India: Newsletter - August, 2021

LEGISLATION

1. Companies (Creation and Maintenance of databank of Independent Directors) Second Amendment Rules, 2021

The Ministry of Corporate Affairs notified the Companies (Creation and Maintenance of databank of Independent Directors) Second Amendment Rules, 2021 on 19^th August, 2021. The new amendment provides that the Indian Institute of Corporate Affairs (IICA), shall send an annual report to every individual whose name is included in the data bank and also to every company in which such individual is appointed as an independent director, within 60 days from the end of every financial year.

This amendment also prescribes the format to issue the Annual report.

2. Companies (Appointment and Qualification of Directors) Amendment Rules, 2021.

The Ministry of Corporate Affairs issued the Companies (Appointment and Qualification of Directors) Amendment Rules, 2021 on 19th August, 2021. The Amendment provides that an individual shall not be required to pass the online proficiency self-assessment test to be included in independent directors databank when he has served for a total period of not less than three years as on the date of inclusion of his name in the data bank in the pay scale of Director or equivalent or above in any Ministry or Department, of the Central Government or any State Government, and having experience in handling,—

1. the matters relating to commerce, corporate affairs, finance, industry or public enterprises; or
2. the affairs related to Government companies or statutory corporations set up under an Act of Parliament or any State Act and carrying on commercial activities.

The Amendment further provided that the following individuals, who are or have been, for at least ten years: -

1. an advocate of a court; or
2. in practice as a chartered accountant; or
3. in practice as a cost accountant; or
4. in practice as a company secretary,
   
   would not be required to pass the online proficiency self-assessment test.".

3. Limited Liability Partnership (Amendment) Act, 2021

This Act seeks to encourage the startup ecosystem and facilitate greater ease of doing business for the law-abiding corporates in the country, amending the Limited Liability Partnership Act, 2008.

Key Changes

1. Decriminalization of offences: The Act decriminalizes 12 offences under LLPs. Currently, there are 24 penal provisions in the LLP Act, 21 compoundable offences, and 3 non-compoundable offences. After the amendments, the penal provisions will be cut to 22 with compoundable offences reduced to 7 and non-compoundable offences will remain the same. The decriminalized cases will be shifted to an "In-house Adjudication Mechanism" (IAM) which would help reduce the burden of criminal courts.
2. Small LLPs: The Act has introduced a new concept of "small limited liability partnership" in line with the concept of small company under the Companies Act, 2013. Previously, there were relaxations for thresholds up to turnover size and partner's contribution of Rs. 40 lakh and Rs. 25 lakhs, respectively.
   Now, the Amendment Act has increased the threshold of Rs. 25 lakhs to Rs 5 crores and Rs. 40 lakh turnover size will now be increased to Rs. 50 crores. Hence, Rs. 5 crores contribution and Rs. 50 crores turnover will be treated as a small LLP thereby expanding the scope of a corporate business to be treated as a small LLP. Further, the Central government may also notify certain LLPs as start-up LLPs.
   The small LLPs will be subject to reduced fee, lesser compliance and smaller penalties in an event of default.
3. Compounding of Offences: Previously, the Act had allowed the Central Government to compound any offence, that were punishable only with a fine, under the Act. The amount imposed could be up to the maximum fine prescribed for the offence. The Amendment Act provides that the Central government may compound any offence under the Act which is punishable only with a fine. Further, the new Amendment permits the Regional Director or any other officer not below the rank of Regional Director to compound any offence under the LLP Act which is punishable with a fine only. The application for the compounding of an offence shall be made to the Registrar who shall forward the same, together with his comments to the Regional Director or any other officer not below the rank of Regional Director authorized by the Central government. The amount imposed may be up to the maximum fine prescribed for the offence. If an offence by an LLP or its partners was compounded, then a similar offence cannot be compounded within a three-year period.
4. Special Courts: The amendment Act provides for the establishment of special courts for speedy trial of offences under the Act. The special courts will consist of a sessions judge or an additional sessions judge, for offences punishable with imprisonment of three years or more and a metropolitan magistrate or a judicial magistrate for other offences. The decision of these special courts can be appealed in high courts.
5. Standards of accounting: The Amendment Act provides that the standards of accounting and auditing for classes of LLPs would be prescribed by the Central Government, in consultation with the National Financial Reporting Authority.
6. Appellate Tribunal: Under the LLP Act, 2008, appeals could be filed against orders of the NCLT before the National Company Law Appellate Tribunal (NCLAT). The Amendment Act prohibits that an appeals against order where it was passed with the consent of the parties. It also provides that the appeal has to be filed within 60 days from the date of the Order.
7. Punishment for fraud: Previously, the Act had provided that in situations where an LLP or its partners carry out an activity to defraud their creditors, or for any other fraudulent purpose, every party involved knowingly involved in the fraud was punishable with imprisonment of up to two years and a fine between Rs 50,000 and five lakh rupees. The Amendment Act has increased the maximum term of imprisonment from two years to five years for any fraudulent activity.

