SEBI & RBI Amendments

SEBI & RBI Amendments:

Securities and Exchange Board of India (SEBI) vide SEBI/CFD/DIL/LA/1/2009/24/04 dated April 24, 2009 has made amendments to the ‘Listing Agreement’:

Amendment No 1:

SEBI asks companies to declare dividend on a per share basis only.
Insertion of clause 20A - Listed companies shall declare their dividend on per share basis only

For instance, a company having shares of face value Rs 2, and declaring a dividend of Rs 2, will have to say that it has declared a dividend of Rs 2 per share and not a dividend of 100%.

Impact:

Very beneficial for the common man and shareholder to understand the exact amount of dividend he/she is supposed to receive. This Amendment will bring uniformity in the manner of declaring dividend among listed companies. Since face value of shares differs from company to company and the company announcement saying 'dividend declared at 100%' does not exactly give a clear picture of the amount of the dividend to the shareholder. This Order from SEBI will surely help in removing the confusions among the shareholder and also from the investment aspect, investors will be placed at a better position in respect of his/her investments. Though it may be somehow inconvenient to companies declaring dividend for example if the face value of their shares is Re.1 and they declare Re. 0.50 it will not give exact indication on sharing profitability (return), which is 50% as compared to declaration when made on percentage basis. But for the sake of understanding and bringing similarity / uniformity, the order sounds good, since now there is no liberty to the companies to declare dividend as per their discretion on per share / percentage / on any other basis.

Amendment No. 2:

SEBI reduces the timelines for the notice period by listed companies for all corporate actions like dividend and bonus, to name a few.
Amendments to Clause 16 and Clause 19 - The notice period for record date has been reduced to 7 working days and for board meeting has been reduced to 2 working days.

Impact:

It is very beneficial for all the stakeholders including the companies & shareholders. It will mitigate the chances of manipulation in share prices by providing less time to the concerned elements. For companies, it will help in reducing the chances of insider trading and provide flexibility in terms of time for taking internal decisions. The closure time for trading window under insider trading regulations will also get reduced. This will ensure faster dividend and bonus share delivery to the shareholders.

RBI Circular:

Payment of interest on 'daily basis' by banks on savings back account

At present, the interest (3.5 per cent per annum) is calculated on the minimum balance held in the account from the 10th of each month to the last day of that month. So, if a bank customer has Rs 1 lakh in his savings account one day and then Rs 100 another day, the minimum balance taken for calculation of interest in the period would be Rs 100.

But, from April 1, 2010, the interest paid on the savings account will be on the daily minimum balance. In other words, even the Rs 1 lakh balance in the savings account will earn the customer interest, even if it is withdrawn later.

As per the new directive issued by RBI, only commercial banks will need to follow this new method of interest payment on savings accounts. Commercial banks include all banks other than co-operative ones.

Impact:

The Circular is in the best interest of bank account holders and would like to term it as ‘path-breaking’. Customers were at loss due to the previous method of calculation of interest. Where banks charge interest for loan taken for every day (like in case of credit card), the Circular is very justified to make the customers benefit, since banks use their deposits and earn from it on daily basis because of the Money Multiplier mechanism. This will definitely motivate people to hold more money in their savings bank accounts. This means that the money will start earning higher interest even as it remains liquid and safe.

RBI Circular:

Banking Companies (Nomination) Rules, 1985 – Acknowledgement of Nomination and indicating the Name of the Nominee in Pass Books / Fixed Deposit Receipts

Impact:

This is yet another investor friendly order from the RBI. This will ensure security and record keeping for the customer. Any investment done should ideally have a nominee registered. This will also ensure that banks also do not get into unnecessary formalities at the time of maturity or pre-mature withdrawal, since the nominee details will be available with both – the bank and the customer.

CS. Monika Bhardwaj

Anand Wadadekar

Consumer Friendly RBI Circulars

Reserve Bank of India (RBI) issues Circular for enhancing the security of online monetary transactions:

Background:

With the increased use of credit and debit cards in the country, RBI has been reviewing various options to enhance the security of online transactions.

Circular:
With the passage of the Payment and Settlement Systems Act 2007, the Reserve Bank has got the power to regulate all online transactions.

