Priyanka's Blog

February 18, 2010

A General Note on Patents in the field of Atomic Energy

Filed under: Uncategorized — P S @ 11:15 am

 

  1. General Background: The TRIPS Agreement

 

India has been a member of the World Trade Organization (“WTO“) since 1st January 1995. The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”), negotiated in the 1986-94 Uruguay Round, introduced intellectual property rules into the international multilateral trading system for the first time. The areas covered by the TRIPS Agreement included: (i) Copyright and related rights, (ii) Trademarks including service marks, (iii) Geographical indications, (iv) Industrial designs, (v) Patents, (vi) Layout-designs (topographies) of integrated circuits, (vii) Undisclosed information, including trade secrets.

 

As a signatory to the TRIPS Agreement, India (like other member states) was required to amend its municipal laws relating to intellectual property to align them with international obligations as envisaged by the TRIPS Agreement. Accordingly, several amendments were brought to the intellectual property regime in India. For purposes of the present inquiry, I note that the Patents Act, 1970 was amended by the amending Act 38 of 2002. However, these amendments did not alter the erstwhile Section 4 of the Act which bars the grant of a patent in respect of an invention relating to atomic energy “falling within sub-section (1) of Section 20 of the Atomic Energy Act, 1962″.

 

  1. Relevant Provisions of the Patents Act, 1970

 

 

Section 4 of the [Indian] Patents Act, 1970 provides that “No patent shall be granted in respect of an invention relating to atomic energy falling within sub-section (1) of Section 20 of the Atomic Energy Act, 1962 (33 of 1963)”.

 

Section 47 of the Patents Act provides that the grant of a patent under the said Act is certain condition inter alia that any process / product which is the subject matter of a patent may be imported or made by the government for its own use.

 

Section 65 of the Patents Act, 1970 provides as follows:

 

65.
Revocation of patent or amendment of complete specification on directions from Government in cases relating to atomic energy – (1) Where at any time after grant of a patent, the Central Government is satisfied that a patent is for an invention relating to atomic energy for which no patent can be granted under sub-section (1) of Section 20 of the Atomic Energy Act, 1962 it may direct the Controller to revoke the patent, and thereupon, the Controller, after giving notice to the patentee and every other person whose name has been entered in the register as having an interest in the patent, and after giving them an opportunity of being heard, may revoke the patent.

 

(2) In any proceedings under sub-section (1), the Controller may allow the patentee to amend the complete specification in such manner as he considers necessary instead of revoking the patent.”

 

Section 102 of the Patents Act provides for “Acquisition of inventions and patents by the Central Government” for a “public purpose”. Under this section an invention which is the subject of an application for a patent or a patent, both, could be acquired from the applicant / patentee for a public purpose. For such acquisition, the Central Government shall pay to the applicant / patentee (as the case may be) such compensation as may be agreed between the Central Government and such person.

 

  1. Relevant Provisions of the Atomic Energy Act, 1962

 

The Atomic Energy Act, 1962 (“the AE Act“) is an Act “to provide for the development, control and use of atomic energy for the welfare of the people of India and for other peaceful purposes and for matters connected therewith”. Section 20 of the AE Act, which is relevant for present purposes, is reproduced here:

Section 20. Special provision as to inventions

(1) As from the commencement of this Act, no patents shall be granted for inventions which in the opinion of the Central Government are useful for or relate to the production, control, use or disposal of atomic energy or the prospecting, mining, extraction, production, physical and chemical treatment, fabrication, enrichment, canning or use of any prescribed substance or radioactive substance or the ensuring of safety in atomic energy operations.

(2) The prohibition under sub-section (1) shall also apply to any invention of the nature specified in that sub-section in respect of which an application for the grant of a patent has been made to the Controller of Patents and Designs appointed under the Indian Patents and Designs Act, 1911, before the commencement of this Act and is pending with him at such commencement.

(3) The Central Government shall have the power to inspect at any time any pending patent application and specification before its acceptance and if it considers that the invention relates to atomic energy, to issue directions to the Controller of Patents and Designs to refuse the application on that ground.

(4) Any person, who has made an invention which he has reason to believe relates to atomic energy, shall communicate to the Central Government the nature and description of the invention.

(5) Any person desiring to apply for a patent abroad for an invention relating to or which he has reason to believe relates to atomic energy shall obtain prior permission from the Central Government before making the application abroad or communicating the invention to any person abroad, unless three months have elapsed since his request for permission was made to the Central Government and no reply was received by him.

(6) The Controller of Patents and Designs shall have the power to refer any application to the Central Government for direction as to whether the invention is one relating to atomic energy and the direction given by the Central Government shall be final.

(7) Any invention in the field of atomic energy conceived whether in establishments controlled by the Central Government or under any contract, sub-contract, arrangement or other relationship with the Central Government shall be deemed to have been made or conceived by the Central Government, irrespective of whether such contract, sub-contract, arrangement or other relationship involves financial participation of or assistance from the Central Government.

(8) Notwithstanding anything contained in the Indian Patents and Designs Act, 1911, the decision of the Central Government on points connected with or arising out of this section shall be final”

 

Definitions of some of the key terms used in the above referred Section 20 of the AE Act are included herein below for ease of reference:

 

Atomic Energy” means energy released from atomic nuclei as a result of any process, including the fission and fusion process [Section 2(1) (a) of the AE Act]

 

Prescribed substance” means any substance including any mineral which the Central Government may, by notification, prescribe, being a substance which in its opinion is or may be used for the production or use of atomic energy or research into matters connected therewith and includes uranium, plutonium, thorium, beryllium, deuterium or any of their respective derivatives or compounds or any other materials containing any of the aforesaid substances. [Section 2(1) (g) of the AE Act]

 

Radioactive Substance” or “Radioactive Material” means any substance or material which spontaneously emits radiation in excess of the levels prescribed by notification by the Central Government. [Section 2(1) (i) of the AE Act]

 

Section 3 of the AE Act in relation to “General Powers of the Central Government” stipulates inter alia that subject to the provisions of the AE Act, the Central Government shall have the power “to declare as “restricted information” any information not so far published or otherwise made public relating to… (iii) the theory, design, construction and operation of plants for the treatment and production of any of the prescribed substances and for the separation of isotopes; (iv) the theory, design, construction, and operation of nuclear reactors…” [Section 3 (c) of the AE Act]

 

Furthermore Section 18 of the Atomic Energy Act provides for “Restriction on disclosure of Information” and by sub-section (1) thereof empowers the Central Government to make an order restricting the disclosure of information, whether contained in a document, drawing, photograph, plan, model or in any other form whatsoever, which relates to, represents or illustrates: (a) an existing or proposed plant used or “proposed to be used” for the purpose of producing, developing, or using atomic energy, or (b) the purpose or method of operation of any such existing or proposed plan, or (c) any process operated or proposed to be operated in any such existing or proposed plant. Section 18(2) further stipulates that “No person shall disclose or obtain or attempt to obtain any information restricted under sub-section (1)”.

 

A seemingly dangerous provision appears in Section 11 of the AE Act which provides for “Compulsory acquisition of prescribed substances, minerals and plants”. Vide the said section, the Central Government may inter alia compulsorily acquire, in accordance with the provisions of the said section, any prescribed equipment; any plant which is designed or adapted for the mining or processing of any minerals referred to in Clause (b) of Section 11(1) or substances obtained therefrom or for the production or use of any prescribed substance or a radioactive substance or for the production, use or disposal of such articles as are or are likely to be required for or in connection with the production, use or disposal of atomic energy or for research into matters connected therewith. The said section then stipulates the procedure to be followed in the course of such compulsory acquisition and Section 21 of the AE Act stipulate the principles relating to payment of compensation for compulsory acquisition.

 

Section 28 of the AE Act clarifies that the provisions of the AE Act shall have effect notwithstanding anything inconsistent therewith contained in any enactment (other than the AE Act) or any other instrument having effect by virtue of any enactment other than the AE Act. Finally, Section 30 of the AE Act provides for the Central Government’s power to make rules. Sub-section (2) of the said Section 30 stipulate that “without prejudice to the generality of the foregoing powers, such rules may provide for (a) declaring any information not so far published or otherwise made public as restricted information and prescribing the measures to be taken to guard against unauthorized dissemination or use thereof…”

 

  1. Comments / Observations

 

It is clear that currently Indian law does not allow for patenting of inventions relating to atomic energy. This position appears to be different than the one ensuing in the United States of America (“the US“) where while there continues to be a bar on patents for inventions related solely to atomic weapons, patents for other inventions related to atomic invention may be granted after scrutiny by the Department of Energy in the US. No such distinction is made by the current legal framework in India between atomic weapons and atomic energy. It has therefore been vehemently argued (particularly after the Indo-US Civil Nuclear 123 Agreement) that although India may open doors for nuclear commerce and looks to import billions of dollars worth of civil nuclear technology however “antiquated provisions in the Indian Patents Act may make this bumpy ride a bit more uncomfortable”. Indian companies are lobbying hard with the Government of India to amend the Atomic Energy Act so as to allow private participation in nuclear power plants. However, until such amendments in fact come into force, it is the laws as they stand today which will be applied to commercial deals in the field of atomic energy.

