| Govt not to define ' ordinary course of business' |
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Lack of clarity could lead to more disputes and court cases AMBIGUITY IN COMPANIES LAW DEEPAK PATEL New Delhi, 24 August The corporate affairs ministry has ruled out defining the term 'ordinary course of business', used several times in the Companies Act, 2013. This, experts say, might lead to confusion and litigation. "We are not going to define the ' ordinary course of business'. Companies will have to do it themselves," said a senior ministry official, asking not to be named. Though the term has been used at various places in the new companies law, it has primarily drawn attention because of its significance in cases of related- party transactions. According to the new legislation, if a related- party transaction is not part of a company's 'ordinary course of business', besides a few other conditions, it will need to get approvals from the board of directors and the audit committee. Also, if a transaction is ' material', it requires approval of 75 per cent of minority shareholders. "There is no definition for what is ordinary and what is not. So, there will be confusion over whether a particular related- party transaction, such as royalty payment, requires approval from the board of directors or minority shareholders," says Dolphy D'Souza, partner at a member firm of EY Global. According to an expert, the memorandum and articles of association of the company concerned will be used to interpret an ' ordinary course of business' in the event of litigation. This, in some cases, might lead to subjectivity. Yogesh Sharma, partner (assurance) at Grant Thornton India LLP, says while it will be easy to identify what is ' ordinary course of business' in most cases, it will remain subjective and require judgement in situations where it is not so obvious. "Consider royalty payments, for example. It can be taken as ordinary course of business for a company like Maruti Suzuki but one might view it differently in the case of, say, a Tata Group company." Turn to Page 13 > Old law In the Companies Act, 1956, use of the term ' ordinary course of business' was fewer New law The Companies Law, 2013, uses the term in relation with issues like related- party transactions, loans to directors, powers of the board, insider- trading provisions, etc Difficulty In the absence of a clear definition, it might become tough to see which areas of related- party transactions might need approval from the board and audit committee 'Material' issue If a transaction is material, 75% of minority shareholders' approval is also needed, but the term ' material' is not defined Current norm For listed firms, Sebi currently has a broad list of material events. If a company's decision is stock price- sensitive and has material bearing on its operations, the decision has to be notified to stock exchanges |
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| In search of a fine balance |
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In the glass bangle factories of Firozabad, Uttar Pradesh, there are no lunch breaks; furnaces keep burning. The factories are filthy, the condition of workers miserable, and accidents are common. These findings, among others, are mentioned in Welfare of Glass and Bangle Workers of Firozabad, a report by a Parliamentary standing committee on labour, presented to the Lok Sabha on August 30, 2012. Instances of violent agitations at automobile plants, lockouts at pharmaceutical units and a case of a jute mill chief executive beaten to death in West Bengal are some other pieces of news related to labour unrest in the recent past. The fractured worker- management relationship can be assessed from a 2011 report on industrial disputes, closures, retrenchments and lay- offs, released by the government in March 2014. The report said in 2011, India recorded 370 industrial disputes ( strikes and lockouts), leading to loss of wages amounting to ₹ 48 crore and production loss worth ₹ 422 crore. As the National Democratic Alliance government plans to overhaul age- old labour laws, the need of the hour is a balancing act between labour rights and corporate welfare. Legislation Recently, the Union Cabinet approved proposals to amend three labour laws — the Factories Act, 1948; the Apprentices Act, 1961; and the Labour Laws (exemption from furnishing returns and maintaining registers by certain establishments) Act, 1988. Allowing women to work in night shifts, increased penalties for violation of law, relaxation of norms for apprenticeships and easing the procedure for filing returns in small industries are some of the other proposed changes. However, in a maze of about 100 existing labour laws, the proposed amendments are of little significance. Currently, the two most contentious Acts related to labour are the Industrial Disputes Act, 1947; and the Contract Labour ( Regulation and Abolition) Act, 1970. The disputes Act stipulates if the number of workers in a unit is at least 100, the government's prior approval is necessary for retrenchment. During an economic slowdown, employing