manager
whose agreement is so terminated or set aside, shall for a period
of five years from the date of the order terminating the agreement,
without the leave of theCompany LawBoard, be appointed, or act, as
the managing or other director or manager of the company. Any
person who knowingly acts as a managing or other director or
manager of a company in contravention of the above provision, every
director of the company, who is knowingly a party to such
contravention shall be punishable with imprisonment for a term
which may extend to one year, or with fine which may extend to five
thousand rupees, or with both. TheCompany LawBoard will not grant
leave for appointment as managing director or director or manager
of the company unless notice of the intention to apply for leave
has been served on the Central Government and that Government has
been given an opportunity of being heard in the matter.
Powers of Central Government to prevent oppression or
mismanagement:The Central Government may appoint such number of
persons as theCompany LawBoard may, by order in writing, specify as
being necessary to effectively safeguard the interests of the
Company or its shareholders or public interests, to act as
directors thereof for such period not exceeding 3 years on any one
occasion[11] as it deems fit if theCompany LawBoard:-
On a reference being made to it by the Central Government ; or
on an application of not less than one hundred members of the
company or of members of the company holding not less than
one-tenth of the total voting power therein, is satisfied, after
such inquiry as it deems fit to make, that it is necessary to make
the appointment or appointments in order to prevent the affairs of
the company being conducted either in a manner which is oppressive
to any members of the company or in a manner which is prejudicial
to the interests of the company or to public interest.
However, in lieu of passing order as aforesaid, theCompany
LawBoard may, if the company has not availed itself of the option
given to it of proportional representation to minority shareholders
on the Board of the company, direct the company to amend its
articles in the manner provided section 265 and make fresh
appointments of directors in pursuance of the articles as so
amended within such time as may be specified in that behalf by
theCompany LawBoard.
In case the Central Government passes such an order it may, if
thinks fit, direct that until new directors are appointed in
pursuance of the order aforesaid, not more than two members of the
company specified by the Company law Board shall hold office as
additional directors of the company. The Central Government shall
appoint such additional directors on such directions.
The person appointed as a director by the Central Government in
accordance with the above provisions, need not hold any
qualification shares or need to retire by rotation. However, his
office as director may be terminated at any time by the Central
Government and another person appointed in his place. No change in
the constitution of the Board of Directors can take place after an
additional director is appointed by the Central Government in
accordance with these provisions unless approved by theCompany
LawBoard. The Central Government in such cases may also issue such
directions to the company as it may consider necessary or
appropriate in regard to its affairs.
Power of the Tribunals to prevent change in Board of Directors
:Where a complaint is made to theCompany LawBoard by the managing
director or any other director or the manager of a company that, as
a result of a change which has taken place or is likely to take
place in ownership or any shares held in the company, a change in
the Board of directors is likely to take place which (if allowed)
would affect prejudicially the affairs of the company, theCompany
LawBoard may, if satisfied, after such inquiry as it thinks fit to
make that it is just and proper to do so, by order direct that no
resolution passed or that may be passed or no action taken or may
be taken to effect a change in the Board of directors after the
date of the complaint shall have effect unless confirmed by
theCompany LawBoard.
Any such order shall have effect notwithstanding anything to the
contrary contained in any other provision of this Act or in the
memorandum or articles of the company, or in any agreement with, or
any resolution passed in general meeting by, or by the Board of
directors or, the company. TheCompany LawBoard shall have power
when any such complaint is received by it, to make an interim order
to the effect set out above, before making or completing the
inquiry aforesaid. Nothing contained above shall apply to a private
company, unless it is a subsidiary of a public company.[12]
Powers of Inspectors[S.240]:Where an inspector investigating the
affairs of the company thinks it necessary to investigate the
affairs of another company in the same management or group , he is
empowered to do so. However as mentioned in section 239(2), he has
to obtain prior approval of the Central Government for that
purpose.[13] Section 240 has been amended by the Amendment of 2000
.Sub-section (1) was substituted. The new sub-section provides that
it shall be the duty of all officers and other employees and agents
of the company and those of any other body corporate whose affairs
are being investigated under Section 239:
a) to preserve and to produce to an inspector or any other
person authorized by him in this behalf with the previous approval
of the Central Government, all books and papers of or relating to
the other body corporate, which are in their custody or power;
and
b) otherwise to give to the inspector, all assistance in
connection with the investigation which they are reasonable able to
give.