Reserve Bank of India has issued a Circular on February 18, 2009 making it mandatory for banks to clear online card transactions only after they are authenticated by a separate password. Further in the same Circular, RBI has also made it mandatory for banks to send SMS and online alerts for all online transactions exceeding Rs 5,000.

“It would be mandatory to put in place a system of providing for additional authentication / validation based on information not visible on the cards for all online card not present transactions,” the RBI said, in a circular issued to all banks.

These rules will be effective from 1st August, 2009. This directive on online verification has been issued under Section 18 of the Payment and Settlement Systems Act, 2007.

The central bank will also shortly prescribe security measures to be employed for card usage in interactive voice response (IVR) transactions, where cardholders punch in their card details into the telephone to make payments. However, such transactions are minimal.


Reconciliation of transactions at ATMs failure-time limit:

Background:

The use of Automated Teller Machines (ATMs) for cash withdrawal has been increasing in the country. However, of late, the Reserve Bank has been receiving a number of complaints from bank customers, regarding debit of accounts even though the ATMs have not disbursed cash for various reasons.
Banks take considerable time as much as 50 days in reimbursing the amounts involved in such failed transactions to card holders.
The Reserve Bank has concluded that delay of the magnitude indicated above is not justified, as it results in customers being out of funds for a long time for no fault of theirs. Therefore, it was decided that, banks shall reimburse to the customers the amount wrongfully debited within a maximum period of 12 days from the date of receipt of customer complaints. This decision was communicated to the banks vide an RBI circular dated October 23, 2008. However, RBI has observed that the banks have not taken adequate care to percolate these instructions to their branches as evident from continuing complaints in this regard.

Circular:

RBI has therefore issued a Circular dated February 11, 2009 to banks asking them to strictly adhere to the time discipline indicated in the above mentioned circular. Non-adherence to the time discipline shall attract penalties prescribed under the Payment and Settlement Systems Act 2007.
This directive is issued under Section 18 of Payment and Settlement Systems Act 2007.

Section 18 of the said Act gives the RBI broad-based powers to give directions to “system providers or the system participants or any other person either generally or to any such agency and in particular, pertaining to the conduct of business relating to payment systems”. These orders can be given by the RBI if it is satisfied that it is in public interest.

IMPACT:

These Directives by the Reserve Bank of India surely are a welcome step in ensuring safe online & ATM transactions.

Due to this frauds through online transactions may soon see a dramatic decline. At present, anyone who has access to information printed on credit / debit cards, such as the card number & the Credit Verification Value (CVC) number, can misuse the card online. With this Circular in place, this loophole will now soon be fixed and the people can breathe a sigh of relief.

Online payment made through credit cards or online debit of bank accounts while filing compliance documents with MCA, SEBI, etc. will also be more secure and safe.

Also the Circular which puts a time-frame for banks to reimburse to the customers the amount wrongfully debited through ATMs, within a maximum period of 12 days from the date of receipt of customer complaints, is also a benefiting one.

These Circulars and the measures by banks in ensuring safe and secure banking were very much required and are very timely. All this will give confidence to people who were risk averse to online banking transactions or were away from ATMs/online transactions, due the news of people getting duped to the tune of thousands & lakhs of rupees.

CS. Monika Bhardwaj
Anand Wadadekar

Towards Greener Environment - Carbon Credit

CS. Monika Bhardwaj, B.Com (Hons.), ACS
Anand Wadadekar, M.Com, M.A (Eco), MBA, AMFI

Environmental Management:

Environmental management is not merely managing the environment but it’s the management of human interaction with; and impact upon the environment in order to conserve the environment for mankind’s sake. Managing environment is the biggest issue these days which is being faced by everyone everywhere across the globe. Initially, the Environmental Law was perceived as one of the most important tools of environmental management. However, Protection of environment from degradation has now not just remained a legal issue but a management issue as well.

It is observed that mere compliance of environmental law on pa does not result in effective control of pollution. An alternate paradigm for pollution abatement for more effective methods of environmental control beyond traditional "command-and-control (CAC)" style regulation is to use economic instruments (EIs) or market-based instruments (MBIs). Introduction of market based instruments will help to reduce emission of pollutants, pollution and will surely increase social responsibility of industries. Eco-taxes, tradable emission limits and negotiated agreements are some of the types of instruments which can be used effectively and efficiently.

In India, environmental management is largely carried out at the state level. This is true for natural resources such as forests and land as well as for air, water quality and solid waste pollution.

