Mumbai-based brand ‘Shaadi.com’ was launched in 1997 by Anupam Mittal and cousins, founders of People Interactive (India) Private Limited (“Company”). Since its introduction into the “matrimonial market”, the brand has become a prominent online matchmaking platform with international repute and presence. However, in early 2024, news broke about a messy legal battle between Anupam Mittal (by this time, serving as managing director for over 15 years) and WestBridge Ventures II Holdings, a Mauritius-based private equity fund (“WestBridge”), from whom the Company had secured funding in 2006. Spanning proceedings before courts in India and Singapore, the case is poised to become a landmark moment in the evolution of international arbitration law and intra-corporate disputes. Involving allegations of forced transfer to competitors and an expensive series of litigations, this dispute necessitates that potential investors and investee companies (and their founders) glean an understanding of the key takeaways.
Background of the Relationship between the Parties
Timeline
Event
1997
People Interactive (India) Private Limited (“Company”) founded and Mumbai-based “sagaai.com” launched by Anupam Mittal and family (“Founders”), offering an online matchmaking platform for Indians around the world.
2001
The platform is renamed to “Shaadi.com” and becomes the Company’s flagship brand. [1]
October 2004
Anupam Mittal appointed as Managing Director of the Company.
February 10, 2006
WestBridge Ventures II Holdings, a Mauritius-based private equity fund (“WestBridge”) invests INR 165,89,00,000 (Rupees One Hundred Sixty Five Crores Eighty Nine Lakhs) in the Company (“Investment”). Company, Founders and WestBridge sign a shareholders’ agreement. [2]
Parties agree on exit rights for WestBridge, which includes the following options:(i) an Initial Public Offering (IPO) to be completed within 5 years of closing;(ii) sale of WestBridge shares to third parties (excluding significant competitors);(iii) redemption or buyback provisions if the IPO was not completed within 5 years; and(iv) drag-along rights if the Company fails to buyback shares within 180 days of exercising the buyback option (“Drag Along”). If an IPO was not completed within 5 years, WestBridge could redeem all its shares and if necessary, “drag along” all other shareholders (including Founders) to sell their shares to a third party.
Parties agree in the SHA that:(i) the SHA is governed by the laws of India; (ii) any disputes arising from the agreement would be resolved through arbitration as per the International Chamber of Commerce Rules (“ICC”) with seat of arbitration in Singapore; and (iii) the enforcement of arbitration award would be subject to Indian laws.
2006
Consequent to the investment, WestBridge holds 44.38% and Anupam Mittal holds 30.26% of the shareholding of the Company.
2011
Contractually agreed period to complete IPO expires.
2017 – 2019
WestBridge seeks to exit the Company by allegedly entering into discussions to sell its shares to a direct competitor, Info Edge India Limited (“Info Edge”), owner of matchmaking platform ‘Jeevansathi’. [3]
Tensions between the parties continue, with alleged acts of oppression and mismanagement by WestBridge “facilitated” by other Founder directors [4], including a joint requisition to the Company to convene an extraordinary general meeting of the Company. The agenda for such meeting involves replacing Anupam Mittal as the managing director.
December 2020
WestBridge exercises its buyback option, requiring that the Company: (i) convert the 1,000 Series A1 preference shares into 580,779 equity shares; and then, (ii) effect a buyback of said equity shares. Company converts the preference shares, but is unable to offer the buyback price for the converted equity shares.
October 2021
WestBridge issues a drag-along notice compelling the sale of shares to a “significant competitor”, relying on the SHA which states that if the buyback could not be completed, the Drag Along rights would be triggered, which included the right to have the holding of the minority shareholders (including founders) liquidated and sold to any party without restriction.
Jurisdiction is Key – India v/s Singapore:
This dispute has highlighted significant challenges in cross-border legal disputes and the complexities of enforcing shareholder agreements in international fora. Despite litigation stretching on since 2021, the issue of oppression and mismanagement has yet to be ruled on, and the current issue before the courts is actually of: (i) jurisdiction, i.e., determining the competent authority to adjudicate on the SHA and allegations of oppression and mismanagement; and (ii) enforceability of foreign arbitration awards:
Singapore Jurisdiction: WestBridge argued that since the SHA stipulated that arbitration would be governed by International Chamber of Commerce (ICC) rules with Singapore as the arbitration seat, the dispute was to be heard and adjudicated in Singapore. The Singapore courts upheld this on the basis of: (i) the composite test, ruling that whether a dispute is arbitrable or not will be determined by the law of the seat as well as the law governing the arbitration agreement; and (ii) oppression/mismanagement disputes being arbitrable under Singapore law.
Indian Jurisdiction: Mittal argued that jurisdiction to hear issues of corporate oppression and mismanagement is exclusively vested with the NCLT under Sections 241-244 of the Companies Act, 2013 and are not arbitrable under Indian law, in accordance with Section 48(2) of the Indian Arbitration & Conciliation Act, 1996 (“A&C Act”), which is briefly excerpted below:
“Enforcement of an arbitral award may also be refused if the Court finds that—
(a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
(b) the enforcement of the award would be contrary to the public policy of India.
Explanation 1: For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if – (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.” (emphasis added)
It is crucial to note that the provisions of the A&C Act have been interpreted to limit the arbitrability of intra-company disputes and consequently, provide Mittal with the legal grounds to resist enforcement of the foreign arbitration award.
Implications of the Case
This case holds significant implications for corporate law, cross-border investments, and the arbitration landscape, particularly in the context of Indian startups and venture capital:
Jurisdiction Determination: The case emphasizes the importance of clearly defining jurisdiction in cross-border agreements, especially where legal disputes span multiple countries. The differing interpretations of arbitration clauses by Singapore and Indian courts underscore the complexities of jurisdictional overlaps.
Extent of Arbitration in Legal Disputes: The case explores the limits of arbitration, particularly concerning corporate governance issues like oppression and mismanagement. The contrasting legal positions in Singapore and India highlight the potential conflicts that arise when arbitration is attempted in disputes traditionally reserved for domestic courts.
Enforcement of Cross-Border Orders: The enforceability of foreign arbitration awards in domestic courts is a critical concern, especially when the awards conflict with local laws. The Bombay High Court’s observation that corporate oppression disputes are non-arbitrable under Indian law, thus rendering foreign awards unenforceable, could set a precedent for future cases.
Corporate Oppression and Minority Rights in India: The case brings to light the challenges of protecting minority shareholder rights in complex financial arrangements involving multiple jurisdictions. It illustrates the potential for exit mechanisms, such as drag-along rights, to be used in ways that might disadvantage minority stakeholders.
Adverse Impact on Shaadi.com
The crux of Anupam Mittal’s case is simple – if the Drag Along with sale of shares to a significant competitor is enforced, the impacts to the Company and the ‘Shaadi.com’ brand are adverse:
Control of the Company: If Info Edge or any other competitor were to purchase the shares sold as part of the Drag Along structure, this would open the path for them to acquire the majority shareholding in the Company, and could drastically alter the Company’s control dynamics. Currently, Anupam Mittal holds a 30% stake, while WestBridge controls 44.3%. With the consummation of the Drag Along sale, this could facilitate a takeover by such competitor and potentially diminish the Founder’s influence over the Company.
Business, Strategy and Culture: A shift in control/ownership could lead to a major restructuring of Shaadi.com’s strategic direction and operations. This might affect key business decisions, brand positioning, and market strategies. Additionally, a change in control could impact the Company’s culture and its relationships with stakeholders, including employees, customers, and partners.
Competition: As one of three prominent names in the online matchmaking platform industry (including ‘BharatMatrimony’ and ‘JeevanSathi’), any potential acquisition of the Company by a competitor would result in a potential acquisition of the ‘Shaadi.com’ brand absorbing the customer base and effectively, the market share held. This could not only result in a dramatic change in the existing market competition but potentially require strategic realignment within the industry.
Future Implications for Startups and Venture Capital Firms
For startups and venture capital (VC) firms, this case underscores several crucial lessons.
Lessons in Drafting: It is crucial that: (i) exit clauses and dispute resolution mechanisms be drafted with precision; and (ii) transaction documents include clearly outlined terms for various scenarios, including exits, buybacks, and drag-along rights, to prevent ambiguous interpretations and conflicts. Properly crafted agreements and well-defined dispute resolution processes can mitigate risks and facilitate smoother exits and transitions
Jurisdictional Issues: It is critical that arbitration provisions be aligned with the legal frameworks of all involved jurisdictions. This alignment helps avoid prolonged and expensive legal disputes that can arise when different legal systems have conflicting interpretations of agreements. Startups and VCs should also consider the implications of international arbitration clauses and ensure they are practical and enforceable across jurisdictions.
Preference for Singapore-seated arbitration: One of the key takeaways from this dispute is that differing principles of law governing arbitrability of a subject matter, would impact the enforceability of foreign awards in India. Given its reputation as an arbitration-friendly jurisdiction, Singapore is often designated as the seat of arbitration in investment and shareholder agreements. However, in light of this case it is crucial for parties to keep two elements in mind when negotiating an arbitration clause designating a foreign seat: (i) the law applicable to the arbitration agreement must be expressly stipulated to avoid any uncertainty; and (ii) the subject matter of the anticipated dispute should be arbitrable under both the law applicable to the arbitration agreement as well as the law of the seat.
Conclusion
The WestBridge vs. Shaadi.com dispute transcends a typical investor-company conflict and stands as a landmark case in corporate governance and cross-border legal disputes, with particular impact on arbitration law. It has the potential to reshape how shareholder agreements are interpreted and enforced, particularly in complex, multi-jurisdictional contexts. The outcome of this case is likely to set important precedents for the management of shareholder rights, dispute resolution, and arbitration processes in international investments, especially given the popularity of choice of Singapore as a seat of arbitration for foreign investors. It also sheds light on the intricate balance between protecting minority shareholder interests and upholding contractual agreements. The implications of this case extend beyond Shaadi.com, influencing future legal frameworks and practices for corporate governance and investor relations in the global business landscape.
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References:
[1] Article published in the business journal from the Wharton School of the University of Pennsylvania on May 11, 2012, accessible here. [2] NCLT Order on September 15, 2023, in Anupam Mittal v People Interactive (India) Private Limited and others, available here.
[3] Article published by Inc42 on September 05, 2024, accessible here. [4] Bombay High Court Judgement on September 11, 2023, in Anupam Mittal v People Interactive (India) Private Limited and others, available here.
The Companies Act, 2013 (the “Act”), has introduced significant changes to the rules governing application monies received by companies through private placement and preferential allotment of shares, aiming at enhanced transparency, protection of investor interests, and ensuring timely utilization of funds.
This article outlines the key provisions and implications of non-compliance regarding the refund of application monies under the Act.
Following the recent budget announcement, which aimed to simplify regulations for Foreign Direct Investment (FDI) and Overseas Investment (ODI), the Department of Economic Affairs has amended the FEMA (Non-debt Instruments) Rules 2019. A significant aspect of this amendment is the introduction of a new provision that enables FDI-ODI swaps. We have curated a slide below to help you understand this better.
Broad Mechanics
Foreign Company A holding shares in Foreign Company B.
Foreign Company A transferring shares of Foreign Company B to Indian Company.
Indian Company issuing its shares to Foreign Company A as consideration for acquiring shares of Foreign Company B.
Indian Company now permitted to acquire shares of a Foreign Company under ODI Rules via the swap route. i.e., Consideration for purchase of shares of Foreign Company B from Foreign Company A can be discharged by way of issuing its own equity shares to Foreign Company A.
𝘖𝘵𝘩𝘦𝘳 𝘢𝘮𝘦𝘯𝘥𝘮𝘦𝘯𝘵𝘴:
1. Investment by OCIs on non-repat basis 𝐞𝐱𝐜𝐥𝐮𝐝𝐞𝐝 from calculation of indirect foreign investment. Earlier only NRI investment was excluded.
2. Aggregate FPI cap of 49% of paid-up capital on a fully diluted basis has now been removed. FPIs now required to 𝐨𝐧𝐥𝐲 𝐜𝐨𝐦𝐩𝐥𝐲 𝐰𝐢𝐭𝐡 𝐬𝐞𝐜𝐭𝐨𝐫𝐚𝐥 𝐨𝐫 𝐬𝐭𝐚𝐭𝐮𝐭𝐨𝐫𝐲 𝐜𝐚𝐩.
3. ‘White Label ATM Operations’ has been recognized as a new sector, with 100% 𝐅𝐃𝐈 𝐧𝐨𝐰 𝐚𝐥𝐥𝐨𝐰𝐞𝐝 𝐮𝐧𝐝𝐞𝐫 𝐭𝐡𝐞 𝐚𝐮𝐭𝐨𝐦𝐚𝐭𝐢𝐜 𝐫𝐨𝐮𝐭𝐞.
Key Indian players in this sector: India1 Payments, Indicash ATM (Tata Communications), Vakrangee, and Hitachi Payments.
4. NR to NR transfer will require prior Govt approval 𝐰𝐡𝐞𝐫𝐞𝐯𝐞𝐫 𝐚𝐩𝐩𝐥𝐢𝐜𝐚𝐛𝐥𝐞. In the erstwhile provisions, it was required only if investment in the specific sector required prior Govt approval.
5. Definitions – Control now defined in Rule 2, and definition of “startup company” has been aligned with “startups” recognised by DPIIT vide notification dated February 19, 2019. Definitions of “control” and “startup company” elsewhere have been deleted.
The IFSCA issued a consultation paper yesterday proposing an “informal guidance” framework, summarized below:
Who can request:
Existing players in IFSCA
Persons intending to undertake business in IFSC
Others as may be specified
Types of guidance:
No-Action Letters: Request IFSCA to indicate whether or not it would take any action if the proposed activity/ business/ transaction is carried out
Interpretive Letters: Request for IFSCA’s interpretation of specific legal provisions
Process:
Application fee: USD 1,000
IFSCA aims to respond to requests within 30 days
The consultation paper invites stakeholders / public to submit feedback by September 10, 2024 via email This is a proactive approach by the IFSCA to foster transparency and provide support to entities operating or looking to operate within the IFSC, ensuring that they have the necessary guidance to comply with the evolving regulatory landscape.
The Reserve Bank of India has updated its Master Directions on Foreign Investment in India (FED Master Direction No.11/2017-18) as of August 08, 2024, introducing key definitions and clarifying various provisions.
Among these updates, the validity of the Valuation Certificate is particularly noteworthy.
Loan from Directors or Relatives and Compliances involved
In urgent situations, companies often seek to quickly augment their working capital by sourcing funds from their Directors in the form of loans. This approach provides a rapid solution for meeting immediate financial needs. However, it is crucial to ensure that such transactions comply with the provisions outlined in the Companies Act, 2013 (the “Act”).
Key Compliance Points
01. Board Approval Required According to Section 179(3)(d) of the Act, any loan from Directors or their relatives must be approved by a formal Board resolution. This means that the company must convene a Board Meeting and pass a resolution authorizing approval of these loans.
02. Declaration of Source of Funds Under Rule 2(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014 (“Deposit Rules”), the Director or their relatives must provide a declaration stating that the funds are not sourced from loans or deposits accepted from other parties.
03. Permissible Loans The Deposit Rules outline specific conditions for permissible loans that are not classified as deposits. Compliance with these conditions is crucial to ensure proper categorization and regulatory adherence.
04. Disclosure in Financial Statements and Director’s Report Any loans received must be appropriately disclosed in the notes to the Financial Statements and the Director’s Report, ensuring transparency and compliance with regulatory requirements.
A Wholly Owned Subsidiary (WOS) is a company whose entire share capital is held by another company, known as the holding or parent company. The process of incorporating a wholly-owned subsidiary in India is governed by the Companies Act, 2013. The application is processed by the Central Registration Centre (CRC), Ministry of Corporate Affairs.
Prerequisites for setting up a WOS (Private Company) in India
Holding Company to pass a resolution authorising the setup of a WOS in India and identifying the proposed name(s); paid up capital and authorised signatories / nominees of the WOS
Check if RBI/Government approval is required for receiving Foreign Direct Investment (FDI) Identify minimum 2 directors, 1 of whom shall be a Resident Director
Identify an Authorised Representative on behalf of Holding Company to sign documents to be submitted for incorporation
Identify a Nominee Shareholder of the Holding Company who will hold minimum shares in the WOS on behalf of the Holding Company
While ODI offers opportunities for persons resident in India to expand their market reach in bona fide businesses, access new resources, and achieve economies of scale, it also comes with significant challenges that can affect the success of such investments.
Key challenges and recommendations
● Identification of First Subscriber of Foreign Entity: First subscribers to be identified at the time of incorporation of the foreign entity, to avoid additional undertakings by CA/CPAs.
● Documentation to entail recent Forex Rate: Check with your AD bank at what rate the transaction will go through. Exchange rate volatility can affect the value of investments and returns when converted back to INR and AD banks usually insist on putting recent dates in all their documents.
● Certification Complexity: Obtaining various certifications from Chartered Accountants to verify investment limits, source of funds, and compliance with both Indian and foreign regulations adds to administrative burden. Bankers typically require Audited Financials not older than six (6) months or CA Certified provisional statements and interim reports in addition to Section E certification & host country compliances certification.
● Financial commitment Cap: Financial commitments of an Indian Entity must not exceed 400% of the net worth from the latest audited balance sheet (within 18 months) or USD 1 billion per year, whichever is lower. Resident individuals can invest in equity capital up to the Liberalized Remittance Scheme limit of USD 250,000 annually.
● Deferred Payment Agreement (DPA): Mandatory requirement if securities are not subscribed to immediately upon incorporation of Foreign Entity.
● Submission of Evidence of Investment: Share certificate to be submitted as a proof of investment within six months of the generation of UIN.
● Permissibility of ODI in specific cases: If there are outstanding reports or submissions such as APR, Share Certificate, Foreign Liabilities & Assets (FLA), LSF payment for that Foreign Entity, ODI will not be permitted.
● All ODIs under the same UIN: All future ODIs must be processed through the same AD Bank that issued the UIN. Transactions through a different AD Bank are only possible after transferring the UIN, which is a complex and cumbersome process.
Conclusion
Foreign Exchange Management (Overseas Investment) Directions, 2022 (dated August 22, 2022) offers Indian companies significant opportunities for growth and expansion. However, the process is complex and requires careful navigation of legal, regulatory, and financial challenges.
Success in overseas investment requires careful planning and a good grasp of both Indian and international regulations. Overall, the ODI process requires meticulous planning, adherence to regulatory requirements, and coordination between various stakeholders.
Therefore, Indian businesses looking to venture abroad must engage with legal and financial experts who can guide them through these challenges, ensuring compliance with all relevant regulations and maximizing the potential return on their investments. With the right strategy, businesses can seize global opportunities, minimize risks, and expand their international footprint.
The Union Budget 2024, announced on July 23, 2024, proposed a significant change in the long-term capital gains tax regime. The long-term capital gains tax rate is set to be reduced from 20% to 12.5%. However, this proposal included removal of the indexation benefit for long-term capital gains on the sale of assets, including real estate.
Initially, this removal of indexation benefit was to apply to properties acquired after 2001. In a relief to real estate owners, it has now been proposed to extend the option of availing indexation benefit to properties purchased until July 23, 2024.
Taxpayers selling property purchased before July 23, 2024 will have two options to compute their long term capital gains tax:
– Continue under the old tax regime : Pay a 20% long-term capital gains tax with the indexation benefit
– Opt for the new tax regime: Pay a lower tax rate of 12.5% without any indexation benefit
But what happens in case of a long term capital loss? Will the loss on account of indexation benefit be allowed to be carried forward? Let us know your thoughts in the comments below or reach out to us at [email protected] for a detailed discussion.
The International Financial Services Centres Authority (IFSCA) has proposed amendments to the FME Regulations to introduce a Platform Play framework, discussed below:
What?
Fund Management Entities (FMEs) operating in GIFT IFSC may extend their fund management platforms to other clients.
Who?
All FMEs registered with IFSCA can manage schemes (funds) for other clients, up to an AUM of USD 10 million per fund.
How?
– Adequate disclosures in offer documents
– Appointment of distinct Principal and Compliance Officers for each strategy.
– Implementation of a comprehensive risk management framework.
– Regular internal audits and reviews.
– A robust mechanism to address investor complaints and disputes.
– Operational independence for each strategy.
Why?
This framework draws inspiration from the Luxembourg ManCos model, managing more than EUR 100 bn in AUM, where investment funds are managed on behalf of others, handling key tasks such as portfolio management, risk control, compliance, and investor relations.
The proposed Platform Play framework will allow fund managers to explore opportunities in GIFT IFSC by using the platform of an existing FME. Additionally, this framework offers existing FMEs the opportunity to expand their service offerings to other funds.
General public and stakeholders are requested to forward their comments/suggestions on this framework on or before August 26, 2024.
What do you think of this? Reach out to us at @[email protected] for a deeper discussion or leave a comment below.
1. Who is a Company Secretary? 2. Appointment criteria as per the Companies Act, 2013. 3. Penalties for non-compliance. 4. Key insights and compliance tips.
Circular resolutions, as per Section 175 of the Companies Act, 2013, allow the Board of Directors to make urgent decisions without formal meetings. This method is quick, efficient, and essential for time-sensitive matters.
Key Points:
1. Process: Circulate the draft to all directors via hand delivery, post, or electronic means. 2. Approval: Resolution passes with majority approval. 3. Exclusions: Certain significant decisions like issuing securities or approving financial statements must be made in formal meetings.