For facilitating the task of the inspector it is the duty of all
officers in charge of the management of the company to produce to
the inspector all books and papers of the company which are in the
custody and power and to give to the inspector all assistance in
connection with the investigation which they are reasonably able to
give.[14]The inspector may examine on oath any such person and for
this purpose require his personal attendance.[15]If a person
required to appear or to produce books, makes a default that is a
punishable offence.[16]Where an inspector finds a person, whom he
has no power to examine on oath, ought to be so examined the
inspector may do so with the previous approval of the Central
Government. Notes of any such examination are to be taken in
writing and signed by the person examined and may be used in
evidence against him [17].A refusal to answer any question is also
punishable.
ConclusionOppression and mismanagement are part and parcel of
business. During the course of business, oppression of
small/minority shareholders takes place by the majority
shareholders who are in control of the company. Similarly,
mismanagement of business is not uncommon. When we talk of
mismanagement we mean mismanagement of resources. Mismanagement
could mean siphoning of funds, causing losses due to rash decision,
not maintaining proper records, not calling requisite meetings.
Finer version of mismanagement could arise where the management
does not act/react to a business situation leading to downfall of
business.
The concept of oppression and mismanagement is more relevant or
common to family owned concerns. The reasons are very obvious.
Family owned concerns are owned by family members who over time
develop vested interest in business vested interest in their own
heirs being the most common - thereby leading to oppression of
other family members. Here typically, the controlling member of the
family appropriates the family holdings by means of either a fresh
issue or fraudulent transfers in his favor or reconstitutes the
board in such a manner as to alienate the other family members. The
result is the other family members get oppressed.
Secondly, the family owned concerns are not professional managed
and their system of functioning is usually personal. They lack
probity and fair play. They generally do business in a manner where
they begin to benefit personally to the exclusion of other members.
This leads to oppression of other family members/mismanagement of
companies.
In order to check all these discrepancies the need was felt to
have any measure to prevent the Oppression and mismanagement and
thus under Chapter 6th of Part 6th of Companies Act , 1956 provides
for the judicial as well as administrative remedies to check
Oppression and mismanagement. It is a powerful tool which provides
such power that even a singer member can approachCompany LawBoard
if any of his right has been infringed or in order to prevent the
Oppression and mismanagement in the company.
PROCEDURE POWERS AND FUNCTIONS OF THE SECURITIES APPELLATE
TRIBUNAL UNDER SEBI ACT 1992.The legal reforms began with the
enactment of the SEBI Act, 1992, which established SEBI with
statutory responsibilities to (i) protect the interest of investors
in securities, (ii) promote the development of the securities
market, and (iii) regulate the securities market. This was followed
by repeal of the Capital Issues (Control) Act, 1947 in 1992 which
paved way for market determined allocation of resources. Then
followed the Securities Laws (Amendment) Act in 1995, which
extended SEBIs jurisdiction over corporates in the issuance of
capital and transfer of securities, in addition to all
intermediaries and persons associated with securities market. It
empowered SEBI to appoint adjudicating officers to adjudicate wide
range of violations and impose monetary penalties and provided for
establishment of Securities Appellate Tribunals (SATs) to hear
appeals against the orders of the adjudicating officers. Then
followed the Depositories Act in 1996 to provide for the
establishment of depositories in securities with the objective of
ensuring free transferability of securities with speed, accuracy
and security. It made securities of public limited companies freely
transferable subject to certain exceptions; dematerialised the
securities in the depository mode; and provided for maintenance of
ownership records in a book entry form. The Depositories Related
Laws (Amendment) Act, 1997 amended various legislations to
facilitate dematerialization of securities. The Securities Laws
(Amendment) Act, 1999 was enacted to provide a legal framework for