Green and Grey Products:

Almost every product has multiple environmental impacts. The products and their manufacturing processes, consume energy, use renewable and non-renewable material and generate emissions. A product is ‘green’ when its environmental and societal performance, in production, use and disposal, is significantly improved and improving in comparison to conventional or competitive product offerings, i.e. they are sustainable from the environmental point of view. A Green Product is environmentally preferable and leaves minimum environment footprints.

When a product is unsustainable from the environmental point of view, it is termed as ‘grey’.

Market Based Instruments (MBI) for Environmental Benefits:

“Market Based Instruments refer to the environmental policies which encourage change in technology, behaviour or products through financial incentives like subsidies, taxes, price differentiation or market creation.”

CARBON CREDIT - As one of the most effective MBI:

What does Carbon Credit mean?

A permit that allows the holder to emit one ton of carbon dioxide; Credits are awarded to countries or groups that have reduced their green house gases (GHG) below their emission quota.

Its goal is to stop the increase of carbon dioxide emissions. The Kyoto Protocol presents nations with the challenge of reducing greenhouse gases and storing more carbon. A nation that finds it hard to meet its target of reducing GHG could pay another nation to reduce emissions by an appropriate quantity. The carbon credit system was ratified in conjunction with the Kyoto Protocol.

For example, if an environmentalist group plants enough trees to reduce emissions by one ton, the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, it could purchase this carbon credit from the environmental group.
The carbon credit system looks to reduce emissions by having countries honor their emission quotas and offer incentives for being below them.

Indian Initiatives for environmental management:

Comparing the globally placed carbon trade, India seems nowhere near.

However, Policy Statement for Abatement of Pollution, 1992 by the Government favours the use of MBIs for pollution control, wherever feasible. In the recent years, compulsion to comply with Euro II emission norms is a very confident step towards controlling air pollution.

It has now become essential for companies to make environmental considerations as a part of their business decision making.

The enactment of the Information Technology Act, 2000 has enabled the industry to kick-start the use of electronic mode as a valid legal medium for carrying out its business operations which were until now done compulsorily on paper. This includes initiatives like MCA e-filing, Income Tax e-filing, SEBI Reporting and other electronic communications via, emails and video conferencing.

What we professionals can do?

India is still not a signatory to the Kyoto Protocol, which in a way, is a road-block for effectively carrying out environmental management by the industries. Currently companies like Jindal Stainless, Essar Steel, Hyderabad Chemicals, Paschim Hydro Energy P. Ltd, The Andhra Pradesh Paper Mills Ltd, have been making use of market based instruments like Carbon Credits in their businesses.

It is a need of the hour for Company Secretaries, Chartered Accountants, Lawyers, Cost Accountants and other Management professionals to put up their say in the management of their respective organisations (financial, manufacturing or services) and be a part of the decision making more proactively & aggressively.

At the organisation level:
1. The various industry Chambers like FICCI, ASSOCHAM, CII should take-up the issue of introducing market based instruments like Carbon Credits through a legal framework with the Government. These trade organizations can also come up with some award program to the Companies which religiously follow the norms. Such award program will work as a motivating factor in the industry to adopt the norms suo-moto.
2. Introduction of corporate-run carbon funds
3. Introduction of Government-run carbon programmes. (Just recently Multi-Commodity Exchange (MCX) has taken a pioneering effort to launch Carbon Credit Futures in India and has been recognized as India’s First Green Exchange)
4. We, professionals, should stress upon and make the company management aware of the benefits of such market based instruments
5. Awards like ‘Best Green Idea’ for employees coming up with suggestions; ideas, ways, etc. should be introduced.
6. Ask the management of our respective organisations to take help of the MBIs wherever feasible.
7. Computer-based entrance tests for educational courses.
8. Organizations can also come up with policies for reducing wastes like for encouragement of use of metal water bottle in the organization in place of plastic water bottles which is sanitary, easy to clean and is capable of being used over and over.
9. Organizations can also encourage use of reusable lunch bags / cups etc. in their cafeteria / lunch rooms which helps in avoiding use of plastic / paper, use of hand towels in toilets and lunch rooms instead of paper towels and electric dryers.