Our latest document provides comprehensive insights into the various types of meetings mandated by the Act, including the crucial first board meeting for private companies.
Key topics covered include: 1. Board Meetings 2. Annual General Meetings (AGM) 3. Extraordinary General Meetings (EGM) 4. First Board Meeting for Private Companies
We’re thrilled to share the remarkable growth in fund management activities at GIFT-IFSC! Our latest infographic highlights the significant increase in the number of FMEs and funds, investment commitments, and quarterly growth. This impressive surge underscores the expanding scale and acceptance of GIFT-IFSC as a premier fund management hub.
At Treelife, we believe that financial literacy is the cornerstone of business success. Understanding key financial concepts can empower you to make informed decisions and drive your business forward. We’ve created this post to help you get familiar with 10 essential financial terms that every professional should know.
Swipe through to enhance your financial knowledge!
We at Treelife have compiled a guide to help you manage the process of the intricate landscape of share transfers efficiently and comply with the legal requirements under The Companies Act, 2013, and The Foreign Exchange Management Act, 1999.
Key Highlights:
1. Form SH-4 Submission 2. Board and RBI Approvals 3. Documentation
Navigating the startup ecosystem can be a daunting task, especially for new entrepreneurs trying to turn innovative ideas into viable businesses. Understanding key terms and concepts in the startup world is essential for anyone aiming to succeed in this dynamic environment. Here, we break down some of the most important terms that every startup founder, investor, and enthusiast should be familiar with.
1. Product-Market Fit: This term refers to the degree to which a product satisfies a strong market demand. Achieving product-market fit is crucial for the success of any startup, as it signifies that the product meets the needs of the target audience. An example of this is Zomato, which successfully identified the need for a reliable platform for restaurant discovery and food delivery, thereby catering to the urban consumer’s demand for convenience and variety.
2. Minimum Viable Product (MVP): MVP is the simplest version of a product that can be launched to test a new business idea and gauge consumer interest. The goal is to validate the product concept early in the development cycle with minimal investment. Paytm is a prime example, initially launching as a simple mobile recharge platform before expanding into a full-fledged digital wallet and financial services provider.
3. Go-To-Market Strategy: This strategy outlines how a company plans to sell its product to customers, including its sales strategy, marketing, and distribution channels. It is essential for effectively reaching and engaging the target market. For instance, a well-known ride-hailing company used aggressive marketing and deep partnerships with banks and manufacturers to penetrate the Indian market by offering significant discounts and loans to drivers.
4. Customer Acquisition Cost (CAC): CAC is the total cost incurred by a company to acquire a new customer, including expenses related to marketing, advertising, promotions, and sales efforts. It is a critical metric for assessing the efficiency of a startup’s customer acquisition strategies. According to a 2022 report by IMAP India, the average CAC for Indian startups across various sectors is approximately ₹1,200-1,500.
5. Lifetime Value (LTV): LTV represents the total revenue a business can expect from a single customer account over the entirety of their relationship with the company. For instance, Swiggy evaluates LTV through its Swiggy One membership, analyzing factors such as average order value, order frequency, and subscription renewals to determine the enhanced value brought by members compared to typical customers.
6. Freemium Model: This business model offers basic services for free, with advanced features or functionalities available for a fee. LinkedIn is a prominent example, providing free networking services while offering premium subscriptions for enhanced job search features and LinkedIn Learning.
7. Runway: The runway is the length of time a company can continue operating before needing additional funding, based on its current cash reserves and burn rate. For instance, Unacademy recently made financial adjustments that reduced its cash burn by 60%, securing a financial runway of over four years.
8. Burn Rate: Burn rate refers to the rate at which a company spends its cash reserves or venture capital to cover operating expenses before achieving positive cash flow. Monitoring burn rate is crucial for ensuring a startup’s long-term sustainability. A notable example is WeWork, which in 2018 lost $1.6 billion despite generating $1.8 billion in revenue, indicating a burn rate that far exceeded its ability to generate profit.
9. Fundraising: This is the process of securing financial investments from investors to support and expand business operations. A significant example is Flipkart’s $2.5 billion investment in August 2017, which played a critical role in scaling its operations and strengthening its position in the competitive e-commerce market against global players like Amazon.
By understanding these essential terms, startup founders can better navigate the complexities of the entrepreneurial landscape, make informed decisions, and increase their chances of building a successful business.
The ‘transaction flow’ refers to the various stages involved in a Company obtaining funding from an Investor. Given that this imposes numerous obligations on the Company and the Founders, it becomes critical for Founders to have a clear understanding of the steps involved in receiving funding from an Investor. However, fledgling startups often find the complex terms involved overwhelming and are thus unable to gain a clear picture of the process flow involved in raising funding.
Important Steps
Term Sheet – a non-binding agreement that outlines the basic terms and conditions of the transaction.
Transaction Documents – refers to the agreements required to be entered into between the parties to lay down the governing framework of the investment. This would typically take the form of a securities subscription agreement (“SSA”) and a shareholders’ agreement (“SHA”), or a variation of the same known as a securities subscription and shareholders’ agreement (“SSHA”). These agreements will contain detailed language on the nature of each party’s rights and obligations under the contract and will be binding on the parties.
Execution – refers to the stage where the parties actually sign and ‘execute’ the Transaction Documents, validating the same and binding the parties to the terms agreed.
Conditions Precedent – refers to the conditions required to be completed by the Company and/or Founders to the Investor’s satisfaction before the investors wire the funds to the Company’s bank account (also referred to as Closing). The conditions precedent shall be completed in parallel with execution of transaction documents so that there is no delay in Closing.
Closing – refers to the stage at which the funds are received by the company and securities are allotted to the Investors.
Conditions Subsequent – refers to the conditions required to be completed by the Company and/or Founders after Closing, typically include conditions arising out of due diligence of the company and other compliance related steps.
The ‘Transaction Flow’ – A Founders’ perspective
Important Terms
Points to bear in mind for Founders
Term Sheet
A Term Sheet helps layout the structure for the Transaction Documents and can help establish the negotiated position on critical terms early in the process, which in turn, enables a quick flow from drafting and vetting of agreements to Execution. Term Sheets are non-binding and the terms, although not advisable, but, can vary in the transaction documents.
Due Diligence
A due diligence exercise reviews the records maintained by the Company to ascertain whether the Company’s operations are in accordance with the applicable law. The findings are then highlighted to the Investors basis the magnitude of risk involved in a due diligence report.
Typically, startups have trouble ensuring the secretarial compliances prescribed under Companies Act, 2013 (and relevant rules thereunder) or compliances prescribed under labour legislations, and rectifying the same is made a Condition Precedent or a Condition Subsequent. This would vary from Investor to Investor, based on how risk averse they are.
Transaction Documents
In the event that the Company has already completed previous round(s) of funding, Founders must pay heed to the rights of existing Investors and ensure that the appropriate waiver of rights (as applicable) is captured in the agreements. Further, in case of an existing SHA with Investors from earlier rounds of funding, the parties would execute an amendment to SHA or a complete restated SHA, which would be signed by all shareholders of the Company, in addition to the incoming Investors. Consequently, the transaction documents would require consensus of terms from both existing and incoming Investors.
It is also important to note that employment agreements between the Founder(s) and the Company (sometimes prescribing specific conditions of employment by Investors) are often made part of this stage.
Execution
Every agreement would require payment of stamp duty to the competent state government. The duty payable varies from state to state and agreement to agreement, and is either a fixed value or a percentage (%) value of the investment amount (i.e., the ‘consideration’). The Stamp papers are required to be procured prior to the execution of the transaction documents.
Execution can be done through either wet ink or digital signatures.
Conditions Precedent
This usually encompasses a variety of obligations on the Company/Founders. Typically, completion of this stage is marked by a “Completion Certificate” issued by the Company.
We can broadly categorise Conditions Precedent into two headings: (a) statutorily mandated conditions; and (b) Investor mandated conditions.
Statutorily mandated conditions – this would include actions such as passing board and shareholders’ resolutions for increasing authorised capital of the Company and issuance of shares, circulation of offer letters and filing the legally mandated forms for private placement of securities (such as SH-7, MGT-14), procuring requisite valuation reports, et al.
Investor mandated conditions – this would typically arise from a due diligence exercise undertaken by the Investors of the Company. Legal and/or financial issues in the operations of the Company would be actioned for resolution here. However, based on the regulatory requirements applicable to a foreign Investor, sometimes satisfaction of certain compliances that would ordinarily be undertaken later, are included in this stage.
Closing
This stage is marked by movement of funds from the Investors and related compliances to be undertaken under law/the Transaction Documents to complete the allotment of securities, such as: filing of PAS-3, issue of share certificates, amending the articles of association, compliance with Foreign Exchange Management Act, 1999 (including filing form FC-GPR reporting the remittance received), appointment of directors, etc.
It is critical to understand that this is the stage at which the Investors actually become shareholders of the Company.
Conditions Subsequent
Conditions subsequent are usually required to be completed within a specific period after the Closing Date (i.e., the date on which Closing takes place).
These can include items such as amendment of articles of association and memorandum of association of the Company or even statutory filings (such as under Companies Act, 2013 or Foreign Exchange Management Act, 1999). However, this can also include special items mandated by the Investors such as appointment of a labour law consultant or privacy law consultant to ensure that the Company is in compliance with applicable laws that might be too complex for the Founders to navigate without professional expertise.
Conclusion
It is important to realise that every Investor is different and therefore the ‘transaction flow’ can look different for two different rounds of funding for the same Company. The above terms are simplified for Founders to gain an understanding of what to expect when preparing to raise funding. Founders who are aware of the intricacies involved in raising funding can:
be better prepared in structuring the round;
gain an understanding of the ancillary costs roughly involved; and
negotiate a position that allows for the completion of certain action items in a manner that does not cause significant financial strain or undue delay in reaching the Closing stage.
Reach out to us at [email protected] to discuss any questions you may have!
The Limited Liability Partnership Act, 2008 (LLP Act) has truly transformed how businesses operate in India, offering the best of both worlds by combining the benefits of companies and partnership firms. One fantastic feature of the LLP Act is its broad definition of “business”.
According to section 2(e) of the LLP Act, “Business” covers every trade, profession, service, and occupation, except for those activities the Central Government specifically excludes through notifications. This expansive definition shows off just how flexible and adaptable the Limited Liability Partnership (LLP) structure is, making it a great fit for all sorts of business activities.
But hey, setting up an LLP comes with its own set of rules, especially for certain sectors. If you’re in banking, insurance, venture capital, mutual funds, stock exchanges, asset management, architecture, merchant banking, securitization and reconstruction, chit funds, or non-banking financial activities, you gotta get that in-principle approval from the relevant regulatory authority.
Investment activities fall under non-banking financial activities, so if an LLP wants to jump into the investment game, it needs the thumbs up from the Reserve Bank of India (RBI).
RBI’s Stance on LLPs Engaging in Investment Business Activities
The RBI, the big boss of financial and banking operations in India, keeps a close eye on non-banking financial activities to make sure they play by the rules and keep the financial system rock solid.
When it comes to setting up entities with a main gig in investment, India has some pretty tight regulations, all under the watchful eye of the RBI.
This is super important for Limited Liability Partnerships (LLPs) looking to jump into the investment game. The RBI’s guidelines, along with the Reserve Bank Act, 1934, lay down the law on who can get in and what they need to do to stay legit in the world of non-banking financial activities, including investment business.
Key Provisions of the Reserve Bank Act, 1934
Defining: Business of Non-Banking Financial Institution:
Section 45-I (a) of the RBI Act, 1934
“Business of a Non-Banking Financial Institution” means carrying on of the business of a financial institution referred to in clause (c) and includes business of a non-banking financial company referred to in clause (f);
Defining: Non-Banking Institution and Financial Institution
Section 45-I (e) of the RBI Act, 1934
Non-Banking Institution has been defined as a “Company, Corporation, or Co-Operative Society”
Section 45-I (c) of the RBI Act, 1934
Financial Institution” means any non-banking institution which carries on as its business or part of its business any of the following activities, namely: —
The financing, whether by way of making loans or advances or otherwise, of any activity other than its own;
The acquisition of shares, stock, bonds, debentures or securities issued by a government or local authority or other marketable securities of a like nature;
*The definition is very exhaustive so we have kept it limited to our topic
Defining: “Non-Banking Financial Company’’
Section 45-I (f) of the RBI Act, 1934
‘‘Non-Banking Financial Company’’ Means–
(i)A financial institution which is a company;
(ii)A non-banking institution which is a company, and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
(iii)Such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the central government and by notification in the official gazette, specify;
Mandates by the RBI
Section 45-IA of the RBI Act, 1934
This section mandates that no non-banking financial company shall commence or carry on business without:
Obtaining a certificate of registration from the RBI.
Maintaining a net owned fund of at least twenty-five lakh rupees or as specified by the RBI, up to two hundred lakh rupees.
Implications for LLPs
Given the definitions and requirements stipulated by the Reserve Bank Act, it becomes clear that the RBI’s regulatory framework is tailored to companies as defined under the Companies Act, 2013. This specific requirement means that only entities registered as companies under the Companies Act, 2013, are eligible for registration with the RBI to conduct non-banking financial activities, including investment businesses. Here are some of the reasons as to why the LLPs are in-eligible for carrying on the business of Investment Activities:
Legal Structure: LLPs, while flexible and beneficial for many business activities, are distinct from companies in their legal structure and registration under the LLP Act, 2008.
Regulatory Compliance: The RBI’s regulatory provisions explicitly require the registration of non-banking financial companies (NBFCs) to be entities formed under the Companies Act. This ensures that such entities adhere to the rigorous compliance, reporting, and governance standards applicable to companies.
Notification and Specificity: The RBI, through its notifications and the provisions of the Reserve Bank Act, explicitly delineates the types of entities that can engage in non-banking financial activities. LLPs do not meet these criteria due to their differing legal status and operational framework.
Conclusion
In summary, while the LLP Act, 2008, provides a robust framework for various business activities, it falls short when it comes to non-banking financial activities, specifically investment businesses. The RBI’s regulations necessitate that only companies registered under the Companies Act, 2013, are eligible for registration and approval to operate as NBFCs. Therefore, LLPs cannot be registered as NBFCs for the purpose of carrying out investment activities. This clear demarcation ensures that the financial sector remains regulated and compliant with the highest standards set forth by the RBI, maintaining the stability and integrity of the financial system.
Rights issue is a process of offering additional shares to the existing equity shareholders (“Shareholders”) of the Company at a pre-determined price which is generally lower than the market value of shares. The concept of a rights issue stands out as a significant mechanism for raising capital. One unique feature of a rights issue is providing the right to shareholders to renounce the shares offered to them in favour of any other person who may or may not be an existing shareholder of the Company. This article explores the process and implications of rights issue by way of renunciation under the Companies Act, 2013.
Overview
Rights issue helps companies raise additional capital while giving preference to current shareholders. The key points regarding a rights issue under the Companies Act, 2013, includes:
Proportionate Allotment: Shares are offered to existing shareholders in proportion to their current holdings.
Price: Typically, shares are offered at a price lower than the prevailing market price or at any price decided by the Board of Directors of the Company.
Fixed Time Frame: Shareholders are given a specific period to exercise their rights (minimum 7 days to maximum 30 days).
Provisions for Renunciation:
The Companies Act, 2013 outlines the procedures for rights issue and renunciation.
Section 62 of the Companies Act, 2013 governs the rights issue and Section 62(a)(ii) permits the renunciation of these rights in favour of any other person.
Procedure for Renunciation
The process of renunciation involves several steps:
Offer Letter: Anoffer letter is circulated to existing shareholders with details on the rights issue, including shares offered, price, terms, offer period, and options to accept or waive or renounce.
Acceptance or Renunciation: Shareholders are given the option to either partially or wholly renounce their rights. To renounce their rights, shareholders must submit the renunciation form within the stipulated time.
In case the shares are renounced to foreign investors, the Company will need a valuation report.
Subscription by Renouncee: The new holder (renouncee) can subscribe to the offered shares by paying the requisite amount.
Allotment: The Board allot the shares to the renouncee after receiving acceptance letter and payment.
Conclusion
The rights issue mechanism under the Companies Act, 2013, with its provision for renunciation, provides a balanced approach for companies to raise capital while offering flexibility to shareholders. By understanding and effectively utilizing these provisions, companies can enhance their financial strategies, and shareholders can make informed decisions to optimize their investment portfolios. The renunciation process, governed by clear legal guidelines, ensures transparency and efficiency, contributing to the overall stability and growth of the capital markets in India.
Looking at the title above, the meaning of same may not be clear because it includes two technical terms:
General Meeting
Shorter Notice
So, what is a General Meeting?
Going by the technical terms, a General Meeting is defined as a “a duly convened, held and conducted Meeting of Members”. In common words, a General Meeting is a gathering where the Shareholders of a Company meet to discuss and take decisions on important matters concerning the Company.
and what is a shorter notice?
Further, as per the provisions of Section 101(1) of Companies Act, 2013, a General Meeting may be called by giving a notice of 21 clear days (meaning the day of sending the notice and the day of the meeting are excluded from calculation of 21 days). Any notice not confirming with above requirement is a shorter notice.
However, MCA has granted a special exemption for Private Limited Companies in this case through its notification dated June 5, 2015. These companies can have a notice period shorter than 21 clear days, provided their Articles allow for it.
A General Meeting may be called at shorter notice if consents for the same have been received from the required number of shareholders in writing or in electronic mode, as further explained below:
Type of Meeting
Annual General Meeting (In general terms, the meeting where annual financial statements are approved by Shareholders)
Other General Meetings
Consent Required
Atleast 95% of the members entitled to vote at the meeting
Majority of Voting Members
Holding not less than 95% of the Paid-up Share Capital that gives Right to Vote
Are we required to file the above consents for shorter notice anywhere?
There is no legal provision that necessitates the requirement to file the consents of members with the registrar for holding a meeting at shorter notice. However, a recent adjudication order no. ROCP/ADJ/Sec-101(1)/(JTA(B)/24-25/17/422 to 425 issued by the Registrar of Companies, Pune on May 28, 2024, highlighted a case where a company filed a resolution in Form MGT-14 without furnishing consents of members for shorter notice. The officer concluded this omission as a default under Section 101(1) of the Companies Act, 2013, treating it similarly to holding a General Meeting at shorter notice without proper consent from members.
Consequently, a penalty of Rs. 3,00,000 (Three Lakh Rupees) was imposed on the company and its directors
Therefore, it is advisable to attach these consents with Form MGT-14 when filing a resolution passed at such a meeting.
A health-tech company operating a digital clinic under the brand name ‘Proactive For Her’, providing a digital platform to offer accessible, personalized, and confidential healthcare solutions for women.
Project Undertaken
Review of accounting records and tax filings on a monthly basis
Compliance assistance for fundraising
How We Helped?
Review of Accounts and Tax Filing:
Treelife conducted a thorough review of the monthly accounting books to ensure accuracy and completeness, helping the company maintain precise financial records.
We ensured GST payments and returns were filed timely and accurately, reducing the risk of non-compliance and potential penalties for the company.
Our team streamlined and regularized tax returns, annual filings, and other statutory compliances according to applicable due dates, ensuring the company met all regulatory requirements promptly.
Fundraising (Compliance Advisor):
Treelife provided compliance advisory services for the company’s fundraising efforts, ensuring that all financial records and compliance requirements were up-to-date.
We assisted with the timely updating of accounting entries and filings, completing requisite regulatory compliances efficiently.
Our involvement ensured a reduction in the turnaround time (TAT) for payments and MIS processing, facilitating smoother financial operations and improved investor confidence.
By leveraging our expertise in financial and compliance advisory, Treelife enabled ‘Proactive For Her’ to maintain accurate financial records, meet all compliance requirements, and support its fundraising activities. Our comprehensive support helped the company focus on its core mission of providing accessible and personalized healthcare solutions while ensuring robust financial and compliance management.
Treelife played a pivotal role in helping an Indian private limited company transition to a US-headquartered structure. By setting up an LLP in India and guiding the investment process under the ODI route, we ensured compliance with FEMA and income-tax regulations. Our strategic approach enabled the company to raise funds from foreign investors and expand globally with minimal tax implications.
Business Overview
Indian individual promoters had established a private limited company in India and sought to expand their business globally. They aimed to raise funds from foreign investors and transition to a US-headquartered structure.
Project Undertaken
Setting up an LLP in India
Investment in a newly incorporated US entity under the ODI route
Acquisition of Indian entity shares by the US entity from the promoters
Structure Mechanics:
Indian individual promoters set up an LLP in India.
The LLP makes investments in a newly incorporated US entity under the ODI route.
The US entity acquires the shares of the Indian entity from the promoters, adhering to FEMA and income-tax regulations.
A benchmarking study is undertaken for all ongoing transactions between the US entity and the Indian entity.
Parameters:
The gift structure used under the erstwhile ODI rules was no longer possible, as Indian resident founders can now receive gifts of shares from their relatives.
Recently revamped ODI rules by RBI do not permit a foreign company to set up an Indian subsidiary where the Indian promoters control such a foreign company.
Any transaction between the offshore company and its Indian subsidiary needs to be benchmarked from a transfer pricing perspective.
Minimal income-tax implications and adherence to FEMA pricing norms.
Facts:
Indian promoters aimed to expand their business globally and raise funds from foreign investors.
They sought to move to a US-headquartered structure to facilitate this expansion.
By strategically structuring the investment and ensuring compliance with the latest ODI rules and FEMA pricing norms, Treelife enabled the company to achieve its global expansion goals. Our financial advisory services provided the necessary support to navigate complex regulatory landscapes and optimize tax implications, ensuring a smooth transition for the company’s international growth.
