[aaykarbhavan] source Business standaard

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DEEPAK PATEL The Income Tax Act, 1961, the Consumer Protection (Amendment) Act, 2002, Companies Act 2013 and the Mines and Minerals ( Development and Regulation) Act, 2015 throw up several instances of badly drafted laws hurting their respective sectors, something akin to a tail wagging the dog. Yet, the country's executive and legislature don't seem to have learnt much from these mistakes, leaving the judiciary to wield the broom to clean the mess. Experts point to numerous inefficiencies in the long- drawn process of drafting laws. The pain of drafting Legislative drafting is a joint process of the administrative ministry and the Ministry of Law. The initial formulation is usually prepared in the ministry, based on domain knowledge. "It is generally done by the person most familiar with the law on the subject — usually the joint secretary who has the perspective," says former Union mines secretary S Vijay Kumar, who also served as joint secretary of Rajya Sabha. Sometimes, when the issue is complex, instead of drafting the Bill, a Cabinet note is first made, so as to obtain the views of all the ministries concerned. In this process, which usually takes years, a Bill gets the approval of the law ministry and the other ministries concerned, the Union Cabinet, the parliamentary standing committee or joint parliamentary committee, and the Lok Sabha and Rajya Sabha. Government officials familiar with the process say most Bills are drafted in a hurry. Consequently, there is inadequate consultation with stakeholders, improper initial formulation due to sparse knowledge and insufficient examination by the law ministry. Generally, the primary drafting is carried out by a junior senior levels, resulting in poor drafts." says a former senior government official. However, former Union law secretary T K Viswanathan says the officer making the draft can't be solely held responsible for the flaws. " The main reason for complexity in drafting is the fact that the legislative draftsmen are trying to simultaneously communicate with different types of audiences. This includes the ministry concerned, the legislators, the judiciary, the officials who enforce the the legislation, and finally, the common man," says Viswanathan. The drafting officer has to satisfy conflicting demands. " One of the better ways to reduce court cases is ensuring clarity and preciseness in drafting," says Joy Basu, senior advocate in the Supreme Court. errors, the government should have a dedicated ' drafting committee' comprising retired judges, consultants, lawyers, attached to each ministry, Basu suggests. Moreover, experts say the primary drafting process shouldn't be hurried; adequate time must be given to all ministries concerned. " Give time to ( other) ministries to react to the draft Bill, and have interministerial meetings if necessary, rather than summarily taking a half- baked proposal straight to the Cabinet just to do things quickly," says the former government official quoted earlier. Additionally, the government's tendency to swiftly bring about an ordinance, often bypassing the process of getting a Bill analysed by department parliamentary standing committees ( DPSCs), Parliament has a ' Bills section', which scrutinises the various provisions. Errors can be detected and corrected at this stage. " But Parliament's Bills section is grossly understaffed. At times, a single officer has to be attached to two- three parliamentary committees," says Viswanathan. He adds DPSCs, which have the power to recommend changes in the law, should have adedicated member from the Bills section to ensure certain quality in drafting of a Bill. Finally, most legislators are unfamiliar with the drafting process, evident from the drop in the number of private member Bills being brought up and the legislative time assigned for discussion. " It is clear that more legislative time needs to be devoted for consideration and passing of Bills in Parliament," Viswanathan says. COMPANIES ACT, 2013 Instance of ambiguous provision: If a company enters into a transaction which is in its ordinary course of business and at arms length basis, then such a transaction wont be termed as related party transaction ( RPT). Consequently, such transactions need not follow the strict rules assigned for RPTs. ( section 188) Impact: | No definition or guideline given for arms length basis or ordinary course of business |Likely to create problems for companies later. For example, a minority investor can drag a company to court terming any transaction not being at arms length basis NEGOTIABLE INSTRUMENTS ACT, 1881 Instance of ambiguous provision: " If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded againstand punished accordingly" ( section 141) Impact: | Section 138 of this Act pertains to the criminal offence of a cheque not getting honoured due to companys fault |The provision is not clear as to who should exactly be held accountable for such offence. As a result there have been numerous cases where the lower court terms the whole board of directors of a company as accountable, and involves them in daily criminal proceedings |Supreme Court in a recent judgement said that the board cant be held accountable for dishonour of one cheque RIGHT TO INFORMATION ACT, 2005 Instance of ambiguous provision: " The provisions of this Act shall have effectnotwithstanding anything inconsistent therewith contained in the Official Secrets Act, 1923 ( 19 of 1923), and any other lawfor the time being in force or in any instrumenthaving effect by virtue of any lawother than this Act." ( section 22) Impact: | " This provision does not give a clear- cut superintendence over provisions of all other legislation providing information dispensation'' |This has led to a lot of applications seeking information under the RTI Act being dismissed CONSUMER PROTECTION ACT, 1986 Instance of ambiguous provision: The definition of ` consumer was amended in 2002 to exclude people who obtain goods or avail of services for ` commercial purpose. An explanation was added which excludes certain cases from the ambit of ` commercial purpose. But the phrase itself was not precisely defined. ( section 2) Impact: | Every litigation on general insurance before a consumer courtstarts off with an argumentby the insurance company thatitis for commercial purpose and therefore the insured is nota consumer, and thatthe courtdoes nothave jurisdiction WHEN AMBIGUITY STRIKES