workers on regular payroll turns out to be a major financial constraint. Also, securing the government's permission for retrenchment is difficult. In 2011, 89 industrial units were shut, against 42 in 2010. And, financial stringency accounted for the highest number of closures at 40 per cent. Indiscipline accounted for most of the 370 industrial disputes in 2011 ( 30 per cent). " The present labour laws are more antilabour than reform- oriented. Today, employers cannot take any disciplinary action against workers. As a result of the provisions of the Act, of the labour force of 490 million in India, only 29 million ( including 18 million in the government sector), are regular employees. For protecting the rights of just six per cent of the workforce, the law is doing bigger harm," says N G Khaitan, partner in law firm Khaitan and Co. The Contract Labour (Regulation and Abolition) Act, 1970, has led to many disputes related to discrepancy over wages between contract and regular labourers. In 2011, wages and allowances accounted for 24.9 per cent of industrial disputes and involved the highest number of workers. In 2008, a consultative committee of the labour ministry said low wages, long hours, and lack of amenities were some issues the Act didn't address. According to a survey by the Indian Staffing Federation, about half the contract workers in reputed firms received an average salary of ₹ 5,000- 10,000 amonth, lower than the average salary of regular workers. Moreover, the contract workers weren't covered under any social security scheme. State amendments As most labour laws are in the Concurrent List, states are free to amend these. In a landmark move, the Rajasthan government recently amended four key labour laws— the Industrial Disputes Act, the Factories Act, the Contract Labour Act and the Apprentices Act. One of the key amendments in the Industrial Act was stating only units with at least 300 workers would need government approval for retrenchment. The state also increased the percentage of workers needed for registration as a representative union from 15 per cent to 30 per cent. It is expected the Central government will emulate its Rajasthan counterpart on changes in labour laws. "About 60 per cent of factories in India employ 1- 30 workers. So, with the amended law in Rajasthan, a large number of workers can be employed as regular workers," says Khaitan. States such as West Bengal are, however, sticking to old laws. For instance, even when the Centre amended the Industrial Disputes Act to ensure only units with at least 100 workers needed government approval for retrenchment, the West Bengal government retained the number at 50. In 2011, the state accounted for the highest number of industrial disputes— 153 out of 370. Tamil Nadu, Kerala and Gujarat followed. Industrialised states have taken various steps to introduce changes in contentious labour laws, but these have been sectorspecific. For example, in 2004, the Gujarat government amended the Industrial Disputes Act, exempting special economic zones from government permission to lay off employees. Similarly, Andhra Pradesh and Goa have amended the Contract Labour Act, prohibiting contract labour in core activities. Opposing views The proposal to overhaul labour laws has seen its share criticism. Unsurprisingly, the biggest opposition comes from labour unions. But what surprises many is the Bharatiya Mazdoor Sangh, or BMS, ( the trade union arm of the Bharatiya Janata Party), too, is livid with the reforms. " We strongly oppose the Rajasthan government's proposal to amend labour laws," says BMS president Baij Nath Rai. Gopal Krishna, an activist of the Toxic Watch Alliance, says the proposed amendments in the Factories Act do away with the first schedule, which lists of hazardous substances used in various processes. While the Bill says the intention is to widen the scope of hazardous substances, there is ambiguity on this matter. "Factories employing up to 19 workers will not have legally binding responsibility for the safety of their workers inside the factory. The amendment also undermines the legal protection on work hours, a weekly off and other rights to decent working conditions," says Krishna. An equitable overhaul in labour laws, it seems, is easier said than done. As the Centre overhauls labour laws, it's vital to ensure businesses and workers do not take each other for granted A SNAPSHOT OF INDIAS MYRIAD LABOUR LAWS There are 44 central laws governing labour relation, enforced by the Centre, states or both. In addition, there are another 100 state- specific labour laws enacted and enforced by states If wishes were horses: Some key industry demands [1]Shift labour to the State List, from Concurrent List of the Constitution [1]Have a uniform definition of terms such as industry and worker across statutes [1]For better interpretation and understanding, industry should be termed enterprise and workman should be termed employee [1]Have a single labour authority to deal with all aspects of labour, self- certification, and a single consolidated return [1]Reduce dispute settlement mechanisms