In just a few weeks, Treelife transformed the financial infrastructure of an innovative SaaS company. We set up efficient accounting systems, ensured seamless bookkeeping, and provided critical fundraising support. Discover how our strategic approach reduced their operational burden and enhanced their financial management.
Business Overview
An innovative insurance-tech company using technology and innovation to transform the traditional insurance model. The company offers a cloud-based platform that connects distributors to the insurance ecosystem.
Project Undertaken
Setting up systems for HR, accounting, and payroll
Ongoing bookkeeping, tax compliance, and payments
Fundraising and due diligence support
How We Helped?
Setting Up:
Treelife took ownership and set up the entire accounting system for the company from inception using Zoho Books and Zoho Payroll.
Assisted in migrating from Zoho Payroll to Keka, ensuring a smooth transition.
Effective implementation of software and processes reduced the time and effort required by the founders.
Bookkeeping and Accounting:
Timely updating of accounting entries and filing, ensuring compliance with regulatory requirements.
Completion of requisite regulatory compliances, reducing TAT for payments and MIS processing.
Fundraising & Vendor Due Diligence:
Represented the company during the due diligence process conducted by investors, assisting them in understanding the business model and transaction workflow.
Submitted data in the requisite formats and seamlessly resolved queries from the diligence team regarding finance and tax-related areas promptly.
By leveraging our expertise in financial management, Treelife significantly improved the company’s operational efficiency and supported its growth journey. Our comprehensive services ensured that the company was well-prepared for investor scrutiny and ongoing financial challenges.
The Union Budget 2024 marks a significant milestone in India’s economic journey. This Budget underscores the Government’s commitment to maintaining fiscal prudence while driving substantial investments in critical sectors. Despite global economic challenges, the Indian economy has fared well, maintaining stability and growth. For 2024-25, the fiscal deficit is expected to be 4.9% of GDP, with a target to reduce it below 4.5% next year. Inflation remains low and stable, moving towards the 4 percent target, with core inflation (non-food, non-fuel) at 3.1 percent.
The theme of the Budget focuses particularly on employment, skilling, MSMEs, and the middle class. This budget outlines the roadmap to Viksit Bharat 2047 focusing on nine priority areas to generate ample opportunities for all: productivity and resilience in agriculture, employment and skilling, inclusive human resource development and social justice, manufacturing and services, urban development, energy security, infrastructure, innovation and R&D, and next-generation reforms.
The Budget introduces several pivotal reforms aimed at simplifying tax structures, incentivizing investments, and promoting sustainable growth. The abolition of angel tax, reduction in corporate tax rates for foreign companies, and comprehensive review of the Income-tax Act, 1961 in the coming days are expected to bolster the startup ecosystem and attract international investments.
The subsequent sections of this Budget document provide an in-depth analysis and key highlights related to personal taxation, business reforms, investment opportunities, and developments in GIFT-IFSC. Personal taxation changes include revised income tax slabs, increased deductions, and adjustments in Taxes Collected at Source (TCS) and Taxes Deducted at Source (TDS) regulations. Business reforms cover the abolition of the angel tax, reduction in corporate tax rates for foreign companies, and measures to enhance ease of doing business. Investment opportunities are improved through rationalization of the capital gains tax regime, changes in holding periods and tax rates, and amendments related to buyback taxation and Securities Transaction Tax (STT) rates. GIFT-IFSC developments include tax exemptions for Retail Schemes and Exchange Traded Funds (ETFs), removal of surcharges on specified income, and other measures. These sections provide a comprehensive overview of the Union Budget 2024’s measures to support individuals, businesses, and investors, and to enhance India’s position as an attractive destination for global investment and financial activities.
The Union Budget 2024 is a balanced and forward-looking document, reflecting the Government’s resolve to steer the economy towards sustainable growth, innovation, and inclusiveness. This detailed presentation analysis aims to provide a comprehensive analysis of the Budget’’s key highlights, policy changes, and their implications for various sectors of the economy.
Overview
Key Macroeconomic Indicators from Budget 2024
Key indicators
Budget 2024-25
Budget 2023-24
Total Receipts (other than borrowings)
⬆️INR 32.07 lakh crore
INR 27.2 lakh crore
Net Tax Receipts
⬆️INR 25.83 lakh crore
INR 23.3 lakh crore
Total Expenditure
⬇️INR 48.21 lakh crore
INR 45 lakh crore
Fiscal Deficit (as % of GDP)
⬇️4.9%
5.90%
Gross Market Borrowings
⬇️INR 14.01 lakh crore
INR 15.4 lakh crore
Net Market Borrowings
⬇️INR 11.63 lakh crore
INR 11.8 lakh crore
Notes: 1. Inflation: Low, stable and moving towards the 4 per cent target, 2. Core inflation (non-food, non-fuel): 3.1 per cent
Key Policy Highlights – Budget 2024
1. Employment and Skilling
Provides wage support and incentives for first-time employees and job creation in manufacturing, along with employer reimbursements for EPFO contributions. Expected to benefit 2.1 crore youth, 30 lakh manufacturing jobs, and incentivize 50 lakh employees.
Internships for 1 crore youth in 500 top companies over 5 years, with INR 5,000 monthly allowance along with one-time assistance of INR 6,000. Companies eligible to cover training costs and 10% of internship costs from their CSR funds.
2. MSMEs and Manufacturing
Credit Guarantee and Support: The Credit Guarantee Scheme facilitates term loans for machinery and equipment purchases without collateral, covering up to INR 100 crore per applicant. Additionally, a new mechanism will ensure continued bank credit to MSMEs during stress periods, supported by a Government-promoted fund.
New Assessment Model for MSME Credit: Public sector banks to develop new credit assessment models based on digital footprints rather than traditional asset or turnover criteria.
3. Ease of Doing Business (Tax and Compliance)
Angel Tax Abolished: Abolishment of angel tax for all classes of investors to boost the startup ecosystem and entrepreneurial spirit.
Income Tax Reforms: Comprehensive review of the Income-tax Act, 1961 in the coming days to reduce disputes and litigation.
Variable Capital Company (VCC) Structure: Legislative approval sought for providing an efficient and flexible mode for financing leasing of aircrafts and ships and pooled funds of private equity through a ‘variable company structure’.
Stamp Duty Reduction: Encouraging states to moderate high stamp duty rates and consider further reductions for properties purchased by women.
Foreign Direct Investment (FDI) and Overseas Investment: The rules and regulations for FDI and Overseas Investments will be simplified to facilitate foreign direct investments, nudge prioritization, and promote opportunities for using Indian Rupee as a currency for overseas investments.
4. Space Economy and Technology
A venture capital fund of INR 1,000 crore to expand the space economy by five times in the next decade.
Full exemption of customs duties on 25 critical minerals and reduction on two others to support sectors like space, defense, and high-tech electronics.
5. Services
Development of Digital Public Infrastructure (DPI) applications at population scale for productivity gains, business opportunities, and innovation by the private sector. Planned areas include credit, e-commerce, education, health, law and justice, logistics, MSME services delivery, and urban governance.
An Integrated Technology Platform will be set up to improve the outcomes under the Insolvency and Bankruptcy Code (IBC) for achieving consistency, transparency, timely processing, and better oversight for all stakeholders.
6. Others
Urban Land Related Actions: Land records in urban areas will be digitized with Geographic information system (GIS) mapping. An IT-based system for property record administration, updating, and tax administration will be established. These will also facilitate improving the financial position of urban local bodies.
9 Pillars to Viksit Bharat 2047 and Policy Initiatives
To drive India’s growth and development, the Union Budget 2024 outlines nine strategic pillars that form the foundation for the nation’s economic agenda, aiming towards Viksit Bharat 2047. These pillars encompass key sectors and initiatives aimed at enhancing productivity, fostering innovation, and ensuring inclusive development. Each pillar is supported by targeted policy measures designed to create opportunities, boost investments, and address critical challenges. The following sections detail these pillars and the corresponding policy initiatives.
Decoding Tax in Budget 2024
The subsequent part of this Budget document is broken down into 4 primary sections providing in-depth tax analysis including:
Personal – Individuals including founders, team members, etc.
Investment – Primarily taxation norms around capital gains.
Business – Startups and other businesses.
GIFT-IFSC – Proposed amendments for IFSC units.
These sections provide a comprehensive overview of the Union Budget 2024’s measures to support global investment and financial activities.
I. Personal
Revision of slab rates for individuals under new tax regime
Proposed changes in personal income tax slabs for individuals (highlighted below) resulting in a tax saving of up to INR 17,500 excluding surcharge and cess under new tax regime.
Existing Slabs (INR)
Proposed Slabs (INR)
Tax Rate
0-3,00,000
0-3,00,000
NIL
3,00,001-6,00,000
3,00,001-7,00,000
5%
6,00,001-9,00,000
7,00,001-10,00,000
10%
9,00,001-12,00,000
10,00,001-12,00,000
15%
12,00,001-15,00,000
12,00,001-15,00,000
20%
>15,00,000
>15,00,000
30%
Note : Full tax rebate available for taxable income upto of INR 7,00,000
Treelife Insight:
We have prepared a tax calculator to explore potential tax savings here.
Increase in tax deductions under new tax regime
Standard deduction for salaried employees is proposed to be increased to INR 75,000 from INR 50,000.
Cap of deduction against income from family pension for pensioners increased to INR 25,000 from INR 15,000.
Deduction for employer’s contribution to NPS increased from 10% to 14% even for employees other than Central or State Government employees.
TCS collected from minors
TCS collected from minors can only be claimed as credit by the parent in whose income the minor’s income is clubbed. This amendment is effective from January 1, 2025.
Credit for TCS and all TDS for salaried employees
It is proposed to allow employees to club their TCS and TDS (other than salaries) for the purpose of computing TDS to be deducted from salary.
Treelife Insight:
TCS is usually collected on foreign travel, LRS remittances, purchase of cars beyond a limit. This will help salaried employees effectively manage tax cash flows.
Income classification of rent on residential house
It has been clarified that income from letting out of a residential house to be classified under the heading “Income from house property” and not “business income”.
Increase in limits for applicability of Black Money Act, 2015 for disclosure of foreign income and asset in the Income Tax Return (ITR)
Penal provisions under section 42 and 43 of the Black Money Act, 2015 proposed to not apply in case of non-reporting of foreign assets (other than immoveable property) with value less than INR 20,00,000 (increased from earlier threshold of INR 5,00,000).
Quoting of Aadhaar Enrolment ID in ITRs discontinued
Quoting of Aadhaar Enrolment ID proposed to be no longer allowed in place of Aadhaar number for ITRs filed after October 1, 2024.
II. Investment
1. Rationalization of Capital Gains Tax Regime
Capital gains tax regime is proposed to be rationalized with effect from July 23, 2024 as summarized below:
Rationalization of Holding Period:
Type of Asset
Period to qualify as Long term
All listed securities
12 months
All other assets (including immovable property)
24 months
Change in Tax Rates:
Long term capital assets
Type of Asset
Residents
Non-residents
Current
Proposed
Current
Proposed
Listed equity shares and units of equity oriented mutual fund
10%
12.5%
10%
12.5%
Unlisted equity shares
20%
12.5%
10%
12.5%
Unlisted debentures and bonds
20%
Applicable rates
10%
Applicable rates
Units of REITs & InvITs
10%
12.5%
10%
12.5%
Immovable property
20%
12.5%
20%
12.5%
Notes:
Exemption available under LTCG has been increased to INR 125,000.
No indexation benefit available for LTCG however forex fluctuation benefit available to NR on sale of unlisted shares.
Indexation available for unlisted shares on March 31, 2018 and sold in Offer for Sale (OFS)
Short term capital assets
Type of Asset
Residents
Non-residents
Current
Propose
Current
Proposed
Listed equity shares and units of equity oriented mutual fund
15%
20%
15%
20%
Others
No change – taxable at applicable rates
Treelife Insight:
Mandatory classification of income on sale debentures (including CCDs / NCDs) and bonds as short term capital gains is a big move and could impact the Real Estate investors where such instruments are widely used. It will be interesting to see how such investors will react to this increase in tax rates.
Reduction in tax rates for long term capital gains on unlisted equity shares should give an impetus to PE / VC funds investing in startups as the lower tax rate will ultimately lead to an increase in the IRR for investors.
Reducing the period of holding for immovable properties to 24 months and reducing the long term capital gains tax rate to 12.5% will be looked at positively.
2. Change in taxation of buyback
Currently, buyback distribution tax is levied on the company at ~23% on the distributed income. It is proposed to tax the buyback proceeds in the hands of the shareholders as “dividend income” at applicable tax rates. The cost of acquisition of shares being bought back to be claimed as a capital loss (depending on holding period).
This amendment is proposed to be effective from October 1, 2024
Treelife Insight:
This will deter companies from offering buybacks as there is a significant tax outflow for the shareholders under the proposed regime. Further there could be timing mismatch between the claiming of loss and payment of tax on buyback proceeds resulting in cash outflow for the shareholders.
3. Increase in STT rates
STT rates for futures and options proposed to be increased with effect from to be effective from October 1, 2024:
Current
Proposed
Options
0.0625%
0.1%
Futures
0.0125%
0.02%
III. Business
1. Abolition of Angel Tax
Angel tax i.e. section 56(2)(viib) of the Income-tax Act, 1961 proposed to be abolished with effect from April 01, 2024
Treelife Insight:
This is a big and welcome move for the startup ecosystem which should significantly boost investor confidence, especially foreign investors which were bought under the ambit of angel tax recently
This amendment is prospective in nature and thus, past tax disputes to still continue
Gift tax i.e. section 56(2)(x) for recipient of shares continues to apply
Differential equity pricing structures will now evolve with this relief
It may be interesting to see if investors insist on ‘merchant banker’ valuation reports under section 56 (2) (x) in small equity fundings which materially affect startups.
2. Reduction in corporate tax rate for foreign companies
Tax rates for foreign companies proposed to be reduced from 40% to 35%.
3. Clarification for taxes withheld outside India
It is clarified that taxes withheld outside India are to be included for the purposes of calculating total income.
4. Increase in limit of remuneration to working partners of a firm allowed as deduction
Existing Structure
Allowable Remuneration
Proposed
Allowable Remuneration
on the first INR 3,00,000 of the book profit
or in case of a loss
INR 1,50,000 or at the rate of 90 % of the book profit, whichever is more
on the first INR 6,00,000 of the book profit or in case of a loss
INR 3,00,000 or at the rate of 90 % of the book profit, whichever is more
on the balance of the book-profit
60%
on the balance of the book-profit
60%
5. Miscellaneous
Equalisation levy of 2% proposed to be abolished with effect from August 1, 2024
Vivaad Se Vishwas Scheme proposed to be introduced
Time limit for issue of notice for initiation of re-assessment reduced from maximum 10 years from end of assessment year to 5 years and 3 months from end of assessment year.
Insertion of section 74A , an approach that consolidates the dealing with discrepancies irrespective of fraud and simplifying the procedural aspects under the CGST Act (on recommendations of GST Council) from FY 2024-25 as under
Limitation period stands at 42 months (from the due date of furnishing the annual return for the financial year) for the purpose of issuance of notice (earlier it was 36 months in case of no allegation of fraud or suppression and 60 months in case of allegation of fraud or suppression)
Time period of 12 months for purposes of passing order (beyond 42 months as aforesaid) extendable by 6 months with approval.
6. Clarificatory amendments related to TDS
Section 194-IA (TDS on sale of immovable property) – Proposed to add a proviso to clarify that the threshold limit of INR 50 lakhs is to be checked on the total value of the property and not on amount paid to each individual seller (with effect from October 1, 2024).
Excluding sums paid under section 194J from section 194C (Payments to Contractors) –Earlier, taxpayers used to deduct TDS under section 194C even if the payment was liable to TDS under section 194J because there was no specific mutually exclusive clause while defining the word “work”. It is proposed to amend the definition of “work” under section 194C to specifically exclude any sum referred to in section 194J (with effect from October 1, 2024)
7. Rationalization of TDS/TCS rates
Section
Old rates
Proposed new rates
Section 194D – Payment of insurance commission (in case of resident person other than company)
5%
2%
(with effect from April 1, 2025)
Section 194DA – Payment in respect of life insurance policy
5%
2%
(with effect from October 1, 2024)
Section 194G – Commission etc on sale of lottery tickets
5%
2%
(with effect from October 1, 2024)
Section 194H – Payment of commission or brokerage
5%
2%
(with effect from October 1, 2024)
Section 194-IB – Payment of rent by certain individuals or HUF
5%
2%
(with effect from October 1, 2024)
Section 194M – Payment of certain sums by certain individuals or Hindu undivided family
5%
2%
(with effect from October 1, 2024)
Section 194-O – Payment of certain sums by e-commerce operator to e-commerce participant
1%
0.1%
(with effect from October 1, 2024)
Section 194F – Payments on account of repurchase of units by Mutual Fund or Unit Trust of India
20%
Proposed to be omitted
(with effect from October 1, 2024)
New Section 194T – Payment of salary, remuneration, interest, bonus or commission by partnership firm to partners
NA
10% on various payments made to partners – salary, remuneration, interest, bonus or commission
(with effect from April 1, 2025)
New Section 193 – Interest paid exceeding on Floating Rate Savings (Taxable) Bonds (FRSB) 2020 with effect from October 1, 2024
NA
10% (threshold – exceeding INR 10,000)
(with effect from October 1, 2024)
Section 206(7) – Interest on late payment of TCS
1% per month or part of the month
1.5% per month or part of the month
(with effect from April 1, 2025)
8. Procedural changes related to TDS proposed:
Time limit to file belated TDS/TCS return in order to not-attract penal provisions to be reduced from 1 year to 1 month from the due date of filling of such TDS/TCS returns (Section 271H) – with effect from April 1, 2025.
Provision to include levy of TCS at 1% on Luxury goods of value exceeding INR 10 lakhs. (Section 206C(1F)) List of such luxury goods are yet to be notified. – with effect from January 1, 2025
Exemption from prosecution if the payment of TDS is made before the due date of filing of TDS return as applicable for such TDS payments (Section 276B) – with effect from October 1, 2024
Applications for Lower tax deductions / collection at source can be made in respect of TDS/TCS u/s 194Q and 206C respectively – with effect from October 1, 2024.
Non revision of the TDS / TCS filings post 6 years of the end of the financial year in which the returns are to be filed. – with effect from April 1, 2025.
Fixation of time limit for deeming an assessee in default as under –
6 years from the end of FY in which credit given / payment was made.
2 years from the end of FY in which the correction statement is filed – with effect from April 01, 2025.
Nil / Lower Tax rates for certain class of notified persons (Class of persons yet to be notified) – with effect from October 1, 2024.
IV. GIFT-IFSC
1. Tax exemptions extended to Retail Schemes and ETFs
Proposed to amend the definition of ‘Specified Fund’ under Section 10(4D) to include Retail Schemes and ETFs launched in GIFT-IFSC thereby extending the beneficial tax regime applicable for CAT III AIFs to GIFT-IFSC to Retail Schemes and ETFs
Treelife Insight:
Relevant only for Inbound Funds setup by pooling money from non-resident investors as the condition that units (other than Sponsor / Manager units) to be held by non-resident investors continues to apply.
2. No surcharge on income for Specified Fund
Surcharge rate on interest and dividend income proposed to be removed for Specified Fund set-up in GIFT-IFSC even if setup as other than Trust
3. Section 68 provisions no longer applicable to Venture Capital Funds (VCFs)
Section 68 dealing with unexplained cash credits allows the tax officer to seek an explanation to provide the source of its funds used for making investment / offer loans to companies subject to these provisions. It is proposed to amend the definition of ‘venture capital funds’ to include VCFs in GIFT-IFSC thereby exempting them from questioning by the tax officer under section 68.
4. Finance Companies exempted from complying with ‘Thin capitalisation’ norms
Exemption from ‘Thin Capitalisation’ norms prescribed under section 94B for Bank and NBFCs extended to Finance Companies in GIFT-IFSC
Treelife Insight:
Finance companies in GIFT-IFSC, especially those engaged in treasury functions, lending or borrowing from non-residents should benefit from the removal of the cap on the deduction for interest expenditure, which was previously limited to 30% of EBITDA for that financial year.
5. Exemption on specified income from Core Settlement Fund setup by recognised clearing corporations
Proposed to amend the definition of ‘recognised clearing corporations’ under Section 10(23EE) to include ‘recognised clearing corporations’ setup in GIFT-IFSC, thereby, exempting any specified income of Core Settlement Guarantee Fund, set up by such corporations.
IFSCA has released a Circular prescribing the fees for the newly introduced Book-keeping, Accounting, Taxation, and Financial Crime Compliance Services (BATF) Regulations.
𝐀𝐧𝐧𝐮𝐚𝐥 𝐅𝐞𝐞𝐬 𝐟𝐨𝐫 𝐒𝐞𝐫𝐯𝐢𝐜𝐞 𝐏𝐫𝐨𝐯𝐢𝐝𝐞𝐫𝐬: – Less than 500 employees: $5,000 per activity – 500 to 1,000 employees: $7,500 per activity – More than 1,000 employees: $10,000 per activity
𝐊𝐞𝐲 𝐏𝐨𝐢𝐧𝐭𝐬 𝐟𝐨𝐫 𝐄𝐱𝐢𝐬𝐭𝐢𝐧𝐠 𝐀𝐧𝐜𝐢𝐥𝐥𝐚𝐫𝐲 𝐒𝐞𝐫𝐯𝐢𝐜𝐞 𝐏𝐫𝐨𝐯𝐢𝐝𝐞𝐫𝐬 (𝐀𝐒𝐏𝐬): – Existing ASPs rendering BATF services under the IFSCA ASP Framework are not required to pay the application fee for the same activity under BATF regulations. – Annual/recurring fees will be adjusted for the fees already paid under the ASP framework.