On individual level, we professionals can contribute in the following way:

1. We, professionals, can help our respective organizations in implementing effective waste management systems. We can also assist in registering our manufacturing units under Indian Green Building Council and products under Bureau of Energy Efficiency voluntarily; though for some the registration is mandatory.
2. Internal policies may also help in encouraging paperless communications, use of common transport etc. as far as possible. Such policies may atleast ensure minimum use of paper (double side printing), avoidance of wastage and re-cycling of waste paper and therefore, saving trees – a natural resource.
3. We can also assist in encouraging our fellows in full utilization of software applications, for example execution of daily work in soft copies rather than printing (Eg. Excel Macros for data processing, analysis, etc.). This way, we will solve two problems i.e. space for storage of physical records and availability/ accessibility of all records at a centralized server hence, reducing dependence on human factor. We all are aware that most of the official communications can be done through email/video conferences. We professionals can advise our managements / fellow employees to adopt such practices.
4. We, professionals, need to refer to many laws for which we purchase bulky books every year. Here, we can purchase CDs instead of those books, which will reduce substantial use of paper and storage and will be easy to use.
5. We can also adopt and advise good practices of reducing carbon footprint for example using CNG gas in our cars, maximum use of public transport system.
6. We can advise our managements to come up with policies to reduce wastages, be it paper, electricity or any other. Policies on travels can also be modified to discourage air travel at all levels of management. A small change can add a big thing to the concept of “Go Green”.

Conclusion:

It’s the need of the hour to think very seriously on reducing environment loss by religiously following & implementing and innovating techniques & ways to contain the same. This is a high time to call a revolution for reducing carbon footprint in order to preserve what’s left of the ozone layer, which is a protective layer between sun’s harsh ultra violet rays and the living beings. Otherwise, the day is not far when the world will be full of hunger; sun burnt, blind people, scary sounds and many more incurable diseases.

CLAUSES MAKE AGREEMENTS FLAWLESS

CS. Monika Bhardwaj, B.Com (Hons.), ACS

In common parlance the terms ‘Agreement’ and ‘Contract’ are used as synonyms. But in legal jargon, these two terms are not the same. Agreement is a vital element for a contract to become valid, but it’s not a contract in itself. The enforceability of an agreement makes it a Contract. It is said that, every Contract is an agreement, but every Agreement is not a contract.

In India, the entire law covering the concept of ‘Agreement’ is embodied in the Indian Contract Act, 1972. Commencing from our day-to-day life to the important decisions of the business world everybody is exposed to either one (express) or the other (implied) form of an Agreement; whether it’s an account opening form or a joint venture / technical collaboration; agreements touch life of every person.

However, in industry, drafting an Agreement is crucial task and extreme caution is required so as to protect the interest of the concerned entity. Increasing business activities makes it imperative to carefully draft or vet an agreement since this is the stage where potential disputes can be avoided and course of actions can be framed or freezed.

The art of drafting in India has developed without the aid of formalized structure of legislation; instead, it is totally based on legal traditions. Of late, India has immensely benefited by exchanging the drafting techniques with the rest of the world. Each type of agreement has some peculiar clauses, which need extra caution and care.

The purpose of this Article is to highlight the importance of drafting an agreement vis-à-vis few important clauses in an agreement. This article shall focus on drafting the general commercial agreements. Here in this article the term ‘Agreement’ is used as a synonym of the term ‘Contract’.

Indemnity

Almost all commercial agreements have an indemnity clause, wherein one party agrees to indemnify the other from the losses / damages caused by its own acts. Such clauses are inevitable and need to be capped. Further, amount of risk involved in the indemnification needs to be compared with the benefits to be derived out of the business relationship. Indemnification for exemplary, consequential, indirect and incidental damages should be avoided. In view of the risk involved, these clauses need careful drafting. Root cause analysis is required for the existence of such clauses. If not required in a particular situation, such clauses should be avoided.

Jurisdiction

‘Jurisdiction’ determines which Court should properly adjudicate a case / dispute i.e. Competent Court. Jurisdiction means the authority to govern or legislate and such authority is derived out of the subject, type or cause of action. The clause excluding one out of two competent courts should not be against the public policy. The contract ousting the jurisdiction of the Indian courts, however, the Indian courts was not without jurisdiction.
It was held that the agreement ousting the jurisdiction was void as it was opposed to the public policy [Rajendra Sethia vs. Punjab National Bank (AIR 1991 Delhi 285)]. That means, if a court in India has jurisdiction to entertain the suit and in agreement it is specifically agreed that any dispute between the parties will be submitted to a Foreign Court. Being opposed to public policy, such clause would be void. The plea that party agreed to submit to the Foreign Court will not up held. This can be considered for stay of a suit but cannot be a ground for rejection of a plaint.

