In the last quarter, the global economic market witnessed a manifestation of the effect digital assets and Web 3.0 have had on the overall market cash flow.
Venture capital investments in fintech and crypto projects native to the metaverse and Web 3.0 have already touched USD 10 billion globally. The majority of the investments were made in crypto and non-fungible token (NFT) exchanges, decentralized financial applications, and token issuers.
Currently, Indian stakeholders are grappling with the issue of inadequate regulation in the Web 3.0 space. Indian policymakers have not developed a law for regulating Web 3.0 despite it being in the pipeline for more than two years. Although tax implications and advertising standards have been deliberated upon and decided, the lacuna in the Indian legal regime needs the attention of stakeholders and lawmakers. During the Web 2.0 phase, India was unable to participate in policy making for internet governance due to limited consumption heft and foreign innovation.
Today, India is striving to position itself as an authority in the blockchain space by leveraging the local brainpower and consumer base. While NFTs indeed emerged as an extension of celebrity identities in India, today its presence is felt across industries. Entities such as GaurdianLink, MakeMyTrip and Lakme Fashion Week are also dabbling into NFT collectibles. However, the prevailing regulatory grey zones in the intellectual property laws, finance rules, securities laws and cybercrime laws call for the immediate action of Indian policymakers to implement enabling and safeguarding provisions. Given the lack of regulations and policy grey zones, investing in digital assets such as NFT is fraught with challenges, requiring careful consideration and due diligence.
NFT are cryptographic assets on a blockchain. Creators in the Web 3.0 space can attain a license for recreation and use from the copyright owner of the original artwork. However, the original NFT owner retains the copyright in the original digital asset. Essentially, the license enables an NFT license to manipulate and capitalize on the artwork digitally. On the other hand, the original NFT owner can invest and capitalize on the growth of the NFT through existing brand identities such as trademarks, logos, characters, books, movies, music, illustrations, etc.
In layman’s terms, even if you manage to buy an NFT license, you are still not automatically permitted to manipulate the artwork licensed or sell anything related to the said NFT. The original owner’s consent plays a key role in establishing the scope and nature of the rights enjoyed by an NFT license owner.
It is pertinent to design an NFT license agreement to fit your specific needs despite there being certain boilerplate smart contracts being used by key industry players. In exercising the IP rights by NFT owners, any transfer, sub-licensing or assignment and terms for such transfer, sub-license or assignment must be chalked out with specific attention to the terms of the original license. In certain cases, original owners may limit the scope of control over modification of the original digital asset and what may be combined with the said digital asset.
For instance, NFTs can be created in multiple layers within the same artwork, where each layer is made by different artists and then individually tokenized. Furthermore, it can also be programmed to change its layers based on certain triggers. These characteristic features of NFTs may lead to some undesired usage of the original owner’s IP that can only be prevented by explicit limitations in the smart contract which governs the digital asset’s usage.
Under the Copyright Act, 1957, for any assignment of copyright to be valid, such assignment will have to necessarily be in writing and signed by the assignor or his/her duly authorized agent, specifying the rights, duration and territorial extent of such assignment. NFT owners can, in addition to ownership rights, include terms on how subsequent purchasers may attain ownership of the subject matter NFT and select the marketplaces (open, curated or proprietary) on which their NFT can be resold.
The NFT license can prescribe specify the rights and restrictions on displaying, copying and usage of the NFTs. A general use license usually assigns a worldwide, non-exclusive, non-transferable, royalty-free license to use, copy and display the same, whereas a commercial use license can be crafted to allow the purchaser to commercially exploit the NFT. NFT owners and creators can also opt to include terms prescribing fees and royalties associated with the initial and subsequent sale of the NFT.
Decentralized finance (De-Fi) is under threat of fraudulent and money laundering activities due to the nature of blockchain technologies. De-Fi-related hacks have hiked 2.7 times in 2021 from 2020. From human trafficking and terrorist financing to drug trading, cryptographic money laundering has harrowing effects. The highly lucrative market for NFTs coupled with anonymity could potentially become an avenue for money laundering and other illegal funds transfers, if not already. At present, there is no generally accepted standard for monitoring the flow of assets in the digital space despite the potentially catastrophic risks it may result in.
The Prevention of Money Laundering Act, 2002 prohibits all forms of private cryptocurrencies. However, it fails to prescribe the technologies that fall under the scope of the term “cryptocurrencies” and what aspects of the same will constitute a violation of the law. However, the Ministry of Corporate Affairs as of 24 March 2021 mandated all listed and unlisted companies to declare all cryptographic transactions in their balance sheets effective 01 April 2021 by inserting item (xi) in Paragraph 5 of Schedule III, Part II of the Companies Act, 2013. On the other hand, policymakers need to notify virtual asset providers as “Reporting Entities” under the Prevention of Money Laundering Act, 2002 and stipulations to upgrade reporting requirements needs to be prescribed.
In a recent case of Hitesh Bhatia v. Mr. Kumar Vivekanand, the Delhi High Court, in dealing with cryptocurrency transactions, held that cryptocurrency transactions shall comply with the general laws in India such as Prevention of Money Laundering Act, 2002, Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, 1985, Foreign Exchange Management Act, 1999, Tax laws and all RBI regulations relating to Know Your Customer, Combating of Financing of Terrorism compliance guidelines, and Anti-Money Laundering requirements. While the Court did not adjudicate on the issue of the legality of cryptocurrencies, the observations made in the instant case pave a path for effective navigation of regulatory discourse associated with such complex technologies and will by extension apply to NFT transactions as well.
It is reported that cryptocurrencies worth USD 5.2 billion could be stolen in 2022. Hackers use stolen private keys and passwords attained through security breaches caused by software bugs to access crypto funds. While establishment of identity will create more secure platforms for virtual interactions, private players face uncertainty due to the ever-evolving data privacy regulations and their enforcement owing to the nascent stage at which the law currently. Another concern that arises is the loss of data since all data is stored virtually. A blockchain may be operated anonymously, thereby increasing the risk of compromised and hacked accounts resulting in long-lasting damage and loss of data for account-holders. In such a situation, the ability to anonymously operate the blockchain becomes a problematic feature.
Industry stakeholders will need to conduct background checks to verify the integrity of the seller’s ownership rights and the authenticity of the online marketplace. Players are advised to conduct transactions only with verified sellers on reputed platforms.
At the moment, from a regulatory perspective, policymakers are split-minded, but it is clear more policies to incentivize digital assets are needed. The first step toward a novel framework to regulate NFTs is the creation of a definition. The definition needs to be wide enough to accommodate the various sub-classes of virtual assets that currently exist and may be invented in the future.
It is at this juncture that Indian entities such as the RBI, SEBI and the Ministry of Finance can undertake joint regulation of the NFT space and position India as an industry standard-setting nation. A coordinated approach will also ensure that the convoluted issues relating to crypto-assets are adequately addressed. These entities, in consultation with the legislature and industry experts, can deliberate regulatory concerns and introduce forward-thinking policies and protocols.
Until the implementation of appropriate NFT regulations and policies in India, stakeholders will do well to be mindful of potential pitfalls in transacting in NFTs and should consider taking adequate protective steps, such as conducting thorough client / customer due diligence to ensure the legitimacy of the transacting party and title in NFT assets and ensuring detailed contractual terms tailored to their unique needs instead of solely relying on boilerplate smart contracts available on mainstream platforms.
 Venture Capitalists Catch Crypto Fever, Stampeding Towards Web 3.0, NDTC Profit.
 “DeFi Has Accounted for Over 75% of Crypto Hacks in 2021”, CoinDesk.
 Hitesh Bhatia v. Mr. Kumar Vivekanand, Case No. 3207/2020.
 Master circular of RBI dated July 1, 2013.
 “DeFi-fo-fum: hackers find new ways to gobble up crypto”, Economic Times.