 

As noted herein above at present the Indian law does not allow for patenting of inventions relating to atomic energy. Section 4 of the Patents Act and Section 20 of the AE Act are strictly worded in this behalf. Even if a patent is granted for an invention relating to atomic energy, the same may be revoked under Section 65 of the Patents Act as reflected above.

 

It must however be noted that the prohibition envisaged under the Patents Act read with the AE Act is against “grant” of a patent. In other words, what the AE Act mandates is that no patents
shall be granted for inventions
which (in the opinion of the Central Government) fall under the rigor of the said section. The said sections do not debar protection of technical know-how / trade secrets / confidential business information of a party whether relating to a patent or otherwise. Such rights are frequently the subject matter of a commercial contract and are protected by common law principles in India.

 

Trade Secrets

 

In the US trade secrets are afforded statutory protection, both at the Federal and State levels, with meaningful civil and criminal remedies to counter misappropriation of trade secrets, including compensatory and punitive damages, injunctive relief, attorneys’ fees. This is not the case in India which currently does not provide a statutory legal protection of trade secrets. The term “trade secrets” is not defined under any law at present. However, at the moment in India, common law and English precedents provide for protection of trade secrets and confidential information. Parties rely on and can rely on contracts to protect trade secrets / confidential information.

 

Article 39 of the TRIPS Agreement stipulates that “undisclosed information” often treated as synonymous with trade secrets, can be protected as provided for under Article 10 bis of the Paris Convention. India being a signatory to TRIPS, it is not long until India will have a substantive text on the protection of trade secrets. However, at present there is no such law. The National Innovation Bill, 2008 (draft), in Chapter VI titled “Confidentiality and Confidential Information and Remedies and Offences”, vide Section 8 “allows parties to contractually set out the terms and conditions governing rights and obligations in respect of confidential information, including with a view to maintain confidentiality and prevent misappropriation.” Section 2 (3) of the said Bill defines “confidential information” as meaning “information, including a formula, pattern, compilation, program, device, method, technique or process, that: (a) is secret, in that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within circles that normally deal with the kind of information in question; (b) has commercial value because it is a secret and (c) has been subject to responsible steps under the circumstances by the person lawfully in control of the information, to keep is secret.” This definition is based on the definition provided in the Uniform Trade Secrets Act (on which most US state laws regarding trade secrets are based). Please note that the National Innovation Bill is still to be codified as a law.

 

It has to be appreciated that trade secrets per se cannot be legally protected. What is enforceable is the consequential effects of breach of trust or legal contracts. The trade secrets law under the common law seems to have adopted a functional approach to defining trade secrets. The courts demarcate between information that is in the public domain and that which is not. A concise definition was given in this behalf by Megarry VC in Thomas Marshall Ltd vs. Guinle (1978) where the Court identified four factors that are to be considered: (i) the owner must believe that the release of the information would be injurious to him or of advantage to rivals or others, (ii) the owner must believe that the information is confidential or secret, that is, not already in the public domain, (iii) the owner’s belief must be reasonable, and (iv) the information must be judged in light of the usage and practice of the particular industry or trade concerned.

 

The basic test for imposing an obligation for breach of confidence was laid down in Saltman Engg Co vs. Campbell Engg Co Ltd.(1963) where it was stated (by Lord Greene) that “If the Defendant is proved to have used confidential information, directly or indirectly obtained from the Plaintiff, without the consent, express or implied, of the Plaintiff, he will be guilty of an infringement of the Plaintiff’s rights.” I also make a cautionary note that while it is prudent business practice to enter into non-disclosure agreements to prevent the misuse of trade secrets, however, the validity of such agreements has to be examined within the purview of Section 27 of the Indian Contract Act, 1872, which states that every agreement by which a person is restrained from carrying on any trade, business or profession, is invalid. I have referred to cases pertaining to Section 27 of the Contract Act in the subsequent portion of this note.

 

In John Richard Brady and Ors. vs. Chemical Process Equipments Pvt. Ltd. and Anr. [AIR 1987 Delhi 372] the Delhi High Court, in a case involving unauthorized use of trade secrets observed, “It will also be in the interests of justice to restrain the defendants from abusing the know how, specifications, drawings, and other technical information regarding the plaintiff’s fodder production unit entrusted to them under strict confidentiality, which they have apparently used as a ‘spring board’ to jump into business field to the detriment of the plaintiffs… or from using in any other manner whatsoever the know-how, specifications, drawings and other technical information about the fodder production unit disclosed to them by the plaintiffs.”

 

In Daljeet Titus, Advocate vs. M Alfred A Adebare and Ors. [130 (2006) DLT 330]

the Delhi High Court relied upon the views expressed in Margaret, Duchess of Argyll (Feme Sole) vs. Duke of Argyll [(1965) 1 AllER 611] that a court must step in to restrain a breach of confidence independent of any right under law. Such an obligation need not be expressed but implied and the breach of such confidence is independent of any other right as stated above.

 

Section 27 of the Indian Contract Act has attracted most of the trade secret litigation in India. In Wipro Limited vs. Beckman Coulter International SA [2006 (2) CTLJ 57; 131 (2006) DLT 681], the Delhi High Court exhaustively dealt with the existing authorities on the doctrine of restraint of trade (embodied in Section 27 of the Indian Contract Act) and trade secrets. The court examined the observations made in Taprogge Gesellschaft case [AIR 1988 Bombay 157] that “the distinction between restraints imposed by a contract, operative during the subsistence of the contract and those operative after the lifetime of the contract is of a fundamental character… Again, the purpose for which a restraint is expected to serve determines the character of the restraint. For instance the restraints which operate during the term of the contract have to fulfill one kind of purpose, i.e. furthering the contract. On the other hand, the restraints operative after the termination of the contract strive to secure freedom from compensation for a person who no longer works within the contract.” The Court further observed that “Generally speaking, the negative covenants operative during the term of the contract are not hit by Section 27 of the Contract Act because they are designed to fulfill the contract and not to restrict them. On the other hand, when a restriction applies after the contract is terminated, the restriction on freedom of trade, business or profession takes the form of restraint on trade, business or profession. This distinction which is of fundamental nature has to be borne in mind.”

 

The Court also relied on the observation of the Supreme Court of India in Gujarat Bottling Company Ltd. vs. Coca Cola Co. & Ors. [(1995) 5 SCC 545] wherein it was stated that “Since the doctrine of restraint of trade is based on public policy, its application has been influenced by changing views of what is desirable in the public interest. The decisions on public policy are subject to change and development with the change and development of trade and the means of communication and the evolution of economic thought.”

 

In the end, the Delhi High Court in Wipro Limited vs. Beckman Coulter International SA concluded that “Negative covenants tied up with positive covenants during the subsistence of a contract be it of employment, partnership, commerce, agency or the like, would not normally be regarded as being in restraint of trade, business or profession unless the same are unconscionable or wholly one sided… The question of reasonableness as also the question of whether the restraint is partial or complete is not required to be considered at all whenever an issue arises as to whether a particular term of contract is or is not in restraint of trade, business or profession.”

 

Patent and Trade Secret: Distinction

 

Information eligible for trade secret protection may or may not be eligible for patent protection. Trade secrets unlike patents can include wider base of information. Trade secret protection can last in perpetuity as long as the information remains secret and maintains its value whereas a patent (granted in India) expires 20 years from its filing date [Section 53 of the Patents Act, 1970]. Further, in order to protect a trade secret, uniqueness in the sense of patent law is not required. Further, the owner of a trade secret unlike the holder of a patent does not have an absolute monopoly on the information or data that comprises the trade secret. Currently, in India, patentability of computer software is in question, which however can be easily protected as a trade secret.

 

Section 24 of the Indian Contract Act

 

Section 24 of the Indian Contract Act stipulates that a contract “contrary to law” shall be void. I note that what is contrary to law is protecting a patent in the atomic energy sector if it falls within Section 20(1) of the AE Act. It cannot mean that if two parties by contract agree to a certain set of obligations (in this case confidentiality of business related / technical information) then such obligations will not be protected. Arguably, the fact that such contract pertains to a protected area of law (viz. atomic energy) should not make a difference so long as the contract (or any provision thereof) is not contrary to a statutory tenet.

 

The fact that a patent cannot be granted for a particular technology cannot ipso facto mean that such technology cannot be protected by way of contractual agreement.

 

The one difficult area, as I presently see it, is technology that may be “derived” from that of another entity’s technology which the Government of India may have under license / contract. Section 20(7) of the AE Act, stipulates “any invention in the field of atomic energy conceived whether in establishments controlled by the Central Government or under any contract, sub-contract, arrangement or other relationship with the Central Government shall be deemed to have been made or conceived by the Central Government, irrespective of whether such contract, sub-contract, arrangement or other relationship involves financial participation of or assistance from the Central Government.” It is in relation to this provision of the AE Act that Section 24 of the Indian Contract Act may pose a hurdle. Section 24 of the Indian Contract Act stipulates that a contract “contrary to law” shall be void. I’m not sure therefore that contractual clauses which override the provision of Section 20(7) of the AE Act can be built into the contract and if yes whether they will be upheld. Prima facie it does not seem possible.

