Supreme Court sees corporate lobby against Sebi
BS REPORTER
Mumbai, 3 November
The Supreme Court has dismissed many petitions in the past but rarely
has the country's apex court accused the petitioners of being " stool
pigeons" of powerful corporate lobbies. That's precisely what the
judges did on Friday in a detailed 87- page order rejecting the case
against the appointment of Securities and Exchange Board of India
(Sebi) Chairman U K Sinha, a close reading of the judgment shows.
Reacting to the affidavit that talked about action taken by Sebi
against " influential and powerful" business houses, including Sahara
and Reliance, the court said: " We are unable to easily discard the
reasoning. The anxiety of these business houses for the removal of the
present Sebi chairman is not wholly unimaginable." The court also said
the petitioner seems to be a surrogate for a " powerful phantom
lobby".
"We have been left with the very unsavoury impression that the
petition is more for the protection of the vested interests of some
unidentified business lobbies." The court was ruling on a public
interest litigation ( PIL) filed in September 2011, challenging the
finance minister's power to nominate two additional members in the
selection committee for the appointment of the chairman and whole-
time members of Sebi. Filed by a Bangalore resident, Arun Kumar
Agarwal, the PIL alleged irregularities in the appointment of Sinha as
Sebi chairman and sought that it be quashed.
It is ironic that the petitioners' counsel, Prashant Bhushan, had also
alleged before the court that C B Bhave was denied extension as Sebi
chairman because of his insistence that investigations are held on
complaints against Sahara and RIL, the latter in an insider- trading
case relating to Reliance Petroleum in which ₹ 500 crore was made in
four days of trading in September 2007.
The order, pronounced in open court, said the court could have
dismissed the petition as it was not maintainable on several grounds,
including " absurd allegations".
In the process, the court also questioned the motive behind many PILs
filed with unfailing regularity in courts across the country. "It is
not entirely inconceivable that a petition disguised as " public
interest litigation" can be filed with an ulterior motive or at the
instance of some other person who hides behind the cloak of anonymity,
even in cases where the procedure for selection has been meticulously
followed. The petitioner has cleverly distorted and misinterpreted the
official documents on virtually each and every issue. In our opinion,
the petition does not satisfy the test of utmost good faith which is
required to maintain PILs," the court said.
The apex court had last year issued notices to the Centre and Sebi and
also impleaded the President's secretary, Omita Paul, who was advisor
to the then finance minister when the decision to appoint Sinha as
Sebi chairman was taken.
"We have been left with the very unsavoury impression that the
petition is more for the protection of the vested interests of some
unidentified business lobbies"
—SUPREME COURT ( In its order rejecting a PIL against U K Sinha's
appointment as Sebi chairman)
A PIL filed in September 2011 had challenged the finance minister's
power to nominate two additional members in the selection committee
that had appointed Sebi chairman UK Sinha
Says anxiety of powerful business houses, including Sahara & RIL, for
Sebi chairman's removal is not unimaginable
Legal gaps spawn Saradha- like scams
NAMRATA ACHARYA
Around April this year, when Saradha and some other companies, all
with no defined business activities, surfaced for duping about 1.7
million small investors, a similar scam was brewing in Odisha. Within
a month, a few Odisha- based companies shut shop after raising
deposits from thousands of investors. The two scams, put together, are
now set to drain nearly ₹ 800 crore as compensation from state
exchequers, though the size of the scams could be many times the
compensation.
In the last two months, owners of more than five companies across
India have been arrested for deceiving investors. Each of the scams
was too small in magnitude to attract widespread public attention, but
together enough to wipe out a substantial amount of household savings.
Ironically, the number of scams involving small investors is almost
commensurate with the number of regulations for investor protection.
But with the loopholes in the laws exceeding the number of
regulations, opaque financial transactions have found their way into
the formal financial system.
Chit Funds
Chit fund, one of the oldest and recognised financial instrument, has
been a perennial source of scams, although there are well defined laws
under the Chit Funds Act, 1982 to regulate them.
According to the Act, any chit fund company having 20 per cent
subscribers domiciled in a certain state, has to be registered in that
state. Further, the chit fund companies are required to deposit a sum
equivalent to the total chit fund amount in public- owned banks or
securities. However, the Act vests the responsibility of framing rules
with the state governments.