Arbitration

Of late, the number of disputes in the industry has increased tremendously. Initially, the principal burden was on Courts that have traditionally captured the majority of such disputes. In an attempt to control litigation costs and expediting the process of dispute resolution, many companies are looking to employ alternate dispute resolution mechanisms commonly referred to as ADR -- to avoid the lengthy court procedures. Two of the most commonly used ADR mechanisms are ‘mediation and arbitration’. Mediation is a voluntary process through which the parties meet and try to negotiate a resolution to their dispute by referring to a third-party facilitator. Arbitration is a process that results in a binding decision that the parties can seek to enforce through the courts. Arbitration through a single arbitrator, mutually appointed by the parties, is a cost effective and speedy way for dispute resolution. Generally companies seek mediation and if they fail, they prefer to refer the dispute to Arbitration. Therefore Arbitration clause is very must.

Intellectual Property Rights

Intellectual Property Rights (IPR) has gained significant importance amidst globalization and liberalization. The agreement should provide for the protection of IPR of the parties. Mere acquisition of Intellectual Property (IP) rights is of little importance if it cannot be enforced effectively. Well-framed IP clauses are the best means to limit the instances of IP violations. Declaration of ownership on all Intellectual Property Rights on the subject matter is imperative. The party must seek protection of the intellectual property rights on its own products / services. At the same time, indemnification should be taken for Intellectual Property Rights infringement of any third party.

Force Majeure

Sometime in spite of all the efforts, a party finds it difficult to fulfill its obligations under the Agreement for some reasons beyond its control. The situation becomes pathetic if the damage clause is severe. Here comes the ‘Force Majeure’ clause to rescue. Such clauses enables a party to escape from the liability arising out of non-performance of its duties under the agreement for some reasons beyond its control / unpredictable circumstances viz. delivery failure due to transport strike, non payment of dues due to banker strike, act of god, lock-outs, war, riot, sabotage etc. Such clause needs care, the party suffering from any factor considering Force Majeure must inform the other party about the existence of such factor responsible for nonperformance and must take due care for resumption of its obligations under the agreement at its earliest possible otherwise it may lead to termination of the agreement itself. The period of delay / non-performance should be excluded from the total term of the agreement.

Termination Clause

Every agreement must contain an ‘exit clause’. At times, it becomes difficult to carry the relationship throughout the term of the Agreement; then in such circumstances this clause comes handy. This depends upon the position and requirement of the contracting parties. Sometimes, the parties intentionally agree not to provide exit clause to one of the contracting party or to provide some lock-in period or to provide exit under some particular situations viz. in case of material breach of the terms of the agreement / insolvency etc..

Other cautions

Exclusive agreements should be avoided. Generally these agreements attract anti-trust laws. Any agreement, which is a restraint on the civil rights of a party, is generally void. Agreements wherein one party is to reveal some confidential information to the other for the execution of the agreement, must provide non-disclosure clause for maintaining the confidentiality of the information till the time it comes into public domain; without breaching the terms of the agreement. In employment agreement, clause containing any restraint on the civil rights of the employee should be avoided.

In almost all agreements, the potential disputes should be kept in mind and accordingly the safeguards should be provided viz. in case of leases; refund of security deposit should be protected, in case of delay in refund the possession of premises should be retained, in case of non-vacation liquidated damages should be provided and so on. The clause pertaining to the governing law should be carefully considered since it provides the enforcement mechanism for the agreement. Scope of work, consideration, relationship between the contracting parties and the procedural part should be clearly stated. In conglomerates, the specific policies of the entity needs to be adhered whether it’s anti-corruption, anti-boycott or any other to save it from the consequences of international laws. The main purpose of an agreement is to bring transparency in a transaction, minimize chances of disputes by bringing as much clarity as is possible and also to avoid any misinterpretation.

To conclude, we can say that, ‘Clauses’ play a crucial role in agreements and contracts and help in creating a legal relationship which is transparent and forward looking.