Can a Company apply for information under the Right to Information Act, 2005 (“RTI Act”)

Filed under: Right to Information — P S @ 10:24 am

Statement of Object & Reasons: “An Act to provide for setting out the practical regime of right to information for citizens to secure access to information under the control of public authorities, in order to promote transparency and accountability in the workings of every public authority…”

The object of the RTI Act is to promote an “informed citizenry”, “transparency of information”, “to contain corruption” and to “hold Governments and their instrumentalities accountable to the governed”.

Who can apply for information under the Right to Information Act, 2005?

In conformity with its objects and reasons, Section 3 of the RTI Act stipulates that “Subject to the provisions of this Act, all citizens shall have the right to information”. The definition of “right to information” itself is set forth in Section 2(j) of the RTI Act and states inter alia that the right to information means the right to information accessible under the RTI Act which is held by or under the control of any public authority and includes the right to inspect work, documents records, taking notes, obtaining information in the form of diskettes etc.

Section 6 of the RTI Act, is the provision regarding “Request for obtaining information” and states that “A person who desires to obtain any information under this Act, shall…”. Inasmuch as the word used in this provision is “a person” as opposed to a “citizen” it appears that any “person” can apply for information under the provisions of the RTI Act. The term “person” is defined under section 3(42) of the General Clauses Act, 1897 which states that “person” shall include any company, or association or body of individuals, whether incorporated or not.

Can a Company file a request seeking information under the RTI Act?

In view of what is stated above, i.e. information can be requested for by a “person” (which term includes a juristic person such as a company), it may not be necessary to go into this specific question. There are cases where a company has requested for information under the provisions of the RTI Act and the requested information has been provided by a public authority [See: Perfect Machine Tools Co. Ltd. vs. State of Maharashtra & Ors. 2008(2) MhLJ 404 – where a private company sought for some information from the Municipal Corporation of Greater Bombay by way of a RTI Application and the same was provided; National Mineral Development Corporation vs. Government of India & Ors. WP(C) No. 8004/2007].

In J.C. Talukdar vs. C.E.(E) CPWD Kolkata (CIC/WB/C/2007/00104 & 105 dated 17 May 2007), the Applicant / Mr. Talukdar, requested for certain information from the CPWD, Kolkata, in his capacity as the Managing Director of one Ganesh Electric Stores. The said request was refused under Section 3 of the RTI Act. Consequently Mr. Talukdar filed an appeal before the CIC. In the course of dealing with the said Appeal the CIC observed as follows:

“This is at heart a question of whether a company or its director will fall under the definition of  citizen under the RTI Act. A company or a corporation is a “legal person” and, as such, it has a legal entity. This legal entity is distinct from their shareholders, managers, managing directors. This is a settled position in law since the Solomon’s case decided long back by the House of Lords. They have rights and obligations and can sue and are sued in a court of law. Section 3 of the RTI Act confers “right to information” on all “citizens”. A “citizen” under the Constitution Part II that deals with “citizenship” can only be a natural born person and it does not even by implication include a legal or a juristic person…

The objective of the Right to Information Act is to secure access to information to all citizens in order to promote transparency and accountability. The Hon’ble Supreme Court in Bennett Coleman Co. Vs. Union of India (1972) 2 SCC 788 held that a shareholder is entitled to protection of Article 19 and that an individual’s right is not lost by reason of the fact that he is a shareholder of the company. The Bank Nationalization Case has also established the view that the fundamental rights of shareholders as citizens are not lost when they associate to form a company. In Delhi Cloth & General Mills Co. Ltd. (decided on 21 July 1983), the Apex Court observed that the judicial trend is in the direction of holding that in the matter of fundamental freedoms guaranteed by Article 19 the right of shareholder and the company which the shareholders have formed are rather co-extensive and the denial to one of the fundamental freedoms would be denial to the others (Para 12).

Even if it were conceded that a company or a corporate body is a legal entity distinct from its shareholders and it is not in itself a citizen it is a fact that all superior courts have been admitting applications in exercise of their extraordinary jurisdiction from companies, societies and associations under Article 19 of the Constitution of which the RTI Act, 2005 is a child. Very few petitions have been rejected on the ground that the Applicants / Petitioners are corporate bodies or companies or associations and as such not “citizens”. This Commission also has been receiving sizeable number of such applications from such entities. If the courts could give relief to such entities the PIOs also should not throw them out on a mere technical ground that the Applicant / Appellant happened to be a legal person and not a citizen. In conclusion we direct that an application / appeal from an association or a partnership firm or a Hindu Undivided Family or from some other group of individuals constituted as a body or otherwise should be accepted and allowed.”

The observations and opinion in J.C. Talukdar’s case has been followed in several subsequent cases by the CIC, viz. Shri. R.K. Sharma vs. Ministry of Home Affairs, Delhi Police (Appeal No. CIC/WB/A/2007/00264), Shri. Hitesh Kumar vs. Ministry of Personnel, Public Grievances & Pensions (Appeal No. CIC/WB/A/2007/00184) and the position that now emerges is clear that a company can apply for information under the provisions of the RTI Act. Such an application can be made through the company’s authorized representative / employee.

 

February 17, 2010

Brood Tharoor!?!

Filed under: Random Thoughts — P S @ 6:09 pm

November 18, 2009

So, it’s ok that you are amorous as a politician, but damn you cannot be humorous. 

A politician can be a passionate, sentimental writer, even bordering on the romantic at times. But Mr. Shahi Tharoor upsets the Congress by in fact adhering to it’s austerity drive in solidarity! Frankly, I laughed so much at Mr. Tharoor’s witty comment but even more when I read Ms. Jayanti Natrajan’s response to it. Here’s a quick recap for those who missed the episode:  On his page on Twitter, which by the way has a growing fan club (of about 5,000 followers), Minister of State for External Affairs Shashi Tharoor was asked: “Tell us minister, next time you travel to Kerala, will it be cattle class?” Mr. Tharoor replied: “Absolutely, in cattle class out of solidarity with all our holy cows”. J

The Congress high command thought these remarks of Mr. Tharoor were insensitive, with Ms. Jayanati Natrajan stating that “These are unacceptable given the sensitivity of all Indians and not in sync with our political culture… Thousands of people travel in economy class.”

Of course, thousands of people travel in the economy class and thousands travel in business class and thousands travel in trains and buses and two wheelers and just on their two feet.  Did she say sensitivity of all Indians? Now, I don’t want to get into a jurisprudential debate here and raise the issue of “all” Indians (i.e. each and every one of them). I’d like to keep this rather simple. The simple question is – Why can we not take humor in our stride? It’s like we suffer from a colonial hangover of sorts when it comes to matters related to the legislature, executive or judiciary. Frankly there’s nothing so majestic or regal about any of these institutions inasmuch as they are comprised of very normal human beings (like you and me) who are meant to protect and promote the lives of you and me. It’s almost nauseous to hear / see things like “Yes sir… no Sir…of course Sir…Jee Madam… Jaisa Aap Kahen Madam… We believe that…”. Will we please GET ON WITH IT, throw the colonial garbage out and learn to talk to each other truly as equals, because that’s what we are – EQUAL.

If a Minister of State responds to a question asked to him, must we crucify him for being witty? Take it easy! He said nothing insensitive. In fact the Congress should be happy that the guy believes in solidarity. He moves out of his 5 star suite which he was paying for from his own pocket in deference to the Congress’ newly coined austerity drive without questioning the sensibility of the drive itself.

It appears that the government feels that the austerity drive respects the “sensitivity of all Indians”. An astute writer for the Hindustan Times, Mr. Rajesh Mahapatra, commented (in his article “The buck stops here”, Page 10, Hindustan Times, 17th September) that “Rahul Gandhi’s travel in the Shatabdi Express was a nightmare for Security officials and may have cost the government more than the Rs. 10,000 saved by the economy class journey”. Well said. Although I would like to add that the government ought to also bear in mind that the safety and security of general janta cannot be compromised in the name of an austerity drive, the very success of which is suspect. How cool is it as an idea to have Mr. Rahul Gandhi travel in the Shatabdi Express and endanger not just his safety but also that of co-passengers. Not to mention the mayhem his visit to the New Delhi Railway Station may have caused. Security personnel running amok, traffic snarls due to VIP movement…

I must say though, the idea of being austere is indeed very appealing. I personally liked the comment made by Mr. Rahul Gandhi when he said that as a politician one must always be austere and there is no particular time for being so. That was indeed an inspiring statement.

I’m amazed however at the total lack of taking humor in one’s stride. I mean give Mr. Tharoor a break! For starters, it’s a great thing that the man likes to connect with the people through the medium of Twitter. But there’s a whole bunch of people out there who object to his twittering. I think there’s nothing more appealing than connecting with the janta, protection of whose interests and person is the prime reason for Mr. Tharoor’s being in the job he is. It’s great that we have a politician who believes in “connecting” with the people as opposed to others who without giving a damn to my sensitivity, use the money I pay in taxes, to erect monumental disasters by lining up statutes of elephants in a park!!

Is Sanjeev Nanda really indefensible?