trading of derivatives of securities and units of CIS. The
Securities Laws (Second Amendment) Act, 1999 was enacted to empower
SAT to deal with appeals against orders of SEBI under the
Depositories Act and the SEBI Act, and against refusal of stock
exchanges to list securities under the SCRA. The next intervention
is the SEBI (Amendment) Act, 2002 which enhanced powers of SEBI
substantially in respect of inspection, investigation and
enforcement.Constitution : The Act established a Board, called
Securities and Exchange Board of India (SEBI), to protect the
interests of investors in securities and to promote the development
of and to regulate the securities market. It prescribed that the
Board would consist of a Chairman, one member each from amongst the
officials of the finance ministry, the law ministry and the RBI and
two other members. In order to avoid conflict of interest, it was
provided that a member shall be removed from office if he is
appointed as a director of a company. Functions : In addition to
its general responsibility, it was assigned the following specific
responsibilities:(a)regulating the business in stock exchanges and
any other securities markets,(b)registering and regulating the
working of stock brokers, sub-brokers, share transfer agents,
bankers to an issue, trustee of trust deeds, registrars to an
issue, merchant bankers, underwriters, portfolio mangers,
investment advisors and such other intermediaries,(c)registering
and regulating working of CIS, including mutual funds,(d)promoting
and regulating self regulatory organizations (SROs),(e)prohibiting
fraudulent and unfair trade practices relating to securities
market,(f)promoting investor education and training of
intermediaries,(g)prohibiting insider trading in
securities,(h)regulating substantial acquisition of shares and
takeover of companies, (i)calling for information from, undertaking
inspection, conducting inquiries and audits of the stock exchanges,
intermediaries and SROs, (j)performing such functions and
exercising such powers under the SCRA as may be delegated by the
Central Government, (This was done in the interest of integrated
regulation. Then all the powers under the SCRA were exercisable by
Central Government. Until SEBI stabilizes, it was considered
desirable that important powers are not transferred from Central
Government, but delegated to SEBI.) (k)levying fees or other
charges for carrying the above purposes, (l)conducting research for
the above purposes and(m)performing such other functions as may be
prescribed.The Board was empowered to delegate any of its powers
and functions under the Act (except powers to make regulations) to
any member, officer of the Board or any other person. Securities
Appellate Tribunal
ESTABLISHMENT, POWERS AND FUNCTIONS OF ADJUDICATING AUTHORITY
AND THE APPELLATE TRIBUNAL UNDER FOREIGN EXCHANGE MANAGEMENT ACT
(FEMA) 1999.IntroductionThe Foreign Exchange Management Act, 1999
(FEMA) replaces the Foreign Exchange Regulation Act (FERA). FERA
was introduced in 1974 to consolidate and amend the then existing
law relating to foreign exchange. FERA was amended in 1993 to bring
about certain changes, as a result of introduction of economic
reforms and liberalization of Indian Economy. But it was soon
realized that FERA had by and large outlived its utility in the
changed economic scenario and therefore replaced by FEMA in
1999.MeaningFEMA was introduced by the Finance Minister in Lok
Sabha on August 4, 1998. The Bill aims to consolidate and amend the
law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market India. It
was adopted by the parliament in 1999 and is known as the Foreign
Exchange Management Act, 1999. This Act extends to the whole of
India and shall also apply to all branches, offices and agencies
outside India owned or by a person resident in India.Objectives and
Reasons for enactment of FEMAFEMA was enacted to consolidate and
amend the law relating to foreign exchange with the objective of
facilitating external trade and payments and for promoting the
orderly development and maintenance of foreign exchange market in
India (Preamble). The statement of objects and reasons set the tone
of the enactment of new legislation:i.The Foreign Exchange
Regulation Act, 1973, was reviewed in 1993 and several amendments
were enacted as part of the ongoing process of economic
liberalization relating to foreign investments and foreign trade
for closer interaction with the world economy. At that stage, the
central government decided that the further exchange of the Foreign
Exchange Regulation Act would be undertaken in the light of