4. Companies (Registration of Foreign Companies) Amendment Rules, 2021 and the Companies (Specification of definitions details) Third Amendment Rules, 2021

Through these amendments the Ministry of Corporate Affairs has explained the term electronic mode.

The term electronic mode has been defined under rule 2(1)(h) of Companies (Specification of definitions details) Rules, 2014 and under rule 2(1)(c) of Companies (Registration of Foreign Companies) Rules, 2014, however, the explanation for the above term has been inserted through this amended as follows:

"The electronic-based offering of securities, subscription thereof or listing of securities in the International Financial Services Centres set up under section 18 of the Special Economic Zones Act, 2005 (28 of 2005) shall not be construed as 'electronic mode' for the purpose of clause (42) of section 2 of the Act."

5. Notification dated 5^th August, 2021; Ministry of Corporate Affairs

Through this notification, the Ministry notified the exemption of foreign companies and companies incorporated or to be incorporated outside India, whether the company has or has not established, or when formed may or may not establish, a place of business in India, from the provisions of sections 387 to 392.

6. Rent-a-Cab (Amendment) Scheme, 2021 and Rent a Motor Cycle (Amendment) Scheme, 2021

The Central Government through notification dated 5th August, 2021 has issued the Rent-a-Cab (Amendment) Scheme, 2021. Through this amendment, the battery-operated motor cabs and motor cabs driven on methanol and ethanol are exempted from the requirement of a permit under Section 66 of the Act.

Similarly, through Rent a Motor Cycle (Amendment) Scheme, 2021, battery operated motor cycles and motor cycles driven on methanol and ethanol were exempted from the provisions of section 66 of the Act.

7. Tribunals Reforms Act, 2021

The Act seeks to dissolve certain existing appellate bodies and transfer their functions, such as adjudication of appeals, to other existing judicial bodies.

Among the Tribunals that the Act seeks to abolish include Film Certification Appellate Tribunal, Airports Appellate Tribunal, Authority for Advanced Rulings, Intellectual Property Appellate Board and Plant Varieties Protection Appellate Tribunal. As well as tribunals established under the Geographical Indications of Goods (Registration and Protection) Act, 1999 and the Control of National Highways (Land and Traffic) Act, 2002.

All cases pending before such tribunals or authorities will be transferred to the Commercial Court or High Court.

8. General Insurance Business (Nationalisation) Amendment Act, 2021

The General Insurance Business (Nationalisation) Amendment Act, 2021 seeks to privatise government companies undertaking general insurance business in India.

Key highlights of the Act are:

1. Four subsidiary companies of GIC: (i) National Insurance, (ii) New India Assurance, (iii) Oriental Insurance, and (iv) United India Insurance are no longer required to have shareholding of the central government.
2. The General Insurance Business (Nationalisation) Act, 1972 will not apply to the four companies from the date on which the central government renounces control of the insurer. Control means: (i) the power to appoint a majority of directors of a specified insurer, or (ii) to have power over its management or policy decisions.
3. The Board of directors of the four companies may frame terms and conditions of service of employees. The amendment limits the liability of the Board of the four companies.

9. Factoring Regulation (Amendment) Act, 2021

Key highlights:

1. The amendment provides that every factor shall register the particulars of every transaction of assignment of receivables in his favour with the Central Registry set-up the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
2. The Reserve Bank may, by notification, make regulations consistent with this Act to carry out the provisions of this Act.