Until recently, several states bypassed the central Chit Fund Act by
not framing rules for enforcing the Act or implementing their own laws
governing chit funds.
Two states— Haryana and Jammu & Kashmir— neither had any Act governing
chit funds nor did they frame rules to implement the central Act.
"Laying no rules for the Act is as good as having no Act," said S
Sivaramakrishnan, General Secretary, All India Association of Chit
Funds.
In May 2012, the Supreme Court passed a verdict that only Central Chit
Funds Act, 1982, would be applicable to all chit fund firms operating
in the country.
The biggest setback from the judgment was to Kerala, where the state
government operates one of the biggest chit funds in the country.
However, with Haryana and Jammu & Kashmir not having any law to
regulate chit funds, the SC verdict was of little significance. As a
result, in the last one year there has been a proliferation of chit
fund companies.
While a chit fund can be registered in one state, it can enroll
members from any other state in the country.
"Haryana did not come up with any rule even after the SC verdict. So
the implementation of the central Act did not take place, and the very
purpose of the Act was defeated," said S Sivaramakrishnan.
The association is now planning to move the court with the intention
of bringing Haryana under the purview of the central Act.
In 2011, the Union government constituted a key advisory group to
amend the Chit Fund Act, 1982, but the amended Act is yet to be
framed.
The size of the registered or legal chit fund industry is estimated to
be close to ₹ 30,000 crore, but the turnover of unregistered chit fund
companies is almost 100 times that of the registered chit fund
industry, according to Sivaramakrishnan .
Deposit taking Multi- level Marketing Companies
One of the murkiest strata of the dubious finance industry is embedded
in the layers of multilevel marketing companies, or companies that
work on the principle of chain marketing. The two laws that allow
dubious companies to raise public deposits are a) Companies
(Acceptance of Deposits) Rules, 1975 b) Collective Investment Schemes
( CIS), which fall under the Securities and Exchange Board of Indias
(Sebis) purview.
Companies ( Acceptance of Deposits) Rules, 1975
The law allowed companies to raise deposits for the purpose of meeting
any of its short term requirements for funds under the Companies (
Acceptance of Deposits) Rules, 1975.
This allowed several tainted companies, including Saradha, to raise
money, often as advances for booking real estate project. A more
informal aspect of this tool took the shape of raising money for
booking rooms in resorts owned by the firms.
This apart, companies used to raise money from the public by forming
small societies that raised money through private placement of
debentures, a crude instrument that had its genesis in the rural
areas.
Many companies, which used to raise money by way of debentures or
shares, offered returns as high as 20 per cent on investment, almost
double the rate of interest offered by banks. However, this was not a
very popular instrument for raising large scale deposits, as under
Section 67 of the Companies Act any issue of preferential shares to
more than 50 people would be deemed as a public issue, and require
Sebi clearance.
"Most companies that raise deposits through debentures appoint very
close relatives as trustees while for the public at large, they are
categorised as independent trustees," said Mamata Binani, former
chairman, Institute of Company Secretaries of India (ICSI), eastern
region.
The recently released Companies ( Acceptance of Deposits) Rules, 2013
has laid down stringent rules for raising deposits.
"The rules to raise deposits are very stringent in the new Act. A lot
of responsibility has been vested with the debenture trustee. Also, if
share application money is kept beyond a particular time period, it
would be deemed as deposit," said Binani.
Collective Investment Schemes
The second way of raising deposits, CIS, is a recognized financial
tool to raise deposits. However, none of the companies running such
schemes possess a valid certificate from the Sebi.
In the past year alone, the regulator has passed more than four orders
against companies running CIS.
However, a long chain of agents of the company collectively act as a
shield to protect them from any regulatory clampdown.
Often, when Sebi passes an order against such CIS schemes, agents act
as litigants in fighting legal cases against Sebi orders, citing
livelihood grounds. In the process, the companies are able to obtain
ex- parte stay on Sebi orders at district level courts, which is a
major hindrance in curbing the operations of such companies.