subsequent developments and experience in relation to foreign trade
and investment. It was subsequently felt that a better course would
be to repeal the existing Foreign Exchange Regulation Act and enact
a new legislation. A task force constituted for the purpose
submitted its report in 1994 recommending substantial changes in
the existing Act.ii.Significant developments have been taking place
since 1993 such as substantial increase in foreign exchange
reserves, growth in foreign trade, rationalization of tariffs,
current account convertibility, liberalization of Indian
investments abroad, increased access to external borrowings by
Indian corporate and participation of Foreign investors in the
stock markets.Accordingly, a bill to repeal and replace Foreign
Exchange Regulation Act, 1973 was introduced Lok Sabha on
04.08.1998. On reference to the standing committee modifications
and suggestions were submitted by the standing committee in its
report. After incorporating modifications and suggestions of the
standing committee, the central government decided to introduce the
new law, the Foreign Exchange Management Bill and repeal the
Foreign Exchange Regulation Act, 1973Salient Features of FEMAFEMA
extends to whole ofIndia. It shall also apply to all branches,
offices and agencies outsideIndia, owned or controlled by a person
resident inIndiaand also to any contravention there under committed
outsideIndiaby any person to whom the Act applies. Therefore joint
ventures or wholly owned subsidiaries, though outsideIndia, but
controlled fromIndiaare intended to be covered by the Act. The new
Act is meant to be user friendly with the object to facilitate
external trade and payments for promoting the orderly development
of foreign exchange inIndia.Under the new law, the emphasis for
determining the residential status is on the actual period of stay
inIndia, whereas under FEMA, the emphasis was on the intention of
the person. Under the new law, it is not necessary that the person
should be continuously and physically present inIndia. It will be
sufficient the total of stay inIndiais 182 days or more during the
year.The central government may from time to time give general or
special directions to the Reserve Bank and Reserve Bank shall
comply with such directions. The central government may by
notification make rules to carry out the provisions of the Act. The
Reserve Bank may by notification make regulation to carry out the
provisions of the Act and rules there under. Every rule and
regulation made under the Act shall as soon as after it is made, be
laid before each house of parliament. If any difficulty arises in
giving effect ti the provisions of the Act, the central government
may by order, do anything not inconsistent with the provisions if
the Act for the purpose of removing the difficulty.Suspension of
operation of FEMAIf the central government is satisfied that
circumstances have arisen rendering it necessary that any
permission granted or restriction imposed by the Act should cease
to be granted or imposed or if it considers necessary in public
interest, the central government may by notification, suspend or
relax to such extent either indefinitely or for such period as
notified, the operation of all or any of the provisions of the
Act.Bar of legal proceedingsNo suit, prosecution or other legal
proceedings shall lie against the central government or the Reserve
Bank or any officer of the government or of the Reserve Bank or any
person exercising any power or discharging any functions or
performing any duties under the Act for anything done in good faith
or extended to be done under the Act or rule, regulation,
notification, direction or order made there under.Repeal, Savings
and Cognizance of offencesWith the enactment of FEMA, FERA stands
repealed and appellate board constituted under FERA shall stand
dissolved. No court and adjudicating officer shall take cognizance
or notice of an offence or any contravention under FEMA after the
expiry of two years period from 1.6.2000. However, while FERA was
in force all offences committed under FERA shall continue to be
governed by FERA as if FERA had not been repealed. Any appeal
preferred to the Appellate Board under FERA but not disposed off
before the commencement of FEMA shall stand transferred and shall
be disposed off by the Appellate Tribunal constituted under FEMA.
FEMA is for regulation and management of foreign exchange through
authorized person and provides for penalty for contravention of the
provisions. The object is for promoting orderly development and
maintenance of foreign exchange market in India.