Filed under: Criminal Law — P S @ 5:43 pm

Recently, upon reading an article, possibly the 100th one that I read regarding the BMW Case, I was a little miffed, a little puzzled and possibly a lot unsettled for many reasons. I am writing this piece in the hope that some of those who would in fact read it, may offer suggestions / thoughts that might help me answer questions that I’m not able to readily answer for myself at this point. My only request to those who read this piece would be to read it objectively, without being judgmental. I believe that one of the principal reasons for my angst in relation to this case is the thought (perhaps not entirely unfounded) that even before someone decides to comment on this case, the large scale media coverage that it has received seems to cloud one’s vision which skews in favor of the prosecution and against the defense primarily because of the affluent status of the accused.

Most articles I have read about the case or TV shows that I have seen so far seem to have focused on how “privileged brats” claim to be above the law. People / Media have indulged in “spoilt brat-bashing” and it appears that this criminal case under trial really “captivated the nation as a test of fairness of India’s judicial system”. It is distressing that I haven’t seen anyone talking about what the law on the subject really is and how it ought to be applied to the case. So, instead of initiating yet another socio-moral dialogue on this issue, I’d like to focus, to begin with, on the law in question, as I understand it.

The BMW Case – a look at the law in question

For those who may not be aware of this, it is a well settled principle of common law that mens rea (or criminal intention) is an essential ingredient of a criminal offence. So, when questioning whether Sanjeev Nanda is really a criminal under our criminal law, the first category of questions we ought to ask are: (i) Did Mr. Sanjeev Nanda really have the criminal intention of killing someone that night? (ii) Did the fact that he drank and then drove his BMW give him the requisite mens rea? (iii) Did he have the requisite “knowledge” that his act was likely to cause death or injury? The next question is – Was Mr. Sanjeev Nanda’s act just a rash and negligent act? There is a difference between these two categories. Our law, under Section 304 of the Indian Penal Code, 1908 deals with what is “culpable homicide not amounting to murder” and prescribes the punishment for it; Section 304A sets forth the provision of causing “death of any person by doing any rash or negligent act not amounting to culpable homicide”. While the punishment prescribed for an offence under Section 304 is imprisonment that may extend to ten years and / or fine, the punishment prescribed for an offence under Section 304A is imprisonment which may extend to two years and / or fine.

For “culpable homicide not amounting to murder”, Section 304 of the Indian Penal Code, 1908 prescribes two kinds of punishments applying to two different circumstances: Whereas Part I of Section 304 mandates that if the act by which death is caused is done with the intention of causing death or such bodily injury as would cause death, the punishment is imprisonment for life, or imprisonment of either description for a term which may extend to ten years and fine. Part II of Section 304 mandates that if the act is done with knowledge that it is likely to cause death but without
any intention to cause death or such bodily injury as is likely to cause death, the punishment is imprisonment of either description for a term which may extend to ten years, or with fine or with both.

Mr. Sanjeev Nanda has been prosecuted and proceeded with under Part II of Section 304 of the Indian Penal Code, i.e. the criminal act of culpable homicide not amounting to murder and not under Section 304 A of the Indian Penal Code, 1908 which deals with cases of causing “death of any person by doing any rash or negligent act not amounting to culpable homicide”. The question is, in reality, did Mr. Sanjeev Nanda act with knowledge that his act was likely to cause death or was his act of drinking and driving a rash and negligent act?

This brings one to the next logical question, i.e. what is it that the law considers as being a “rash or negligent act”? Dealing with the scope and applicability of Section 304 A of the Indian Penal Code (pertaining to rash and negligent act), the Supreme Court of India has observed that “Section 304A applies to cases where there is no intention to cause death and no knowledge that the act done in all probability will cause death. The provision is directed at offences outside the range of Sections 299 (i.e. Culpable Homicide) and Section 300 (i.e.
Murder) of the Indian Penal Code, 1908. The provision applies only to such acts which are rash and negligent and are directly the cause of death of another person. Negligence and rashness are essential elements under Section 304A. Culpable negligence lies in the failure to exercise reasonable and proper care and the extent of its reasonableness will always depend upon the circumstances of each case. Rashness means doing an act with the consciousness of a risk that evil consequences will follow but with the hope that it will not. Negligence is a breach of duty imposed by law. In criminal cases, the amount and degree of negligence are determining factors. A question whether the accused’s conduct amounted to culpable rashness or negligence depends directly on the question as to what is the amount of care and circumspection which a prudent and reasonable man would consider to be sufficient considering all the circumstances of the case. Criminal rashness means hazarding a dangerous or wanton act with the knowledge that it is dangerous or wanton and the further knowledge that it may cause injury but done without any intention to cause injury or knowledge that it would probably be caused.” [See: Prabhakaran vs. State of Kerela (AIR 2007 SC 2376)]

The distinction between “culpable rashness” and “culpable negligence” has been very aptly pointed out by Holloway J. in these words: “Culpable rashness is acting with the consciousness that the mischievous and illegal consequences may follow, but with the hope that they will not, and often with the belief that the actor has taken sufficient precautions to prevent their happening. The importability arises from acting despite the consciousness. Culpable negligence is acting without the consciousness that the illegal and mischievous effect will follow, but in circumstances which show that the actor has not exercised the caution incumbent upon him and that if he had, he would have had the consciousness. The importability arises from the negligence of the civic duty of circumspection.” Our Supreme Court has also relied upon the aforesaid view in Prabhakaran’s case.

Inasmuch as the Supreme Court, in Prabhakaran’s case, has observed that “…the extent of… reasonableness will always depend upon the circumstances of each case”, the question is what test of reasonableness ought one apply to the BMW Case in the context of the doings / misdoings of Mr. Nanda? Shall it be what would be reasonable from the standpoint of a 45 year man or one who is 19 years old, as Mr. Nanda then was? Inasmuch as criminal statutes demand a strict construction, would it not be fair that we apply the test of reasonableness from the standpoint of a 19 year old? Surely, no 19 year old person would proclaim that drinking and driving is fashionable or legal or even proper. To the contrary, they would all deprecate it, however, at the same time, may not accord it the same kind of importance as perhaps a 45 year old person would (in a majority of cases). That is to say, while they may not endorse and encourage it, they may possibly consider it as a necessary evil that they live with owing to peer pressure or other reasons. However, perhaps it would be fair to say that none of them would construe drinking and driving as being acts which would necessarily result in the criminal act of culpable homicide not amounting to murder.

Specifically in the context of Mr. Nanda, the question is, did he, on that night, really have the requisite “knowledge” that his act of drunk driving would result in someone’s death? This is different than the fact that it “could” have resulted in death, however uncertain that supposition is. For the probability of death occurring as a result of drunk driving is only a probability and not a certainty. If the answer to this is in the negative, which it is for me, then his prosecution under Part II of Section 304 seems unfair. I can understand his acts / omissions being rash and / or negligent, but not one that were with the knowledge that they would cause death.

It does not appeal to me that he would have set out from his home that night with the intention of drinking then driving and then killing someone. It does not appeal to me that it was a premeditated plot to kill someone. It is not as if he left his home that night with a vow that he will return home only after killing six people under his car? Sure, one needn’t have that overt a requirement, however, it is worth considering in the light of the law in question and the interpretation afforded to it. Certainly, Mr. Nanda can be attributed with knowledge that drinking and driving is an offence under law. He can further be attributed with the knowledge that drinking and driving may result in an accident which may likely cause death / injury to himself or to others. But did he have knowledge that this was a certain consequence of his act of drinking and driving or did he merely have the consciousness of a risk that evil consequences will follow but with the hope that they will not? The answer, for me, is the latter.

A further question is whether all cases of drunk driving dealt with under Part II of Section 304? The answer of course is No. So what cases of drunk driving have been dealt with under Part II of Section 304 of the Indian Penal Code?

It appears as if one is placing the BMW Case in the same paradigm of interpretation as one afforded to other recent media-famous cases, such as the Priyadarshini Mattoo case where an obsessive stalker raped and then mercilessly killed a girl, or the case of Jessica Lal where a man shot a girl because she refused to serve him a drink at a bar, or the Nitish Katara Murder Case where two brothers killed the lover of their sister in rage. In all of these cases, it is plain to see that, premeditation, plotting, criminal intent and knowledge that acts / omissions would result in death seem to be established. In fact the intent was clearly to kill. Is it the same in the BMW Case? Perhaps, not. However, the flavor given to it, is, it appears, as if it was a premeditated murder. One of the reasons that this case got such attention and hype was, admittedly, to prove the point that the rich / affluent are not above the law. True. However, ought this principle not be vice-versa, i.e. ought the law not equally be for the rich / affluent? In other words, ought we to afford a stiffer interpretation to statutory provisions because the case at hand involves the driver of a BMW as opposed to a truck? Would that be fair? As I understand it, law has to be applied without fear or favor, but not differently because of a difference in the social status of an individual.

Each time I have read a media story pertaining to the BMW Case, the focus has been on the affluent background of Mr. Nanda. Even when the verdict in the matter was pronounced, one of the articles that appeared in a leading magazine stated that on the day of the verdict Mr. Nanda was dressed “in formal attire more suited to a date with a corporate board room than a tryst with Tihar…”. It further commented that Mr. Nanda was the “grandson of a naval chief, and the son of a rich arms dealer, driving a BMW as opposed to a Maruti 800″. It appears as if Mr. Nanda’s affluent status has been made to work tremendously against him in a criminal trial when in fact his status should not be so relevant to the verdict that is ultimately passed. After all, our laws are to be applied uniformly and fairly.