Gold schemes
Gold loan schemes are yet another popular, but widely misused
instrument for raising public deposits. RBI allows jewellery companies
to take advance, which is not treated as a deposit.
"It will amount to acceptance of deposits, if in return for the money
received, the jewellery shop promises to return the principal amount
along with interest," according to RBI.
In a typical gold jewellery scheme, a gold retailer collects monthly
instalments from customers for 12 or 15 months, and offers discount on
the gold value of the investments in the form of gold jewellery at the
end of the term.
Soon after the Saradha crisis, several Bengal- based tainted companies
opened jewellery outlets, through which they could collect deposits.
"Some big jewelers have enough gold to back up purchase advance.
However, some jewelers are diverting it into real estate, which might
be a cause for trouble," said Cheeran Verghese, chartered accountant .
This apart, forming credit cooperative society is another convenient
way to raise deposit. According to RBI, co- operative credit societies
cannot accept deposits from the public in general.
However, they can accept deposits only from their members within the
limit specified in their bye laws.
With so many avenues laid open to raise public deposits, who knows
whether another Saradha is in the making?
Thousands of agents and depositors took to the streets in April this
year demanding justice in the Saradha case BS PHOTO
Size of the legal chit fund industry is close to ₹ 30,000 crore, but
turnover of unregistered ones is hundred times more
While a chit fund can be registered in one state, it can enroll
members from any other state in the country
No retrospective effect in criminal jurisprudence
In the context of the recent rape cases, retrospectivity of criminal
law has assumed more importance. The law regarding retrospective
effect for criminal jurisprudence is not quite the same as for civil
jurisprudence. With regard to levy of taxes, which comes under civil
jurisprudence, the law allows retrospectivity, but in tax law, if
there is a penal provision, retrospectivity is not permitted.
It is well- established that in tax laws the Parliament can make laws
retrospectively to collect taxes. There are so many judgements on this
issue from which we find that the courts have successfully upheld the
levy of taxes retrospectively both for validation as well as for
explanation and clarification. Clarificatory amendment has been held
retrospective.
There is still a doubt whether retrospective effect can tantamount to
a fresh levy. High Court judgements are not unanimous.
However the judgement of the Supreme Court in Empire Industries case (
1985) clearly gives the conclusion that retrospective legislation has
to be acase of small repair and not a fresh imposition of tax.
The law is not the same in respect of criminal cases. Retrospective
effect is not allowed in criminal law. Article 20 of the Constitution
specifically bars it. Article 20( 1) reads thus: "Protection in
respect of conviction for offences – ( 1) No person shall be convicted
of any offence except for violation of a law in force at the time of
the commission of the act charged as an offence, nor be subject to a
penalty greater than that which might have been inflicted under the
law in force at the time of the commission of the offence". This
protection given in the Constitution has been the main source of all
other judgements with respect of penal provisions in tax cases. The
judgements have made it well settled that there cannot be any
retrospectivity in respect of penalty and confiscation.
This has been upheld in many judgements and the most famous judgement
is in the case of JK Spinning & Wvg. Mills Ltd. Vs. UOI – 1987( 32)
ELT234( SC).
The court held in this case that tax could be retrospectively charged
due to retrospective amendment of Central Excise Rules 9 and 49, but
there could not be any retrospective imposition of penalty or
confiscation of goods.
The exact words of the judgment were thus: " It will be against all
principles of jurisprudence to impose penalty on a person or to
confiscate his goods for an act or omission which was lawful at a time
when such an act was performed or omission made but subsequently made
unlawful by virtue of a provision of law." There are several judgments
to the same effect following this leading judgment. Also, in the case
of CCE, Ahmedabad vs. Orient Fabrics Pvt. Ltd. – 2003 (158) ELT 545(
SC), the Supreme Court held that amendment of Additional Duties of
Excise Act providing penal provision cannot be given retrospective
effect.
In another important case, CCE, Mumbai vs. Lal Mining Engg. Works –
2007( 215) ELT167( SC), the issue was whether the provision of Section
11 AC of the Central Excise Act, which was amended with effect from
September 28, 1996 providing for a mandatory penalty could be
retrospectively applied.