The Limited Liability Partnership (Amendment) Act, 2021 (“LLP Amendment Act”) received the assent of the President of India on August 13, 2021. The LLP Amendment Act will now come into effect from April 1, 2022, vide notification issued by the Ministry of Corporate Affairs (“MCA”) bearing no. S.O. 621 (E) dated February 11, 2022 (“Notification”). The LLP Amendment Act aims to improve ease of doing business for limited liability partnerships (“LLPs”) by decriminalizing offences, introducing small LLPs and start-up LLPs, enabling compounding of offences, establishing special courts and appointing adjudicating officers, amongst other amendments. Another pertinent aim of the LLP Amendment Act is to incentivize unorganized business enterprises to an organized incorporated structure, while creating ‘congenial business climate based on trust and compliances’, as stated in the Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act 2008 (“Report”), issued in January 2021.
An analysis of the changes brought by the LLP Amendment Act was published by us on November 16, 2021, which can be accessed here.
Pursuant to the Notification and as an update to our previous post on the subject, we have placed hereunder the key changes brought about by the LLP Amendment Act and the Limited Liability Partnership (Second Amendment) Rules, 2022 (“LLP Amendment Rules”):
The Limited Liability Partnership Act, 2008 (“LLP Act”), contained 24 (twenty-four) penal provisions, which has now been reduced to 22 (twenty-two) penal provisions while also reducing the maximum penalty from Rs. 5,00,000/- (Rupees Five Lakhs only) to Rs. 1,00,000/- (Rupees One Lakh only). These changes were made to remove criminality and prosecution for any technical or procedural omission or non-compliance in the ordinary course of business. Additionally, Section 76A has been introduced by the LLP Amendment Act for the appointment of officers not below the rank of registrar, as adjudicating officers for adjudication of penalties, and laying down the provision for appeal against the order of such adjudicating officers and also to provide procedures for such adjudications and appeal. The decriminalization of offences and appointment of adjudicating officers while providing ease of doing business, will ensure more flexibility to LLPs, improved corporate compliance and faster adjudication of penalties.
Further, out of the 22 (twenty-two) penal provisions: (i) 12 (twelve) offences will be adjudicated by an in-house adjudication mechanism, (ii) 7 (seven) will be compoundable offences and (iii) 3 (three) will be non-compoundable offences. The 12 (twelve) offences brought under the in-house adjudication mechanism is as follows:
The LLP Amendment Act introduced the concept of small LLPs in line with the concept of small companies under the Companies Act, 2013 (“Companies Act”) for the creation of a class of LLPs which would be subject to lesser compliances, fees and penalties, helping reduce the burden of compliance and associated costs for start-up LLPs and small businesses. Small LLPs have been defined as LLPs having contribution not exceeding Rs. 25,00,000/- (Rupees Twenty-Five Lakhs only) and a turnover for the immediately preceding financial year not exceeding Rs. 40,00,000/- (Rupees Forty Lakhs only). Pursuant to the Section 76A (3) introduced by the LLP Amendment Act, small LLPs will be liable to lesser penalties i.e., half the penalty specified under the relevant provision, subject to a maximum penalty of Rs. 1,00,000/- (Rupees One Lakh only) for such small LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for every partner or designated partner or any other person, as the case may be. The introduction of small LLPs will be a lucrative model for smaller unregulated businesses providing greater flexibility and equal opportunity, while also providing such entrepreneurs with greater flexibility and protection from compliances and penalties under the LLP Act.
Section 39 of the LLP Act has been amended to provide the principles for compounding of offences, manner, procedure, and effect of compounding on pending prosecutions in the trial courts, in line with Section 441 of the Companies Act. Accordingly, offences under the LLP Act which is punishable with ‘fine only’, will shift to the in-house adjudication mechanism (IAM) instead of being treated as criminal offences and the Regional Directors (“RDs”) or any other officer not below the rank of a RD, duly authorised by the Central Government, have been authorized to compound such offences for a sum not exceeding the maximum fine prescribed for such offences and not less than the minimum fine prescribed for such offences.
The LLP Amendment Act has introduced Sections 67A enabling the Central Government to establish special courts for the purpose of providing speedy trial of offences and has introduced Sections 67B and 67C to deal with procedure and powers of the Special Courts along with appeals and revisions.
The special court will consist of a single judge:
Further Section 77 has been amended and the powers of Judicial Magistrate of the first class or Metropolitan Magistrate have been transferred to special court which will have the power to impose punishment under Section 30 of the LLP Act. Also, all the criminal cases pending against the LLPs, its partners, designated partners, and any person concerned will be transferred to the Special Court under Section 67A. The LLP Amendment Act has introduced Section 77A empowering special courts to take cognizance of any offence punishable under the Act on a complaint in writing made by registrar or any officer not below the rank of registrar duly authorized for such purpose. Until such time the special courts are designated and established, special courts in terms of Section 435 of the Companies Act have been designated as special courts for the purpose of trial of offences punishable under the LLP Act and a Court of Sessions or the Court of Metropolitan Magistrate or a Judicial Magistrate of the first class, as the case may be, exercising jurisdiction over the area has been designated as special courts for criminal offences. Such special courts will be instrumental in reducing the burden of pending cases in courts and faster disposal of cases.
Since more and more companies are converting to LLPs and with a view to augment the financial reporting and disclosure standards of LLPs, the LLP Amendment Act now empowers the Central Government to prescribe accounting and auditing standards for certain classes of LLPs in consultation with the National Financial Reporting Authority. While LLPs already enjoy reduced compliance requirements, the aforesaid amendment will bring better transparency in the financial affairs of LLPs.
The MCA recently notified the LLP Amendment Rules vide notification dated March 4, 2022, whereby several clerical and procedural amendments were made for easing compliances for LLPs. The major amendments prescribed therein are detailed below:
Apart from the aforementioned amendments, various forms given below have been substituted / updated for easy usage:
Regulatory stance regarding LLPs is a mix of strict and soft touch. On one hand, the government extended certain stern company law provisions to LLPs on February 17, 2021, such as disqualification of partners / designated partners on failure to file Annual Returns for 3 (three) years; identification of significant beneficial owner of the LLP; restricted limit of maximum number of partnerships for partners / designated partners and enabling of regulatory power to inspect books and documents and undertake investigation. On the other hand, the government is also keen to make the LLP structure lucrative for stakeholders and with the amendments introduced vide the LLP Amendment Act and the LLP Amendment Rules, it is clear that the government’s intent is to enable ease of doing business for LLPs. The introduction of small LLPs and start-up LLPs, decriminalization, relaxed penalty regime, compounding of contraventions, as well as prescribed procedural efficiencies will attract more entrepreneurs and investors from the unorganized sector into the fold of LLPs and allow them to work in a business-friendly environment with lesser compliance requirements and greater flexibility.
Industry stakeholders need to evaluate the ideal structure for incorporation based on their needs as the LLP structure personifies both simplification and even standardization of compliances vis-à-vis companies. That said, only time will tell the efficacy of LLPs, in line with the evolving business environment, changing regulatory stance and different stakeholder interests.
The views and opinions expressed in this article are those of the author alone. This article is for general information purposes only and should not be construed as legal advice or be a substitute for legal counsel on any subject matter. No reader should act or rely on any information contained in this article, without first seeking appropriate legal or other professional advice.
On August 13, 2021, the Limited Liability Partnership (Amendment) Act, 2021 (“LLP Amendment Act”) received the assent of the President of India. The LLP Amendment Act aims to improve ease of doing business for limited liability partnerships (“LLPs”) by decriminalizing several minor, technical or procedural violations under the Limited Liability Partnership Act, 2008 (“LLP Act”). The Ministry of Corporate Affairs ("MCA”) has, vide its notification bearing no. S.O. 621 (E) dated February 11, 2022, notified April 1, 2022 as the effective date for the provisions of the LLP Amendment Act.