The article further stated that Mr. Nanda belongs to “a pantheon of well-placed citizens who could have expatiated for the original sin of drunken or dangerous driving by showing spontaneous humanity to their victims, but drove away to escape the tentacles of the law.” My question is, did he really drive away from the scene of crime that night to “escape the tentacles of the law” or could the reason have been his fear, shock, inability to think straight at that moment? Are we jumping to the conclusion that he drove away that night to “escape the tentacles of the law”. Even assuming for a moment that he did (which is what a lot of road accident offenders seem to do) must this become a ground to extrapolate his case / trial as one which must establish beyond doubt that justice will be delivered “regardless of who you are and how fat your wallet is.”

There are other aspect of this case, those that has appalled us all, i.e. the role played by the lawyers in trying to circumvent the law by procuring witness statements, influencing other lawyers and witnesses, followed by witnesses turning hostile… I have not, however, dealt with those aspects of this case in this post for now… although I have some serious comments on that as well… Hopefully I will write about those before too much time passes.

February 4, 2010

General Liabilities of the Managing Director of a Company under Indian Law (including penal liability)

Filed under: Companies Act — P S @ 11:49 am

General Background on Position of Directors

1. Generally stated, directors of a company have always been considered and treated as trustees of a company and all its shareholders. Since directors of a company are persons selected to manage its affairs for the benefit of shareholders, it is an office of trust which, if they undertake it is their duty to perform fully and entirely in good faith.

2. As agents of the company, directors have a fiduciary relationship with the company and such a fiduciary relationship imposes upon the directors, duties of loyalty and good faith towards the company. Further, directors, as fiduciaries, are required not to put themselves in a position where there is conflict (actual or potential) between their personal interests and their duties to the company.

3. The duty of directors have been laid down as requiring them to act with such care as is reasonably to be expected from them, having regard to their knowledge and experience. They are not absolved from the duty of reasonable supervision, nor are they permitted to be shielded from liability because of lack of knowledge or wrongdoing, if that ignorance is the result of gross inattention. However, a director is not required to have an expert’s knowledge.

Position of a ‘Managing Director’ under the [Indian] Companies Act, 1956

1. The term “Managing Director” has been defined under Section 2(26) of the Companies Act as follows:

Section 2(26)     “managing director” means a director who by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called:
Provided that the power to do administrative acts of a routine nature when so authorized by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management:

Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of Directors 

Duties of Directors

1. With a view to understand the liabilities attaching to a director, it is important to first note the duties of a director which vary according to the nature and size of the company, and have to be ascertained on the facts of each case. In all cases, in discharging the duties of his / her position, a Managing Director must act honestly and without negligence, i.e., with that amount of care which an ordinary man will be expected to take, as if the business of the company was his / her own. To explain this point succinctly, I note here three propositions (on this subject) laid down by Justice Romer in
City Equitable Fire Insurance Co. (1925) Ch 407 (which was relied upon in India in the case of National Bank of Upper India, Lucknow vs. Dina Nath Sapru and others AIR 1926 Oudh 243):
 

(i) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge or experience.

(ii) A director is bound to give continuous attention to the affairs of his company, his duties being of an intermittent nature to be performed at periodical Board meetings or committee meetings. He is not bound to attend all Board and committee meetings, though he ought to attend all such meetings as he is reasonably able to.

(iii) In respect of all such duties as may be properly left to some other official having regard to the exigencies of business or articles of association of the company, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.

In addition to the above, the following few points deserve to be noted:

(iv) Though all books of accounts and other books and papers of a company are open to inspection by a director, he / she is not bound to examine individual entries in the books

(v) While a director is undoubtedly liable for loss caused to the company through gross or culpable negligence on his part, he is not expected to take all possible care inasmuch as his duty to the company extends only to the taking of such care as an ordinary person is expected to take in his own affairs.

(vi) Directors should ensure that the company’s funds are properly invested and not indulge in dangerous speculation.

(vii) In discharging their duties, directors must act honestly and must exercise such reasonable degree of skill and diligence as would amount to reasonable care which an ordinary man might be expected to take (Govind Narayan Karkade vs. Rangnath Gopal Rajopadhye, AIR 1930 Bom 572).

2. In Gower’s principles of Modern Company Law (6th Edition, 1997, page 601) it is stated that in applying the general equitable principles to directors of a company, four separate rules have emerged. These are: (1) that directors must act in good faith in what they believe to be the best interests of the company; (2) that they must not exercise the powers conferred upon them for purposes different from those which they were conferred; (3) that they must not fetter their discretion as to how they shall act; and (4) that, without the informed consent of the company, they must not place themselves in a position in which their personal interests or duties to other persons are liable to conflict with their duties to the company.

3. Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors. Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions. It has been held that no universal application can be formulated as to this duty of supervision, and the question of whether it has been discharged, must depend on the facts of each particular case, including the director’s role in the management of the company (Barings plc (No. 5) Re (1999) 1 BCLC 433 at page 489: (1999) 1 All ER 1017 (Ch D) by Jonathan Parker, J.).

Liabilities of a Director under the Companies Act

1. A Managing Director can be held liable under the Companies Act firstly under provisions which impose liability on the ‘officer who is in default’ as defined in Section 2(31) of the Act and under Section 5. Section 2(31) of the Act provides that an ‘officer who is in default’ in relation to any provision referred to in Section 5, has the meaning specified in that Section. For ease of reference, the provision embodied in Section 5 of the Act is extracted here:

Section 5.     For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty whether by way of imprisonment, fine or otherwise, the expression `officer who is in default’ means all the following officers of the company, namely:
(a)     the managing director or managing directors; (b) the whole-time director or whole-time directors; (c) the manager; (d) the secretary; (e) any person in accordance with whose directions or instructions the Board of Directors of the company is accustomed to act; (f) any person charged by the Board with the responsibility of complying with that provision: provided that the person so charged has given his consent in this behalf to the Board; (g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors: Provided that where the Board exercises any powers under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.”

2. The tenor of the definition of “officer who is default” indicates that it is not necessary to prove that the default has been committed by the officer knowingly or willfully. Where there is a managing or whole-time director or manager, it would be an abuse of the process of the court if proceedings are launched against ordinary directors without examining their role in the default (Ravindra Narayan v. ROC, Jaipur, (1994) 81 Com Cases 925 (Raj); G. Vijayalakshmi v. SEBI, (2000) 100 Com Cases 726 (AP)). Nonetheless it goes without saying that any person can be covered by a prosecution if a role can be attributed to him in the default. Further the defaults for which liability may be attached mean defaults committed during the officer’s tenure (C. V. Siva Prasad v. ROC, (1997) 88 Com Cases 420).

3. The accepted legal position appears to be that where the penal provisions provide for punishment of ‘officers in default’ prosecution is filed against the managing director(s), whole time director(s) and Manager, apart from the Secretary, if any, and the company. Only in cases where there is no such managerial personnel (i.e. managing director/whole time director/manager), prosecution is filed against all ordinary directors, apart from the Secretary, if any, and the company (As also provided in Circular No. 6/94 F. No. 3/41/93-CL-V dated 24th June 1994 of the Department of Company Affairs). It is settled law that the liability of a person is dependent on the statutory prescriptions governing such liability and it has been held that in order to attract liability under the Companies Act, it has to be seen as to on whom the Act / Statute fixes the liability (P.C. Agarwala vs. Payment of Wages Inspector, MP & Ors. AIR 2006 SC 3576).

4. Under the Companies Act, the expression ‘officer who is in default’ appears in several penal provisions and the officers identified in Section 5 (as per terms thereof) are liable for the consequences provided therein. The relevant portions of these penal provisions are briefly enumerated in another post.

5. There are also other penal provisions in the Companies Act where the expression ‘officer who is in default’ does not appear. In such cases prosecution would lie against the officers or persons (which in certain cases may include the directors also) specified, in the respective Sections. Here I may mention that “officer” is defined by Section 2(30) of the Act to include any director, manager or secretary or any person in accordance with whose directions or instructions the Board of directors or any one or more of the directors is / are accustomed to act. Those Sections under which other officers and persons including directors may be liable for defaults have been briefly set out in another post on this blog.

6. For most of the aforesaid provisions to get triggered, there needs to be a positive action by the officer that is in contravention of the statutory provision. In other words, the necessary mental state or mens rea, (i.e. mental element necessary for a particular crime whether by way of a guilty mind; a criminal intent; a guilty or wrongful purpose) will be relevant for such offences and it would have to be established that the offence was committed knowingly or willfully and prosecution is required to fix liability with respect to the particular officer. I will be discussing this issue in the context of criminal liability in the later part of this post.