between labour and employers from four levels to one or two [1]Consolidate laws under four broad heads — terms and conditions of employment, wages, welfare, and social security [1]Exempt small enterprises from Industrial Disputes Act, 1947, and the Industrial Employment ( Standing Orders) Act, 1946 [1]Supervisors, managers and people holding administrative positions, irrespective of the salary limits, should be taken out of the purview of the definition of workman [1]No notice by employer before stipulating any change in the service conditions [1]A 14- day notice of strike should be compulsory [1]Recognise go- slow and work- to- rule as strike [1]Mandatory payments to contract workers through cheque/ bank accounts [1]Make Factories Act applicable to manufacturing units employing 20 workers, if working with the aid of power, or 40 workers if working without power [1]Exempt establishments employing less than 10 people from the Shops and Establishments Act [1]Only trade unions having membership of at least 25% of the total work force should be registered How some states make life easy for businesses Tamil Nadu [1]Combined annual return for Factories Act, Contract Labour and Regulation Act, Maternity Benefit Act, Payment of Wages Act and Minimum Wages Act [1]Self- certification under Shops and Establishments Act, Minimum Wages Act, Payment of Wages Act, and Maternity Benefit Act for IT establishments [1]Software establishments exempted from the provisions of opening and closing hours and holidays under the Shops and Establishment's Act Karnataka [1] Combined annual return for Factories Act, Contract Labour and Regulation Act Maternity Benefit Act, Payment of Wages Act, Minimum Wages Act, and Payment of Bonus Act [1]Exemption of establishments in the software industry from the Standing Orders Act Andhra Pradesh [1]Self- certification under Factories Act, except hazardous industries [1]Definition of core activity under Contract Labour Act, payment of salaries to contract workers through bank accounts or cheques [1]Exemption from provisions related to daily and weekly hours, opening and closing hours, engagement of women, holiday wages for software establishments Maharashtra [1] Self- certification under Factories Act, and Shops and Establishment's Act Gujarat [1] Combined annual returns under Factories Act, Contract Labour Act, Payment of Wages Act, Minimum Wages Act, Payment of Bonus Act, Payment of Gratuity Act, Equal Remuneration Act, and Industrial Employment Standing Orders Act Uttarakhand [1] All contractors to submit registers on a fixed day before the authorities for inspection, avoiding inspection of principal employers establishment Rajasthan [1] Self- certification under Contract Labour Act, Payment of Wages Act, Factories Act, Minimum Wages Act, Maternity Benefit Act, Payment of Bonus Act, Payment of Gratuity Act, Equal Remuneration Act, and Industrial Employment Standing Orders Act. One return filed for all these Acts Source: Ficci & CII MANAGEMENT VS LABOUR: A FRACTURED RELATIONSHIP Top 5 states with highest number of industrial disputes ( 2011) State Number Number Production losses of disputes of workers (~ crore) WestBengal 153 137,460 28.4 Tamil Nadu 64 152,249 4.6 Gujarat 30 4,889 51.3 Kerala 29 44,448 29.2 Andhra Pradesh 20 64,222 20 Industrial disputes classified by causes Cause Percentage of total Percentage of numberof disputes workers involved Indiscipline 30 7.4 Wages & allowances 24.9 23.9 Charterof demands 16.2 17.4 Personal 9.2 14.1 Otherreason 7 4.1 Source: GoI statistics on industrial disputes, closures, retrenchments and lay- offs, Year 2011, ( March 2014) |
| BRIEF CASEN [1] M J ANTONY |
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In a dispute in which arbitration proceedings had not commenced for two decades, the Supreme Court has ruled that the court has the power to appoint an arbitrator against the terms of the contract. In this case, North- Eastern Railway vs Tripple Engineering Works, the railway terminated the contract in 1994 and a panel of arbitrators was appointed in 1996 to decide on the disputes. But little had happened since then. When the contractor company moved the Patna high court, it appointed a retired chief justice of the Sikkim high court as arbitrator. This was challenged by the railway in the Supreme Court, arguing that according to the General Conditions of Contract, a judge could not be an arbitrator. The Supreme Court rejected the contention and upheld the high court's action in view of the peculiar facts of the case. " In a situation where the procedure and process under the Arbitration and Conciliation Act has been rendered futile, the power of the court to depart from the agreed terms of appointment of arbitrators must be acknowledged in the light of the several earlier decisions," the judgment said. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Illegal auction sale set aside The Supreme Court last week asked the Orissa Financial Corporation to return the money to the purchaser of a property bought in auction conducted by the corporation against law. It allowed the corporation to recover the cost from its officers who acted against the rule laid down in the State Financial Corporation Act. According to the rule, if a borrower defaults, the loan cannot be recovered from third parties like guarantors. In this case, Subhransu Sekhar Padhi vs Gunamani Swain, a person bought a truck with loan from the corporation but he defaulted. Since the vehicle could not be traced, the corporation seized the property of his father- in- law who mortgaged his property for the loan. When it was auctioned, the wife and children moved the court against the sale. The court set aside the sale invoking Section 29 of the Act. It said that the auction purchaser who parted with his money to buy the property was a " victim of an illegal procedure adopted by the corporation." >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Prevention of unjust enrichment Emphasising its stand on the issue of unjust enrichment, the Supreme Court has stated that a company would not be entitled to claim refund of tax illegally collected by the state unless the firm establishes that it had not passed on the tax liability directly or indirectly to consumers. The principle was reiterated in a large batch of cases, led by Deccan Cements vs Assistant Director of Mines. The company in this case was in the business of manufacture and sale of cement. It secured mining leases of limestone and dolomite. These minerals were exigible to two imposts under the Telengana Area Act and the Andhra Pradesh Mineral Rights Act. These laws were challenged by various companies and it reached the Supreme Court two times. Ultimately, the law was found to be unconstitutional and the court ordered refund of the tax collected. However, the Andhra Pradesh High Court ruled that the companies were not automatically entitled to refund. They must show that they had not passed on the tax liability to consumers. Against that order, the companies appealed to the Supreme Court. It dismissed all of them and told them to show before the authorities that they had not passed on the burden to the consumers. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Quarry lease of precious stones quashed The Supreme Court last week dismissed the appeal of Vivek Exports, which was granted a 20year quarrying lease for ornamental stones, though its lease had been quashed by the high court of Karnataka. The judgment stated that " in case where a lease has been quashed by the court for whatever reason, granting renewal of such a quashed lease is impermissible and may amount to fraud on the power of renewal exercised by the state government." The issue of lease was challenged by a rival firm, when its application for quarrying in the same area was rejected by the Karnataka government. The government order granting several leases was quashed by the high court. Though the challenge to the government order was made by this firm after nine years, the delay in moving the court was pardoned as it came to know about the government sanction only through a right to information petition. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Order to release Belgian chocolates The Delhi High Court last week directed the Commissioner of Customs to release about 4,000 kg of the famous Guylian chocolates imported from Belgium and lying in the warehouse since January this year, after complying with certain directions. The Food Safety and Standards Authority of India had found two defects in the 16 varieties of these imported chocolates. Packages of eight varieties had no label indicating the date of manufacturing, expiry date and other related information about the product. Another objection was that vegetable oil was used as the filling in eight other varieties. These allegations were contested by the importer in a writ petition, United Distributors Incorporation vs Union of India. The high court stated that since the goods were perishable, the commissioner must release them after proper labelling, "with utmost expedience". The objection about vegetable oil was found to be unsustainable as it has been permitted in other cases. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Tax case straddling continents The revenue authorities have just lost an appeal against the ruling of the Authority for Advance Ruling ( AAR) in one of the most complex cases involving capital gains tax in sale of shares of companies across the globe. Shorn of details, AAR had held that the capital gains arising out of the sale of shares of an Indian company, Copal Research India Ltd, sold by a company incorporated in Mauritius ( Copal Research Ltd) to a Cyprus company ( M/ s Moodys Group Cyprus Ltd) and sale of shares of a US company ( Exevo Inc) sold by the Mauritius Company ( Copal Market Research Ltd) to another US company ( Moodys Analytics, Inc) were not liable to tax in India in the hands of the seller companies. Consequently, the purchasing companies had no obligation to withhold tax. This view was upheld by the Delhi High Court in its judgment, Director of Income Tax vs Moody's Analytics, USA. A weekly selection of key court orders |
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