Further, in exercise of the powers conferred under Section 76A of the LLP Act, the MCA has, vide notification bearing no. S.O. 622 (E) dated February 11, 2022, appointed registrar of companies (“ROCs”) as adjudicating officers for adjudication of penalties under the LLP Act with effect from April 1, 2022. It was also clarified that appeals, if any, is to be filed before the regional directors (“RDs”) having jurisdiction over the ROCs and such appeal is to be disposed off by the RDs in accordance with notification published by the MCA vide: (i) G.S.R. 887(E) dated December 16, 2011, (ii) G.S.R. 763(E) dated October 15, 2012, (iii) G.S.R. 832(E) dated November 3, 2015 and (iv) S.O. 2652(E) dated July 25, 2019.
The LLP Amendment Act reduces the total number of penal provisions from 24 (twenty four) to 22 (twenty two), out of which: (i) the newly introduced in-house adjudication mechanism will adjudicate upon 12 (twelve) offences by imposing only monetary penalties, (ii) 7 (seven) offences will be compoundable and (iii) 3 (three) offences will be non-compoundable. The LLP Amendment Act also introduces the concept of small LLPs and start-up LLPs in order to incentivize such class of LLPs by making them liable to pay lesser penalties in the event of default, subject to a maximum of Rs. 1,00,000/- (Rupees One Lakh only) for such LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for every partner or designated partner or any other person, as the case may be.
The Ministry of Corporate Affairs (“MCA”), on September 23, 2021, had directed the Registrar of Companies (RoCs) to accord approval for extension of time by 2 (two) months, i.e. till November 30, 2021, for holding of annual general meeting (“AGM”) for the financial year 2020-2021 ended on March 31, 2021. In furtherance of the aforesaid extension in holding of AGM and in the interest of the stakeholders,the MCA has decided to charge only normal fees upto December 31, 2021 for filing of financial statements and annual returns, to be filed in the respective e-forms, for the financial year ended on March 31, 2021. The exempted e-forms are as follows:
|1.||AOC-4||Form for filing financial statement and other documents with the registrar|
|2.||AOC-4 (CFS)||Form for filing consolidated financial statements and other documents with the registrar for NBFCs|
|3.||AOC-4 XBRL||Form for filing XBRL document in respect of financial statement and other documents by a company with the registrar|
|4.||AOC-4 Non-XBRL||Form for filing financial statement and other documents with the registrar|
|5.||MGT-7||Form for filing annual return by a company|
|6.||MGT-7A||Form for filing annual return by a one person company and a small company|
The aforesaid extension of the timeline has been notified by MCA vide its General Circular no. 17/2021 dated October 29, 2021.
It may be noted that pursuant to sub clause (4) of Section 92 of the Companies Act, 2013, the annual return (Form MGT-7/MGT-7A) is to be filed within 60 (sixty) days from the date on which the AGM is held or should have been held. Therefore, in line with the extension of time for holding AGM till November 30, 2021, a company holding its AGM on November 30, 2021 (or a company failing to hold AGM by November 30, 2021) should be able to file Form MGT-7/MGT-7A by January 29, 2022 in accordance with the time period specified under the Companies Act, 2013, without having to pay any additional fees. MCA needs to provide a clarification in this regard and until such time, normal charges for filing Form MGT-7/ MGT-7A will be applicable only till December 31, 2021.
The Ministry of Corporate Affairs ("MCA"), owing to the 'challenges faced by limited liability partnerships due to COVID-19 pandemic' and in response to the representation received from stakeholders, has vide its General Circular No. 16/2021 dated October 26, 2021 extended the timeline for filing statement of account and solvency in Form 8 under Section 34 (3) of the Limited Liability Partnership Act, 2008 till December 30, 2021. Further, the MCA has exempted such limited liability partnerships from paying any additional payments for delay in filing the statement of account and solvency till December 30, 2021.
The above decision is in furtherance of the Government's continued efforts to facilitate India Inc.'s ease of running businesses, in the wake of the ongoing COVID-19 pandemic.
The Limited Liability Partnership (“LLP”) structure is a specialised hybrid business vehicle combining the benefits of a regulated company and providing the flexibility of a partnership firm. Amongst other advantages, it has the advantage of limiting the individual liability of its partners as against the business entity akin to a company and at the same time permitting relaxed discretion for internal governance vide the LLP agreement while generally enjoying lesser compliance burden.
The Government has been systematically carrying out legislative reforms to incentivise the entrepreneurial endeavours of the unorganized sector and to promote a favourable business environment to spur innovation and economic activity in the country. Accordingly, The Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act, 2008 (“Report”) dated January 4, 2021, recommended reforms to the Limited Liability Partnership Act, 2008 (“Act”) and thereafter, the Union Cabinet on July 28, 2021, announced its decision to amend the Act for the first time since the Act came into effect in 2009.
Given the above decision, the Limited Liability Partnership (Amendment) Bill, 2021, was passed by both Rajya Sabha and Lok Sabha, and subsequently received the President’s assent on August 13, 2021, thereby attaining the status of the Limited Liability Partnership (Amendment) Act, 2021 (‘Amendment Act’).
With the focus to provide greater ease of doing business to LLPs and to decriminalize compoundable offences involving “minor, procedural or technical violations”, the Amendment Act gives further impetus to the viability of the LLP structure by introducing the changes.
The amendments can be categorized as follows:
As stated in the Report, the rationale behind decriminalization is that ordinarily an act which is punishable with a fine, contains an element of “mens rea” i.e. a guilty mind which is usually affiliated with serious and pre-meditated fraudulent acts, and are typically tried by a criminal court. However, bona fide business-related omissions, technical and minor violations that do not involve mens rea should not be treated with criminal convictions and instead be subjected to civil penalties enforced through an in-house adjudication mechanism.
In view of the above, the Amendment Act offsets criminal liability and decriminalizes the following offences as detailed below by prescribing only civil liability in the form of monetary penalties under the in-house adjudication mechanism:
|1.||Section 10 - Punishment for contravention of Sections 7 and 9||Description: Contravention relating to general obligations of designated partners. Comment: While completely omitting contravention under Section 8, the Amendment Act, decriminalises punishments under Sections 7 and 9 by prescribing monetary penalties.|
|2.||Section 13 - Registered office of LLP and change therein||Description: Contravention pertaining to registered office of the LLP and change therein. Comment: The Amendment Act decriminalises the offence under Section 13 by prescribing monetary penalties.|
|3.||Section 17 - Change of name of LLP||Description: Failure to comply with the directions of the Central Government in relation to change of name of LLP. Comment: Section 17 has been overhauled by prescribing procedural provisions that enable an existing company, LLP or proprietor to notify the Central Government of the resemblance in a LLPs name that was incorporated subsequently. Further, the Amendment Act also eradicates the punishment for failure to change the name of LLP on the direction of the Central Government by stipulating that a different name will be auto-allotted to the LLP by the Central Government instead of penal consequences. The Section also provides the LLP with an option to subsequently change its name by following the prescribed provisions.|
|4.||Section 21 - Publication of name and limited liability||Description: Failure to display basic information regarding LLP on invoices, official correspondences and publications. Comment: The Amendment Act decriminalises the offence under Section 21 by prescribing monetary penalty.|
|5.||Section 25 - Registration of changes in partners||Description: Failure to notify registrar regarding changes in the partners of the LLP within stipulated time. Comment: The Amendment Act decriminalises the offence under Section 25 by prescribing monetary penalty.|
|6.||Section 34 - Maintenance of books of account, other records and audit, etc.||Description: As stated in the Report, Section 34 provides for two different compliances, namely: § ‘Maintenance of books of accounts as prescribed at the registered office and regular preparations of accounts and its audit in line with the prescribed rules.§ Filing of a Statement of Account and Solvency within a period of six months from the end of each financial year.’Comment: Since the first compliance is meant for ensuring financial discipline and integrity of financial data, the punishment for failure in complying with Sections 34 (1), (2) and (4) requires no change and any defaulting LLP and every defaulting designated partner of such LLP shall be punishable with fine.However, non-filing of financial statements i.e., Statement of Account and Solvency within the prescribed time is altered to a civil liability being a procedural violation and hence a LLP that fails to comply with the provisions of Section 34 (3) shall be liable to pay penalty.|
|7.||Section 35 - Annual return||Description: Non-filing of Annual Return. Comment: The Amendment Act decriminalises the offence under Section 35 by prescribing monetary penalty.|
|8.||Section 60 - Compromise, or arrangement of LLPs||Description: Non-filing of the order of Tribunal within the prescribed time.Comment: The Amendment Act decriminalises the offence under Section 60 by prescribing monetary penalty.|
|9.||Section 62 - Provisions for facilitating reconstruction or amalgamation of LLPs||Description: Non-filing of the order of Tribunal within the prescribed time.Comment: While decriminalising the offence under this Section by prescribing monetary penalty, an important clarification in the form of explanation (ii) has been introduced stating that ‘a LLP shall not be amalgamated with a company’. The aforesaid amendment has put to rest the long overdue clarification regarding amalgamation of a LLP with company. Accordingly, a LLP intending to amalgamate with a company will necessarily have to convert itself into a company.|
|10.||Section 73 – Non compliance of any order passed by Tribunal||Description: Penalty for failure to comply with any order passed by the Tribunal. Comment: The Amendment Act has omitted the Section in entirety by relying on the Tribunal’s power to invoke its contempt jurisdiction in the event of failure to comply with the order passed by the Tribunal.|
|11.||Section 74 – General penalties||Description: General penal provision for instances where no penalty or punishment is provided for contravention Comment: The Amendment Act decriminalises the offence under Section 60 by prescribing monetary penalty.|
Further, the Amendment Act has reduced the maximum penalty from Rs. 5,00,000/- (Rupees Five Lakhs only) to Rs. 1,00,000/- (Rupees One Lakh only) for LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for designated partners. Such reduced penalties will prove to be a financial relief for LLPs with default on procedural lapses.