Adjudicating Authority(Sec. 16)Appointment.For the purpose of
adjudication, the Central Government may appoint officers of the
Central Government as the Adjudicating Authorities. The appointment
shall be made by an order published in the official Gazette, for
holding an enquiry in the manner prescribed after giving the person
alleged to have committed contravention, against whom a complaint
has been made (referred to as the said person) a reasonable
opportunity of being heard for the purpose of imposing any penalty,
if levied, it may direct the said person to furnish a bond or
guarantee for such amount [Sec. 16(1)]Jurisdiction. The Central
Government shall, while appointing the Adjudicating Authorities,
also specify in the order published in the official Gazette their
respective jurisdiction [Sec. 16(2)].Procedure of inquiry.The
Adjudicating Authority shall hold an enquiry only upon a complaint
in writing made by an officer authorized by a general or special
order by the Central Government [Sec. 16(3)]. The said person may
appear either or person or take the assistance of a legal
practitioner or a chartered accountant of his choice for presenting
his case before the Adjudicating Authority [Sec. 16(4)]Powers of
Adjudicating Authority. The Adjudicating Authority shall have the
same powers a civil court which are conferred on the Appellate
tribunal under sec. 28(2) and-a)All proceedings before I shall be
deemed to be judicial proceedings within the meanings of secs. 193
and 228 of the Indian Penal Code, 1860;b)Shall be deemed to be a
civil court for the purposes of Secs. 345 and 346 of the code of
Criminal Procedure, 1973.Appeal to Special Director (Appeals)(Sec.
17)Appointment.The central government shall, by notification,
appoint one or more Special Directors (Appeals) to hear appeals
against the orders of the Adjudicating Authorities. It should also
specify in the said notification the matter and places in relation
to which the Director (Appeals) may exercise jurisdiction [Sec.
17(1)].Appeal.Any person aggrieved by an order made by the
Adjudicating Authority (being an Assistant Director of Enforcement
or a Deputy Director of Enforcement) mayprefer an appeal to the
special Director (Appeals) [Sec. 17(2)]. The appeal shall be filed
within 45 days from the date on which the copy of the order made by
the Adjudicating Authority is received [Sec. 17(3)].On receipt of
an appeal, the Special Director (Appeals) may pass such order
thereon as h thinks fit confirming, modifying or setting aside the
order appealed against. But before he passes any such order he
shall give the parties to the appeal an opportunity of being heard
[Sec. 17 (4)]. The opportunity of being heard is an offshoot of the
requirement of compliance of the principles of natural
justice.Again, the order refusing the permission must be supported
by valid reasons. If the order of refusal does not give any reason
or contains reasons which are not valid or the reasons have no
rational nexus to the object, or the reasons are colored by policy
or expediency, the applicant will be entitled for the judicial
relief [ Appejay Pvt. Ltd. V. Union of India,(1979) 49 Comp. Cas.
602 (call.)].Copy of the order to be sent to the parties and the
Adjudicating Authority. The Special Director (Appeals) shall send a
copy of every order made by him to the parties to appeal and to the
concerned Adjudicating Authority [Sec. 17(5)].Establishment of
Appellate Tribunal(Sec. 18)The Central Government shall, by
notification, establish an Appellate Tribunal to be known as the
Appellate Tribunal for the Foreign Exchange to hear appeals against
the orders of the adjudicating authorities and the Special Director
(Appeals) under this Act.Appeal to Appellate Tribunal(Sec. 19)The
Central Government or any person aggrieved by an order made by an
Adjudicating Authority or the Special Director (Appeals) may prefer
an appeal to the Appellate Tribunal. The person appealing against
the order of the Adjudicating Authority or the Special Director
(Appeals) levying any penalty, shall while filing the appeal,
deposit the amount of such penalty with such authority as may be
notified by the Central Government. Where in any particular case,
the Appellate tribunal is of a opinion that the deposit of such
penalty would cause undue hardship to such person, it may dispense
with such deposit [Sec. 19(1)].Appeal to b filed within 45 days.