The Supreme Court held that Section 11AC being a penal provision
providing for a mandatory penalty, it cannot be invoked in a case of
this nature as the same would amount to giving retrospective operation
thereto, which is impermissible in law.
However, retrospectivity was allowed by the Supreme Court in the case
of an amendment in 2001 in the Narcotic Drugs and Psychotropic
Substances Act, 1985 ( NDPS). This was in view of the fact that it was
clear from the objectives and reasons while making the amendment that
the intention was to make the law beneficial to the accused in petty
cases. So it amounted to mollifications of the rigour of punishment
retrospectively for pending cases.
In this case it is proved that if the intention of retrospectivity is
clear in the law, even in criminal law, there can be retrospectivity.
Conclusion: So the clear position is that while retrospective effect
is allowed, with limitations, in taxation law in general, no
retrospective effect can be given in penal provisions even in tax law.
However, if the retrospective intention is clear from the law, it can
be retrospective even in criminal jurisprudence.
EXPERT EYE
SUKUMAR MUKHOPADHYAY
Article 20 of the Constitution specifically bars retrospective effect
in criminal law
BRIEF CASEN [1] M J ANTONY
Setback forworks contractors
Contractors, who undertake government projects, received a setback
last week when the Supreme Court barred arbitration if the agreement
contains aclause that the chief engineer will decide the issues
between the parties. Such a term, which is common in focus of 23
appeals. In a typical case from Karnataka, one firm lodged a claim
against the government for lack of cooperation on the part of the
chief engineer leading to non- completion of a river bridge.
It asked the high court to appoint an arbitrator under the Arbitration
and Conciliation Act, but its application was rejected. The court
stated that if the firm was not satisfied with the decision of the
chief engineer, it should go to a civil court and not take the
arbitration route. Therefore, the firm appealed to the Supreme Court,
along with 22 others that were in the same plight.
All these appeals were decided against the contractors in the leading
case, P Dasratharama Reddy vs Govt of Karnataka.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> ITO can make roving enquiry on deposits
Several financial institutions that resisted disclosure of details of
their customers to income tax authorities, on the ground of
confidentiality, have lost their cases in the Supreme Court. The
revenue authorities sought information from their customers who have
cash transactions or deposits above Rs one lakh for over three years.
There was no inquiry or legal proceedings pending against the
customers under the Income Tax Act. Therefore, the banks challenged
the requisition under Section 133( 6), calling it an "unauthorised
fishing inquiry". The Kerala High Court, in atypical case, upheld the
notice in the case, Kathiroor Service Coop Bank vs CIT. The appeals
were dismissed by the Supreme Court stating that the Financial Act
1995 expanded the power of the assessing authorities and now they can
gather general particulars of customers in the nature of a survey and
store information in computers for checking evasion of tax.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Director's onus when cheque bounces
If a director of a company has to be prosecuted in a cheque bouncing
case, the person complaining must specifically allege that the
director concerned was in charge of, and responsible to conduct the
business of the company. In this case, A K Singhania vs Gujarat State
Fertiliser Co, the payee complained against several directors. The
magistrate issued process against all of them. Two of them moved the
high court to quash their prosecution under the Negotiable Instruments
Act. The high court did not quash Singhania's, leading to his appeal
in the Supreme Court.
Allowing his appeal, the court ruled that he was not in charge of the
transaction though he was often consulted in business matters by other
directors. That did not make him culpable.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Interest on PF arrears
The Supreme Court has ruled that when the provident fund commissioner
demands interest on delayed contribution, the employer has a right to
be represented on the computation of dues. In this case, Arcot Textile
Mills vs RPFC, the company became sick and was unable to pay the
provident fund contribution towards the employees. The authorities
demanded interest on belated remittances. The firm wanted to know how
the authorities calculated the interest and it alleged that the
computation was not given. When it appealed to the Madras High court,
it rejected the petition stating that the firm should approach the
appellate authority under the Act. The firm approached the Supreme
Court, which set aside the high court judgment. The apex court stated
when the authorities compute the interest and send a " bald order" to
the firm, the affected employer could ask for clarification and it
should be given an opportunity to object to the calculation of
interest, the Supreme Court said.
A weekly selection of key court orders
CS A Rengarajan
Chennai
9381011200
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