The Government has, however, maintained the status quo for serious non-compliances which involves an element of fraud, deceit, injury to public interest and wrongful dealings in line with the extant provisions of the Act. Furthermore, the Amendment Act extends the imprisonment provision from two years to five years for every person guilty of fraud under Section 30 of the Act.
The Amendment Act introduces “Small LLPs” akin to “Small Companies” under the Companies Act, 2013 (“Act, 2013”) to attain the same underlying principles of extending compliance relaxations and fee reductions to small scale/start-up businesses for facilitating ease of business and incentivising corporate compliances.
The structural machinery of LLPs owing to their inherent flexibility is often employed by micro and small enterprises as a preferred business structure. The legislative intent of Small LLP is to create a class of LLPs that is subject to lesser compliances, lesser fees, to reduced cost of compliance and further to subject such class of LLPs to lesser penalties in the event of default.
Section 2 (ta) of the Amendment Act stipulates that “small limited liability partnership” means a LLP:
and fulfils such terms and conditions as may be prescribed.
Accordingly, Section 69 of the Act containing the provisions of the payment of additional fee is also amended indicating that a different fee or additional fee may be prescribed for different classes of LLPs or for different documents or returns required to be filed under the Act or rules made thereunder.
Further, it is also exclusively provided under Section 76A that, if a penalty is payable for non-compliance of any of the provisions of this Act by a Small LLP or a start-up LLP (“Start-up LLP”) or by its partner or designated partner or any other person in respect of such LLP, then such LLP or its partner or designated partner or any other person, shall be liable to a penalty which shall be one-half of the penalty specified in such provisions subject to a maximum of one lakh rupees for LLP and fifty thousand rupees for every partner or designated partner or any other person, as the case may be. For the sake of clarity, Start-up LLP is explained to mean a LLP incorporated under the Act and recognised as such in accordance with the notifications issued by the Central Government from time to time.
Reduced fees and penal consequences would not only reduce the cost of compliances for LLPs falling under the category of Small LLPs but will also incentivize the micro and small enterprises to corporatize their business. Therefore, the efficiency posed by Small LLPs will be lucrative for interested stakeholders looking to structure and scale their businesses with lesser compliance costs.
The Amendment Act substitutes all references to the erstwhile Companies Act, 1956 with the Act, 2013.
Section 7 of the Act prescribes that every LLP shall have at least one resident Designated Partner. The Amendment Act revises the residency requirement contained therein from erstwhile one hundred and eighty-two days to one hundred and twenty days during the financial year. Reduction in number of days to qualify as ‘resident in India’ will be an added advantage to individuals or entities resident outside India intending to become a resident designated partner in LLPs given that 100% (one hundred percent) FDI is now permitted in specified LLPs under the extant FDI regulations. Furthermore, the aforesaid amendment will be beneficial to those designated partners facing difficulty due the travel restrictions imposed owing to the COVID-19 pandemic and will provide an added relief to designated partners facing difficulties in maintaining residential status under the Act.
The Amendment Act grants power to the Central Government to prescribe accounting and auditing standards for a class or classes of LLPs vide Section 34A in consultation with the National Financial Reporting Authority and the Institute of Chartered Accountants of India. The accounting and auditing standards will usher enhanced financial discipline for the LLPs and bring about transparency commensurate with best practices to attract enhanced commercial and investor interest.
With the object of ‘delineating principles for compounding of offences, manner and procedure thereof and effect of compounding on pending prosecutions in the trial courts’ as stated in the Report, the Amendment Act amends Section 39 by substituting the said Section entirely with a modified Section thereby incorporating in the Act the principles of compounding and procedures as prescribed under Section 441 of the Act, 2013.
Accordingly, the Regional Director or any other officer not below the rank of Regional Director recognised by the Central Government will be authorised to compound any offence under the Act which is punishable with only fine. Compounding will not be allowed for an offence committed by an LLP or its partner or its designated partner within three years from the date on which a similar offence committed by it or them was compounded. Any second or subsequent offence committed after the expiry of the period of three years from the date on which the offence was previously compounded, shall be deemed to be the first offence.
The Amendment Act introduces a new judicial regime under Sections 67A, 67B and 67C spearheaded by Special Courts to be established by the Central Government for swifter dispute resolution for LLPs and also amends provisions related to appeals under Section 72. This will significantly drive ease of doing business for involved stakeholders along with bringing efficiency, transparency, and much-needed certainty for providing speedy trial of offences under the Act.
The Special Court shall consist of a single judge:
Procedure and powers of Special Courts along with appeals and revisions are further postulated under Sections 67B and 67C.
To exercise the power and discharging functions conferred on the Central Government and for the purpose of registration of LLPs under this Act, the Central Government, by notification has been empowered to establish such number of registration offices at such places as it thinks fit and to specify the jurisdiction. This move is aimed at decongesting the extant offices of the registrar of companies who is at present responsible to oversee the administrative functions for both companies and LLPs.
Section 18 which relates to an application for direction to change the name in certain circumstances; Section 73 which relates to penalty on non-compliance of any order passed by Tribunal; and Section 81 which relates to transitional provisions are omitted from the Act owing to duplication and/or redundancy.
These were some of the major amendments brought in by the Amendment Act. By virtue of the amendments, it can be seen that the Government has initiated a beneficial overhaul of the existing LLP regime by introducing ease of compliance for honest and ethical entrepreneurs and opening gateways to foster a healthy business environment. Given that one of the eligibility conditions under the Start-up India Action Plan is that a start-up should be incorporated as a private limited company, registered partnership firm or a LLP, the regulatory changes concerning LLPs will catalyse interests to formalize emerging business operations as LLPs and simultaneously promote domestic individual entrepreneurship.
Decriminalization and a comparatively relaxed penalty regime brought in by flexibility to compound minor contraventions and policy infrastructure for speedy dispute resolution will foster the ease of living for law-abiding LLPs. While the amendments are forward-looking, the Government has failed to regularise the debenture issuance for LLPs in contrast to the Report which envisaged that an LLP may issue secured non-convertible debentures to specified bodies corporate or trusts which are regulated by the Securities and Exchange Board of India and the Reserve Bank of India. The inability of LLPs to issue non-convertible debentures and access to debt markets, at variance with companies, will continue to pose as a major impediment in raising capital under the current regime.