7. With regard to mitigation of liability of the officers of a company, Section 201 of the Act puts certain restrictions on a company. The said Section reads as follows:

Section 201    (1) Save as provided in this section, any provision whether contained in the articles of the company or in an agreement with a company or in any other instrument, for exempting any officer of the company or any person employed by the company as auditor from, or indemnifying him against, any liability which, by virtue of any rule of law, would otherwise attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void:

Provided that a company may, in pursuance of any such provision as aforesaid, indemnify any such officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgement is given in his favour or in which he is acquitted or discharged or in connection with any application under Section 633 in which relief is granted to him by the court.”

8. The object of the proviso to Section 201(1) of the Act is to enable a company to indemnify any of its officer / auditor against liability incurred in defense by any of them only in the event of their having been found to be innocent or to have acted bona fide i.e. honestly by a competent court and not in any other case. I note that a company cannot spend its own funds or give financial help to any officer for defending him / her in any civil or criminal proceeding, it can only indemnify him / her in cases where he / she has succeeded and thereby has shown to the competent court that his / her conduct was bona fide or justified in circumstances of the case. The question of reimbursement may arise only after the termination of the proceedings in favor of the concerned officer.

9. Here it may be noted that the liability incurred in the course of ordinary and proper management is different from the liability arising from breaches of duty as contemplated by Section 201 of the Act. In the ordinary course of things directors or officers of a company being agents (or acting as agents of a company) can expect to be indemnified under the provisions of Section 223 of the Indian Contract Act, 1872 (“Contract Act”) in respect of liabilities incurred in managing the business of the company in good faith. Section 223 of the Contract Act, reads as follows:

“Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of the third person.”

Further, Section 222 of the Contract Act, which deals indemnification of agents against lawful acts, reads as follows:

“The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.”

10. It is also possible for a company to take an appropriate insurance policy (where the company pays the premium, etc.) for its own protection against loss caused to it by its directors, and also to re-compensate the officer, against any loss he / she suffers because of any act done in his / her capacity as an officer of the company. This is not in contravention of Section 201 of the Act, since the company does not agree to indemnify the directors against their liability to the company, but merely agrees to meet the expense of procuring an undertaking from the insurer to do so. 

A General Discussion on Liabilities of Directors based on judicial decisions

Director’s Knowledge as knowledge of the company

1. Where an individual can be identified with a company then that individual’s knowledge may be regarded as the knowledge of the company, if he is under a duty to communicate that knowledge to the company. In most cases, a Managing Director is identified with his company and therefore the Managing Director’s knowledge is imputed to the company (Union India Sugar Mills Co. Ltd., Re, AIR 1933 All 607). The officer of a company is under a duty, if he is aware that a transaction into which his company or a wholly owned subsidiary is about to enter is illegal or tainted with illegality, to inform the board of the company of this fact (Belmont Finance Corporation vs. Williams Furniture Ltd. (No. 2), (1980) 1 All ER 393).

2. It has been held that the default of the managing director who is the ‘directing mind and will’ of his company, could be attributed to the company (Lennard’s Carrying Company vs. Asiatic Petroleum Ltd. 1915 AC 705 (HL)). In the same case (i.e. Lennard’s Carrying Company Case) Viscount Haldane articulated the alter ego doctrine peculiar to company law and as something distinct from the ordinary principle of agency and vicarious liability. In a celebrated passage (At page 713), he observed that “… a corporation is an abstraction. It has no mind of its own any more than a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation.”

3. This principle has also been followed in India inasmuch as the Supreme Court of India has, in J. K. Industries Ltd. & Ors. v. Chief Inspector of Factories and Boilers & Ors., [1997] 88 Comp Cas 285 (SC) held that, “…since a company is a legal abstraction, without a real mind of its own, it is those who in fact control and determine the management of the company, who are held vicariously liable for commission of statutory offences. The directors of the company are, therefore, rightly called upon to answer the charge, being the directing mind of the company”. The Supreme Court relied upon the Lennard’s Carrying Company’s case as well as Tesco Supermarkets vs. Nattras (1972) AC 153 (HL), where the House of Lords held that “… the question: what natural persons are to be treated in law as being the company for the purpose of acts done in the course of its business, including the taking of precautions and the exercise or due diligence to avoid the commission of a criminal offence, is to be found by identifying those natural persons who by the Memorandum and Articles of Association or as a result of action taken by the directors, or by the company in general meeting pursuant to the Articles, are entrusted with the exercise of the powers of the company.

4. In criminal law, the alter ego of the company may, depending on the circumstance of the case, be found at a lower level in the managerial hierarchy and not necessarily at the level of the Board of Directors or the managing director. So for instance, in a case where the assistant managing director and the traffic manager of a company had surrendered ‘all relevant powers of control’ over the operation of its ships to the marine superintendent, he was held to be a directing mind for this purpose (The Lady Gwendolen (1965) 2 All ER 283 (CA)).

5. As regards the liability of directors, the Supreme Court of India has, while observing that it is a question of fact to be determined on the evidence in each case, said that a “director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of, but also liable for fraud in the conduct of the business of the company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially. If he does so he could be held liable for dereliction of duties… even if he is not shown to be guilty participating in the commission of fraud. It is enough if his negligence is of such character as to enable frauds to be committed and losses thereby incurred by the company”. (Official Liquidator vs. P.A. Tendolkar (1973) 43 Com Cases 382: AIR 1973 SC 1104. See Also: Globe Motors Ltd. vs. Mehta Teja Singh & Co. (Agencies) (1984) 55 Com Cases 445 (Delhi – DB))

Liability for illegal acts

1. It is a settled principle of law that ignorance of the law is not a defence in legal proceedings for violation of any statutory obligation. Specifically in the context of companies and its directors, it has been observed that where directors use their powers to part with the moneys of their company in a manner or for a purpose which the law forbids, it is not a defence to proceedings to make them liable for their act to plead merely that they acted in ignorance of the law (Louis Steen vs. Charles Allen Law (1963) 3 All ER 770).

2. A similar prohibition would also apply in cases where a director obtains any secret commission or any illegal gratification for the award of a contract with the company (Boston Deep Sea Fishing & Ice Co. Ltd. vs. Ansell (1886-1890) All ER Rep 65 (CA)). A company can recover from its director any money received by him by way of a bribe in fraud of the company and the company can also sue him and the person giving the bribe for any loss sustained through entering into a disadvantageous contract or the company may rescind the contract.

3. In a particular case, the managing director of a company withdrew money from the company’s account and used it to pay bribes to a contract awarding authority, and when sued by the company contended that the company had benefited by having substantial contracts awarded to it. The Court observed in this case that as a director of the company, he had no authority to use the company’s money to pay bribes and the fact that the company may have benefited from the payment of the bribes did not provide the director with any defence (Hannibal (E) & Co. vs. Frost (1988) 4 BCC 3 (CA)).

Liability for Negligence

1. While there are no objective standards of skill and care which could help determine whether a director has been negligent, there are a few general principles (arising out of the duties imposed on a director) which may be kept in mind while exercising the functions of the director of a company. For ease of reference, we have noted here some principles that emerge from judicial decisions on this subject.

2. Directors are not liable for negligence if they act honestly, for the benefit of the company and within their powers with such care as is reasonably expected of them, having regard to their knowledge and experience. Directors are not bound to bring any special qualifications into their office. The mere omission to take every possible care will not amount to negligence (Lagunas Nitrate Co. Ltd. vs. Lagunas Syndicate (1899) 2 Ch. 392). We note however, that given the fiduciary nature of a director’s role coupled with his duty to act in the best interest of the company, it is incumbent on directors to share and use any special knowledge they have for the benefit of the company’s business.

3. Though the directors as a body are responsible for the conduct of the company’s business, it is undoubted law that they can delegate their powers to one or more of themselves for the purpose of carrying it on more conveniently (Public Prosecutor vs. T.P. Khaitan (1957) 27 Com Cases 77, 83: AIR 1957 Madras 4).

4. A director is entitled to trust persons in a position of responsibility until there is reason to distrust them. In a specific case (based on the facts therein) it was held that the director was not liable for the impugned business decision, taken by him in reliance on the advice of a senior partner in an eminent firm of city solicitors without making further inquiries (Norman vs. Theodore Goddard (a firm) (1991) BCLC 1028 (Ch D)).

5. Directors have been held to have acted negligently when they released company funds to pay a debt and purchase assets without verifying whether the company owed the debt and whether the assets had been or were being transferred to the company (United Rubber Estates Ltd. vs. Cradock (No. 3), (1968) 2 All ER 1073).

6. Directors who participated in the company’s transactions without making inquiries to ensure that the transactions had been duly authorized by the Board resolutions and were for the benefit of the company were held to be negligent (Land Credit Co. of Ireland vs. Lord Fermoy (1870) 5 Ch App 763).

7. It has been observed that a company director who knowingly makes a false representation while acting as a director can be held personally liable not only in deceit, but also for negligent misrepresentation (Thomas Saunders Partnership vs. Harvey, The Independent, May 5, 1989 : 1989 CLY 304).

8. In the context of this subject, we may note the comments of a learned author, A. Ramaiya, to the effect that “…decided cases on negligence belong to the 18th and early 19th century. It is suggested that the present conditions of professional management and whole-time directors, who make a career out of their directorship, require stricter standards of care and skill, on the part of directors.” This suggestion has become even more relevant in the current Indian context, particularly after the acts of corporate misfeasance / malfeasance which have come to light in the Satyam case which is briefly set forth in this post.