Every appeal under Sec. 19(1) shall be filed within a period of 45
days from the date on which a copy of the order made by the
Adjudicating Authority or the Special Director (Appeals) is
received by the aggrieved person or by the Central Government.
However, the Appellate Tribunal may entertain an appeal after the
expiry of the said period of 45 days if it is satisfied that there
was sufficient cause for not filing it within that period [Sec.
19(2)].Orders by the Appellate Tribunal. On receipt of an appeal
under Sec. 19(1), the Appellate Tribunal may, after giving the
parties to the appeal an opportunities of being heard, pass such
orders thereon as it think fit, confirming, modifying and setting
aside the order appealed against [Sec. 19(3)]. It shall send a copy
of every order made by it to the parties to the appeal and to the
concerned Adjudicating Authority or the Special Director (Appeals)
[Sec.19 (4)].Expeditious Disposal of Appeal. The appeal filed
before the Appellate Tribunal under Sec. 19 (1) shall be dealt with
by it as expeditiously as possible and endeavor shall be made by it
to dispose of the appeal finally within 180 days from the date of
receipt of the appeal. Where the appeal could not be disposed of
within the period of 180 days, the Appellate Tribunal shall record
its reasons in writing for not disposing of the appeal within the
said period [Sec. 19 (5)].Requisition of records of the
proceedings.The Appellate Tribunal may, for the purpose of the
examining the legality, propriety or corrections of any order made
by the Adjudicating Authority under Sec. 16, call for the records
of such proceedings and make such order in the case as it thinks
fit. The record may be called for by the Appellate Tribunal on its
own motion or otherwise [Sec. 19(6)].Composition of Appellate
Tribunal(Sec. 20)Composition.The Appellate Tribunal shall consist
of a Chairperson and such number of Members as the Central
Government may deem fit [Sec. 20(1)].Jurisdiction.a)The
jurisdiction of the Appellate Tribunal may be exercised by Benches
thereof.b)A Bench may be constituted by the Chairperson with one or
more Members as the chairperson may deem fit.c)The benches of the
Appellate Tribunal shall ordinarily sit at New Delhi. These may
also sit at such other places as the Central Government may, in
consultation with the chairperson, notify.d)The Central Government
shall notify the areas in relation to which each bench of the
appellate tribunal may exercise jurisdiction [Sec. 20(2)].Transfer
of the Members.The Chairperson may transfer a Member from one Bench
to another Bench [Sec. 20(3)].
BPO (BUSINESS PROCESS OUTSOURCING)What is business process
outsourcing (BPO)? BPO is the process of hiring another company to
handle business activities for you.
BPO is distinct from information technology (IT) outsourcing,
which focuses on hiring a third-party company or service provider
to do IT-related activities, such as application management and
application development, data center operations, or testing and
quality assurance.
In the early days, BPO usually consisted of outsourcing
processes such as payroll. Then it grew to include employee
benefits management. Now it encompasses a number of functions that
are considered "non-core" to the primary business strategy.
Now it is common for organizations to outsource financial and
administration (F&A) processes, human resources (HR) functions,
call center and customer service activities and accounting and
payroll.
These outsourcing deals frequently involve multi-year contracts
that can run into hundreds of millions of dollars. Often, the
people performing the work internally for the client firm are
transferred and become employees for the service provider. Dominant
outsourcing service providers in the BPO fields (some of which also
dominate the IT outsourcing business) include US companies IBM,
Accenture, and Hewitt Associates, as well as European and Asian
companies Capgemini, Genpact, TCS, Wipro and Infosys.
Many of these BPO efforts involve offshoring -- hiring a company
based in another country -- to do the work. India is a popular
location for BPO activities.
Frequently, BPO is also referred to as ITES -- information
technology-enabled services. Since most business processes include
some form of automation, IT "enables" these services to be
performed.Benefits and limitationsHITEC cityHyderabad, India, the
hub of information technology companiesThe main advantage of any
BPO is the way in which it helps increase a company's flexibility.