LLPs, akin to any other legitimized business structure will require a responsive regulatory regime matching global best practices. While the industry reaction to most of the amendments is welcoming, we will have to see if the Government continues to proactively evolve the LLP regulations to retain and foster its commercial relevancy.
By Mr. Manu Varghese (Partner – Head of General Corporate & Commercial)
and Mr. Jones Vaidya (Associate) on September 7, 2021
Vide General Circular No. 11/2021 and General Circular No. 12/2021 dated June 30, 2021, the Ministry of Corporate Affairs (“MCA”) has updated the scope of previously issued General Circular No. 06/2021 and General Circular No. 07/2021 (“Previous Circulars”). The Previous Circulars first issued on May 3, 2021, had introduced certain time period relaxations and additional fee waivers to alleviate the compliance concerns of various stakeholders due to constraints on account of the COVID – 19 pandemic.
Owing to the continuation of COVID – 19 pandemic and the resultant constraints, stakeholders can now avail extended benefits under General Circular No. 06/2021 and General Circular No. 07/2021 which prescribed relaxation in timelines and waiver of additional fees. Accordingly, only normal fees shall be levied up to August 31, 2021, for Forms due for filing during the period from April 1, 2021 to July 31, 2021 (erstwhile May 31, 2021).
MCA has listed the following Forms for which waiver of additional fees shall be provided under the above-mentioned General Circulars:
|Form CHG-1||Creation / Modification of Charge
(Other than Debenture related)
|Form CHG-9||Creation / Modification of Charge related to Debentures or rectification thereof.|
|2.||Statutory Auditor||Form ADT-1||Appointment of Auditor|
|Form ADT-3||Notice of Resignation by the Auditor|
|3.||Registered Office||Form INC-22||Notice of situation or change of situation of Registered Office|
|4.||Nidhi Company||Form NDH-3||Half-yearly Return|
|Form NDH-2||Application for an extension if a Nidhi Company is unable to comply with: (i) the requirement of having 200 members or more or (ii) prescribed ratio of net own funds to deposits of 1:20 or less within 1 (one) year from the date of incorporation|
|Form NDH-4||Application for declaration and for updation of status|
|5.||Foreign Company||Form FC-4||Annual Return|
|Form FC-1||Information Filing|
|Form FC-2||Return of alteration in the documents filed for registration|
|6.||One Person Company||Form INC-4||Change in Member/Nominee|
|Form INC-6||Application for Conversion|
|7.||Dormant Company||Form MSC-3||Return of Dormant Companies|
|8.||Conversion of Company||Form INC-27||Conversion of public company into private company or private company into public company|
|9.||Investor Education and Protection Fund||Form IEPF-3||Statement of shares and unclaimed or unpaid dividend not transferred to the Investor Education and Protection Fund|
|Form IEPF-4||Statement of shares transferred to the Investor Education and Protection Fund|
|Form IEPF-5||Company eVerification Report|
|10.||Filing of Financial Statements||Form AOC-4||Filing financial statements and other documents with the Registrar|
|Form AOC-4 NBFC||Filing financial statements and other documents with the Registrar for NBFCs|
|Form AOC-4 CFS NBFC||Filing consolidated financial statements and other documents with the Registrar for NBFCs|
|Form AOC-4 XBRL||Filing XBRL document in respect of financial statements and other documents with the Registrar|
|Form AOC-4 CFS||Filing consolidated financial statements and other documents with the Registrar|
|11.||Annual Return||Form MGT-7||Annual return by a Company|
|12.||Limited Liability Partnerships||LLP Form 3||Information about LLP Agreement and changes thereof|
|LLP Form 11||Annual Return|
|13.||Director Resignation||Form DIR-11||Notice of resignation of a director to the Registrar|
|14.||Special Resolutions||Form MGT-14||Filing of Special Resolutions and Agreements to the Registrar|
|15.||Section 8 Companies||Form INC-20||Intimation to Registrar of revocation/surrender of license issued under section 8|
|16.||Business Commencement||Form INC-20A||Declaration of Commencement of Business|
|17.||Report on Annual General Meeting for Listed Public Companies||Form MGT-15||Filing Report on Annual General Meeting|
|18.||Securities Allotment||Form PAS-3||Return of allotment|
|19.||Half Yearly Share Capital Report for Unlisted Public Companies||Form PAS-6||Reconciliation of Share Capital Audit Report (Half-yearly)|
|20.||Directors and Key Managerial Personnel||Form DIR-12||Appointment of Directors and the Key Managerial Personnel and the changes among them|
|21.||Appointment of Company Executive||Form MR-1||Return of appointment of Managing Director / Whole time Director /Manager|
|22.||Submission of Documents||Form GNL-2||Form for submission of documents with the Registrar|
|23.||Designation and Withdrawal as Officer-in-default||Form GNL-3||Details of Persons/ Directors/ Charged/ Specified|
|24.||Submission of Details relating to Registered Owner and Beneficial Holding||Form MGT-6||Persons not holding beneficial interest in shares|
|25.||Buy-back||Form SH-11||Return in respect of buy-back of securities|
|26.||Cost Audit Report||Form CRA-4||
Filing Cost Audit Report with the Central Government.
It may be noted that the waiver of additional fees is applicable only if the above-mentioned Forms are due for filing during the period from April 1, 2021 to July 31, 2021 and until further clarification from MCA, remaining forms (not listed above) having due date between April 1, 2021 to July 31, 2021 do not have any benefit of relaxation in timelines or waiver of additional fees.
In the Financial Year 2021-22, the Ministry of Corporate Affairs (“MCA”), vide 2 (two) General Circulars dated April 22, 2021 and May 5, 2021, introduced additional corporate social responsibility (“CSR”) activities to support the ongoing fight against Covid-19 pandemic, in extension of the original MCA General Circular No. 10 / 2020 dated March 23, 2020 which first stipulated that spending of CSR funds for Covid-19 shall be eligible CSR activity under Section 135 and Schedule VII of the Companies Act, 2013.
The companies including government companies are encouraged to undertake the activities, projects or programmes prescribed as CSR spending, directly by themselves or in collaboration as shared responsibility with State Governments or other companies, subject to fulfilment of Companies (CSR Policy) Rules, 2014 and the CSR circulars issued by MCA.
Stakeholders can now undertake the following activities as CSR activities under items (i) and (xii) of Schedule VII of the Companies Act, 2013, relating to promotion of health care, including preventive health care and disaster management respectively:
Given the ongoing Covid-19 crisis in the country, especially the severely overwhelmed healthcare infrastructure and acute oxygen shortage, stakeholders should consider spending for these activities not by choice, but as a dire necessity.
The Ministry of Corporate Affairs (“MCA”) vide 3 (three) General Circulars dated May 3, 2021 introduced several time and fee allied relaxations to alleviate the concerns of the corporate citizens facing constraints due to the severity of the COVID - 19 pandemic.
Accordingly, stakeholders can avail the following benefits:
The period from April 1, 2021 to May 31, 2021 is now excluded for calculating the 30 (thirty) days period for filing Form CHG-1 and CHG-9.
For Form CHG-1 and Form CHG-9, where the date of creation / modification of charge is before April 1, 2021 but the filing is yet to expire as on that date on account of pendency of 30 (thirty) days - the entire period beginning from April 1, 2021 to May 31, 2021 shall not be counted for the purposes of prescribed “30 (thirty) days”.
After March 31, 2021, the count of 30 (thirty) days shall begin from June 1, 2021.
Therefore, if one is yet to file Form CH-1 and/or Form CH-9 for a creation / modification for an event that occurred before April 1, 2021, then the period from April 1 - May 31, 2021 stands excluded from the count of the prescribed period of “30 (thirty) days” for the purposes of filing.
In relation to additional fees for delayed filing, the same shall be triggered only after 30 (thirty) days which shall be calculated as follows:
Delay Period = Period beginning from Event Date until March 31, 2021 + Period beginning from June 1, 2021 till Date of Filing.
If Delay Period is less than 30 (thirty) days, then no additional fee is applicable.