Liability for breach of warranty of authority and in respect of contracts

1. A director is not personally liable for his company’s failure to perform a contract which he has made on its behalf, but he is liable in damages to a person with whom he purports to make a contract which is not binding on his company at all. When a director representing a company negotiates a contract he impliedly represents to the other contracting party that he has the authority to bind the company as its agent. If he lacks this authority, he is guilty of a breach of warranty of authority, and is liable for the loss which the other party suffers as a result of entering into the contract. A director will be personally liable to the other party for breach of warranty of authority when the contract is ultra vires the company or even if intra vires, is beyond the authority of director.

2. While negotiating a contract for his / her company, a director should make it clear to the other party that the contract will be entered into by the company and not the director personally. If he does not do this and the other party believes that he is contracting with the director or agent and not the company, the contract they conclude will be a personal one made with the director and he will be personally liable for fulfillment of the promises made. (Raja Ram Jaiswal vs. Ganesh Prasad AIR 1959 All 29).

Liability under guarantee for company’s debts

1. In the context of a loan transaction of the company, it was held that the directors who had not given any personal guarantee for the loan could not be made liable merely because they were directors. The company is as much a separate entity from shareholders as from directors (Indian Overseas Bank vs. R.M. Marketing & Services Pvt. Ltd. (2001) 107 Com Cases 696 (Delhi)).

2. In another case, a bank granted a temporary overdraft accommodation to a company for the purpose of meeting its working capital requirements. The advance was granted on the strength of a specific undertaking or promise made by the respondents, who were the managing director and a director, to liquidate within one month the entire outstanding in the account including costs and expenses. A decree passed against the director and the managing director personally was held to be justified. They could not get an order that recovery should not be out of their personal assets (Indian Overseas Bank vs. A.B. Senan (1999) 96 Com Cases 839 (Kerala))

3. Where certain directors who had guaranteed the company’s debts retired and new directors were appointed in their place who also signed the guarantee bond and there was no agreement to show that the earlier guarantee had ceased to be operative, it was held that all the directors including retired directors were liable jointly and severally under the guarantee (Bank of Baroda vs. Official Liquidator (1992) 73 Com Cases 688 (MP)). Where the guarantee is in individual capacity, the director is not released from his liability by ceasing to be director (M R Lakshmi Narayanan vs. Syndicate Bank (2000) 99 Com Cases 87 (Madras)).

 Liability under Torts

1. A director is not automatically liable for torts of the company irrespective of the size of the company or of the degree of his control over its affairs. In determining his / her liability it is necessary to examine carefully the role he / she played in relation to the alleged tortuous acts. There is no general requirement that a director would be liable for torts committed by a company only if he / she has acted recklessly or with the knowledge that the acts are tortuous. The director’s state of mind may be relevant where there is necessary ingredient in proving the commission of the particular wrong, but different considerations would apply where the state of mind of the tortfeasor is not relevant, as for example in breach of copyright (Evans (C) Ltd. vs. Spritebrand Ltd. and Sullivan 1985 BCLC 105). Where evidence established that certain directors had authorized and certain others had engaged in activities which constituted infringement, the directors were held liable (Apple Computer Inc. vs. Mackintosh Computers Inc. (1987) LRC (Comm) 658). We note however, that much depends on the facts of each case.

2. We note in the context of tortuous liability that the fact that a director is the effective controller and owner of a company is quite insufficient of itself to fix him with a personal liability for torts committed by the company and that what is required for such liability is that the director must himself have expressly directed or procured commission of the tortuous act. This element of personal involvement is also discussed in the later part of this Memo in the context of criminal liability and liability accruing on account of specific statutory provisions.

 Criminal Liability: General Principles

1. The general premise of a penal provision is the presence of “mens rea“, i.e. mental element necessary for a particular crime whether by way of a guilty mind; a criminal intent; a guilty or wrongful purpose. This forms, generally, the presumption for holding a person guilty of a criminal offence (except in cases of strict or vicarious liability).

2. Specifically in the context of companies, as held by various courts in India, since a company is a legal abstraction without a real mind of its own, it is those who in fact control and determine the management of the company, that are held vicariously liable for commission of statutory offences by the company. The directors of the company are, therefore, called upon to answer the charge, being the directing mind of the company. This was held by the Supreme Court of India in the case of J. K. Industries Ltd. & Ors. v. Chief Inspector of Factories and Boilers & Ors., [1997] 88 Comp Cas 285 (SC) wherein the Supreme Court relied upon the cases of Tesco Supermarkets Limited v. Nattrass, [1972] AC 153 (HL) and Lennard’s Carrying Company Limited v. Asiatic Petroleum Company Limited [1915] A.C.705

3. In other words, it is understood and considered that ordinarily, a corporate body like a company acts through its managing director or board of directors or authorized agents or servants and the criminal act or omission of an agent including his state of mind, intention, knowledge or belief ought to be treated as the act or omission including the state of mind, intention, knowledge or belief of the company. Thus, it has been held that a corporate body ought to be indictable for criminal acts or omissions of its directors, or authorized agents or servants, whether they involve mens rea or not, provided they have acted or have purported to act under authority of the corporate body or in pursuance of the aims or objects of the corporate body (State of Maharashtra vs. Syndicate Transport Co. (P) Ltd. and Ors. AIR 1964 Bom 195).

Provisions under Specific Statutes in India

After noting the general principles above, I am now noting the liability of a Managing Director under some specific enactments in India. While in some instances, the statute itself may be fairly clear as to what would form the basis of liability of an officer including a managing director of a company, in other cases the statue may be wanting clarity.

Insecticides Act, 196

1. Section 33 of the Insecticides Act, 1968 (“Insecticides Act“) provides specifically in relation to offences by companies, as under:

“(1) Whenever an offence under this Act has been committed by a company, every person who at the time the offence was committed, was in charge of, or 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 against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any punishment under this Act if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any Director, Manager, Secretary or other officer of the company, such Director, Manager, Secretary or other officer shall also be deemed to be guilty of that offence and shall be  liable to be proceeded against and punished accordingly.”

2. It is clear therefore, that this provision mandates imposition of liability not only on the company itself but also every person (including directors) who
at the time the offence was committed, was in charge of, or was responsible to the company for the conduct of the company’s business. The proviso to Section 33 however, affords protection against liability to (only) those persons who are able to prove that the offence was committed without their knowledge or that they exercised all due diligence to prevent the commission of such offence thereby underscoring the requirement of mens rea and duty of care.

3. Accordingly prosecutions under the Insecticides Act where there was not even an allegation that the directors in question were in charge of or were responsible for the conduct of the company’s business or had consented or connived in the matter were quashed (Bharat Pulverising Mills (P) Ltd. v. State of AP, (1991) 1 Comp LJ 403 (AP); D.K. Jhaver v. State of Punjab, (1996) 87 Com Cases 236 (P&H)).

 Income Tax Act, 1961

1. The Income Tax Act, 1961 (“IT Act“), which deals with inter alia the income tax payable by any person in India defines ‘person’ as including a company. Being a separate legal entity distinct from its shareholders and directors, a company is liable for the taxes payable by it.

2. Under the provisions of Section 179(1) of the IT Act, it is provided that in the case of a private company, if there is any tax due from it in respect of any income of any previous year, which cannot be recovered from the company, then every person who is a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

3. Further, Section 278B of the IT Act, which deals with offences committed by a company, reads as follows:

 (1)    Where an offence under this Act has been committed by 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 against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to any punishment if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.
(2)    Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
(3)    Where an offence under this Act has been committed by a person, being a company, and the punishment for such offence is imprisonment and fine, then, without prejudice to the provisions contained in sub-section (1) or sub-section (2), such company shall be punished with fine and every person, referred to in sub-section (1), or the director, manager, secretary or other officer of the company referred to in sub-section (2), shall be liable to be proceeded against and punished in accordance with the provisions of this Act.”

 4. Thus, according to Section 278B of the IT Act, 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 such a company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. However, a person would not be held liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence. Further where any offence under the IT Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer, then such a person shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

5. With reference to the said provisions, certain penal provisions of the IT Act may be briefly mentioned. For instance, as per the provisions of Section 276B of the IT Act, if a person fails to pay to the credit of the Central Government, (a) the tax deducted at source by him as required by or under the provisions of Chapter XVII-B (Deduction at source); or (b) the tax payable by him, as required by or under sub-section (2) of section 115-O (Tax on distributed profits of domestic companies), he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 (three) months but which may extend to 7 (seven) years and with fine.

6. Less rigorous punishment such as imprisonment for a period of 2 (two) years/ 3 (three) years is prescribed for offences such as willful attempt to evade tax (Section 276C), failure to furnish returns of income (Section 276CC), failure to produce accounts and documents (Section 276D), falsification of books and accounts (Section 277A), etc. Also, as per the provisions of Section 278A, if any person convicted of an offence under Section 276B or sub-section (1) of Section 276C or Section 276CC or Section 276DD or Section 276E or Section 277 or Section 278 is again convicted of an offence under any of the aforesaid provisions, he shall be punishable for the second and for every subsequent offence with rigorous imprisonment for a term which shall not be less than 6 (six) months but which may extend to 7 (seven) years and with fine.