𝐈𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐭 𝐃𝐚𝐭𝐞: – Existing ASPs must communicate their willingness to operate under the new BATF regulations for bookkeeping, accountancy, and taxation services by August 2, 2024.
The “Navigating Labour Laws: A Comprehensive Regulatory Guide for Startups” by Treelife offers a comprehensive overview of India’s intricate labour law landscape, emphasising the significance of these compliances for startups. Rooted in the fundamental rights (specifically, the Rights to Equality; to Freedom; and against Exploitation) and the directive principles of state policy (contained in Articles 38, 39, 41, 42, and 43) enshrined in the Indian Constitution, labour laws in India are fundamentally welfare legislations, imposing significant compliance responsibility on employers as a result of a socialist outlook seeking to protect the dignity of human labour.
Given the dual role played by central and state governments in labour law, startups are oftentimes unaware of applicable compliances or are under-equipped to navigate the complex framework, lacking the deep technical understanding required. It is this gap in understanding that this Regulatory Guide attempts to bridge, with the major highlight being a quick reference guide for startups to identify critical compliances at both levels of governance.
Other key highlights include:
Complex Regulatory Framework: A breakdown of the multifaceted compliance environment, highlighting for instance, added layer of compliance as seen in the Industrial Employment (Standing Orders) Act, 1946, which dictates terms of employment, and the relevant state-specific Shops and Establishments Acts, which also prescribe similar conditions but with variations, necessitating detailed assessments to determine applicable compliances.
Critical Central Legislations: In order to ensure complete clarity of compliances at the central level, the Regulatory Guide highlights the critical legislations that are typically applicable across industries/sectors to startups, applicability factors, compliance requirements and penalties for violation. Notwithstanding the inconsistent enforcement in these laws, it is pertinent to note that many of these legislations prescribe imprisonment for the officer in default, as potential penalty for failure to comply.
State-Specific Regulations: Beyond central laws, startups must navigate state-specific legislations, which can provide detailed provisions governing the terms of employment and service and even tax obligations, and impose additional compliance requirements.
Statutory Leave Entitlements: A critical point for any startup formulating a leave policy, the Regulatory Guide provides a quick reference to the types of and minimum number of leaves that are mandated by laws. Typically, this can flow from a central legislation (like in the case of maternity benefits) or from state-specific legislations (such as each state’s Shops and Establishments Act, the mandates under which can vary from state to state).
Upcoming Labour Codes: While highlighting the structural issues in the Indian labour law framework, the Regulatory Guide also provides an overview of the proposed Labour Codes, which aim to simplify and reduce ambiguities in law enforcement across states, making it easier for startups to understand and comply with labour regulations, thereby fostering a more straightforward regulatory environment conducive to business operations and growth. The Indian government is consolidating existing the labour laws into four new codes: i) Code on Wages ii) Occupational Safety, Health and Working Conditions Code iii) Social Security Code iv) Industrial Relations Code
Challenges and Recommendations: In addition to navigating the two-level governance required, the Regulatory Guide also identifies some critical challenges faced by startups in complying with the applicable labour laws which include: i) Lack of technical expertise to understand the critical distinctions in certain legally defined terms, such as “workman” and “employee” which have similar meaning outside of the legal parlance, but which can have varying definitions across laws, affecting the applicability of protections and remedies. ii) Requirement for proactive compliance, which can help startups avoid legal pitfalls but which may result in increased compliance costs.
The Labour Law Handbook by Treelife is an essential guide for businesses navigating India’s complex labour law framework. Tailored for startups and growth-focused enterprises, this report simplifies intricate compliance requirements, offering actionable insights into central and state-specific regulations, statutory obligations, and upcoming labour code reforms. With detailed explanations of critical laws, practical compliance checklists, and expert recommendations, this handbook empowers businesses to mitigate legal risks, ensure workforce welfare, and operate confidently in a dynamic regulatory environment.
Artificial Intelligence (AI), especially Large Language Models (LLMs) are transforming the legal and financial sectors. These models enhance efficiency, accuracy, and decision-making through advanced natural language processing (NLP) and text generation. LLMs are built on deep learning architectures and trained on vast datasets to understand, interpret, and generate human-like text and thereby support professionals by automating routine tasks. This article explores how LLMs are transforming both the legal and financial industries, their applications, benefits, challenges, and future implications. [1]
Understanding Large Language Models
LLMs are AI systems designed to understand, generate, and respond to human language in a manner that mimics human-like understanding and reasoning. These models are trained on vast amounts of textual data, allowing them to learn patterns, relationships, and nuances in language. Recent advancements have expanded the capabilities of LLMs beyond simple language understanding to complex tasks such as language generation, translation, summarization, and even dialogue. [2]
Applications of LLM in the Legal Sector
With these developments, LLMs have been given the challenge of revolutionizing the legal sector by offering advanced capabilities in natural language processing (NLP) and understanding legal texts. Here’s how LLMs are being applied in the legal sector, at relatively small scales (at present):
Automating Routine Tasks
LLMs are transforming legal practices by automating routine tasks such as document review, legal research, and case analysis. They can sift through extensive legal databases, extract relevant information from case law, statutes, and regulations, and provide summaries or insights that aid legal professionals in decision-making. [3]
Streamlining Contract Analysis and Due Diligence
In contract law and due diligence processes, LLMs streamline the analysis of contracts by extracting key terms, identifying risks, inconsistencies, or anomalies, and suggesting revisions based on predefined legal criteria, and also provide significant support contract management by analyzing contracts, extracting key points, and categorizing them based on legal issues, thereby saving time on administrative tasks. This reduces the time and effort required for contract review and enhances accuracy in identifying potential legal issues.
Moreover, LLMs assist in legal compliance by monitoring legislative updates, identifying pertinent legal developments, and providing insights to mitigate risks and ensure regulatory adherence. [4]
Compliance Monitoring and Regulatory Analysis
LLMs assist legal departments in compliance monitoring by analyzing regulatory texts, monitoring changes in laws and regulations, and ensuring adherence to compliance requirements. They facilitate the preparation of compliance reports, regulatory filings, and disclosures, thereby improving efficiency and reducing compliance-related risks. [5]
Case Studies and Examples for Legal Sector
Examples of successful integration of LLMs into legal practices include the use of AI-powered platforms for legal research and contract management by law firms and corporate legal departments. These platforms leverage LLMs to enhance productivity, accuracy, and decision-making capabilities in handling legal documents and regulatory requirements.
Some examples wherein LLMs have been opined on or even used by Indian Judiciary include:
In 2023, the Delhi High Court issued a temporary injunction, commonly known as a “John Doe” order, prohibiting social media platforms, e-commerce websites, and individuals from using actor Anil Kapoor’s name, voice, image, or dialogue for commercial purposes without authorization. The Court specifically banned the use of Artificial Intelligence (AI) tools to manipulate his image and the creation of GIFs for monetary gain. Additionally, the Court directed the Union Ministry of Electronics and Information Technology to block pornographic content that features altered images of the actor. [6]
Since 2021, the Supreme Court has employed an AI-powered tool designed to process and organize information for judges’ consideration, though it does not influence their decision-making process. Another tool utilized by the Supreme Court of India is SUVAS (Supreme Court Vidhik Anuvaad Software), which facilitates the translation of legal documents between English and various vernacular languages.
In the case of Jaswinder Singh v. State of Punjab, the Punjab & Haryana High Court put the question of the worldwide view on bail for assaults with cruelty to ChatGPT, and included the excerpt of the response from ChatGPT as a part of the order. While no reliance was placed on the response from ChatGPT itself, the excerpt was in support of the honorable court’s findings and explained that “if the assailants have been charged with a violent crime that involves cruelty, such as murder, aggravated assault, or torture, they may be considered a danger to the community and a flight risk”. [7]
AI-powered platforms have enabled law firms and corporate legal departments to enhance productivity and accuracy in legal research and contract management, including players such as Harvey AI, Leya AI, Paxton AI, DraftWise, Robin, etc., all of which use LLMs and other technologies to provide support to legal professionals to assist lawyers with drafting, negotiating, reviewing, and summarizing legal documents, and to provide more useful legal research and contract management tools.
Moreover, within the Indian Judiciary, LLMs have been employed for tasks ranging from issuing injunctions to aiding in translation and providing broader insights into legal considerations.
These advancements underscore the growing role of AI technologies in augmenting judicial processes while maintaining clarity on their role in supporting, rather than determining, legal outcomes. As AI continues to evolve, its integration promises to further streamline legal operations and foster more informed and equitable judicial decisions.
Impact of LLM on Financial Services
The finance sector faces a deluge of data, including filings, reports, and contracts, requiring meticulous scrutiny due to the high stakes involved. Errors are not an option when handling finances. The recent integration of Large Language Models (LLMs) represents a transformative shift. LLMs have the capability to rapidly process and generate extensive text, automate repetitive tasks, and condense information into accessible formats. Functions such as fraud detection, anomaly analysis, and predictive modeling can now leverage AI and machine learning techniques effectively.
Risk Assessment and Fraud Detection
Machine-learning AI models analyze large datasets in real-time to quickly spot potential fraud by learning from past data. Trained on both fraudulent and legitimate examples, these models categorize transaction patterns, improving fraud detection.
Processing insurance claims for property and casualty involves complex assessments to determine validity and cost, tasks prone to errors and time consumption. While usually requiring human judgment, LLMs can assist by summarizing damage reports.
When combined with AI systems that analyze incident images, LLMs further automate insurance claim processing, speeding up cost assessments. This saves time and money, potentially enhancing customer satisfaction, and strengthens fraud detection to ensure claims are valid and payments are secure. [8]
Improving Compliance and Regulatory Reporting
The financial services sector works under strict rules and regulations. Companies must follow these rules carefully to stay compliant. It’s challenging because regulations change often, so businesses must regularly update their policies and procedures to meet the latest requirements.
Automation plays a crucial role in enhancing compliance processes within banking and financial organizations by streamlining workflows, monitoring regulatory updates, and managing risk effectively. Automated systems, such as Robotic Process Automation (RPA), help banks maintain regulatory compliance by automating tasks like document verification, data entry, and compliance reporting. They also ensure that compliance procedures stay current with evolving regulations, continuously monitoring changes and triggering necessary updates.
Automation further supports Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance by automating customer due diligence and identity verification processes, enhancing fraud detection capabilities. Additionally, automated data management and reporting systems improve the accuracy and efficiency of compliance reporting, while automated audit trails enhance transparency and control over compliance activities. Lastly, automation aids in managing vendor and third-party risks by automating due diligence, risk assessments, and monitoring processes, ensuring compliance with contractual obligations and regulatory requirements. [9]
Implementation of AI in Financial Services
Companies like PayPal and Mastercard are leveraging AI to combat payment fraud effectively. PayPal, handling billions of transactions annually, employs deep learning and machine learning to analyze vast amounts of data, including customer purchase history and fraud patterns. This allows PayPal to accurately detect potential fraud instances, such as unusual account access from multiple countries in a short period. By continuously analyzing data in real-time and generating thousands of rules, PayPal maintains a low transaction-to-revenue ratio, significantly below the industry average.
Similarly, Mastercard has developed its own AI model, Decision Intelligence, which uses a recurrent neural network trained on billions of transactions to predict and prevent fraudulent activities within milliseconds. This technology has substantially improved fraud detection rates across Mastercard’s network, demonstrating AI’s pivotal role in enhancing security and efficiency in the payments industry. [10]
Challenges and Considerations
Data Privacy and Security Concerns
The deployment of LLMs in India’s legal and financial sectors raises significant concerns regarding data privacy and security, due to the lack of any formal legislation or rule-making in relation to use of LLMs in these sectors. Furthermore, these sectors manage sensitive information such as financial records, legal documents, and personal data, necessitating stringent measures to ensure LLMs handle this information securely. While we still lack a dedicated regulation for LLMs in India, compliance with Indian data protection laws, including the Digital Personal Data Protection Act, 2023 and existing regulations like the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, is crucial to maintaining trust and legality.
Ethical Implications and Bias
LLMs trained on extensive datasets may unintentionally perpetuate biases present in Indian societal contexts. In legal applications, biased language models could influence outcomes unfairly, or create a cultural bias of overrepresentation impacting judgments based on factors such as caste, religion, or socioeconomic status. Similarly, biased algorithms in financial services could lead to discriminatory practices in lending or investment decisions. Addressing biases requires meticulous scrutiny during model development, robust testing for fairness, and ongoing monitoring to mitigate unintended consequences, aligning with Indian principles of equality and non-discrimination.
Need for Balanced Human Oversight
While LLMs offer automation and efficiency gains, they cannot replace human judgment in India’s legal and financial decision-making processes. These domains require nuanced understanding, ethical reasoning, and cultural sensitivity—attributes that current AI technologies may lack. Human oversight is essential to ensure LLMs are deployed ethically, interpret outcomes correctly, and intervene when necessary to prevent errors or ethical breaches. Effective oversight by a dedicated regulatory body and audits conducted by independent third parties help ensure compliance and transparency. This oversight aligns with Indian legal principles of fairness, justice, and accountability.
Regulatory Challenges
Integrating AI, including LLMs, into India’s legal and financial sectors must navigate complex regulatory landscapes. Indian laws, such as the Indian Contract Act, 1872, the Banking Regulation Act, 1949, and the Reserve Bank of India’s guidelines on data protection and cybersecurity, impose stringent requirements on data handling, fairness, and transparency. Compliance with these regulations is essential to mitigate legal risks and ensure responsible AI deployment. Collaborative efforts among AI developers, legal experts, and regulatory authorities are crucial to align LLM applications with Indian regulatory frameworks effectively. Stringent guidelines that clearly define acceptable uses of LLMs, along with strict penalties for any violations, are crucial parts of the framework.
Public Awareness
Public awareness campaigns and programs to improve digital literacy aim to empower citizens to navigate AI-generated content confidently. Investment in research and development, international collaboration, flexible regulations, strengthened data protection, and a comprehensive approach are all necessary steps forward.
Conclusion & Future Prospect
In conclusion, LLMs present transformative opportunities for India’s legal and financial sectors, enhancing productivity, decision-making, and customer service. Addressing challenges such as data privacy, bias mitigation, human oversight, and regulatory compliance is paramount to realizing these benefits responsibly. In the legal domain, LLMs can automate document review, streamline contract analysis, and enhance legal research capabilities, thereby boosting efficiency and reducing costs for law firms and legal departments. This technology also holds potential in providing legal assistance to a broader segment of the population, bringing efficiency and improving access to justice. In the financial sector, LLMs can analyze vast amounts of data to aid in risk assessment, customer service automation, and predictive analytics for investment decisions.
While LLMs bring automation and efficiency benefits,human oversight remains indispensable to mitigate these risks, ensuring that LLMs are deployed ethically, interpreting results accurately, and intervening as needed to uphold ethical standards and regulatory compliance in alignment with Indian principles of justice and accountability. Overall, while LLMs offer substantial benefits in terms of efficiency and innovation, their integration into the legal and financial sectors will require careful planning, regulatory adherence, and continuous monitoring to mitigate risks and maximize their positive impact.
The doctrine of “work for hire” is a legal concept that determines the ownership of a copyrighted work when it is created in the context of an employment relationship or under a specific contractual arrangement. The purpose of this doctrine is to establish clarity regarding the rights and ownership of creative works, particularly when multiple parties are involved in the creation process.
Criteria for Work to Qualify as a “Work for Hire”
To qualify as a “work for hire,” certain criteria must be met, although the specifics may vary depending on the jurisdiction. Generally, the following elements are considered:
Employee-Employer Relationship: In an employment scenario, the work created by an employee within the scope of their employment duties is automatically considered a “work for hire.” The employer is deemed the legal author and owner of the copyright.
Commissioned Works: In some cases, a work may be commissioned from an independent contractor, such as a freelancer or consultant. For such works to be categorized as “works for hire,” there must be a written agreement explicitly stating that the work is a “work for hire” and that the commissioning party will be considered the legal owner of the copyright.
It is important to note that different jurisdictions may have variations in the specific requirements and definitions of a “work for hire.” Therefore, it is essential to consult the copyright laws of the relevant jurisdiction for a comprehensive understanding.
“Work for Hire” In The United Kingdom
In collaborative scenarios, where multiple parties contribute to the creation of a work, it becomes necessary to ascertain the ownership of the copyright. The terms of the collaboration agreement and the intentions of the parties involved play a crucial role in such cases.
The case of Creation Records Ltd v. News Group Newspapers Ltd [1997] EMLR 444 shed light on this issue. The court considered a situation where a photograph was taken by a photographer for a newspaper article. The court emphasized the importance of the contractual arrangements and the intention of the parties involved in determining the ownership of the copyright. The photographer, in this case, retained the copyright as the collaboration agreement did not clearly transfer it to the newspaper.
“Work for Hire” In The United States
In the United States, the concept of “work for hire” is extensively addressed under the Copyright Act of 1976. According to Section 101 of the Act, a work qualifies as a “work for hire” if it is:
Prepared by an Employee: The work must be created by an employee within the scope of their employment duties. In such cases, the employer is considered the legal author and owner of the copyright.
The landmark case of Community for Creative Non-Violence v. Reid (490 U.S. 730, 1989) explored the scope of an employment relationship and ownership of a work. The Supreme Court considered factors such as the control exerted by the employer, the provision of employee benefits, and the nature of the work to determine whether the work was a “work for hire.” The court ultimately ruled that the work in question did not meet the criteria for a “work for hire,” and the copyright ownership remained with the creator.
“Work for Hire” In India
In India, the concept of “work for hire” is not explicitly defined in copyright legislation. However, the Copyright Act, 1957, does provide provisions related to the ownership of copyright in works created in the course of employment. The case of Eastern Book Company v. D.B. Modak (2008) addressed the ownership of copyright in works created by employees. The court held that if an employee creates a work during the course of their employment and it falls within the scope of their duties, the employer will be considered the first owner of the copyright unless there is an agreement to the contrary.
When it comes to works created by freelancers or under contractual arrangements, the ownership of copyright is typically determined by the terms of the agreement between the parties involved. In the case of Indian Performing Right Society v. Eastern Indian Motion Pictures Association (2012), the court emphasized the importance of contractual arrangements and the intent of the parties involved in determining copyright ownership. The court ruled that the ownership of copyright rests with the party who commissions the work unless otherwise specified in the agreement.
Similarities and Differences between U.K., U.S., and Indian Approaches
The U.K., U.S., and India have different approaches to the “work for hire” doctrine. While all jurisdictions consider the employment relationship and written agreements as important factors, the specific criteria and legal provisions differ. The U.S. has a more detailed statutory framework for “works for hire,” while the U.K. and India rely on case law and contractual agreements to determine copyright ownership.
Emerging Trends and Future Outlook
Evolving Nature of Employment Relationships: The nature of employment relationships is undergoing significant changes, driven by factors such as the gig economy, remote work, and freelance culture. These developments pose new challenges in applying the doctrine of “work for hire.” The line between employee and independent contractor can become blurred, making it more complex to determine copyright ownership. As the workforce becomes more flexible and diverse, legal frameworks may need to adapt to address these evolving employment relationships.
Influence of Technology and Remote Work: Advancements in technology have transformed the creative industries, enabling collaboration and work across geographical boundaries. Remote work has become more prevalent, and creative projects often involve contributors from different locations. This raises questions about jurisdictional issues and the application of copyright laws in cross-border collaborations. Clear contractual agreements and international harmonization of copyright laws may be necessary to provide guidance and ensure fair treatment of creators.
Practical Considerations for Creators and Employers
Clear Contractual Agreements: Creators and employers should prioritize clear and comprehensive contractual agreements that address the issue of copyright ownership explicitly. These agreements should clearly define the scope of work, the intended ownership of copyright, and any limitations or conditions related to its use, licensing, or transfer.
Negotiating Fair Terms: Creators, especially freelancers and independent contractors, should be proactive in negotiating fair terms that protect their rights and interests. This may involve discussing ownership, compensation, attribution, moral rights, and the ability to use their work for self-promotion or future projects.
Consultation with Legal Professionals: Seeking legal advice from professionals well-versed in copyright law is crucial, particularly when dealing with complex projects or cross-jurisdictional collaborations. Legal experts can provide guidance, ensure compliance with relevant laws, and help draft contracts that protect the rights of creators while meeting the needs of employers.
Awareness of Jurisdictional Differences: When engaging in international collaborations, it is important to have a thorough understanding of the copyright laws and regulations in the relevant jurisdictions. Being aware of jurisdictional differences can help parties anticipate potential conflicts and take proactive measures to address them through appropriate contractual provisions.
Regular Review and Updates: Contracts and agreements should be periodically reviewed and updated to reflect changes in circumstances, business relationships, or legal frameworks. Regularly revisiting contractual arrangements can help ensure that they remain relevant and provide adequate protection to all parties involved.
Collaboration and Communication: Open and transparent communication between creators and employers is essential for a successful working relationship. Engaging in discussions about copyright ownership, expectations, and any potential issues can help prevent misunderstandings and disputes down the line.