However, several sources[which?]have different ways in which they
perceive organizational flexibility. In early 2000s BPO was all
about cost efficiency, which allowed a certain level of flexibility
at the time. Due to technological advances and changes in the
industry (specifically the move to more service-based rather than
product-based contracts), companies who choose to outsource their
back-office increasingly look for time flexibility and direct
quality control.[6]Business process outsourcing enhances the
flexibility of an organization in different ways:Most services
provided by BPO vendors are offered on a fee-for-service basis,
using business models such as Remote In-Sourcing or similar
software development and outsourcing models.[7][8]This can help a
company to become more flexible by transforming fixed intovariable
costs.[9]A variable cost structure helps a company responding to
changes in required capacity and does not require a company to
invest in assets, thereby making the company more
flexible.[10]Another way in which BPO contributes to a companys
flexibility is that a company is able to focus on itscore
competencies, without being burdened by the demands of bureaucratic
restraints.[11]Key employees are herewith released from performing
non-core or administrative processes and can invest more time and
energy in building the firms core businesses.[12]The key lies in
knowing which of the main value drivers to focus on customer
intimacy, product leadership, or operational excellence. Focusing
more on one of these drivers may help a company create a
competitive edge.[13]A third way in which BPO increases
organizational flexibility is by increasing the speed of business
processes. Supply chain management with the effective use of supply
chain partners and business process outsourcing increases the speed
of several business processes, such as the throughput in the case
of a manufacturing company.[14]Finally, flexibility is seen as a
stage in the organizational life cycle: A company can maintain
growth goals while avoiding standard business bottlenecks.[15]BPO
therefore allows firms to retain their entrepreneurial speed and
agility, which they would otherwise sacrifice in order to become
efficient as they expanded. It avoids a premature internal
transition from its informal entrepreneurial phase to a more
bureaucratic mode of operation.[16]A company may be able to grow at
a faster pace as it will be less constrained by large capital
expenditures for people or equipment that may take years to
amortize, may become outdated or turn out to be a poor match for
the company over time.Although the above-mentioned arguments favour
the view that BPO increases the flexibility of organizations,
management needs to be careful with the implementation of it as
there are issues, which work against these advantages. Among
problems, which arise in practice are: A failure to meet service
levels, unclear contractual issues, changing requirements and
unforeseen charges, and a dependence on the BPO which reduces
flexibility. Consequently, these challenges need to be considered
before a company decides to engage in business process
outsourcing.[17]A further issue is that in many cases there is
little that differentiates the BPO providers other than size. They
often provide similar services, have similar geographic footprints,
leverage similar technology stacks, and have similar Quality
Improvement approaches.
LEGAL OUTSOURCING (LPO)Legal outsourcing, also known aslegal
process outsourcing(LPO) refers to the practice of alaw
firmorcorporationobtaining legal support services from an outside
law firm or legal support services company (LPO provider). When the
LPO provider is based in another country, the practice is
calledoffshoringand involves the practice ofoutsourcingany activity
except those where personal presence or contact is required, e.g.