 Factories Act, 1948

1. Under certain enactments specific persons may be identified for imposition of liability. For example, under the Factories Act, 1948 (“Factories Act“), in respect of factory of a company only a director can be “occupier” (i.e. the person who has ultimate control over the affairs of the factory) as set forth in Section 2(n) of the Factories Act (J. K. Industries Ltd. & Ors. v. Chief Inspector of Factories and Boilers & Ors., [1997] 88 Comp Cas 285 (SC)). A director nominated as “occupier” of the factory of a company will be responsible for liabilities attached to an “occupier” under the Factories Act. For example under Section 92 of the Factories Act, there is general penalty for offences, inter alia, providing that if in or in respect of any factory there is any contravention of any of the provisions of the Factories Act or rules made thereunder or of any order in writing given thereunder, the occupier and manager of the factory shall each be guilty of an offence and punishable with imprisonment for a term which may extend to 2 years or with fine which may extend to Rs. 1 lakh or with both. 
 

Prevention of Corruption Act, 198

1. Before I make specific observations in the context of the Prevention of Corruption Act, 1988 (“PoC Act“) I’d like to note some of the statutory provisions of the PoC Act. Section 7 of the PoC Act, provides, inter alia, that whoever being a public servant accepts or obtains or agrees to accept or attempts to obtain from any person for himself or for any other person, any gratification whatever, other than legal remuneration, as a motive or reward for doing or forbearing to do any official act or for showing or forbearing to show, in the exercise of his official functions, favour or disfavour to any person or for rendering or attempting to render any service or disservice to any person, with the Central Government or any State Government or Parliament or the Legislature of any State or with any local authority, corporation or Government company, or with any public servant, shall be punishable with imprisonment which shall not be less than 6 months but which may extend to 5 years and shall also be liable to fine.

2. Section 11 of the PoC Act stipulates that whoever being a public servant, accepts or obtains or agrees to accept or attempts to obtain for himself or for any other person, any valuable thing without consideration, or for a consideration which he knows to be inadequate, from any person whom he knows to have been or to be or to be likely to be concerned in any proceeding or business transacted or about to be transacted by such public servant, or having any connection with the official functions of himself or of any public servant to whom he is subordinate, or from any person whom he knows to be interested in or related to the person so concerned, shall be punishable with imprisonment for a term which shall be not less than 6 months but which may extend to 5 years and shall also be liable to fine. Since the term “valuable thing” is not defined in the PoC Act, it is capable of an expansive interpretation.

3. Section 12 of the PoC Act provides for punishment for abetment of offences defined in Sections 7 or 11 and states that: “Whoever abets any offence punishable under Section 7 or Section 11 whether or not that offence is committed in consequence of that abetment, shall be punishable with imprisonment for a term which shall be not less than 6 months but which may extend to 5 years and shall also be liable to fine.”

4. The word used in Section 12 of the PoC Act is “whoever” which, in my view, would cover within its ambit, a company as well as a natural person. Thus, under the PoC Act, liability can be attached to an officer / managing director of a company for abetment of certain offences. However, what would be necessary to prove in either of these cases for prosecuting and convicting an accused is the presence of the requisite mens rea, i.e. a guilty mind; a criminal intent; a guilty or wrongful purpose for committing the offence. As has been held by courts in India, the relevant question is the state of mind of the accused when he offers a bribe (In re Varadadeskachariar, AIR 1950 Mad 93; Mohadeo Daunappa Gunaki v. State, AIR 1952 Bom 435; Bhimsingh v. State, AIR 1955 Raj 108).

Conclusion

Finally, I would like to make note that for prosecuting a person (whether a company or a natural person) some nexus must exist between the offence committed and the person charged / held responsible for the offence. As stated herein above, in some cases, the statute itself clearly identifies the person who will be held responsible for the commission of an offence, and in other cases much depends on the prosecution’s establishing a case against such person. In the current Indian scenario, one is observing renewed force and attention being given to norms of good corporate governance and a deprecation of corporate misfeasance / malfeasance. Unfortunately however, there is no codified law (other than provisions of the Companies Act) that could define clearly the roles and responsibilities of a Managing Director specifically in this context of corporate governance. However given the fiduciary nature of a Director’s position, it is obligatory for a Director to act, at all times, in a reasonable and responsible manner and in the interest of a company as well as its shareholders.

February 3, 2010

The [Indian] Prevention of Corruption Act, 1988: A bird’s eyeview

Filed under: Anti Corruption — P S @ 11:52 am

 Scope: Primary legislation dealing with corruption in India

 Offences: Makes it an offence for a public servant to accept, obtain or agree to accept or attempt to obtain any gratification other than legal remuneration as a motive / reward for doing / forbearing to do any official act or for showing favour / disfavour in any official act. Receiving gratification as a motive / reward for purpose of inducing a public servant by corrupt or illegal means or by the exercise of personal influence is equally an offence. The term “gratification” is not restricted to pecuniary gratification or to gratification estimable in money.

 Penalties: Imprisonment for six months, extendable to five years, and / or fine, and / or both

FCPA in a nutshell

Filed under: Anti Corruption — P S @ 11:49 am
Title: Foreign Corrupt Practices Act, 1977 of the United States of America

History: Passed as a result of Congressional hearings addressing corporate slush funds, illegal campaign contributions and international bribery.

Purpose: It is considered as the first aggressive anti-bribery statute among developed nations.

Prohibits: The FCPA prohibits offer, payment, promise or authorization to pay anything of value to any foreign government official for purposes of influencing any act or decision in order to obtain or retain business

Requires: Issuers must make and keep accurate books and records, devise and maintain a system of internal accounting controls.

Jurisdiction: All “issuers”, i.e. corporations that issue securities registered in the United States or who are required to file periodic reports with the Securities & Exchange Commission (SEC); Foreign Companies with ADRs listed on U.S. exchanges, U.S. based private companies; Employees of these entities.

Enforcement: Criminal violations are prosecuted by the U.S. Department of Justice (DOJ); Civil violations are enforced jointly by the SEC and DOJ

 

FCPA Compliance Challenges for US Companies doing business in India

Filed under: Anti Corruption — P S @ 11:43 am

The past few years have seen a spate of FCPA enforcement actions against US Corporations with imposition of unprecedented fines and penalties of both quantum and value. In 2008, Siemens paid the largest penalty to date – $800 million. U.S. enforcement agencies have also imposed significant penalties against other companies such as Baker Hughes Inc. ($44 million), ABB Ltd. ($10.5 million), Westinghouse Airbrake Technologies Corporation (Wabtec) ($3,00,000), and The Dow Chemical Company ($325,000). The trend is reflective of the increasing focus of U.S. enforcement agencies on corrupt business practices by companies including those operating in India. Given this scenario, multinational companies cannot afford to ignore the FCPA in their India operations.

In October 2009, the Indian media highlighted a letter written by the Indian ambassador to the United States, Ms. Meera Shankar to the Prime Minister’s Office in India where she provided details of US based firms who had allegedly paid bribes to officials in the Central Insecticides Board, Indian Navy, Railways, Maharashtra State Electricity Board and other Government agencies. The ambassador also pointed out to the PMO that it may like to take appropriate action and investigate these cases in India.

Following this media report, actions have been initiated against the wrongdoers in India including inquiries against the errant public servants, companies and their respective representatives. These actions relate to inquiries under the anti-bribery provisions of the Prevention of Corruption Act, 1988 (POC Act), violation of the accurate account requirements under the Companies Act, falsification of accounts under the Indian Penal Code and related proceedings under the Income Tax Act and other applicable statutes.

As a risk mitigation measure, to avoid such prosecutions and penalties being imposed, and to ensure compliance with applicable laws and established norms of good governance, we always urge companies to create and maintain a Code of Ethics in their India operations. We further urge that adequate Compliance based training on the subject be provided to company personnel; especially top management who are the face of the company for the media and law enforcement agencies alike.

Often business communities react sharply to requests for ensuring compliance with anti-bribery statutes on the ground that this affects the way business is usually done in India. It is felt that offering bribes (which sometimes can be as low as Rs. 100 to as high as 8 digit figures) is necessary for their business operations. While moving to a ‘corruption-free’ zone may not be a completely smooth process, it is not impossible and is in fact necessary given the current enforcement atmosphere.

With increasing instances of FCPA scrutiny in the U.S. resulting in prosecutions and fines, we feel that it is imperative for U.S. companies operating in India to recognize what the risks of violations of FCPA provisions can entail for companies operating in India including on the profitability, expansion plans or the very existence of their businesses. To this end, it is key for these companies to (a) understand the scope and applicability of the FCPA to their enterprise, (b) ensure compliance with the provisions of the FCPA and other laws applicable to companies in India including the POC Act, (c) create and constantly bolster their compliance policies and initiatives with a view to insulate themselves from FCPA scrutiny and to otherwise adhere to established norms of good governance. It is key for businesses to understand what they can and cannot do in their dealings with government officials, how they must devise effective due diligence initiatives when considering the acquisition of a business / entity, and the need to codify a Gifts, Travel and Entertainment Policy, among others.

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