Conclusion
In conclusion, the doctrine of “work for hire” under copyright law is a complex and significant concept that determines copyright ownership in various employment and contractual relationships. Through our critical survey of cases in the United Kingdom, United States, and India, several key insights emerge. In India, while there is no explicit provision for “work for hire,” the Copyright Act recognizes the ownership of copyright in works created during the course of employment. Ownership in freelance and contractual arrangements is determined by the terms of the agreement. Throughout our survey, it becomes apparent that clear and explicit contractual agreements are vital in all jurisdictions to address copyright ownership and prevent disputes.
In the bustling markets and stores of India, where buying and selling happens every day, there’s a set of rules quietly at work to make sure you get what you pay for. These acts and rules are colloquially known as ‘Legal Metrology’. The rules are intended to make sure that measurements and weights used in trade are accurate and fair, and are represented to the consumer clearly. The rules are enforced by the Legal Metrology Division, which is managed by the Department of Consumer Affairs under the Ministry of Consumer Affairs, Food & Public Distribution.
What is Legal Metrology?
Legal Metrology sets out to ensure that whatever you buy (whether it’s rice, oil, fruits, cosmetics, backpacks, electronics, or any other packaged goods or commodities) is in compliance with requirements and guidelines about the quantity, weight, measurements, expiry date, origin, manufacturer, etc., and is also packaged in a manner that these details are captured and made available to you. It’s like having referees in the game of trade, making sure everyone plays fair.
How Does It Work?
Ensuring Accuracy:You might notice a stamp or mark on the weighing/measuring devices/equipments, this is to show that they’ve been verified and are accurate. In fact, the Legal Metrology department also issues Licenses to manufacturers, dealers and repairer of weighing/measuring devices for dealing with such instruments.
Packaged Goods: Ever look at a pack of biscuits or a bottle of shampoo and see all those details like MRP, manufacturing date, expiry date, consumer care information as well as the quantity of the package? Legal Metrology rules make it mandatory for companies to give you this information in the manner prescribed under the Legal Metrology Act, 2009 as well as the Legal Metrology (Packaged Commodities) Rules, 2011 so you are aware of the contents of the package and of your mode of communication with the company in case of any complaints.
What a Consumer Should Know?
Rights as a Consumer: You have the right to get what you pay for. If you feel something is not right, like the weight of a product or the information on the pack, you can file a complaint through the online platform – https://consumerhelpline.gov.in/ , which will be forwarded to the appropriate officer for grievance redressal. One can register complaints by call on 1800-11-4000 or 1915 or through SMS on 8800001915.
Checking for Stamps: Next time you buy something by weight, look for the stamp or mark on the scale or the measuring device. It means it’s been checked and is okay to use
What a Business Owner (For Consumer Goods) Should Know?
Product Packaging and Labelling: You must ensure that all products intended for retail sale are accurately weighed or measured and are packaged as per the prescribed standards. This includes providing essential information such as net quantity, MRP (Maximum Retail Price), date of manufacture, expiry date, and consumer care details on the packaging.
Weighing and Measuring Instruments: Businesses using weighing and measuring instruments (like scales, meters, etc.) must ensure these instruments are verified and stamped by authorized Legal Metrology officers. Regular calibration and maintenance of these instruments are essential to maintain accuracy and compliance.
Compliance and Audits: Regular audits and inspections are conducted by Legal Metrology authorities to verify compliance with Legal Metrology rules. Non-compliance can lead to penalties, fines, seizure of goods or even legal repercussions, which can impact a company’s reputation and operations.
Challenges and Moving Forward
Offences relating to weights and measures are punished with fine or imprisonment or with both depending on the offence committed. The government is working on making these rules easier to understand and ensuring everyone follows them correctly.
Conclusion
Legal Metrology rules are not just about weights and measures; they are about fairness and trust in every transaction you make. By making sure everything is measured and packaged correctly, these rules protect you as a consumer and ensure that businesses play by the rules. So, next time you shop, remember these rules are on your side to make sure you get what you deserve!
The International Financial Services Centres Authority (IFSCA) has recently rolled out the 𝐁𝐨𝐨𝐤-𝐤𝐞𝐞𝐩𝐢𝐧𝐠, 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐢𝐧𝐠, 𝐓𝐚𝐱𝐚𝐭𝐢𝐨𝐧, 𝐚𝐧𝐝 𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐂𝐫𝐢𝐦𝐞 𝐂𝐨𝐦𝐩𝐥𝐢𝐚𝐧𝐜𝐞 𝐒𝐞𝐫𝐯𝐢𝐜𝐞𝐬 (𝐁𝐀𝐓𝐅) 𝐑𝐞𝐠𝐮𝐥𝐚𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐉𝐮𝐧𝐞 2024. We are thrilled to share a snapshot of the permissible activities and essential considerations to keep in mind before setting up a BATF unit.
Permissible Activities
Book-keeping Services
Inclusion: Classify and record transactions, including payroll ledgers in books of account
Exclusion: Does not include payroll management and taxation services
Accounting Services (excluding audit)
Inclusion: Review, compilation, preparation, and analysis of financial statements
Exclusion: Audit; Review and compilation without any assurance and attestation
Taxation Services
Offer tax consultation, preparation, and planning
Advise on all forms of direct and indirect taxes
Prepare and file various tax returns
Financial Crime Compliance Services
Render compliance services of AML/CFT measures, FATF recommendations, and related activities
Additional Requirements
Legal Form: Company or LLP
Service Recipient: Non-resident and does not reside in a high-risk jurisdiction identified by FATF.*
Minimum Office Space Criteria: 60 sq. ft. per employee
*Please refer to the list of High-Risk Jurisdictions – February 2024.
In today’s interconnected global economy, businesses engage in cross-border transactions and collaborations, necessitating robust legal frameworks to govern contractual relationships and resolve disputes. Governing law and jurisdiction clauses play pivotal roles in international commercial contracts, providing clarity, predictability, and mechanisms for effective dispute resolution. This comprehensive guide delves into the intricacies of governing law and jurisdiction clauses, offering insights from legal principles, industry best practices, and relevant regulatory frameworks.
Understanding Governing Law Clauses
Definition and Purpose: Governing law clauses, commonly included in commercial agreements, specify the legal system and laws that will govern the interpretation, validity, and enforcement of contractual rights and obligations. These clauses serve to provide certainty and predictability to parties involved in international transactions, ensuring uniformity in legal interpretation and dispute resolution. The selection of a governing law in international contracts assumes paramount significance, as it delineates the legal framework governing the formation, performance, and termination of contractual relationships. Failure to specify the governing law can culminate in costly jurisdictional disputes, highlighting the indispensability of clear and unequivocal clause articulation. Through diligent consideration of factors such as suitability, parties’ jurisdictions, and intellectual property protection, stakeholders can strategically align the governing law with their commercial imperatives, thereby bolstering contract enforceability and mitigating legal risks.
Importance of Governing Law
The selection of an appropriate governing law is crucial for several reasons:
Consistency and Predictability: By designating a governing law, parties ensure consistency and predictability in the interpretation and application of contractual terms, thereby reducing uncertainty and potential conflicts.
Enforcement of Rights: Understanding the governing law facilitates the effective enforcement of contractual rights and obligations, enabling parties to seek legal remedies in a familiar legal environment.
Mitigation of Legal Risks: Parties can mitigate legal risks associated with unfamiliar legal systems by selecting a governing law that aligns with their business objectives and risk tolerance.
English law is widely preferred in international commercial contracts due to its:
Predictability: English law offers a well-established and predictable legal framework, providing parties with clarity and certainty in contractual matters.
Commercial Expertise: The city of London, renowned as a global financial center, boasts a sophisticated legal infrastructure and expertise in commercial law, making it an attractive jurisdiction for international business transactions.
Arbitration Facilities: London is home to prestigious arbitration institutions like the London Court of International Arbitration (LCIA), offering efficient and impartial dispute resolution mechanisms for international disputes.
Exploring Jurisdiction Clauses
Definition and Scope: Jurisdiction clauses, often coupled with governing law provisions, determine the forum where disputes arising from the contract will be adjudicated and the procedural rules that will govern the resolution process. These clauses play a crucial role in establishing the legal framework for dispute resolution and clarifying the parties’ rights and obligations. Absence of a jurisdiction clause can precipitate jurisdictional ambiguities, exacerbating legal costs and impeding timely resolution of disputes. Through meticulous consideration of factors such as geographical locations, dispute resolution mechanisms, and governing law recognition, stakeholders can strategically align the jurisdiction clause with their commercial objectives, thereby facilitating efficient and cost-effective dispute resolution.
Key Considerations in Jurisdiction Clause Drafting
Type of Jurisdiction: Parties must decide whether to opt for exclusive, non-exclusive, or one-sided jurisdiction clauses, each with distinct implications for dispute resolution.
Geographical Factors: Considerations such as the location of parties, performance of contractual obligations, and the subject matter of the contract influence the selection of an appropriate jurisdiction.
Enforcement Considerations: Parties should assess the enforceability of judgments and awards in potential jurisdictions, considering factors such as reciprocal enforcement treaties and local legal practices.
Best Practices for Clause Selection
Clarity and Precision: Drafting governing law and jurisdiction clauses requires clarity and precision to avoid ambiguity and potential disputes over interpretation.
Conclusion
Navigating governing law and jurisdiction issues in international commercial contracts requires careful consideration of legal principles, industry best practices, and regulatory frameworks. By selecting appropriate governing law and jurisdiction clauses that align with their commercial objectives and risk tolerance, parties can mitigate legal risks, enhance contractual certainty, and foster successful business relationships on a global scale. With a comprehensive understanding of the complexities surrounding these clauses and adherence to best practices, businesses can navigate the challenges of international commerce with confidence and resilience.
The Doctrine of Unconscionable Contract stands as a vital safeguard in the realm of Indian contract law, aiming to prevent exploitation and injustice arising from unfair or oppressive contractual agreements. Unconscionability is a legal concept rooted in fairness, particularly within contractual relationships. It allows a party to challenge a contract if it contains excessively harsh or oppressive terms or if one party gains an unjust advantage over the other during negotiation or formation. This principle has been acknowledged by the Law Commission of India in its 199th report on Unfair (Procedural & Substantive) Terms in Contract. The Doctrine of Unconscionable Contract serves as a mechanism to rectify these imbalances by empowering courts to scrutinize contractual agreements and invalidate provisions that contravene principles of fairness and equity.
In addition to unconscionability, the principles of non est factum offer further protection to individuals against unfair contracts. Non est factum, meaning “it is not the deed,” applies when a party signs a document under circumstances where they are mistaken as to its nature or contents. This principle recognizes that individuals should not be bound by contracts they did not understand or intend to enter into. Indian courts have invoked non est factum to set aside contracts in cases of fraud, misrepresentation, or extreme misunderstanding, thereby safeguarding individuals from unjust contractual obligations.
Furthermore, the doctrines of coercion and undue influence provide additional safeguards against unfair contractual practices. Coercion refers to situations where one party compels another to enter into a contract through threats, undermining the voluntariness of the agreement. Undue influence, on the other hand, occurs when one party having apparent authority of a fiduciary relationship exploits a position of power or trust to exert undue pressure on the other party, thereby influencing their decision-making. Indian courts scrutinize contracts for signs of coercion or undue influence, and contracts tainted by these factors may be declared void or unenforceable.
UK and Indian Law
In the United Kingdom, scholars have associated “exploitation” with the concept of unconscionability. They distinguish between unconscionable enrichment and unjust enrichment, with the former focusing on preventing exploitation and providing restitution for damages caused by exploitative bargains. Courts assess whether one party has taken advantage of the other, often due to factors like immaturity, poverty, or lack of adequate advice.
Indian law, while not explicitly codifying the doctrine of unjust enrichment, embodies principles that align with its core tenets. Within Indian jurisprudence, concepts of undue influence and unequal bargaining power, as delineated in Sections 16 (Undue Influence) and 19 (Voidability of Agreements without Free Consent) of the Indian Contract Act 1872, establish a foundation for equitable treatment in agreements. Unjust enrichment, though not codified, encapsulates the essence of retaining benefits unjustly at another’s expense, contravening principles of justice and fairness. Despite the absence of specific legislative mandates, Indian courts possess inherent authority to order restitution, aiming to dismantle unjust gains and restore fairness. This empowerment enables courts to fashion remedies tailored to the unique circumstances of each case, ensuring that aggrieved parties are made whole again.
Landmark Judgments in India:
The evolution of unconscionability in Indian contract law is punctuated by landmark judgments that have shaped its contours and applications. In Central Inland Water Transport Corporation v. Brojo Nath Ganguly (1986 SCR (2) 278), the Supreme Court of India set a precedent by declaring a clause in an employment contract, which waived an employee’s right to sue for breach of contract, as unconscionable and therefore void. Similarly, in Mithilesh Kumari v. Prem Behari Khare (AIR 1989 SC 1247), the court deemed a lease agreement clause requiring exorbitant security deposits as unconscionable and unenforceable. These judgments underscore the judiciary’s commitment to upholding fairness and equity in contractual relationships, irrespective of the parties’ relative bargaining positions.
Recent judicial pronouncements further illuminate the significance of the Doctrine of Unconscionable Contract in protecting vulnerable parties from exploitation. In Surinder Singh Deswal v. Virender Gandhi (2020 (2) SCC 514), the Supreme Court struck down a clause in a promissory note that deprived the borrower of due process rights, reaffirming the judiciary’s commitment to rectifying injustices arising from unconscionable contracts.
Broader Implications and Legal Perspectives:
The Doctrine of Unconscionable Contract transcends its immediate legal implications, embodying broader principles of distributive justice and societal welfare. By addressing power imbalances and ensuring equitable outcomes in contractual relationships, unconscionability contributes to a legal framework that prioritizes fairness and integrity. Moreover, the doctrine underscores the judiciary’s role as a guardian of individual rights and a bulwark against exploitative practices in commercial transactions.
Conclusion:
In conclusion, the Doctrine of Unconscionable Contract serves as a cornerstone of Indian contract law, safeguarding individuals against exploitation and injustice in contractual agreements. Through landmark judgments and insightful analyses, Indian courts have reaffirmed the legality and relevance of unconscionability, underscoring its pivotal role in upholding fairness and equity in contractual relationships. By promoting principles of distributive justice and societal welfare, unconscionability contributes to a legal landscape that fosters integrity, equality, and justice for all parties involved.
Software as a Service (SaaS) agreements have become increasingly prevalent in the digital era, especially in India, where the technology sector is rapidly expanding. These agreements typically involve the provision of software applications hosted on cloud-based platforms to users on a subscription basis. One critical aspect of SaaS agreements is the disclaimer of warranty clause, which plays a pivotal role in defining the rights and responsibilities of both the service provider and the user. In this article, we delve into the significance of the disclaimer of warranty clause in SaaS agreements under Indian contract law, exploring its implications, legal framework, and practical considerations.
Contextualizing the Disclaimer of Warranty Clause
At its essence, the disclaimer of warranty clause embodies the principle of caveat emptor – let the buyer beware. In the realm of SaaS agreements, this clause assumes paramount significance as it pertains to the assurances and guarantees, or lack thereof, regarding the performance, functionality, and suitability of the software platform provided by the service provider. By disclaiming certain warranties, the provider seeks to mitigate legal exposure and shield itself from potential claims arising from performance discrepancies, operational disruptions, or functional inadequacies inherent to software solutions.
Providing Platform on an “As Is” Basis
Central to the disclaimer of warranty clause is the provision of the SaaS platform on an “as is” basis. This legal construct signifies that the service provider makes no representations or warranties regarding the platform’s fitness for a particular purpose, merchantability, or non-infringement of third-party rights. Essentially, the platform is delivered in its current state, devoid of any implicit or explicit assurances regarding its performance, reliability, or compatibility with the user’s specific requirements.
Waiving Off All Warranties
By waiving off warranties of merchantability, fitness for purpose, and infringement, the service provider seeks to insulate itself from potential liabilities stemming from software deficiencies, operational disruptions, or intellectual property conflicts. This blanket waiver underscores the contractual understanding that the user assumes all risks associated with platform utilization, including but not limited to data loss, system incompatibility, or third-party claims arising from intellectual property violations.
Legal Framework in India
Under Indian contract law, SaaS agreements are governed primarily by the Indian Contract Act, 1872, which provides the legal framework for the formation, interpretation, and enforcement of contracts. Section 16 of the Act specifies that contracts which are entered into by parties under a mistake of fact or under certain misrepresentations may be voidable at the option of the aggrieved party. However, the Act also recognizes the principle of freedom of contract, allowing parties to negotiate and agree upon the terms of their agreement, including limitations of liability and disclaimer of warranties.
Implications and Importance
Limitation of Liability: The disclaimer of warranty clause serves to limit the liability of the service provider in case of software defects, performance issues, or service interruptions. By explicitly stating that the platform is provided “as is” and disclaiming certain warranties, the service provider seeks to shield itself from potential claims or lawsuits arising from user dissatisfaction or system failures.
Risk Allocation: In SaaS agreements, the disclaimer of warranty clause helps to allocate risks between the parties more equitably. It puts the onus on the user to assess the suitability of the platform for their intended purposes and acknowledges that the service provider cannot guarantee flawless performance or absolute compatibility with the user’s specific requirements.
Clarity and Transparency: Clear and explicit disclaimer of warranty clauses promote transparency and facilitate informed decision-making by apprising users of the inherent risks associated with platform utilization. Users are empowered to assess the platform’s suitability for their specific requirements and risk tolerance, thereby fostering a relationship grounded in mutual understanding and transparency. Further, a well-drafted disclaimer of warranty clause ensures compliance with Indian contract law principles, particularly regarding the requirement of clear and unambiguous contractual terms. Indian courts generally uphold the principle of freedom of contract and give effect to the intentions of the parties as expressed in their agreement, provided that such terms are not contrary to public policy or statutory provisions.
Flexibility and Innovation: By disclaiming warranties of merchantability and fitness for purpose, service providers are afforded greater flexibility and autonomy to innovate and iterate upon their software solutions without the burden of implicit contractual obligations. This fosters an environment conducive to continuous improvement and technological advancement, thereby enhancing the platform’s competitiveness and value proposition in the marketplace.
Conclusion
In the ever-evolving landscape of SaaS agreements, the disclaimer of warranty clause emerges as a cornerstone of legal protection, risk mitigation, and transparency. By delineating the scope of warranties provided and waiving off certain assurances, service providers and users alike navigate the SaaS ecosystem with prudence, clarity, and mutual understanding. As digital solutions continue to redefine business paradigms and empower enterprises with unprecedented capabilities, embracing the nuances of the disclaimer of warranty clause becomes indispensable for fostering resilient, mutually beneficial contractual relationships in the digital age.
In the intricate realm of Indian Contract law, the doctrine of severability and the Blue Pencil Rule serve as vital tools in ensuring fairness and enforceability in agreements. When confronted with contracts containing both legal and illegal provisions, courts employ these doctrines to salvage the valid portions while nullifying the illegal ones. This article delves into the principles behind severability and the Blue Pencil Rule, their application in various jurisdictions, and their significance in modern contract law.
The Doctrine of Severability
At the heart of the contract law lies the Doctrine of Severability, which dictates that if any provision of a contract is deemed illegal or void, the remaining provisions should be severed and enforced independently, provided such severance does not thwart the original intentions of the parties. This principle, embodied in the Severability Clause, safeguards the validity of contracts by allowing courts to salvage the enforceable portions while disregarding the unlawful ones.
The Severability Clause is based on the ‘Doctrine of Severability’ or ‘Doctrine of Separability’, according to which, if any provision of a contract is rendered illegal or void, the remaining provisions shall be severed and enforced independent of the unenforceable provision, ensuring the effectuation of the parties’ intention.
The Blue Pencil Rule
The Blue Pencil Doctrine, rooted in the principle of severability, offers a solution to this dilemma by allowing courts to strike out the illegal, unenforceable, or unnecessary portions of a contract while preserving the remainder as enforceable and legal. The term “blue pencil” originates from the practice of using a blue pencil for editing or censoring manuscripts and films. In contract law, the doctrine gained prominence through the case of Mallan v. May (1844) 13 M and W 511, initially applied in disputes over non-compete agreements.
Subsequently, the doctrine received broader application through cases like Nordenfelt v. Maxim Nordenfelt Guns and Ammunitions Co. Ltd. [1894] A.C. 535, extending its reach beyond non-compete agreements. The concept was officially named in the case of Atwood v. Lamont [1920] 3 K.B. 571. Grounded in the principle of severability, the Blue Pencil Doctrine operates in common law jurisdictions, allowing courts to salvage valid contractual terms by excising the problematic ones.
In India, the Blue Pencil Doctrine finds expression in Section 24 and Section 27 of the Indian Contract Act, 1872. Section 24 states that if any part of the consideration in a contract is unlawful, the entire contract becomes void. Similarly, Section 27 provides that any restraint on lawful profession or trade is void to that extent. Initially applied in cases involving non-compete agreements, the doctrine has since been expanded to cover various aspects of contracts, including arbitration agreements, memorandum of understanding, sale of real estate, and contracts against public policy.
Judicial Pronouncements and Principles
Judicial pronouncements, particularly in landmark cases like Shin Satellite Public Co. Ltd. v. Jain Studios Limited, have elucidated the principles underlying severability. The Supreme Court of India has emphasized the doctrine of substantial severability, focusing on retaining the core aspects of contracts while disregarding trivial or technical elements. Furthermore, principles governing statutory provisions, as outlined in cases like R.M.D. Chamarbaugwalla & Anr. v. Union of India & Anr., provide a roadmap for the application of severability in contractual contexts.