 

Right culture must for corporate governance Volkswagen has cheated regulators, customers, shareholders and other stakeholders by installing software devised to cheat on emissions tests in its diesel cars. The software could recognise when a car was undergoing emissions tests and set temporary pollution controls. During normal operation, the cars would emit as much as 40 times the allowed amount of nitrogen oxides, a class of harmful pollutants. The company was selling the vehicles as ' clean- diesel' vehicles, which meet the environment norms while being economically efficient and high in performance. According to media reports, the new diesel engine ( EA 189), which was developed after R& D efforts for seven years, failed to meet the emission standards of the US and some other countries. Developing the engine was a big bet as the company's strategy was to grow fast by selling ' cleandiesel' technology- driven vehicles in these countries. Therefore, the engine failure was a big blow to its aspiration to grow fast. There were two options: either to invest money, time and other resources to modify the engine design and revise the growth target or to cheat. The company has admitted that the ' cheating software' was installed in 11 million vehicles worldwide. The fraud has a huge cost on the company. It has earned shame by perpetrating the fraud and it will take long to regain the trust of stakeholders. It is facing a potential fine from a US Investigation that may go up to $ 18 billion. It has estimated that it will have to spend 6.5 billion euro towards service costs and " other efforts" meant to restore public trust. The cost might go up. In addition, the company might face 'class action suits'. As reported by Reuter, Volkswagen CEO Matthias Mueller, who replaced Martin Winterkorn after the scam came to light, told German newspaper Frankfurter Allgemeine Zeitung ( FAZ) that manipulations of emissions readings in diesel cars came from company's headquarters in Wolfsburg, Germany, and that he believed only a few employees were involved in it. Mueller's statement gives the impression that the top management was not involved in the ' cheating'. The decision to ' cheat' might not be a boardlevel decision. It is possible that the CEO did not have an idea of what was going on. But it is difficult to believe that it did not have the approval of the senior management. Corporate governance system at Volkswagen, particularly the internal control and risk management systems failed. This kind of corporate governance failure can occur at any company that is successful and aspires to win in the market place continuously. In a highly ethical company, every individual in the organisation holds ' ethical values' even when holding those values might have significant adverse impact on individuals and the company. In those companies making tough decisions is easy. For example, in Volkswagenlike situations, ' cheating' would not be a choice for such a company. But, in a company that could not develop 'highly ethical' culture making such decisions is very difficult. It is more difficult at the individual level or at the team level. Violation of standards of conduct is common in companies where the top management shows significant intolerance for failures. Business firms cannot survive with repeated failures at different levels. Therefore, they build capabilities, invest in technology and develop 'standard operating procedures' to reduce failures to almost at zero level. But, failures are a part of life, and more so in business. Therefore, business firms should develop the culture of accepting and discussing failures with a positive attitude to reduce the motivation to violate ethical standards. Perhaps, the top management of Volkswagen, which is known for technological excellence, could not accept the fact that it would have to severely cut its growth target because of failure to develop the right engine. Building an ethical company requires that the board and the top management demonstrate their commitment to hold ' ethical values' in every situation and the company should implement a policy of 'zero tolerance' for violation of ethical standards. The top management cannot take one view when compliance with ethical standards would cost the company huge and another view when the cost would be insignificant. One cannot create an ethical company by following policies such as ' do not tell a lie, unnecessarily'. Formulating policies, developing standards of conduct and intensive training are not enough in building an ethical company. Policies regarding setting targets, rewarding and penalising employees, balancing variable and fixed pay, and other human resource management policies have a bearing on the organisation culture. For example, unachievable targets or high percentage of variable pay in the total compensation motivates managers to commit accounting fraud and manipulate performance metrics. It is the responsibility of the board to ensure that policies formulated by the management are appropriate. In the absence of right culture (often referred as internal control environment), the internal control system is not effective. This leads to corporate governance failure. I believe corporate governance in Volkswagen failed due to the absence of right organisation culture. Weaknesses in the culture showed up when the company decided to grow faster than before. Affiliation: Chairman, Riverside Management Academy Private Limited asish. bhattacharyya@ gmail. com Culture of accepting failures reduces motivation to violate ethical standards Corporate governance failure like the one at Volkswagen can occur at any company that is successful and aspires to win ASISH K BHATTACHARYYA   BRIEF CASEN [1] M J ANTONY Trade marks are not for ' hoarding' The Supreme Court stated last week that a company cannot claim the right to a trade mark if it registers the name but does not use it for a long time. It would be assumed that the company, by its lethargic conduct, had abandoned its right. In this case, Neon Laboratories Ltd vs Medical Technologies Ltd, two pharma companies were disputing over the trade mark of similar sounding brand names. Medical Technologies argued that its product named Profol for the compound Propofol was being confused with that of Neon's