If Delay Period is more than 30 (thirty) days, then additional fee will be applicable
In case the event of creation / modification of charge falls on or between April 1, 2021 to May 31, 2021, then the prescribed period of “30 (thirty) days” for the purposes of filing shall begin from June 1, 2021.
Goedesic Limited, a company engaged in the business of providing products and solutions for content, communication, collaboration and electronic computing etc. (the “Company”) and listed on the BSE Limited (“BSE”) and the National Stock Exchange of India Limited (“NSE”)1 was subject to an investigation by the Securities and Exchange Board of India (“SEBI”) for the period of April 1, 2012 to March 31, 20132 (the “Investigation”). The Investigation, inter-alia, revealed that the Company made certain misleading corporate announcements during the period of Investigation with respect to buy-back of shares and payment of dividends which impacted the price and volume of the scrip of the Company. This article delves into the intricacies of the aforesaid violation along with related aspects revealed during the period of Investigation and the view taken by the SEBI towards investor protection and strengthening the regulation of the securities market.
The show-cause notice dated December 22, 2015 issued to the Company and other noticees pursuant to the Investigation, inter-alia, alleged that:
Misleading Corporate Announcements
There was a decrease in the total income and net profit of the Company from quarter ended March 31, 2012 with losses of Rs.18.96 crores and Rs.15.57 crores in the quarter ended December 31, 2012 and March 2013 respectively, the Company for the period ended June 2013 indicated ‘profits’ which were essentially increase in other income due to “net gain on exchange fluctuations” and “balance written back” as against profits. In this context, corporate announcements with respect to buy-back of shares and payment of dividends misled the market sentiments with respect to the strength of the Company’s scrip. The relevant corporate announcements along with their consequent impact on the closing market price of the scrip and its trading volume have been briefly highlighted below for ease of reference:
|1.||August 14, 2012||The Board of Directors of the Company (“BoD”) Informed the BSE that the BoD has approved the proposal to buy-back 25% of the equity shares of the Company through open offer and announced a dividend policy wherein dividend shall be declared in the Annual General Meeting (“AGM”) of the shareholders of the Company.||The scrip closed on August 16, 2012 at about 20% above its previous day closing price. BSE& NSE)
Trading volume Increase on ugust 16, 2012 (BSE): 980%
Trading volume Increase on ugust
|2.||November 12, 2012||BoD discussed the recommendation given by the buy- Back committee and decided to meet on November 22, 2012 to deliberate and announce the decision on the same.||The scrip closed on November 13, 2012 at
about 4% below its previous day closing price. (BSE)Trading volume Decrease on November 13, 2012 (BSE): 51%The scrip closed on November 13, 2012 at
about 4% below its previous day closing price. (NSE)Trading volume Decrease on November 13, 2012 (NSE): 49.51%
|3.||November 27, 2012||BoD discussed and approved to buy-back upto 25% of the equity shares of the Company at the maximum buy-back price of Rs. 75/- per share subject to the approval of the shareholders through postal ballot||The scrip closed on November 29, 2012 at
about 8% above its previous day closing price. (BSE)Trading volume Decrease on November 29, 2012 (BSE): 50%The scrip closed on November 29, 2012 at about 8% above its previous day closing price. (NSE)Trading volume Decrease on November 29, 2012 (NSE): 34%
|4.||December 4, 2012||BoD considered and recommended final dividend @ Rs. 2/- per share on the face value of Rs. 2/- each on the equity shares of the Company to be paid after the approval of the shareholders in the AGM.||The scrip closed on December 4, 2012 at about 7.80% below its previous day closing price. (BSE)
Trading volume Increase on December 4, 2012 (BSE): 160%
The scrip closed on December 4, 2012 at
Trading volume Increase on December 4, 2012 (NSE): 190%
The following key observations came forth during the Investigation:
SEBI observed that the Company had not only misled the investors about the issues governing the FCCBs but had also made the announcement of buy-back of equity shares despite being clearly aware of its precarious financial status and lack of liquidity to fructify such public announcements, which shows that the said announcement was made with “no intention” to fulfill the same and predictably, no step whatsoever towards such buy-back was taken by the Company after making such an announcement. SEBI, vide order dated April 19, 2021 restrained the Company and other noticees from accessing the securities market and further prohibition on them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, for a period of two (2) years from the date of the order
SEBI vide this order has emphasized the fact that corporate announcements that are not backed by “intent” are misleading and have the potential of causing the investors to base their investment decisions on false market information. Investor protection and maintaining and strengthening the integrity of the securities market are the guiding principles for regulatory intervention by SEBI and this verdict is guided by the same.
Experts are calling on the government to ease CSR regulations to allow corporate expenditure on vaccinations for employees and treatment of employees suffering from Covid to be covered under spending for corporate social responsibility (CSR). Companies are not permitted to count expenditure incurred exclusively for the welfare of employees as part of their mandatory CSR expenditure under current CSR norms.
Companies with a minimum net worth of Rs 500 crore, turnover of Rs 1,000 crore, or net profit of Rs 5 crore are required to spend at least 2 per cent of their average profit for the previous three years on CSR activities every year.
The Centre has already made numerous changes in CSR norms over the past year to allow corporates to count expenditure towards curbing the spread of Covid-19, including their spending on Covid vaccine awareness and donations to the PM-CARES fund as CSR expenditure.
Devesh Prakash, partner at EY, said, “Corporate India is doing a lot to support employees, so their expectation is that the (CSR) definition is expanded to include employee vaccination,” adding that such a move would improve the reach of the vaccination drive in a shorter time frame and boost vaccinations for unorganised labour in the manufacturing sector.
Manu Varghese, partner at law firm White and Brief, noted that allowing companies to count makeshift Covid facilities only for their employees would also benefit the overburdened healthcare system in general and should be counted towards CSR expenditure. The Centre recently clarified that the expenditure incurred by a company on setting up of makeshift hospitals and Covid facilities would also count towards their mandatory CSR expenditure.
“By providing makeshift hospital facilities and covering medical expenses of their employees, companies will reduce the heavy burden on existing critical Covid infrastructure, thereby benefiting the public at large. The government should consider clarifying that expenditure towards employees will also be counted towards CSR expenditure, so long as there is proper audit and documentation for the expenses incurred,” Varghese added.
Harish Kumar, partner at law firm L&L partners, said the Centre should clarify whether companies incurring scientific research expenditure on Covid-19 vaccination and treatments under their CSR expenditure would be allowed to avail income tax benefits on the same.
The government had last year permitted drug makers to classify research and development expenditure on therapies for Covid-19 as CSR expenditure, but corporations are not permitted to claim tax benefits on CSR expenditure under current rules.
However, the Income-tax Act allows companies to deduct all expenditure incurred on scientific research in a given year from their taxable profits.
India is a perfect example of an ever growing economy with a herculean market size and potential. It no secret that due to this, India is fast becoming one of the fastest growing economies in the world and is also becoming more and more popular as a destination for investment. Typically, in such scenarios people bear the sole concept of Foreign Direct Investment ("FDI") in mind leaving out a very vital part of funding viz. "Third Party Funding". Third Party Funding ("TPF") or also otherwise known as 'Litigation Financing'. In this article, we dive into the basics of the concept of Third Party Funding with an aim to view it from an Indian as well as international perspective.
What is Third Party Funding?
TPF is basically the term coined for an arrangement in which the litigation costs of a party to a dispute is borne by a funder (typically a third party who is neither related to either of the parties to a dispute nor shares any kind of interest in the dispute proposed to be funded) in exchange of a share in the monetary benefit/value of the award of the litigation, if the party so funded succeeds in its claim. Funding in such a process can be done by carefully examination of the claim on its merits and the chance of the same emerging successful in the adjudication of the dispute. Such funding can also be done on an ad-hoc basis depending upon the circumstances of each case and keeping in mind the special requirements/needs, if any. TPF can cover the costs of any kind of dispute resolution mechanisms ranging from old school litigation in courts to arbitration/mediation etc. and need not be limited to any specific type.
Who can be a funder?