The landmark case of Shin Satellite Public Co. Ltd. v. Jain Studios Limited, AIR 2006 SC 963, underscores the significance of the Blue Pencil Doctrine in Indian jurisprudence. The court emphasized the principle of “substantial severability” over “textual divisibility,” highlighting the importance of preserving the main or substantial portion of the contract while excising trivial or unnecessary elements. For the Blue Pencil Doctrine to be applied, substantial severability is essential, and it is incumbent upon the court to carefully assess the contract to determine its validity.
Importance of Express Severability Clauses
The insertion of express Severability Clauses in contracts serves to clarify the intentions of the parties regarding the enforceability of contractual provisions. While such clauses are invaluable in eliminating ambiguity, their absence does not preclude the application of severability principles. Courts rely on established tests and principles to determine the validity and enforceability of contracts, even in the absence of explicit Severability Clauses.
Conclusion
In conclusion, the doctrines of severability and the Blue Pencil Rule stand as bulwarks of fairness and equity in contract law. These principles enable courts to navigate complex contractual disputes, ensuring that valid agreements remain enforceable while invalid clauses are appropriately disregarded. As contract law continues to evolve, the application of these doctrines remains essential in preserving the integrity of contractual relationships and upholding the principles of justice and fairness.
In employment agreements in India, certain clauses often give rise to more debate or controversy compared to others. These contentious clauses, their significance, and aspects of their enforceability and negotiability are as follows:
Non-Compete and Non-Solicitation:
Importance: Restricts employees from working with competitors or soliciting clients or other employees after leaving the company. This helps employers safeguard their trade secrets and customer relationships.
Enforceability: Non-solicit clauses are generally valid. However non-compete clauses are generally not enforceable post-termination of employment, except in special circumstances with limited scope and duration.
Negotiability: Scope and duration can sometimes be negotiated.
Confidentiality:
Importance: Ensures protection of sensitive business information.
Enforceability: Strongly upheld, often extending beyond the employment tenure.
Negotiability: Generally non-negotiable due to its critical nature for safeguarding business interests.
Intellectual Property Rights (IPR):
Importance: If done correctly, automatically transfers rights of employee inventions created during employment to the employer.
Enforceability: Widely enforced, especially in roles involving research and development.
Negotiability: Typically not negotiable.
Termination Clauses:
Importance: Defines conditions for ending employment, either ‘at-will’, for cause, or by resignation.
Enforceability: Enforceable when compliant with labor laws (such as the reason for termination).
Negotiability: Limited, as it usually aligns with statutory requirements.
Probationary Period:
Importance: Establishes a trial period to evaluate the employee’s suitability.
Enforceability: Standard practice, conditions usually enforced as stated.
Negotiability: Duration or terms may be negotiable.
Salary and Compensation:
Importance: Details salary, bonuses, and other benefits.
Enforceability: Highly enforceable as per agreed terms.
Negotiability: Often negotiable, dependent on the role and candidate’s experience.
Working Hours and Leave:
Importance: Specifies expected working hours, workdays, and leave entitlements.
Enforceability: Generally enforceable within labor law guidelines.
Negotiability: Limited, generally adheres to company policy.
Appointment and Position:
Importance: Specifies role, designation, and key responsibilities.
Enforceability: Generally binding but subject to changes in organizational structure.
Negotiability: Limited, often aligned with organizational needs.
Dispute Resolution:
Importance: Outlines how employment disputes will be resolved.
Enforceability: Generally upheld, often includes arbitration clauses.
Negotiability: May be negotiable but usually follows standard legal practices.
Governing Law and Jurisdiction:
Importance: Indicates the legal jurisdiction and laws governing the agreement.
Enforceability: Standard and enforceable.
Negotiability: Typically non-negotiable, aligns with the company’s operational jurisdiction.
In these agreements, the most contentious clauses tend to be those that limit future employment opportunities (non-compete and non-solicitation) and protect business secrets (confidentiality and IPR). While clauses like salary and probation can be more open to negotiation, those related to legal compliance and the company’s proprietary rights are usually firmly set.
Restricting Future Employment: Non-Compete clauses prevent employees from joining competitors or starting a competing business for a specified period post-employment.
Preventing Talent Poaching: Non-Solicitation clauses help companies prevent ex-employees from poaching their clients and current employees.
Employment Agreements Enforceability
Reasonableness of Terms: The Indian Contract Act, 1872, governs these clauses. A Non-Compete clause is generally not enforceable post-termination of employment if it is overly restrictive or unreasonable in terms of duration, geographic scope, and the nature of restrictions.
During Employment: However, during the term of employment, such restrictions are usually considered reasonable and enforceable.
Judicial Interpretation: Courts in India have often held that any clause which ‘restrains trade’ is void to the extent of the restraint, post-termination of employment, as per Section 27 of the Indian Contract Act. However, a balance is sought between the employee’s right to earn a livelihood and the employer’s right to protect its interests.
Employment Agreements Negotiability
Depends on Bargaining Power: The scope for negotiation often depends on the employee’s bargaining power, which varies based on seniority, uniqueness of skills, and market demand.
Customization for High-Value Employees: For senior-level employees or those with access to sensitive information, these clauses are often tailored more specifically and may involve negotiations.
Clarity and Fairness: Prospective employees can negotiate for clarity, a reasonable duration, and a specific scope to ensure the clauses are fair and not overly burdensome.
Compensation in Lieu of Restrictions: Sometimes, negotiations can include compensation for the period during which the employee is restricted from certain activities post-termination.
Under India’s new Digital Personal Data Protection Act, 2023 (the “DPDP Act”), entities which process any personal data in digital form will be required to implement appropriate technical and organizational measures to ensure compliance. In addition, entities will remain responsible for protecting such data as long as it remains in their possession or under their control, including in respect of separate processing tasks undertaken by data processors on their behalf. These overarching responsibilities will extend to taking reasonable security safeguards and procedures to prevent data breaches, as well as complying with prescribed steps if and when a breach does occur.
Importantly, compared to its predecessor draft and unlike the General Data Protection Regulation (“GDPR”) of the European Union which places direct regulatory obligations on data processors, the DPDP Act appears to attribute sole responsibility upon the main custodians of data vis-à-vis the individuals related to such data – as opposed to a mechanism of ‘joint and several’ or shared liability with contracted data processors – even when the actual processing may be undertaken by the latter pursuant to a contract or other processing arrangement.
This position appears to be based on the principle that an entity which decides the purpose and means of processing should be held primarily accountable in the event of a personal data breach. Such liability may also be invoked when an event of non-compliance arises on account of the negligence of a data processor. While processing tasks can be delegated to a third party, such delegation and/or outsourcing needs to be made under a valid contract in specified cases.
Further, organizations need to ensure that their own compliance requirements and other statutory obligations remain mirrored in their supply chain in terms of (i) implementing appropriate technical and organizational measures, as well as (ii) taking reasonable security safeguards to prevent a personal data breach. This parallel compliance regime will extend to the actions and practices of data processors, including in terms of rectifying or erasing data. For example, when an individual withdraws a previously issued consent with respect to the processing of personal data for a specified purpose, all entities processing their data – including contracted data processors – must stop, and/or must be made to stop, the processing of such information – failing which the primary entity may be held liable.
CONTRACTUAL ARRANGEMENTS
Although the term ‘processing,’ as defined in the DPDP Act, involves automated operations, such operations can be either fully or partially automated. Besides, the definition includes any activity among a wide range of operations that businesses routinely perform on data, including the collection, storage, use and sharing of information. Thus, even those business operations which involve some amount of human intervention and/or stem from human prompts will be covered under the definition of ‘processing,’ and thus, the DPDP Act will remain applicable in all such cases.
A “data fiduciary” (i.e., those entities which determine the purpose and means of processing personal data, including in conjunction with other entities) can engage, appoint, use or otherwise involve a data processor to process personal information on its behalf for any activity related to the offering of goods or services to “data principals” (i.e., specifically identifiable individuals to whom the personal data relates) as long as it is done through a valid contract. However, irrespective of any agreement to the contrary, a data fiduciary will remain responsible for complying with the provisions of the law, including in respect of any processing undertaken on its behalf by a data processor.
DUE DILIGENCE AND RISK ASSESSMENT
Given that data fiduciaries may be ultimately responsible for the omissions of data processors, contracts between such entities need to be negotiated carefully. In this regard, the risks associated with such outsourced data processing activities need to be taken into account by data fiduciaries, including in respect of risks related to the following categories:
Compliance: where obligations under the DPDP Act with respect to implementing appropriate technical and organizational measures, preventing personal data breach and protecting data are not adequately complied with by a data processor;
Contractual: where a data fiduciary may not have the ability to enforce the contract;
Cybersecurity: where a breach in a data processor’s information technology (“IT”) systems may lead to potential loss, leak or breach of personal data;
Legal: where the data fiduciary is subjected to financial penalties due to the negligence or omission of the data processor; and
Operational: arising due to technology failure, fraud, error, inadequate capacity to fulfill obligations and/or to provide remedies.
Thus, data fiduciaries need to (1) exercise due diligence, (2) put in place sound and responsive risk management practices for effective supervision, and (3) manage the risks arising from outsourced data processing activities. Accordingly, data fiduciaries need to select data processors based on a comprehensive risk assessment strategy.
A data fiduciary may need to retain ultimate control over the delegated data processing activity. Since such processing arrangements will not affect the rights of an individual data principal against the data fiduciary – including in respect of the former’s statutory right to avail of an effective grievance redressal mechanism under the DPDP Act – the responsibility of addressing such grievances will rest with the data fiduciary itself, including in respect of the services provided by the data processor.
If, on the other hand, a data fiduciary outsources its grievance redressal function to a third party, it needs to provide data principals with the option of accessing its own nodal officials directly (i.e., a data protection officer, where applicable, or any other person authorized by such data fiduciary to respond to communications from a data principal for the purpose of exercising their rights).
In light of the above, before entering into data processing arrangements, a data fiduciary may want to have a board-approved processing policy which incorporates specific selection criteria for: (i) all data processing activities and data processors; (ii) parameters for grading the criticality of outsourced data processing; (iii) delegation of authority depending on risks and criticality; and (iv) systems to monitor and review the operation of data processing activities.
DATA PROCESSING AGREEMENT
The terms and conditions governing the contract between the data fiduciary and the data processor should be carefully defined in written data processing agreements (“DPAs”) and vetted by the data fiduciary’s legal counsel for legal effect and enforceability. Each DPA should address the risks and the strategies for mitigation. The agreement should also be sufficiently flexible to allow the data fiduciary to retain adequate control over the delegated activity and the right to intervene with appropriate measures to meet legal and regulatory obligations. In situations where the primary or initial interface with data principals lies with data processors (e.g., where data processors are made responsible for collecting personal data on behalf of data fiduciaries), the nature of the legal relationship between the parties, including in respect of agency or otherwise, should also be made explicit in the contract. Some of the key provisions could incorporate the following:
Defining the data processing activity, including appropriate service and performance standards;
The data fiduciary’s access to all records and information relevant to the processing activity, as available with the data processor;
Providing for continuous monitoring and assessment by the data fiduciary of the data processing activity, so that any corrective measures can be taken immediately;
Ensuring that controls are in place for maintaining the confidentiality of customer data, and incorporating the data processor’s liability in case of a security breach and/or a data leak;
Incorporating contingency plans to ensure business continuity;
Requiring the data fiduciary’s prior approval for the use of sub-contractors for all or part of a delegated processing activity;
Retaining the data fiduciary’s right to conduct an audit of the data processor’s operations, as well as the right to obtain copies of audit reports and findings made about the data processor in conjunction with the contracted processing services;
Adding clauses which make clear that government, regulatory or other authorized person(s) may want to access the data fiduciary’s records, including those that relate to delegated processing tasks;
In light of the above, adding further clauses related to a clear obligation on the data processor to comply with directions given by the government or other authorities with respect to processing activities related to the data fiduciary;
Incorporating clauses to recognize the right of the data fiduciary to inspect the data processor’s IT and cybersecurity systems;
Maintaining the confidentiality of personal information even after the agreement expires or gets terminated; and
The data processor’s obligations related to preserving records and data in accordance with the legal and/or regulatory obligations of the data fiduciary, such that the data fiduciary’s interests in this regard are protected even after the termination of the contract.
LEARNINGS FROM THE GDPR
Many companies that primarily act as data processors have standard DPAs which they ask data fiduciaries to agree to, or negotiate from. The GDPR provides a set of requirements for such DPAs, including certain compulsory information. In India, such standards could evolve through practice, such as by including clauses in DPAs related to the following:
Information about the processing, including its: (i) subject matter; (ii) duration; (iii) nature; and purpose
The types of personal data involved
The categories of data principals (e.g., customers of the data fiduciary)
The obligations of the data fiduciary
A DPA in India could also set out the obligations of a data processor, including those that require it to:
Act only on the written instructions of the data fiduciary
Ensure confidentiality
Maintain security
Only hire sub-processors under a written contract, and with the data fiduciary’s permission
Ensure all personal data is deleted or returned at the end of the contract
Allow the data fiduciary to conduct audits and provide all necessary information on request
Inform the data fiduciary immediately if something goes wrong
Assist the data fiduciary, where required, with respect to: (i) facilitating requests from data principals in exercise of their statutory rights; (ii) maintaining security; (iii) data breach notifications; and (iv) data protection impact assessments and audits, if required.
CAN A DPA BE USED TO TRANSFER LIABILITY?
Even if a personal data breach or an incident of non-compliance arises on account of a data processor’s act or omission, a DPA alone may not be sufficient to relieve the corresponding data fiduciary of its obligations (including in terms of a financial penalty, as may be imposed by the Data Protection Board of India (the “DPBI”)). However, a DPA may be negotiated such as to allow the data fiduciary to recover money from the data processor in some circumstances.
To be sure, if a data processor fails to comply with its contractual obligations under a DPA and thereby causes a data breach or leads to some other ground of complaint under the DPDP Act, the data fiduciary may still be required to pay the penalty, if and when imposed by the DPBI. However, if such breach and/or non-compliance occurs because the data processor did (or did not do) something, thus amounting to a breach of its DPA with the data fiduciary, then the data fiduciary may be able to seek compensation from the data processor for a breach of the DPA and/or invoke the indemnity provisions under such contract.
For example, a DPA can include a “hold harmless” clause. Such clauses may serve to govern how liability falls between the parties. On the other hand, a limitation (or exclusion) of liability clause may aim to limit the amount that one party will pay to the other in the event that it breaches the contract.
WHAT IF A DATA PROCESSOR PROCESSES PERSONAL DATA OUTSIDE THE CONFINES OF A DPA?
If a data processor processes personal data beyond what is permitted under a DPA, or does so contrary to the data fiduciary’s directions, such processor may become a data fiduciary by itself (other than possibly being in breach of the DPA). As long as a data processor operates pursuant to the instructions of a data fiduciary, it is only the latter that will remain directly responsible to data principals under the DPDP Act (for the specified purpose with respect to the processing of such personal data). However, as soon as a data processor determines the means and purpose of processing in its own right, it may become directly responsible to corresponding data principals.
In this regard, a data fiduciary may wish to include a clause in the DPA that obliges the data processor to process personal data only in accordance with the DPA, and to the extent necessary, for the purpose of providing the services contemplated under such DPA. Alternatively, a data processor could be permitted to process personal data further to the written instructions of corresponding data principals. Further, processing outside the scope of the DPA could require a prior contract between the data principal(s) concerned and the data processor, respectively, with respect to a separate arrangement.
Nevertheless, the personal information that a data processor receives from a data fiduciary for the purpose of processing, or that it collects on the latter’s behalf, can only be processed pursuant to the restrictions of a DPA. If the data processor starts processing such personal data outside the confines pf a DPA, e.g., by gathering additional personal data that it has not been instructed to collect, or starts processing data in a way that is inconsistent with, or contrary to, the data fiduciary’s directions, such data processor is likely to be considered a data fiduciary for the purposes of the DPDP Act.
INDEMNIFICATION
As mentioned above, data fiduciaries may need to include indemnity clauses in their DPAs with data processors, where data processors agree to indemnify the data fiduciary against all third-party complaints, charges, claims, damages, losses, costs, liabilities, and expenses due to, arising out of, or relating in any way to a data processor’s breach of contractual obligations. A mutual “hold harmless” clause is one in which the protections offered and/or excluded are reciprocal between the parties.
CONFIDENTIALITY AND SECURITY
Data fiduciaries need to ensure the security and confidentiality of customer information which remains in the custody or possession of a data processor. Accordingly, the access to customer information by the staff of the data processor should be strictly on a ‘need-to-know’ basis, i.e., limited to such areas and issues where the personal information concerned is necessary to perform a specifically delegated processing function.
Further, the data processor should be able to isolate and clearly identify the data fiduciary’s customer information to protect the confidentiality of such individuals. Where the data processor acts as a processing agent for multiple data fiduciaries, there should be strong safeguards (including via encryptions of customer data) to avoid the co-mingling of such information related to different entities.
Nevertheless, a data fiduciary should regularly monitor the security practices of its data processors, and require the latter to disclose security breaches and/or cybersecurity-related incidents, including, in particular, a personal data breach. After all, a data fiduciary is required to notify the DPBI as well as each affected individual if a personal data breach occurs. In addition, cybersecurity incidents also need to be reported to the Indian Computer Emergency Response Team (“CERT-In”) within six hours from the identification or notification of such incident. At any rate, the data processor must be obliged through a DPA to notify the data fiduciary about any breach of security or leak of confidential information related to customers or other individuals as soon as possible.
BUSINESS CONTINUITY AND DISASTER RECOVERY
Data processors could be required to establish a framework for documenting, maintaining and testing business continuity and recovery procedures arising out of any data processing activity. The data fiduciary could then ensure that the data processor periodically tests such continuity and recovery plans. Further, a data fiduciary could consider conducting occasional joint exercises with its data processors for the purpose of testing such procedures periodically.
To mitigate the risk of an unexpected DPA termination or the liquidation of a data processor, the data fiduciary should retain adequate control over the data processing activities and retain its contractual right to intervene with appropriate measures to continue business operations and customer services. As part of its contingency plans, the data fiduciary may also want to consider the availability of alternative data processors, as well as the possibility of bringing back the outsourced processing activity in-house, especially in the event of an emergency. In this regard, the data fiduciary may need to assess upfront the cost, time and resources that would be involved in such an exercise.
In the event of a DPA termination, where the data processor deals with the data fiduciary’s customers directly, the fact of such termination should be adequately publicized among data fiduciary customers to ensure that they stop dealing with the concerned data processor.
CONCLUSION
As discussed in our previous note, organizations need to check whether and to what extent the DPDP Act applies to them and their operations. Although the provisions of the DPDP Act are not effective as yet, organizations may need to improve their IT and cybersecurity systems to meet new compliance requirements. Relatedly, organizations should monitor entities in their supply chains, such as suppliers and vendors, about data processing obligations. Further, existing contractual arrangements may need to be reviewed, and future contracts with data processors must be negotiated in light of the DPDP Act’s compliance requirements.
SLA stands for service level agreement. It refers to a document that outlines a commitment between a service provider and a client, including details of the service, the standards the provider must adhere to, and the metrics to measure the performance.
Typically, it is IT companies that use service-level agreements. These contracts ensure customers can expect a certain level or standard of service and specific remedies or deductions if that service is not met. SLAs are usually between companies and external suppliers, though they can also be between departments within a company.
Why are SLAs important?
Service Level Agreements (SLAs) are essential in the B2B (Business-to-Business) SaaS (Software as a Service) industry for several reasons:
Customer Expectations: SLAs help set clear and specific expectations for customers regarding the level of service they can expect. This transparency is crucial in B2B SaaS, where businesses rely on the software for critical operations. Clear expectations reduce misunderstandings and improve customer satisfaction.
Quality Assurance: SLAs provide a framework for measuring and maintaining the quality of service. By defining metrics, response times, and availability requirements, B2B SaaS companies can ensure that their software consistently meets or exceeds customer needs and industry standards.
Risk Mitigation: SLAs also serve as risk mitigation tools. They outline what happens in the event of service disruptions, downtime, or other issues. This helps both parties understand their rights and responsibilities, reducing legal disputes and financial liabilities.
Service Improvement: SLAs encourage continuous improvement. When B2B SaaS companies commit to specific performance metrics, they have a strong incentive to invest in infrastructure, monitoring, and support to meet these commitments. Regular performance evaluations can lead to service enhancements and increased customer satisfaction.
Competitive Advantage: Having well-crafted SLAs can be a competitive advantage. B2B customers often compare SLAs when evaluating SaaS providers. Companies that offer more robust and reliable service levels are more likely to win and retain customers.
Trust and Credibility: B2B SaaS companies build trust and credibility by adhering to their SLAs. Meeting or exceeding the agreed-upon service levels demonstrates a commitment to customer success and reliability.
Compliance Requirements: In some industries, regulatory requirements demand that service providers maintain certain service levels and provide documentation of compliance. SLAs serve as the basis for demonstrating adherence to these regulations.
Scalability: As a B2B SaaS company grows and serves a larger customer base, SLAs can help ensure that the quality of service remains consistent and can be scaled to meet increasing demand.
Communication and Accountability: SLAs provide a structured means of communication between the service provider and the customer. They help define roles and responsibilities, making it clear who to contact in case of issues and who is accountable for specific aspects of service delivery.