10. Inland Vessels Act, 2021

The new Act replaces the Inland Vessels Act, 1917. The Act regulates inland vessel navigation by states including the registration of vessels, and safe carriage of goods and passengers. The Act seeks to introduce a uniform regulatory framework for inland vessel navigation across the country promoting economical and safe transportation and trade through inland waters.

Key highlights of the Act:

1. Mechanically propelled inland vessels:The Act defines such vessels any inland vessel in the inland waters which is propelled by mechanical means of propulsion such as ships, boats, sailing vessels, container vessels, and ferries.
2. Inland water area into zones:The State Government shall declare by notification any inland water area to be a "Zone" depending on the maximum significant wave eight criteria.
3. Registration:For operating in inland waters, all such vessels must have a certificate of survey, and a certificate of registration. Vessels with Indian ownership must be registered with the Registrar of Inland Vessels (appointed by the state government). The registration certificate will be valid across the country and will indicate the inland water zones (areas of operation to be demarcated by states) for such vessels.
4. Safety in navigation:Inland vessels shall be required to follow certain specifications for signals and equipment to ensure navigation safety, as specified by the central government. In case of a navigation hazard, the master of a vessel must immediately send a distress signal to other vessels in proximity and to the concerned state government.
5. Accidents:Accidents in any case must be reported to the head officer of the nearest police station, as well as to a state government appointed authority. The state may require the District Magistrate to question into these matters and submit a report recommending actions to be taken.
6. Contravention of provisions: The central government will prescribe the minimum number of people that vessels must have, for various roles. Contravention of any provisions will attract a penalty of up to Rs 10,000 for the first offence, and Rs 25,000 for subsequent offences. The central government will prescribe the standards for qualification, training, examination and grant of certificate of competency, which indicate the fitness of the recipients to serve in the specified roles. State governments will grant these certificates.
7. Prevention of pollution:The central government will release a list of chemicals, any ingredients or substance carried as bunker or as cargo, or any substance in any form discharged from any mechanically propelled inland vessel, as pollutants. Vessels will discharge or dispose sewage, as per the standards specified by the central government. The State governments will grant vessels a certificate of prevention of pollution, in a form as prescribed by the central government.
8. Database on inland vessels:An electronic centralised record of data on inland vessels to be maintained by the central government. These will include information with respect to the(i) registration of vessels, (ii) crew and manning, and (iii) certificates issued.
9. Development fund:A Development Fund to be established under the Act for the following purposes: (i) emergency preparedness, (ii) containment of pollution, and (iii) boosting inland water navigation. Each state will constitute such a development fund. Sources of contribution to the fund include: (i) schemes of state governments, (ii) stakeholders, and (iii)collections from sale of wreck or cargo.
10. Non-mechanically propelled inland vessels:The Act delegates the power to State Government to make rules to regulate non-mechanically propelled inland vessels.

11. Insolvency and Bankruptcy Code Amendment Act, 2021

Key Highlights of the Act:

1. Application for initiating Prepacked Insolvency Resolution Process may be filed in the event of a default of at least one lakh rupees. The Central Government may increase the threshold of minimum default up to one crore rupees through a notification.
2. Inserted a definition of 'Pre-packed Insolvency'.
3. Inserted Chapter III A on Prepacked Insolvency Resolution Process provides the corporate debtors that would be eligible for the pre-packaged insolvency process, the duties of insolvency professionals before initiating the pre-packed insolvency resolution process, the time limit for the completion of pre-packaged insolvency resolution process, etc.
4. The new Amendment has inserted Section 67A relating to Fraudulent management of corporate debtor during pre-packaged insolvency resolution process.
5. Insertion of a new provision on Punishment for offences related to pre-packaged insolvency resolution process.

12. Tap Targeted Long-Term Repo Operations scheme'

The Reserve Bank of India extended the On Tap Targeted Long-Term Repo Operations (TLTRO) Scheme till 31st December 2021.

The On Tap TLTRO was announced in October 2020 in order to provide liquidity support to various economic sectors and banks. LTRO lets banks borrow one to three-year funds from the central bank at the repo rate, by providing government securities with similar or higher tenure as collateral.

At first, the scheme was available up to September 30, 2021 which has now been extended till 31st December 2021.