A funder can be anyone whether it be a specialized third party funder, investment banks, hedge funds, high net worth third party individuals and in some cases even lawyers/law firms. Eyeing the high returns that it can offer on winning the claims, off-lately even insurance companies and pensions funds have started entering the field of Third Party Funding.
Who can receive funding?
In most of the scenarios, it is the Claimant (the party initiates or brings the claim) who is funded by TPF. This also includes Counter-Claimants in case there is a counter-claim involved from the end of one of Defendants in the dispute. This doesn't come as a surprise since they are the parties who receive a good size of monetary award in case of a successful outcome of their claims in the dispute and the process of TPF by the funders and their share of monetary benefit is contingent upon the success of the claims of the Claimants or the Counter-Claimants as the case may be. Even the defendants receive TPF for a probable defence to the claim they are faced with, however, it is a rare case scenarios and the chances of a defendant (without a counter claim) of receiving TPF are none to slim.
What kind of Costs are covered by TPF?
TPF can cover a wide variety of costs including but not limited to lawyers' fees, fees of the court/tribunal, fees charged by expert witnesses, if any, costs imposed in case of adverse orders, out of pocket expenses and other dispute related expense etc. This however, does not mean that in every case of TPF, all of these costs and expenses are necessarily covered. It is open to the funder and the party receiving the funding to tweak the funding agreement/arrangement in such a manner so as to cover only the expenses and costs which are amenable to the assent of both the parties to the funding arrangement.
What kinds of Dispute can be funded?
Strictly speaking, there is no bar coded under the Indian law against any particular kinds of disputes being funded by TPF. However, in India, the concept TPF is relatively not well established in comparison with other foreign nations where the concept of TPF is comparatively quite old and is attracted across a multitude of disputes including but not limited to commercial contracts, international commercial arbitration, class action suits, tortious claims like medical malpractice and personal injury claims, anti-trust proceedings, insolvency proceedings and any other case where the likelihood of the Claimant/Counter-Claimant succeeding in their claim is quite high.
Legal Realm of TPF in India:
The development of third-party funding in India has been almost negligible and it has been only recently that this concept has attracted attention from the Indian courts. Albeit the concept of TPF as mentioned above is not very well rooted in India, it is not no stranger to the Indian market. The concept of third party funding is statutorily recognized in civil suits under the Civil Code of Procedure in states such as Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh. This consent to third-party funding can be adduced from the Civil Procedure Code 1908, which governs civil court procedure in India. Order XXV Rule 1 of the code (as amended by Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh) provides that the courts have the power to secure costs for litigation by asking the financier to become a party and depositing the costs in court.
The Hon'ble Supreme Court of India in its judgment of Bar Council of India vs. A.K. Balaji and Ors.1 has clearly held that there exists no bar on TPF in India in the following words:
"35. In India, funding of litigation by advocates is not explicitly prohibited, but a conjoint reading of Rule 18 (fomenting litigation), Rule 20 (contingency fees), Rule 21 (share or interest in an actionable claim) and Rule 22 (participating in bids in execution, etc.) would strongly suggest that advocates in India cannot fund litigation on behalf of their clients. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation."
From the above extract, it can be safely said that except lawyers, any other third parties in India can fund any of the disputes without facing any legal bar on the same. However, due to bar on lawyers charging their fees on a contingent basis, they are expressly barred from being involved in a TPF transaction in the clothes of a funder.
It is also pertinent to note that there is no legislation in our country as of today, to regulate such scenarios of TPF. However, the (Indian) Code of Civil Procedure, 1908 as amended by a few Indian states including Maharashtra, Karnataka, Gujarat and MP, expressly acknowledges the role of the financier of litigation costs of a plaintiff and sets out the situations when such financier may be made a party to the proceedings. TPF has also received favourable reference in the report of the High Level Committee to review the Institutionalisation of Arbitration Mechanism in India (2017)2.
Limitation of the existing legal landscape:
It is well established that lawyers in India are expressly barred from funding litigation when representing the disputing party or accepting a success based fee. However, what the Indian parliament fails to take into account is that this could bear an inherent structural limitation for funders that typically seek contingency fees of legal counsel as a core factor to an investment decision to ensure alignment of interests. Additionally, whether a TPF arrangement falls foul of public policy would depend on the terms of the arrangement including the funder's stake in the award, if determined to be extortionate. Another limitation that is yet to evolve is the permissibility of foreign investment in third party funding of disputes in India.
Indian litigation is an ever expanding market with increased commercial activity. While there is a demonstrable demand for structured and professional TPF to facilitate the pursuit of viable claims, a few sticky areas of concern are:
The need of the hour is to remove the above mentioned limitations & balance public policy considerations against each other and bridge the gap between legitimate claims and lack of resources to support the same.
Indian Perspective of TPF for Arbitration Disputes:
With increasing cross-border transactions international commercial and investment arbitrations have also increased concurrently. Though, arbitration is the more efficient and time saving procedure (as compared to litigation in domestic jurisdictions) the exorbitant costs attached with it cannot be ignored.
An argument which can be put forth for introducing formal Third Party Funding in Indian arbitration is that litigation and arbitration differ in material aspects. Firstly, arbitration is based upon the concept of party autonomy where all catalysts of the proceeding are directly or indirectly decided by the parties. Thus, keeping in line with the same, parties should be free to take the services of a third-party funder wherever necessary. In support of this, it is opined that a party is a best judge of its interest and the court should ordinarily uphold such consent if it is satisfied that the benefits arising from such funding outweigh the risks associated with such funding.
Another noteworthy point in this respect is that in litigation, there are statutory provisions for providing free legal aid to the party who cannot afford the same. Thus, it is not absolutely incorrect to say that India is perhaps justified, to some extent, in not expanding the scope of third party funding in litigation. However, it is noteworthy to mention here that in contrast to the same, there is no such provision in the Arbitration Act. In such circumstances, a party is either required to put forth its claim (or defend it) on his own or surrender it due to financial restraints. In this respect, it has been observed that unlike litigation, where the litigant has a constitutional right to access to justice; a party de facto loses this right if it is unable to support the costs of arbitration.
In certain cases, the less privileged party may be able to hire the services of a lawyer but the opposite party might be in a position to hire better lawyers, thereby enabling it to put forth its claim in a much better way. Such situations may arise in case of Loan Agreement Defaults, land development/redevelopment agreements with a real estate developer on one side and an individual(s) on the other, where the individual(s) are in an inferior position as compared to the developer. In such circumstances, third-party funding can play a pivotal role while financing such less privileged parties whose claim is likely to succeed thereby, levelling the playing field.
Though TPF transactions are still taking place involving Indian parties to an arbitration dispute, the third party funders are extremely hesitant in funding Indian parties especially when the seat of the arbitration is in India. This is because of lack of judicial and legislative regulation over TPF transactions and contradicting judgments from various high courts in relation to arbitration law weakening its position as a pro-arbitration destination in the world. However, the chances of Indian parties getting third party funders increases exponentially when
International Perspective on TPF:
Over recent years, the concept has attained global impetus and jurisdictions such as Australia, Germany, United Kingdom, Singapore, and Hong Kong have taken steps to abrogate the legal barriers associated with TPF. Evidently, these jurisdictions have acknowledged the benefits associated with the concept, which include enhanced capital, effective recovery mechanism, and facilitating access to justice, to name a few. In the Asian setting, Singapore has passed amendments to its Civil Law Act legalising third party funding for arbitration and associated proceedings. Similarly, Hong Kong has also legalised third party funding for arbitrations and mediations. Other legislative efforts have focussed on creating a conducive environment for arbitration through favourable regulatory measures and tax incentives.
For instance, Singapore has passed legislation waiving the requirement for work permits for foreigners rendering arbitration services in Singapore and removing restrictions on the nationality of counsel and arbitrators involved in arbitrations in Singapore. Singapore also provides incentives in the form of tax exemptions for income derived by non-resident arbitrators for arbitration work carried out in Singapore and a tax exemption of 50 per cent for qualifying law practices on their incremental income that arises out of international arbitration cases which culminate in Singapore or in which substantive hearings have been held in Singapore.