appearances in court and face-to-face negotiations. When the LPO
provider is based in the same country, the practice of outsourcing
includes agency work and other services requiring a physical
presence, such as court appearances.[1]This process is one of the
incidents of the larger movement towards outsourcing. The most
commonly offered services have been agency work, document
review,[2]legal research and writing,[3]drafting of pleadings and
briefs,[4]and patent services.[5]This phenomenon has been a part of
the legal experience since the 1950s, where it was restricted only
to patents.[6]Later, firms began to contract certain services to
back door firms. The process of subcontracting part of the legal
process to different countries is at a nascent stage, with
relatively consistent market growth.[7]Legal process outsourcing
has predominantly been to countries that had previously taken
advantage of thebusiness process outsourcingwave. LPO providers
have established themselves
inCanada,[1]India,[8]thePhilippines,[9]theUnited
States,Israel,[10]andLatin AmericaOverviewThe concept of legal
process outsourcing is based on the division of labour principle,
prevalent in law firms, where various time consuming and onerous
processes like due diligence are delegated to paralegals, document
reviewers or interns.[12]This allows the firm to address the
various legal issues that arise on a daily basis while being able
to streamline productivity.The process involves a contract, with
due consideration, between both firms. The following are the
various methods by which the process could be initiated:[13] Direct
Contract This is the most straight forward means of establishing
contact. The firm needing legal services directly approaches the
legal process outsourcing vendor. Managed Outsourcing This is a
case where the firm establishes contact with a legal process
outsourcing vendor and retains a traditional law firm to coordinate
the vendor's activities and to ensure quality control. Required
Outsourcing This form of outsourcing occurs when the firm mandates
a certain level of outsourcing in the legal process, either to
reduce costs or to fulfill statutory requirements. Multi-sourcing
This involves segregating the work assigned to LPO providers in
order to reduce risk and take advantage of each provider's
strengths. This approach is helpful in cases where expertise is
required on matters of jurisdiction and merits. Having more than
one provider "on deck" also allows a service recipient to obtain
more favorable pricing. On the other hand, multi-sourcing can be
more complicated than other approaches. Successfully managing
multiple, competing providers requires strong and effective
governance procedures.[14]ReasonsAmong the leading proponents of
this process have been corporate clients concerned with rising
legal expenses. The legal departments of corporations began using
the services of such providers. Soon these corporations began to
pressure their legal representatives to outsource certain legal
processes to cut costs.[15]Cost saving is the biggest attraction
for the western firms that outsource their legal work. Indias legal
services are widely considered affordable, efficient, and above
all, skilled. For a legal job outsourced in India, the U.S. firm
pays hardly one-fourth or one-fifth of what it has to pay in the
U.S. for the same work.[16]AdvantagesMost firms and corporations
outsource primarily to save cash, and this is considered the
biggest advantage for legal outsourcing. While an attorney in major
legal markets such as the US may charge from $150 to $500 per hour
when performing rote services, legal process outsourcing firms
generally charge a small fraction of that price. It has attracted
major corporations to outsource specific work outside their legal
departments. Many destinations for outsourcing have benefited from
the upsurge in bankruptcies and litigations that have occurred in
the wake of theGlobal Financial Crisis.[17][18]As reported in
theABA Journal, "[t]he market for outsourced legal work is booming
in India. While lawyers there are doing a lot of routine work, they
are also handling some interesting legal matters, including work
for the makers of movies and television shows."[19]As stated inUSA
Today, "'[y]ou could call it "Outsourcing 2.0" or maybe even "3.0."
Now firms are increasingly trying to leverage expertise,' says
Saikat Chaudhuri, an assistant professor in the business school at
the University of Pennsylvania. Legal Outsourcing is 'growing very,
very quicklyCriticismsOne of the major concerns with outsourcing is
the potential for breaches of client confidentiality. In legal
process outsourcing the issue of client confidentiality assumes
utmost importance. Theattorneyclient privilegeis a doctrine that
says anything conveyed between an attorney and his client shall be
treated with utmost confidentiality and is exempted from disclosure
even in a court of law. However, when either party discloses
confidential information to a third party or the opposite party,
the privilege is deemed to be waived. During the early years of
legal process outsourcing, many law firms hesitated to outsource
their work.[23]Critics and opponents state that, since
communication is being sent to a country other than United States,
the confidentiality is broken; hence, the attorney client privilege
has been waived. However,American Bar Associationclarified this in
2008, clearing the way for the development of legal process
outsourcing. Another criticism is that people performing legal work
may not be bound to necessary ethical standards.[25]The process of
Legal Outsourcing has come in conflict with the Model Code of
Conduct issued by the American Bar Association.[26]However, there
have been ethics opinions from various local bar associations (New
York,[27]San Diego[28]) and recently the American Bar
Association[29]that discuss ethical legal outsourcing and how to
achieve it.
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