Rofol. Therefore it filed asuit alleging ' passing off'. The trial court and the Gujarat High Court passed injunctions in its favour. Therefore, Neon approached Supreme Court. It dismissed the appeal stating that Neon had registered the name in 1992 but started marketing its brand only in 2004, much after the rival company launched its product in the market. The judgment stated that " t he Trade Marks Act does not permit the hoarding of or appropriation without utilisation of a trade mark." Neon even allowed or acquiesced in the marketing of the rival product for several years. " The legislative intent is to ordain that an applicant of a trade mark does not have apermanent right by virtue of its application alone," the court declared and added: " Such a right is lost if it is not exercised within a reasonable time." Toll on bad road cut by half The Supreme Court has directed a road construction company to transfer the toll collected by it and kept in a bank to the Central government so that the road could be repaired with that fund. In this case, DSC Ventures Ltd vs Lal Manohar, the latter moved the Chhattisgarh High Court complaining that parts of the Raipur- Durg road built by the company was in great disrepair and still it was collecting toll at the rate of 40 per cent from the users. The high court asked the company to repair the road in two weeks or deposit the toll in a bank till the legal issues are settled. The company took the second choice and went in for arbitration demanding ₹ 37 crore for loss. Further, it appealed to Supreme Court. It appointed a commission which confirmed the bad state of the road, which required ₹ 19 crore for repairs. The court asked the state government to get a new contractor and monitor its performance. It also cut the 40 per cent toll to 20 per cent. " If the maintenance of the road is absent or significantly poor, recovery of toll at the stipulated rate would be rendered unfair and unjustified," the order said.  Bank merger not end of proceedings Disciplinary proceedings against a manager can be continued even if the bank in which he was working amalgamated with another, the Supreme Court stated in its judgment last week in the appeal, Jagdish Lal vs Punjab National Bank ( PNB). This assistant general manager was working in the Hindustan Commercial Bank Ltd. It was merged with Punjab National Bank. During his tenure in the earlier bank, the manager was facing disciplinary proceedings for flouting lending norms. In spite of that PNB absorbed him because the Supreme Court had passed an order that transferee banks are obliged to take in managers of merged banks. PNB, however, revived the charge- sheet against the manager. He challenged it on several grounds. Primarily he argued that the proceedings against him cannot be revived merely because he is under a new employer. He also contended that he was holding a higher rank in the old bank, while a lower ranking manager issued the fresh charge- sheet. The court rejected all such arguments and stated that under the amalgamation scheme, the new employer was entitled to resume the proceedings. Though he was holding a higher rank earlier, that was a smaller bank and the officer in the larger bank, PNB, had the power to issue the charge- sheet.  Counting broken liquor bottles A distillery which transports liquor in glass bottles cannot predict how many will break during transit. Since the damage is uncertain, it is contingent in nature and cannot be allowed deduction while computing the total income of the company, the Delhi High Court stated last week in the case, Seagram Distilleries ( now Pernod Ricard India Ltd) vs Commissioner of Income Tax. The company, while dispatching the goods made a provision for breakages on the basis of the past history of the region to which the goods are transported. Once the goods reached the destination the company reversed the provision and debited the actual breakages to the profit and loss account. At the close of the accounting year it made a similar provision for all goods under dispatch and debited the same to the P& L account. However, such provision is reversed on the first day of the following financial year and only actual breakages are debited to the P& L account in the succeeding year as and when the goods reach the destination. The court decided that the provision for transit breakages has no scientific basis and is contingent in nature, while dismissing five appeals of the distillery. " The actual transit breakages as and when they occur are allowable as revenue expenditure in the accounting year in which such breakages occur," the judgment clarified. Court receivers deserve better L& T Finance Ltd received caustic comments from the Bombay High Court last week and barely escaped an order of exemplary costs for denying commission to the court receiver who recovered property for the firm from a borrower. The finance company lent money to a transport firm for buying two trucks. Disputes arose between them and the high court appointed a receiver to take possession of the vehicles. He travelled to Chandrapur where the vehicles were kept and hung boards stating that they were taken over by him. Ultimately, the disputes were resolved through arbitration. Then the receiver demanded ₹ 24,276 as one per cent commission from L & T according to the high court rules. This was denied by the company arguing that the receiver had not taken actual possession of the vehicle and no valuation was done. The high court rejected these arguments and dismissed its appeal. It pointed out that the receiver had travelled to Chandrapur and took great pains to recover the vehicles. " We are surprised at the approach of L& T," the judgment said. Court receivers face serious situation as the borrowers have control over the location where they are residing. "Many incidents have taken place where representatives of the court receiver have even been attacked by hirelings… We are surprised that L & T, which is one of the leading finance companies, should make a grievance of this nature and that too after availing the services of the court receiver." A weekly selection of key court orders

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Posted by: CS A Rengarajan <csarengarajan@gmail.com>

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