India: Corporate Law Alert - September 7, 2012

Last Updated: 4 December 2012

Overseas Direct Investments - Rationalisation of Form ODI

The Reserve Bank of India (RBI), vide A.P. (DIR) Series Circular No. 15 dated August 21, 2012, has amended Form ODI Part I and included new declarations under Section E and Section F of the said Form.

Foreign Direct Investment by citizens / entities incorporated in Pakistan

The RBI, vide A.P. (DIR Series) Circular No. 16, dated August 22, 2012, has amended Regulation 5 of Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 to reflect the provisions of Press Note 3 (2012 Series) dated August 3, 2012 issued by the Department of Industrial Policy and Promotion with respect to investment in India by a citizen/ entity incorporated in Pakistan.

Fee for Delayed Filings

The Ministry of Corporate Affairs (MCA) has, vide notification number G.S.R. 617(E) dated August 7, 2012 inserted the following sub-rule (4) in the notification number G.S.R. 501(E), dated July 6, 1999:-

  1. In case of delays in filling applications with the Central Government under sub-section (2) of Section 233B of the Companies Act, 1956 (Act), the fee specified in the Table below will be applicable:
  2. Period of Delay

    Fee Payable with the Application

    Upto 30 days

    Two times the normal fee

    More than 30 days and upto 60 days

    Four times the normal fee

    More than 60 days and upto 90 days

    Six times the normal fee

    More than 90 days

    Nine times the normal fee

Clarification on Para 46A - "The effects of Changes in Foreign Exchange Rates"

The MCA has, vide Circular Number 25/2012 dated August 9, 2012, clarified that para 6 of Accounting Standard-11 and para 4(e) of Accounting Standard -16 will not apply to a company which is applying para 46-A of Accounting Standard- 11.

Applicability of Service Tax on commission payable to Non-Whole Time Directors

The Finance Act 2012 has made service tax applicable to anyone who provides a service not covered under the negative/exempted list and if the value of annual revenue exceeds INR 1,000,000.

The non-whole time directors of a company are not covered under the exempted category and therefore the sitting fee/commission payable to them by a company is liable to service tax.

Further, if the service tax is paid by a company, the service tax paid will be deemed to be remuneration under Section 198 of the Act and would accordingly increase the remuneration amount of such non-whole time directors.

This remuneration could exceed the limit of 1% of the profit of the company, under Section 309(4) of the Act when the Company has a managing/ whole time director/ managers or 3% of the profit of the Company, under Section 309(4) of the Act, as the case may be.

Therefore, as per Section 309 and 310 of the Act, this would require prior approval of the Central Government.

In view of the above, the MCA has, vide General Circular No. 24/2012 dated August 9, 2012, decided, that any increase in remuneration of non-whole time director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of the Central Government under Section 309 and 310 of the Act, even if it exceeds 1% or 3% of the profit of the Company, as under Section 309(4) of the Act, in the financial year 2012-2013.

Clarification – Payment of Remuneration to Managerial Personnel

The MCA has, vide notification number F. No. 14/11/2012 – CL- VII dated August 16, 2012, clarified that any employee of a company holding shares of the company upto 0.5% of paid up share capital of a company under any scheme formulated for allotment of shares to such employees including under a employees' stock option plan or by way of qualification shares will be covered under the category of 'persons not having any interest in the capital of the company'.

In view of the above, companies are exempted from obtaining the approval of the Central Government for payment of remuneration exceeding the limits imposed under the Act in respect of the personnel mentioned above.

Extension of Date

The MCA has, vide Notification number F. No. 17/160/2012 Cl.V. dated September 3, 2012, extended the date for filing of eform 23AC and 23ACA as per the revised Schedule VI from September 15, 2012 to October 15, 2012 or within 30 days from the date of the annual general meeting of the company, whichever is later.

Part I of the Arbitration Act not Applicable to Arbitration Seated outside India

A Constitution Bench of the Supreme Court, in the case of Bharat Aluminum Co v. Kaiser Aluminum Technical Service, Inc1 on September 6, 2012, has held that Part I of the Arbitration & Conciliation Act, 1996 (Arbitration Act) does not have any application to arbitrations that are seated outside India.

The judgment has considered the earlier Supreme Court decisions in the cases of Bhatia International v. Bulk Trading S.A.2 and Venture Global Engineering v. Satyam Computer Services3, and has overruled both these judgments.

The paragraphs mentioned herein below refer to the paragraphs of the said judgment.

The decision discusses and is based on the following principal points:

(i) Provisions of the Act

  1. The principle of territoriality is the governing principle of the Arbitration Act. Consequently, the seat of arbitration will determine jurisdiction of the court. (Relevant Paragraphs -63 & 72)
  2. The reasoning contained in Bhatia's and Venture's cases is incorrect. (Relevant Paragraphs - 54, 76, 85, 161, 171 & 199)
  3. The exclusion of the word "only" in Section 2(2) does not have the consequence of making Part I applicable to arbitrations seated outside India. Such an interpretation cannot be upheld inasmuch as that then Section 2(2) would be rendered superfluous, which is contrary to the principles of statutory interpretation. (Relevant Paragraphs - 59, 63 & 75)
  4. There is no conflict between Section 2(2) on the one hand and (i) Section 1(2); (ii) Sections 2(4) and 2(5); (iii) Section 2(7) on the other hand. These latter provisions have to be read as part of a whole and, in any event, none of them can be read as individually extending the scope of Part I of the Arbitration Act to arbitrations seated outside India. (Relevant Paragraphs - 65, 75, 84, 85, 88, 94 & 75)
  5. Both Section 2(1)(e)4 and Section 20 of the Arbitration Act have to be interpreted keeping in mind the principles of territoriality. Even these provisions cannot be said to extend the applicability of Part I to arbitrations seated outside India. (Relevant Paragraphs - 95, 97, 98, 100 & 121).
  6. Section 28 of the Arbitration Act is not an indication of the intention of the Parliament that Part I can be extended to arbitrations which take place outside India. The section merely shows that the legislature has segregated the domestic and international arbitration. Therefore, to suit India, conflict of law rules have been suitably modified, where the arbitration is in India. This will not apply where the seat is outside India. In that event, the conflict of laws rules of the country in which the arbitration takes place would have to be applied. (Relevant Paragraph -123)
  7. There is a complete segregation of Part I and Part II of the Arbitration Act. Regulation of arbitration consists of four steps (a) commencement; (b) conduct; (c) challenge to the award; and (d) recognition or enforcement of the award. Part I of the Arbitration Act regulates arbitrations at all the four stages. Part II, however, regulates arbitration only in respect of commencement and recognition or enforcement of the award. It is, therefore, clear that the regulation of conduct of arbitration and challenge to an award would have to be done by the courts of the country in which the arbitration is being conducted. Such a court is then the supervisory court possessed of the power to annul the award. (Relevant Paragraphs - 126 & 129)
  8. The non-obstante clause contained in Section 45 of the Arbitration Act does not alter the scope and ambit of the field of applicability of Part I to include international commercial arbitrations, which take place out of India. (Relevant Paragraph - 133)
  9. Section 48(1)(e) of the Arbitration Act is only one of the defenses on the basis of which recognition and enforcement of the award may be refused. It has no relevance to the determination of the issue as to whether the national law of a country confers upon its courts, the jurisdiction to annul the awards made outside the country. The term "[country] under the law of which an award was made" in Section 48(1)(e) of the Act refers only to the country and not to its substantive law. Therefore, it cannot be said that there are two courts with the power to annul an award. (Relevant Paragraphs - 138 & 139, 147 & 157)

(ii) Interim measures under Section 9 of the Arbitration Act

  1. Section 9 of the Arbitration Act cannot be held to be a sui generis provision, which falls neither in Part I or Part II of the Act. (Relevant Paragraph - 160)
  2. Extending the applicability of Section 9 to arbitrations which take place outside India would be to do violence to the policy of the territoriality declared in Section 2(2) of the Arbitration Act. (Relevant Paragraphs - 163)
  3. Once parties choose a foreign seat of arbitration, the attendant consequences must follow. (Relevant Paragraph - 167)
  4. Indian courts, therefore, cannot grant relief under Section 9 of the Arbitration Act in support of arbitrations seated outside India. (Relevant Paragraph - 167)

(iii) Maintainability of an Inter-Party suit for interim relief

  1. Since the basis of such a suit would be the pendency of the foreign arbitration, a party will not be able to file a suit touching upon the merits of the arbitration. (Relevant Paragraph -179)
  2. What can, therefore, be filed is a bare suit for injunction; and identical interlocutory relief would be claimed in such proceedings. Such a suit would not be maintainable because an interlocutory injunction can only be granted during the pendency of a civil suit claiming a relief that is likely to result in a final decision upon the subject in dispute. The interim injunction itself must be a part of the substantive relief to which the plaintiffs cause of action entitles him. These ingredients are missing in such a suit. (Relevant Paragraph - 179)
  3. The right to obtain an interlocutory injunction is not a cause of action in itself. Such a right is merely ancillary to an existing substantive cause of action. (Relevant Paragraph - 185)
  4. The cause of action in such a suit would be contingent / speculative (and not existing) since the plaintiffs only claim would depend on the outcome of arbitration proceedings in a foreign country over which Indian courts would have no jurisdiction. (Relevant Paragraph - 179)
  5. Such a suit would be barred under Section 14(2) of the Specific Relief Act, 1963. (Relevant Paragraph - 183)
  6. No interim relief can be granted unless it is in aid of or ancillary to the main relief that is available to the party on a final determination of the suit. (Relevant Paragraphs - 183 & 184)
  7. For the aforesaid reasons an inter-parte suit simply for interim relief pending arbitrations, even if it be limited for the purpose of restraining dissipation of assets would not be maintainable. (Relevant Paragraph - 197)

(iv) Applicability of the Decision

The law declared by the Court in the present judgment will apply only prospectively, to arbitration agreements executed hereafter. (Relevant Paragraph - 201)

Footnotes

1. Civil Appeal No. 7019 of 2005. See Judgment http://supremecourtofindia.nic.in/outtoday/ac701905p.pdf

2. Reported as (2002) 4 SCC 105

3. Reported as (2008) 4 SCC 190

4. As an aside, it is relevant to note that the Supreme Court has clarified that in a domestic arbitration the seat of arbitration will confer supervisory jurisdiction on the courts of that place. There was a conflict of decisions on this point earlier.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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