Customer Satisfaction and Retention: Meeting SLAs leads to higher customer satisfaction and loyalty. Satisfied customers are more likely to renew their subscriptions and recommend the service to others, contributing to long-term business success.
In April 2023, the five-judge constitution bench of the Supreme Court of India (“Supreme Court”), in M/s NN Global Mercantile Private Limited (“NN Global”) v. M/s Indo Unique Flame Limited (“Indo Unique”) & Ors.,1 has held that an unstamped instrument (including an arbitration agreement contained in it) which is otherwise exigible to stamp duty is non-existent in law and must be impounded by the Court before appointing an arbitrator. In respect of such unstamped agreements, the rights of the parties will remain frozen, or they would not exist until the defect is cured.
In July 2023, the Delhi High Court in Arg Outlier Media Private Limited v. HT Media Limited,2 while considering a challenge to an arbitral award passed on an unstamped agreement held that although in terms of NN Global, the agreement not being properly stamped could not have been admitted in evidence; however, once having been admitted in evidence by the arbitrator, the award passed by relying on such agreement cannot be faulted on this ground. Similar view has been expressed by the Delhi High Court in SNG Developers Limited v. Vardhman Buildtech Private Limited (initially by the Single Judge,3 and later confirmed by the Division Bench4).
In another recent judgment in August 2023, the Delhi High Court in Splendor Landbase Ltd. (“Splendor”) v. Aparna Ashram Society & Anr. (“Aparna Ashram”),5 has laid down the guidelines for expeditiously carrying out the process of impounding the agreement, and determining the stamp duty (and penalties, if applicable) payable. The judgment is in the context of appointment of the arbitrator under Section 11 of the Arbitration Act, and as such, not a binding precedent, as clarified by the Supreme Court in State of West Bengal & Ors.v. Associated Contractors.6
BACKGROUND TO THE DISPUTE
Indo Unique was awarded a work order and entered into a sub-contract with NN Global. The work order (which included the sub-contract) contained an arbitration agreement. A dispute arose in relation to encashment of a bank guarantee between NN Global and Indo Unique. NN Global filed a suit against Indo Unique. Indo Flame applied under Section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) for referring the dispute to arbitration. The application was rejected on the ground that the work order was unstamped, and therefore, unenforceable under Section 357 of the Indian Stamp Act, 1899 (“Stamp Act”).
Indo Flame filed a writ petition challenging the order of rejection. The Bombay High Court allowed the writ. Subsequently, NN Global approached the Supreme Court, where the primary issue was whether an arbitration clause, contained in an unstamped work order, can be acted upon. A three-judge bench of the Supreme Court, vide its judgment dated 11 January 2021 in NN Global vs. Indo Unique,8 held that an arbitration agreement is a distinct and separate agreement, and can be acted upon even if contained in an unstamped instrument.
ISSUE BEFORE THE SUPREME COURT
As there existed contrary judgments of the Supreme Court on this issue,the three-judge bench referred the question of law (reproduced below) to be conclusively decided by the five-judge constitutional bench of the Supreme Court:
“Whether the statutory bar contained in Section 35 of the Stamp Act, 1899 applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Act, would also render the arbitration agreement contained in such an instrument, which is not chargeable to payment of stamp duty, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument?”
DISCUSSION BY THE SUPREME COURT
Existence vs. validity of the arbitration agreement
The Supreme Court discussed the purpose of insertion of Section 11(6A) in the Arbitration Act.10 Noting that under Section 11(6A), Courts must confine their examination to the existence of an arbitration agreement in proceedings under Section 11 of the Arbitration Act, it held that the examination of the existence of an arbitration agreement under Section 11(6A) does not mean mere “existence in fact”. In enquiry under Section 11, the Courts must see if the arbitration agreement exists in law, i.e., the arbitration agreement must be enforceable in the eyes of the law.
Reliance was placed on Vidya Drolia & Ors. vs. Durga Trading Corporation (“Vidya Drolia”),11 where it was held that for an arbitration agreement to “exist”, it should meet and satisfy the requirements under both Arbitration Act and the Indian Contract Act, 1872 (“Contract Act”).12 Therefore, an arbitration agreement must be a valid and enforceable contract under the law. The phrase “arbitration agreement” under Section 11(6A) of the Arbitration Act must mean a contract, by meeting the requirements under Section 2(h) & (j) of the Contract Act.13 Any agreement that cannot be enforced under law cannot be said to be a valid contract and therefore cannot be said to “exist”.
Effect of non-stamping of a document under the Stamp Act
It was held that under Section 35 of the Stamp Act, an unstamped agreement cannot be “acted upon” by the Courts. Relying on the judgment in Hindustan Steel Limited vs. Dilip Construction Company,14 it was held that to “act upon” an instrument or document would mean to give effect to it or enforce it. Therefore, an unstamped agreement, which is otherwise exigible to stamp duty, cannot be enforced by the Courts and cannot be said to have any existence in the eyes of the law.
Further reliance was placed on Mahanth Singh vs. U Ba Yi15 to observe that Section 2(j) of the Contract Act would only be attracted when a contract is rendered unenforceable by application of a substantive law. While the Stamp Act is a fiscal statute, it was held to be substantive law. Therefore, any unstamped contract exigible to stamp duty shall be rendered void under Section 2(j) of the Contract Act. It was further observed that the rights of the parties under an unstamped agreement would remain frozen or rather would not exist until such an agreement is duly stamped.16
Lastly, it was held that Courts are bound under Section 3317 of the Stamp Act to impound an instrument that has not been stamped or is unduly stamped.
On the doctrine of severability
It was observed that doctrine of severability would not play any role in the Courts duty to impound and not give effect to an unstamped instrument under the Stamp Act. While upholding that the arbitration agreement is a separate and distinct agreement from the principal agreement containing the arbitration clause, it was held that the evolution of the doctrine of severability indicates that the same cannot be invoked when dealing with the provisions of the Stamp Act.
It was observed that the doctrine of severability was primarily developed to preserve the arbitration clause in situations where the principal contract is terminated or rescinded for any reason. This was to protect the rights of the parties to resolve their disputes through arbitration, and to ensure that the powers of the arbitrator are not extinguished with the termination of the main contract. The Supreme Court opined that since arbitration agreement by itself is also exigible to stamp duty,18 the doctrine of severability would not be of help where the main contract, containing the arbitration clause, is unstamped.
DECISION OF THE SUPREME COURT
In light of the above analysis, the majority held as under:
An instrument containing the arbitration clause, if exigible to stamp duty, will have to be necessarily stamped before it can be acted upon. Such instrument, if remains unstamped, will not be a contract and not be enforceable in law, and therefore, cannot exist in law.
Section 33 and 35 of the Stamp Act would render an arbitration agreement contained in an unstamped instrument as being non-existent in law, unless the instrument is validated under the Stamp Act.
However, the Supreme Court specifically observed that it is not pronouncing any judgment in relation to the proceedings under Section 9 of the Arbitration Act, i.e., interim protection in aid of arbitration.
EMERGING CHALLENGES IN THE AFTERMATH OF THE JUDGMENT
The judgment of the Supreme Court will have far reaching implications on the pro-arbitration trend that started in 2012 with the BALCO judgment by the Supreme Court. The process for impounding an unstamped or unduly stamped instrument is generally marred by extreme delays, which would in turn cause delays in initiating arbitral proceedings. From a policy perspective, the judgment will also impede the implementation of the institutional arbitration in India, as recommended by the high-level committee chaired by Justice Srikrishna (retd.), as the arbitral institution may not be able to appoint an arbitrator in proceedings arising from unstamped arbitration agreements governed by Indian law. However, the Delhi High Court has provided guidance on the expeditious disposal of the impounding proceedings in cases where the agreement has to be impounded in relation to appointment of arbitrator under Section 11 of the Arbitration Act.
The finding that an unstamped agreement does not exist in law, and the rights of the parties under such an agreement would rather not exist may adversely impact foreign-seated arbitrations. For example, an unstamped agreement, executed outside India, and subject to Indian laws, may not be given effect to by the foreign-seated tribunal, as such an agreement would not exist under the Indian laws. Moreover, while the Supreme Court has stated that it has not pronounced on the matter in relation to Section 9 of the Arbitration Act, it remains to be seen if the Courts would grant any interim reliefs in an agreement that does not “exist” in law.
Lastly, as recognized in the dissenting opinion of Justice Hrishikesh Roy, there have been technological advances in the manner of execution of agreements (such as electronic signatures through DocuSign, etc.) and the advent of smart contract arbitration. The majority judgment has not considered such developments. This may threaten the developing ecosystem of dispute resolution through deployment of technological and artificial intelligence tools.
Proof of Concept (‘PoC’) can also be called as ‘Proof of Principle’, it can be explained as a realization of a particular method/ idea in direction to demonstrate or determine its feasibility or determination or demonstration in principle with the aim of verifying that the concept or theory of the particular agenda has some practical potential. A Proof of Concept is an exercise in which focus is on determining whether an idea/ agenda can be turned into a practicality/ reality. For example, in Software Development, PoC would examine whether an idea is practically feasible from a technology viewpoint. A PoC is usually small, crisp study and incomplete. In simple terms, a Proof of Concept (PoC) is like a plan to test if an idea, product, or design can actually be made into a reality. It’s a way to check if something is doable before committing to full production. It doesn’t deal with things like finding a market for the product or figuring out the best way to make it. One important thing to remember is that a PoC doesn’t focus on what you’ll get in the end but rather on whether the project can work. It’s not meant to figure out if people want the idea or to find the most efficient way to make it. Instead, it’s all about testing if the idea is feasible – giving the people involved a chance to see if it can be developed or built.
Important Considerations for POC Agreement
When creating a Proof of Concept agreement, there are a few things to consider:
Duration of the contract;
Defining the criteria for considering the product or service a success;
Deciding how to evaluate the PoC;
Planning what to do next if the PoC either succeeds or fails.
Benefits of Proof of Concept (PoC)
Proof of Concept (PoC) plays a crucial role in product development due to its significant benefits. It aids in problem identification, leading to resource savings. Products subjected to PoC tend to have a higher likelihood of success, as extensive testing during this phase minimizes business risks. This holds particular significance in today’s fiercely competitive business environment. Some of the advantages of PoC include:
Time and resource conservation for businesses;
Assessing market feasibility;
Detecting technical challenges and offering remedies;
Enhancing product quality;
Offering alternatives through market research.
Key Clauses in a PoC Agreement
Definitions This section defines and clarifies the terms used in the agreement to ensure a clear understanding of their exclusivity and scope. It typically serves as the opening clause of the agreement and helps prevent potential ambiguities in the future.
Duration This clause outlines the period of validity for the Proof of Concept agreement, specifying when it begins and ends. It provides exact dates for the agreement’s effectiveness and termination.
Termination The Termination clause is a critical part of any legal agreement, allowing for the agreement’s termination under specified circumstances or in case of breaches of obligations. It is usually included alongside the terms and conditions.
Performance Obligation This section details the product or service for which the agreement is executed. The specifics of the performance clause may vary depending on the industry and the products or services involved. It typically addresses questions such as the target audience, the nature and purpose of the product or service, desired outcomes, accident prevention measures, and any product/service-specific information.
Ownership The ownership clause is one of the most important clauses in the Proof of Concept Agreement and that is imperative to the agreement. This clause declares that notwithstanding anything mentioned in any other clause the rights to the product or service mentioned in the agreement belong to its manufacturer.The rights mentioned above include all rights such as copyright, patent, trademark, trade secrets and any other intellectual property rights. It includes all copies, modifications, changes made in the product or service by either of the parties to the agreement. Any new product/service that is resultant from the existing product or service mentioned in the agreement that shall also be the property of the manufacturer and no receiving party shall have any obligations or rights on it. The receiving party shall use the product or service only in the manner as specified in the general performance clause of this agreement; however, if the manufacturer creates or invents any other product or service to aid such usage or add value to the mentioned product or service then the additional product or service also belongs to the manufacturer along with all its rights.
Payment Terms The payment terms outline the compensation or payment to be made by the recipient to the manufacturer in return for the services they have utilized. The payment provision should encompass the following elements:
The specified remuneration, service fee, or consideration to be paid;
Any additional charges or reimbursements, if applicable;
Provisions for compensating damages in the event of product or service damage or deviations;
Penalties for delayed delivery; and
Interest penalties for late payments.
Conclusion
A Proof of Concept (PoC) is a valuable tool utilized across various sectors such as science, engineering, drug discovery, hardware, software, and manufacturing. Its primary purpose is to evaluate the feasibility of an idea before committing to full-scale production. In a PoC, it is essential to clarify how the product or service will be employed, define the objectives to be accomplished, and address any other business requirements.
It’s important to note that the effectiveness of a Proof of Concept greatly hinges on the specific business environment in which it is tested. When a PoC is not evaluated in a realistic business setting, the results it yields may lack accuracy. This doesn’t necessarily mean replicating the entire market environment, but rather creating a close approximation to enhance result accuracy.
The PoC Agreement template is designed for situations where more protection is needed than in a final decision, yet it doesn’t constitute a full commitment or engagement. To determine the appropriateness of using the PoC template, a three-step evaluation process is required to ascertain whether it represents a final decision and if the PoC aligns with the situation at hand.
Consequential damages, as the name suggests, refer to the compensation granted to one party for the harm or loss they experience as a result of a breach of the terms in an agreement. These damages are primarily linked to financial losses suffered by the party, including but not limited to potential profits delayed due to the breach or expenses incurred to address the harm caused by the agreement breach.
One of the essential conditions for claiming consequential damages is that they should be clearly and undoubtedly linked to the breach of the contract, rather than being remotely related. It is necessary for the plaintiff to demonstrate that the pecuniary loss or expenses incurred are a direct consequence of the other party’s breach of the agreement.
Important considerations in determination of consequential damages
When determining the extent of consequential damages, several important aspects must be considered:
Proximity/Natural ConsequenceThe first step in assessing consequential damages is to establish that the loss being claimed by the plaintiff is a direct result of the contract breach. Section 73 of the Indian Contract Act, 1872 emphasizes that damages cannot be sought for losses that are remote or indirect. To determine proximity, the concept of the remoteness of damages is applied. According to the Indian Contract Act, for damages to be awarded, it is essential that the loss or damage “arose in the usual course of things from such breach, or the parties knew that such loss or damage could reasonably occur at the time of entering into the contract.” Consequently, the defendant would not be held responsible for damages that are not closely connected to the breach of the contract. The landmark case of Hadley v. Baxendale provided guidelines for assessing the remoteness of damages. According to this case, a party suffering from a contract breach can only recover damages that can reasonably be considered as naturally arising from the breach, following the usual course of events, or that both parties could have reasonably anticipated as the likely result of the breach when making the contract. In summary, consequential damages must be a direct and foreseeable consequence of a contract breach, and damages for remote or indirect losses are generally not recoverable, as established by the Indian Contract Act and the principles outlined in the Hadley v. Baxendale case.
Reasonable ContemplationIn order to understand the remoteness of damage, the first thing which is needed to be determined is whether such loss on the event of a breach was contemplated or anticipated by the party while entering into a contract. When the terms of the agreement are formulated the parties envisage the possible/potential outcomes arising out of the breach of contract. If such loss for which the consequential damages are claimed, was genuinely contemplated by both the parties, then the defendant party cannot evade liability to pay consequential damages by saying that such loss was remote or indirect. This is the unique thing about consequential damages, that even after the apprehension of the possibility of such loss, it is not explicitly mentioned in the contract but the claim can be raised for such loss because it seems plausible to seek damages for such loss.
TestTo establish the connection between default committed and loss is suffered is the necessary concomitant for claiming damages, the breach has to have the real and effective cause for the loss. So basically, the impact of the breach which transcends actual loss and causes other ancillary damages closely related to the subject matter of contract can be recovered in the name of consequential damages. To ascertain the link between breach and injury, the English Courts introduced the “But For” test. In this test, the court discerns on a simple question, whether the loss would have taken place if it weren’t for the wrongful acts/omission by the defendant. The test was first applied in Reg Glass Pty Ltd v. Rivers Locking Systems Ltd, the defendant did not insert the locks on the doors in accordance with the terms of the agreement, later a robbery took place in the house of the plaintiff. The court held that if it weren’t for the defendant’s failure in putting locks in accordance with the agreement the robbery could have been precluded.
The same test of “but for” test was applied by the Hon’ble Supreme Court of India in a landmark case “but for” test, the Hon’ble Supreme Court had stated that neglect of duty of the defendant to keep the goods insured resulted in a direct loss of claim from the government (there was an ordinance that the government would compensate for damage to property insured wholly or partially at the time of the explosion against fire under a policy covering fire risk). The Supreme Court concluded that “But for the appellants’ neglect of duty to keep the goods insured according to the agreement, they (the respondents) could have recovered the full value of the goods from the government”.
Advancements in technology and the expansion of global markets have introduced more intricate challenges, necessitating the businesses take steps to safeguard their rightful interests. To maintain and secure assets like confidential data, unique concepts, and trade secrets, parties entering into contracts frequently find it necessary to incorporate restrictive clauses, which limit the freedom of the other party to utilize confidential information or engage in a particular profession, trade, or business with other parties.
However, it is pertinent to note that these are often a subject of debate since these covenants contradict Section 27 of the Indian Contract Act, 1872 (ICA), which sets out that any agreement restraining someone from engaging in a legal profession, trade, or business is void to that extent. Since the legal framework addressing these conflicts is still in its early stages in India, judicial rulings and established legal principles have been crucial in shaping a jurisprudence that balances the competing interests and rights inherent in restrictive covenants and the provisions of Section 27 of the Indian Contract Act, 1872.
Nevertheless, conflicting interpretations continue to arise, making it necessary to thoroughly review the developments and validity of restrictive covenants in light of Section 27 of the Act.
What are restrictive covenants?
Restrictive covenants typically form a part of most agreements and aims to prevent employees from sharing confidential or valuable information which they gain access to during the term of their employment, a restrictive covenant is a provision that restricts an employee from seeking new employment for a specified period after leaving a company or organization. Notable examples of such restrictive clauses include contracts related to maintaining confidentiality, refraining from disclosing sensitive information, and avoiding solicitation of former colleagues or clients.
Restrictive covenants in employment agreements are contractual obligations placed on employees prohibiting them from engaging in certain actions/activities. The most common kinds of restrictive covenants in the employment context are:
Exclusivity Clauses: These obligations are coterminous with employment and prohibit employees from taking up any other employment or engagements without the express permission of the employer.
Non-Compete Clauses: Employers use these clauses to bar employees during and post-termination from taking up employment or engagements with competitors or from conducting business that would compete with the employer.
Non-Solicit Clauses: These clauses typically restrict an employee from soliciting the employer’s and clients post cessation of the employee’s employment with the organization.
Confidentiality Clauses: These clauses protect trade secrets or other proprietary information from unauthorized disclosure by an employee during and after employment. A confidentiality clause usually defines what information should be considered confidential, the temporal and geographical scope of the obligation, and related rights and consequences for breach of the obligation.
Types of Restrictive Covenants
Points to Remember
Is it lawful for the employers to use restrictive covenants beyond the termination of the employment of the employee? No. Any agreement which restrains a person from exercising a lawful profession, trade or business of any kind is, to that extent, void under the Indian Contract Act, 1872. The only statutory exception to this rule applies to agreements involving the sale of goodwill, wherein the seller and the buyer may agree to certain reasonable restrictions on carrying out a similar trade or business within a certain geographic area. In interpreting this provision, Indian courts have consistently held that while restrictive covenants operating during the term of the employment contract are valid, any clauses restricting an employee’s activities post-employment would be in restraint of trade
How to ensure that the Restrictive Covenants are not in contradiction to Section 27 of the Act? It is advisable that restrictive covenants are drafted narrowly to ensure their enforceability. However, even if restrictions are drafted broadly, the courts ordinarily use the principle of severability to invalidate the restrictions only to the extent that they are excessively broad. The courts can do this whether or not the contract contains a severability clause, although it is advisable to include such a clause in the interests of clarity. An excessively broad restriction may not render the covenant unenforceable in its entirety. For example, it is common for contracts to include restrictive covenants protecting the business of group companies, but the courts will enforce such a clause only to the extent that the employer can demonstrate a reasonable nexus between its business and that of the company concerned.
If an employee is dismissed or the employee resigns in response to a repudiatory breach, will the employee be still bound by any restrictive covenants? The restrictive covenants of non-solicitation, confidentiality and misrepresentation would survive a repudiatory breach or wrongful dismissal and would continue to be enforceable.
While liquidated damages refer to the amount of damages which the party estimates for the breach of the contract. On the other hand, Penalty is damages which are additional to the liquidated damages. The expression ‘penalty’ is an elastic term with many different shades, but it always involves an idea of punishment. The Purpose of a Penalty clause is not to ensure compensation in case of a breach but the performance of a contract. In English Law, the penalty clause is against Public Policy. However, the Indian Courts have been silent on this particular aspect. Section 23 of the Indian Contract Act states that Agreements whose object is opposed to Public Policy is void.
The Indian statue has made a classification on Liquidated Damages and Penalty with reasonability. It means that liquidated damages are reasonable whereas anything which is unreasonable and excessive of the amount of breach is penalty. Liquidated damages or Penalty act as a penalty beyond which the Court cannot give reasonable compensation.
Current legislation governing penalty clauses regulation
The legislature in India has not stated the validity of penalty clauses. These clauses are governed under Chapter VI of the Indian Contract Act, 1872.