In Hong Kong too, there are no restrictions on foreign law firms engaged in arbitration and no requirements are imposed on nationality and professional qualifications on advisers to parties.
In Sweden, any person with full legal capacity without constraints of nationality or professional qualification is permitted to act as an arbitrator.
It is more than clear that various actions around the world are making changes and adapting their legal system by introduction of legislations with an aim to regulate TPF in their nation since they recognize its importance and benefits and hence show a willingness to inculcate the same in their legal system. Similar measures, if adopted with suitable modifications for the Indian context, could give a boost to India's image as a pro arbitration jurisdiction and encourage advent of foreign companies and their business in India thereby giving an impetus to the economic growth of the country.
Need for TPF in the India Legal Scenario:
As per the Access to Justice Survey3 Report prepared By Daksh India, Civil litigants spend INR 497 per day on average for court hearings. They incur a loss of INR 844 per day due to loss of pay. Criminal litigants spend INR 542 per day for court hearings on average and incurred a cost of INR 902 per day due to loss of pay4. Litigants in family matters and service cases spend more on each hearing than other litigants.5
Further, the lowest income group (with an annual income of less than INR 1 lakh) is seen to be most optimistic about their cases being resolved within 1 year. 44% of litigants cited expense as a major deterrent for filing appeals in the High Court if their cases were not resolved in their favour. It is rather very shameful that apart from the real time loss, the loss of productivity due to attending court hearings because of wages and business lost comes to 0.48% of the Indian GDP6. An average of cost of litigation per year (as on the date of publishing this report i.e. during the F.Y. 2015-2016) came up to a staggering figure of Rupees Thirty Thousand Crores. This cost, in consonance with number of pending cases can only be said to have gone up till the current year.
Apart from the above mentioned reasons, TPF should be viewed in light of the various advantages it offers which are as follows:
In recent times, amidst the COVID-19 Pandemic and its deadly repercussions not only on the health of the citizens but also on the economy and the spending power of Individuals in India, there is a dire need of regularizing and encouraging TPF in India. Due to widespread economic distress, parties to such disputes may find themselves unable to bear the high costs of litigation or arbitration. India is but a cost-effective jurisdiction for litigation and dispute resolution. Not only individuals, but even business houses and companies are helpless in facing red in their balance sheets and shrinking size of business with more and more restrictions being put in place.
The corona virus pandemic has also caused more contractual disputes between the companies in India. Indian companies have only one option to fight the case and pay hefty legal fees to lawyers who are very expensive. Companies are not able to meet the working capital requirement due to payment of hefty legal fees to the lawyers. Number of cases having good merits are going uncontested in India. Last year two notable examples of third-party funding have raised awareness amongst corporate finance advisors to see litigation funding as an alternate means of financing: the monetisation of arbitration award in Hindustan Construction Company and Patel Engineering. Major infrastructure companies in India are struggling with stressed assets and huge pending claims, litigation funding would definitely help them to settle their claims.
Having said that, global Third Party Funders are planning to enter the Indian market, anticipating a rise in contractual disputes and bankruptcy related cases. With the benefits/advantages that TPF offers, India should consider introducing a potent legislation in place to regularize TPF in India and extract the maximum benefits out of this system by exploiting the humongous scope that Indian litigation market offers.
The Bombay High Court on Tuesday refused to grant interim relief to pharmaceutical company Cutis Biotech and restrain Serum Institute of India (SII) from using the trademark 'Covishield,' for its coronavirus vaccine. A division bench of Justices Nitin Jamdar and C. V. Bhadang said that the Nanded civil court's order, refusing Cutis an injunction against Serum Institute was not...
A lot has been said about what is largely perceived to be a pro-growth Union Budget 2021 (Budget) and a lot more about the unprecedented viral precursor accompanying this fiscal outlook for the financial year 2021-22. What has however remained unchanged from the pre-COVID era to the near term-after is the Government’s continued push, albeit modest, for start-ups. The Government got to business by offering extended year-bound tax reliefs, unshackling the monetary limitations and reducing the compliance framework for small businesses.
In relation to tax reliefs, the Budget has sought to appease start-ups by extending the capital gains tax exemption for investments in an eligible start-up company and extending the 100% tax rebate on profits, the “tax holiday”, in an eligible start-up - both by an additional financial year. These tax exemptions should help attract investments and create tangible benefits for eligible start-ups.
In the regulatory sphere, beginning with the definitional change of the micro, small and medium enterprises (MSME) effective from July 2020, the redefinition spree has now been extended to small companies under Companies Act, 2013 (2013 Act), by increasing the eligibility limits of INR 50 lacs (Paid up capital) and INR 2 crores (Turnover) to INR 2 crores (Paid up capital) and INR 20 crores (Turnover). The result is the slashing of the compliance burden to almost half and lesser paperwork, in comparison with a private company, benefitting new start-ups seeking a more formalized legal structure. Regulatory flexibility has also been extended to the underperforming “one person companies'' under the 2013 Act, by removing conversion and turnover restrictions, reducing the residency limit for Indian citizens from 182 to 120 days and allowing Non-Resident Indian (NRI) participation. The amendments to the 2013 Act were followed by the decriminalization of the Limited Liability Partnership (LLP) Act, 2008 and putting forth policy intent to introduce “Small LLP’s” and to permit LLPs to raise capital through the issue of non-convertible debentures. Given that one of the eligibility conditions for start-up recognition under the Start-up India Action Plan is the incorporation as a private limited company, registered partnership firm or a limited liability partnership, these regulatory changes should result in more start-ups seeking to formalize their setup as well as promote domestic individual entrepreneurship. The extension of incorporation rights for “one person companies” should incentivise offshore NRI led start-ups to set up shop in India.
Social impact driven financial inclusion is another theme of this Budget, which along with the complementary Startup India Seed Fund Scheme (SISFS) with a target corpus of INR 945 crores envisaging a staggered disbursement over a period of 4 years, beginning from April 1st 2021, to support an estimated 3,600 start-ups. With the SISFS, the Government is seeking to prioritize start-up culture in public welfare sectors such as healthcare, agriculture, social impact, waste management, water management, food processing and financial inclusion, amongst others. Under the SISFS guidelines, only start-ups complying with conditions such as recognition by Department for Promotion of Industry and Internal Trade (DPIIT), incorporated not more than 2 years from date of application, having a market fit business idea with viable commercialization and scaling and early-stage inclination to the use of technology, are eligible. These eligibility requirements may limit the number of actual beneficiaries of the scheme, leaving out the informal and yet to be tech-savvy start-ups, especially in the public welfare sectors. While the real-world impact of SISFS and its performance assessment are yet to be seen, the selection criteria set out in the guidelines seem to incorporate unbridled discretionary authority and bureaucratic involvement in the review and disbursement process.
Despite all the above-mentioned measures, the Budget has not been all sunshine and subsidies for start-ups. The Budget has overlooked resolving some of the critical issues currently faced by start-ups, such as the difference in treatment between DPIIT recognized and non-recognized start-ups, loss of benefits such as the ‘Angel Tax’ exemption to non-recognized start-ups, delinking of ESOP exemption from requiring Inter-Ministerial Board approval exemption from surcharge on gains from sale of unlisted securities and exemption from GST under reverse-charge for start-ups, amongst others. The Government needs to address these issues and arrive at workable solutions which are practical and beneficial to the start-up ecosystem.
While this Budget may seem modest vis-a-vis start-ups, it is nonetheless a push in the right direction and we may see more Unicorns taking root and flourishing in the given growth-conducive environment. Further, with the Government pivoting interest to other areas of importance, it is plausible to see more Zebras gradually rising and contributing to a lasting socio-economic impact. Despite a global pandemic, 2020 alone saw 11 start-ups turning into Unicorns evincing the fact that the Indian start-up ecosystem has come a long way. With the Budget incentives coupled with well-meaning policy initiatives, we can hope to see a further boost in numbers of the much-coveted Indian Unicorns and the existing Unicorns maturing to Decacorns.