CASE LAWS

1. Hemraj Ratnakar Salian v. HDFC Bank Limited, 2021 SCC OnLine SC 611

Facts: Borrowers had mortgaged a property (Secured Asset) in favour of the Bank with an intention to secure the said credit facility.

Later, the Borrowers accounts were declared at non-performing assets, the Bank issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to the Borrowers.

Appellant submitted that he is the tenant of the Secured Asset and has been paying rent regularly to his landlord since inception of his tenancy.

Appellant approached the Magistrate seeking protection of his possession of the Secured Asset as the Magistrate was ceased with the petition under Section 14 of SARFAESI Act filed by the respondent 1 – Bank. Though the magistrate had dismissed the registered tenancy placed on record by the appellant.

Decision: Bench had noted that the appellant's case was that he is a tenant of the Secured Asset and has paid the rent in advance. The Court had observed that, in the detailed representation sent in response to the notice issued under Section 13(2) of the SARFAESI Act, the Borrowers did not claim that any tenant was staying at the Secured Asset. Further, the Court took into consideration that the appellant provided a rent receipt claiming tenancy after the date of creation of mortgage.

The Court had expressed doubts as to the bona fide of the tenant, as there was no good or sufficient evidence to establish the tenancy of the appellant.

The Court also observed that the pleading of tenancy was not supported by any registered document, and adding to this, the appellant himself stated that he was a "tenant-in-sufferance", therefore, he is not entitled to any protection of the Rent Act.

Another point expressed by the Court, was that even if the tenancy had been claimed to be renewed in terms of Section 13(13) of the SARFAESI Act, the Borrower would be required to seek the consent of the secured creditor for transfer of the Secured Asset by way of sale, lease or otherwise, after issuance of the notice under Section 13(2) of the SARFAESI Act and, admittedly, no such consent has been sought by the Borrower.

Hence, the Court dismissed the Court.

2. Bhimrao Ramchandra Khalate v. Nana Dinkar Yadav, 2021 SCC OnLine SC 582

Facts: The plaintiff owned a total of 20 gunthas of agricultural land in the Khunte Village. The plaintiff needed money, so on 22.2.1969, he borrowed Rs.3,000/- from the defendant by signing a "conditional sale deed" document as a security for the loan amount. The plaintiff asked the defendant to relinquish the suit land in exchange for a loan of Rs.3,000/-, but the defendant refused. On February 25, 1989, the defendant transferred the suit land to his brother. On 5.4.1989, the plaintiff sued the defendants to redeem the mortgaged property and possession under the Transfer of Property Act, 1882. Even though it was titled a conditional sale, the plaintiff claims that the transaction dated 22.2.1969 was like a mortgage. On 14.1.2000, the First Appellate Court passed an order dismissing the suit for redemption of the mortgaged property. The High Court affirmed the order on 11.8.2006 in the second appeal. Hence, the appeal was then before the Supreme Court.

Decision: The Supreme Court Bench held that in order to determine whether a document is that of a mortgage or a conditional sale, the intention of the parties has to be seen when the document is executed.

3. Agij Promotion of Nineteenonea Media (P) Ltd. v. Union of India, WP (L) No. 14172 of 2021

Facts: In the following matter, the Petitioner had challenged the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 on the ground that they were ultra vires the Information Technology Act, 2000 and the provisions of Articles 14, 19 (1)(a) and 19(1)(g) of the Constitution.

Decision: The Bombay High Court stayed the operation of Rules 9(1) and 9(3), on two grounds. First, that they imposed an obligation on publishers to observe the Code of Ethics provided under a completely different statutory regime (print journalism and cable TV), alien to the IT Act. The Court noted that Section 87 of the IT Act does not empower the government to impose these compliances upon publishers. The Norms are guidelines framed by the Press Council of India. The sanction of the Norms is moral and not statutory, in its usual journalistic setting. However, the Code of Ethics has placed the Norms to the status of mandatory compliance.

Second, that Rule 9 of the IT Rules prima facie infringed the constitutional guarantee to freedom of speech granted by Article 19(1)(a), by requiring publishers to comply with the Norms.

Although challenges were also made against the application of Rules 7, 14 and 16 of the IT Rules, the Court refused to stay their application.

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