Section 73 of the Act states that compensation for loss is caused by breach of contract. It is defined as “When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.” It is clear from this Section that the loss should be natural and should arise directly out of the breach of this contract. Further, this Section also discusses the remoteness of damage. Remoteness refers to whether the said damage was directly related to the breach. In cases where the damage is indirect and remote, the Court shall not give compensation to the defaulting party. Penalty clauses on the other hand are penal damages which are more than the loss which is incurred.
Section 74 of the Act defines Compensation for breach of Contract where penalty is stipulated for. Contracts in which there is a penalty clause, the aggrieved party can only ask for a reasonable compensation from the parties. The word reasonable is not stated but shall be taken up on a case-to-case basis looking at the circumstances of the case, the amount of default, paying capabilities of the parties etc.
Both liquidated damages and penalty follow the doctrine of reasonable compensation. Doctrine of Reasonable Compensation refers to when the compensation is “reasonable”. Reasonability is determined by the facts and circumstances of each case. In case of a breaching party, reasonability may mean the damage suffered.
The Supreme Court of India in various judgements has mentioned the importance of reasonable compensation. In the case of Construction & Design Services v. Delhi Development Authority [8], the Court stated that the Court must determine the reasonable compensation and then grant it to the injured party.
Enforceability of a penalty clause
In India, the Validity of Penalty Clauses was questioned in various Supreme Court judgements. Generally, penalty clauses are taken in consideration with liquidated damages. In ONGC v Saw Pipes, the Court laid down certain observations referring to Section 73 and 74 of the Act one of which was that “If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the Contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, the party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act.” The Law not only decides the amount of liquidated damages but also the compensation which is ‘likely’ to arise from the breach of the Contract.
Therefore, the Apex Court had explicitly stated that liquidated damages unless unreasonable or penalty shall be allowed. It further stated that even in case of unliquidated damages, if it is not unreasonable or penal then the Court shall allow compensation which is a genuine pre-estimate of the loss.
In Fateh Chand v Balkishan Das, the Supreme Court similarly stated that the “Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon Courts by Section 74.” Contracts with penalty clauses often are unreasonable and put a burden on the defaulting party. Parties in case of wilful default might suffer consequences which are much more than their default. It can be said that putting unreasonable penalties on the defaulting party is against Public Policy. In Central Inland Water Transport Corpn. Ltd. V Brojo Nath Ganguly [12], the Supreme Court said that “Public Policy” and “Opposed to Public Policy” is not defined under the Indian Contract Act and is incapable of a precise definition. Therefore, what is injurious to public good can be the basic definition of ‘Opposed to Public Policy’. Contracts with Penalty Clauses can be said to be against Public Policy because it is harmful to the parties who have defaulted even in cases when the default is not wilful.
Conclusion
Damages are of two types – liquidated and unliquidated. Liquidated damages are defined at the start of the Contract whereas the unliquidated damages refer to when damages have not been pre-estimated but are equal to the amount of breach.
Penalty on the other hand is often added to the Agreement in order to deter the parties to not perform their part of the obligation. In the common law jurisdictions, penalty clauses are not valid. However, the amount of penalty should be excessive and unreasonable.
In India, a variety of cases have been filed with reference to Liquidated Damages and Penalty. Only the amount which is reasonable to the breach shall be provided by the Courts. Therefore, the Indian judiciary makes penalty clauses valid only till the point where it is reasonable and not in excess of the breach.
Under ordinary circumstance, when a person is making any payment to a non-resident, the AD Banker mandates such person to furnish Form 15CA and / or Form 15CB for the transaction before releasing any payment to non-residents in their foreign currency account / offshore bank account. This is because the AD Banker is mandated by the RBI to obtain a certain set of documents (which includes Form 15 CA and / or Form 15 CB) 𝐛𝐞𝐟𝐨𝐫𝐞 𝐩𝐫𝐨𝐜𝐞𝐬𝐬𝐢𝐧𝐠 𝐚𝐧𝐲 𝐫𝐞𝐦𝐢𝐭𝐭𝐚𝐧𝐜𝐞𝐬 𝐨𝐮𝐭𝐬𝐢𝐝𝐞 𝐈𝐧𝐝𝐢𝐚.
Now, here’s the tricky part, what happens if you are making a payment to a non-resident who has an NRO account (for example, NRIs or Person of Indian origin)?
Let’s first understand what is an NRO account? NRO accounts are a popular way for NRIs to manage their deposits or income earned in India such as dividends, pension, rent, sale proceeds, etc. in INR.
If you end up making a payment to an NRO account holder, technically, there is no money going outside India. Hence, the AD Banker is not involved and the remittance can happen directly from the payer’s Indian bank account to the NRO account holder like any other day-to-day transaction.
But, does that mean there is no obligation on the payer to file Form 15CA and / or Form 15CB since there is no money going outside India? 𝐓𝐡𝐞 𝐚𝐧𝐬𝐰𝐞𝐫 𝐭𝐨 𝐭𝐡𝐚𝐭 𝐢𝐬 𝐍𝐨.
The obligation on the payer to file Form 15CA and / or Form 15CB stems from Section 195 of the Income-tax Act, 1961 read with Rule 37BB of the Income-tax Rules, 1962. The section requires any person responsible for making a payment to a non-resident / foreign company to file Form 15CA and / or Form 15CB 𝐩𝐫𝐢𝐨𝐫 𝐭𝐨 𝐫𝐞𝐦𝐢𝐭𝐭𝐢𝐧𝐠 𝐭𝐡𝐞 𝐩𝐚𝐲𝐦𝐞𝐧𝐭.
In layman terms, the obligation to file Form 15CA and / or Form 15CB is not associated with remittance of funds outside India but actually associated with making 𝐩𝐚𝐲𝐦𝐞𝐧𝐭𝐬 𝐭𝐨 𝐧𝐨𝐧-𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬, a fact that is often overlooked by most players.
So keep this in mind 𝐛𝐞𝐟𝐨𝐫𝐞 making your next remittance to a NRO account holder, be it for rent or sale proceeds on transfer of property / shares even if your banker does not mandate as the penalty for non-filing / filing inaccurately is ₹ 1 𝐥𝐚𝐤𝐡!!
Stay ahead of the curve with our insights on FLA reporting, mandated by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA),1999.
What is covered? 1. Understanding the purpose of FLA Reporting 2. Annual filing requirements for Indian companies and LLPs 3. Step-by-step guide to key FLA filing requirements 4. Penalties for non-compliance
Do you hold equity shares in a private limited company that has invested in immovable property or shares of another company? It’s essential to understand how Fair Market Value (FMV) is calculated for equity share transfers of such private limited company.
Under the Income Tax Act, equity share transfers must be executed at FMV, as determined by Rule 11UA. According to Rule 11UA of the Income Tax Rules, the FMV is calculated based on the Net Asset Value (NAV).
The NAV is calculated by subtracting total liabilities from total assets. However, special consideration is required for: 1. Investments in Shares and Securities: These must be valued at their fair market value, not book value. 2. Investments in Immovable Property: The value should be the stamp duty value adopted or assessed by any governmental authority. This necessitates obtaining a valuation report from a registered valuer (L&B).
For companies and stakeholders, understanding these nuances is crucial.
Starting June 18, 2024, all advertisers and advertising agencies must upload a ” – ” before publishing ads on TV, radio, print, or online platforms, as per the . Ensure your ads comply with all guidelines!
Did you know that transfers of shares in a foreign company can be taxable in India if they derive substantial value from Indian assets? Here’s how:
Tax Event: Shares of a foreign company are deemed to derive its value substantially from India, if on the specified date, the value of shares of Indian company: – exceeds INR 10 crore (approx. USD 1.2mn); and – represent at least 50% of the foreign company’s asset value
Key Exemptions – Small Shareholders: Shareholders holding 5% or less, directly or indirectly – Category I FPIs
Background The landmark Vodafone case brought this issue to the forefront. This case involved Vodafone’s acquisition of Hutchison’s stake in a Cayman Islands company, indirectly owning substantial assets in India. The Indian tax authorities claimed tax on the transaction, arguing that the transfer derived significant value from Indian assets. Vodafone contended that the transaction was not taxable under existing laws. The Supreme Court of India ruled in Vodafone’s favor in 2012. However, in response, the Indian government introduced a retrospective amendment to the Income Tax Act, 1961 allowing taxation of such indirect transfers, thereby overturning the Supreme Court’s decision and leading to prolonged legal disputes.
In the realm of financial analysis, a metric known as EBITDA holds significant weight. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is an additional measure of profitability that strips out non-cash expenses (depreciation and amortization), taxes, and interest expenses, which depend on the company’s capital structure. It aims to display cash profit that is generated by the company’s operations. This article covers the definition, calculation, and insights EBITDA offers into a company’s financial well-being.
What is EBITDA?
EBITDA is a financial metric used extensively by companies to measure their financial performance. It provides a distinct idea to investors and lenders about a company’s profitability. However, EBITDA can be misleading as it does not reflect the company’s cash flow.
EBITDA assesses a company’s operating profitability by stripping away the influence of financing decisions, tax implications, and non-cash accounting expenses. This offers a clearer picture of a company’s ability to generate cash flow from its core business activities.
Imagine a company’s profitability as a tree. The core business activities, like selling products or services, represent the roots that generate the company’s lifeblood – cash. EBITDA helps us understand the strength of these roots, independent of how the company finances its operations (interest), the tax environment it operates in (taxes), or how it accounts for the gradual decline in asset value over time (depreciation and amortization).
Calculation of EBITDA
There are two primary ways to calculate EBITDA:
1. The Net Income Approach
This method starts with the company’s net income, which is the profit after accounting for all expenses. Non-cash expenses (depreciation and amortization) and financing costs (interest and taxes) are added back to arrive at EBITDA.
EBITDA = Net Income + Interest Expense + Taxes + Depreciation + Amortization
Example Calculation: Company ABC accounts for their 15,000 depreciation and amortization expense as a part of their operating expenses. Calculate their Earnings Before Interest Taxes Depreciation and Amortization:
This approach utilizes the company’s operating income, which represents the profit before interest and taxes. Since operating income already excludes these factors, we simply add back the non-cash expenses (depreciation and amortization) to reach EBITDA.
EBITDA = Operating Income + Depreciation + Amortization
EBITDA as a Financial Metric
EBITDA shows a company’s financial performance without considering capital investments, such as plant, property, and equipment. It does not account for expenses related to debt and emphasizes the firm’s operating decisions. All these reasons highlight why it may not be an accurate measure of profitability. Additionally, it is often used to conceal poor financial judgment, like availing of a high-interest loan or using fast-depreciating equipment that comes with a high replacement cost. Nevertheless, it is still considered to be an important financial metric. It offers a precise idea of a company’s earnings before financial deductions are made or how accounts are adjusted.
What is EBITDA Margin?
EBITDA margin is a key profitability ratio that measures a company’s earnings before interest, taxes, depreciation, and amortization as a percentage of its revenue. It provides insight into how much cash profit a firm can generate in a year, which is particularly useful for comparing a firm’s performance to that of its contemporaries within a specific industry.
However, EBITDA is not registered in a company’s financial statement, so investors and financial analysts are required to calculate it on their own. It is calculated using the formula below –
EBITDA Margin = EBITDA / Revenue
Notably, a firm with a relatively larger margin is more likely to be considered a company with significant growth potential by professional buyers.
For instance, the EBITDA of Company A is ascertained to be ₹800,000, while their aggregate revenue is ₹7,000,000. On the other hand, Company B registered ₹900,000 as EBITDA and ₹12,000,000 as their aggregate revenue. So as per the formula:
Company Name
EBITDA
Total
Revenue
EBITDA Margin Calculation
EBITDA Margin
A
₹800,000
₹7,000,000
₹800,000 / ₹7,000,000
11.43%
B
₹900,000
₹12,000,000
₹900,000 / ₹12,000,000
7.50%
Therefore, despite having a higher EBITDA, Company B has a lower EBITDA margin when compared to Company A. This means Company A is financially more efficient and hence more likely to be favored by potential investors.
Importance of EBITDA
EBITDA serves as a valuable metric for several reasons:
Operational Efficiency: By focusing solely on a company’s core operations, EBITDA helps assess its operational efficiency and profitability without the impact of financing decisions, tax rates, or accounting methods.
Comparability: Since EBITDA eliminates non-operating expenses, it allows for comparisons between companies within the same industry or sector thereby evaluating investment opportunities or conducting industry benchmarks.
Financial Health: EBITDA provides insights into a company’s financial health and its ability to generate cash from its core business activities. A consistently positive EBITDA indicates robust operational performance, while negative EBITDA may signal underlying operational challenges.
Valuation: EBITDA is often used in financial modeling and valuation techniques such as the EBITDA multiple or Enterprise Value (EV) to EBITDA ratio. These methods help investors estimate the intrinsic value of a company and determine whether a company is overvalued (high ratio) or undervalued (low ratio) relative to its earnings potential.
Example of EBITDA Used in Valuation (EV/EBITDA Multiple):
Company X and Company Y are competing consulting companies that operate in Mumbai. X has an enterprise value of 5,00,000 and an EBITDA of 25,000, while firm Y has an enterprise value of 6,00,000 and an EBITDA of 50,000. Which company is undervalued on an EV/EBITDA basis?
Company X
Company Y
EV
5,00,000
6,00,000
EBITDA
25,000
50,000
EV/EBITDA
20x
12x
On an EV/EBITDA basis, company Y is undervalued because it has a lower ratio.
Limitations of EBITDA
While EBITDA offers valuable insights into operational performance, it has limitations:
Exclusion of Important Expenses: By excluding interest, taxes, depreciation, and amortization, EBITDA overlooks crucial expenses that impact a company’s overall financial health. Ignoring these expenses may give an overly optimistic view of profitability, particularly for heavily leveraged or capital-intensive businesses.
Disregard for Capital Expenditures: EBITDA does not account for capital expenditures (CAPEX) required to maintain or expand a company’s asset base. Ignoring CAPEX can distort cash flow analysis and lead to inaccurate assessments of a company’s long-term sustainability and growth prospects.
Susceptibility to Manipulation: Since EBITDA is a non-GAAP (Generally Accepted Accounting Principles) measure, companies have some discretion in its calculation, which can be exploited to portray a more favorable financial picture. Investors should exercise caution and scrutinize EBITDA figures, considering additional metrics and financial indicators for a comprehensive analysis.
Conclusion
EBITDA serves as a valuable tool for evaluating a company’s operational performance, providing insights into its profitability and financial health. By excluding non-operating expenses, EBITDA offers a clearer view of a company’s core business operations, making it easier for investors, analysts, and stakeholders to assess its performance and compare it with industry peers. However, it’s essential to recognize the limitations of EBITDA and complement its analysis with other financial metrics to gain a comprehensive understanding of a company’s financial position and prospects.
Frequently Asked Questions (FAQ) on EBITDA
1. What is the Difference Between EBITDA and Profit (Net Income)?
Answer: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) focuses on a company’s core operational performance by excluding non-operational costs like interest, taxes, and depreciation. In contrast, profit, or net income, accounts for all expenses, including financing costs, taxes, and depreciation/amortization. EBITDA offers a clearer view of a company’s ability to generate cash flow from its day-to-day operations, making it a valuable metric for investors and analysts.
2. How to Calculate EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)?
Answer: To calculate EBITDA, start with a company’s operating income (EBIT), then add back depreciation and amortization expenses. These figures are typically available in a company’s income statement or financial reports. The formula is:
EBITDA = Operating Income (EBIT) + Depreciation + Amortization
This calculation helps assess a company’s operational profitability without the impact of non-cash expenses and financing costs.
3. What Does EBITDA Tell You About a Company’s Financial Health?
Answer: EBITDA provides insight into a company’s operational efficiency and its capacity to generate cash flow from its core business activities. By excluding interest, taxes, and depreciation, EBITDA allows investors and analysts to evaluate a company’s profitability regardless of its capital structure. This makes it easier to compare companies across industries and identify those with strong operational performance, regardless of tax rates or asset depreciation schedules.
4. What Are the Limitations of EBITDA as a Financial Metric?
Answer: While EBITDA is a useful measure of operational performance, it has limitations. It doesn’t account for interest payments, taxes, or depreciation, which are crucial to a company’s overall financial health. Furthermore, EBITDA can be manipulated through accounting practices, and it may not reflect cash flow accurately. Investors should always consider other financial metrics, such as net income and free cash flow, to get a full picture of a company’s financial condition.
5. Is a Higher EBITDA Always a Good Sign for a Business?
Answer: Not necessarily. A higher EBITDA can indicate strong operational performance, but it doesn’t guarantee profitability or financial stability. To assess whether a company is truly performing well, you need to consider other metrics, such as net income, debt levels, and cash flow. For example, a company with a high EBITDA but significant debt may still face financial challenges. Always analyze EBITDA in context with other financial data.
6. What’s the Difference Between EBITDA and EBIT?
Answer: EBIT (Earnings Before Interest and Taxes) measures a company’s profitability from operations before interest and tax expenses. EBITDA is similar but provides a broader view by adding back depreciation and amortization expenses, which are non-cash items. EBITDA is often preferred for assessing cash flow potential and operational efficiency, while EBIT focuses more on operating income before non-operational costs are considered.
7. Why Do Investors Use EBITDA to Evaluate Companies?
Answer: Investors use EBITDA because it provides a clear picture of a company’s core operational performance without the distortion of financing costs, taxes, and non-cash expenses like depreciation. It allows for easier comparison between companies in the same industry, particularly in sectors with significant capital expenditures. EBITDA is a common metric for evaluating a company’s cash flow potential, profitability, and overall business health.
8. Where Can I Find a Company’s EBITDA in Financial Reports?
Answer: You can find a company’s EBITDA in its income statement, often under the operating income section, or in the financial footnotes of its annual report (10-K or 10-Q). Many companies provide EBITDA figures directly on their investor relations websites. Additionally, financial data platforms like Yahoo Finance, Google Finance, and Morningstar also list EBITDA for publicly traded companies.
India’s Space Technology Sector: An Industry Overview
The Indian space sector is currently undergoing a significant transformation, driven by increased private sector participation and substantial government support. With over 523 private companies and research institutions now actively contributing, India’s space economy is projected to reach $44 billion by 2033, capturing nearly 10% of the global market. This manual aims to provide comprehensive insights into the industry overview, investment landscape, legal considerations, tax incentives, and intellectual property rights essential for stakeholders in the space tech ecosystem.
Government Initiatives and Investment Landscape
The government has allocated nearly $1.6 billion for the Department of Space (DoS), which oversees the Indian Space Research Organisation (ISRO) and other space-related activities. Since 2014, there has been a notable increase in private investments, particularly in satellite manufacturing and launch services, amounting to $233 million across more than 30 deals by July 2023.
Key Participants and Activities
The Indian spacetech ecosystem comprises a mix of public and private entities working collaboratively to advance the country’s space capabilities. Key activities include:
Satellite manufacturing
Launch services
Space research
Space-based applications
Space exploration
Space debris management
Commercial spaceflight
Development of space law and policy
Regulatory Framework
India’s space sector operates under a comprehensive legal and regulatory framework designed to promote innovation and facilitate private sector participation.
Key regulatory bodies and agencies include:
Department of Space (DoS)
Indian Space Research Organisation (ISRO)
Indian National Space Promotion and Authorization Center (IN-SPACe)
NewSpace India Limited (NSIL)
Antrix Corporation Limited (ACL)
Foreign Direct Investment (FDI) Policy
The existing FDI policy allows up to 100% foreign investment in satellite establishment and operation through the government route. Proposed amendments aim to further liberalize the sector, but gaps and ambiguities remain, particularly regarding compliance with sectoral guidelines and definitions of key terms.
Tax Incentives and Government Schemes
To encourage private participation, several tax measures have been implemented, including GST exemptions for satellite launch services and income tax exemptions for R&D expenditures. Key government schemes supporting the sector include:
Startup India Seed Fund Scheme
Technology Development Fund under DRDO
iDEX (Innovations for Defence Excellence)
Atal Innovation Mission (AIM)
GIFT City IFSC: A Gateway to Global Markets
GIFT City (Gujarat International Finance Tec-City) provides a favorable regulatory environment, cutting-edge infrastructure, and a robust ecosystem for space tech companies. It facilitates funding, international collaboration, and regulatory support, making it an ideal gateway for scaling operations and innovation.
Anticipated Developments
The Indian space tech sector is poised for significant growth, driven by increased FDI, public-private partnerships, advanced technologies, and upcoming incentives. The development of reusable launch vehicles and the Gaganyaan mission, slated for 2025, are set to showcase India’s capabilities and bolster its position in the global space community.
Conclusion
India’s space technology sector is at a pivotal moment, characterized by unprecedented growth, innovation, and collaboration. This report serves as a comprehensive guide for industry players, investors, policymakers, and legal professionals navigating the landscape of India’s space tech ecosystem. The combined efforts of public and private entities are driving the sector’s ascent, positioning India as a major player in the global space economy.
In line with the consultation paper issued by SEBI in August 2023, the SEBI and IFSCA have now permitted 100% participation of NRIs, OCIs, and RIs individuals for certain funds set up as SEBI registered FPIs based in IFSC.
This amendment marks a significant enhancement in facilitating the involvement of the NRI community in the Indian financial markets.
However, it is important to note that the formal amendment to the SEBI FPI Regulations is yet awaited.
Let us know your thoughts in the comments below or reach out to us at [email protected] for a detailed discussion.
As we navigate the complexities of tax season, ITR Filing is crucial for individuals and businesses alike.
Here’s what we cover in our detailed guide: 1. Understand why filing ITR is essential 2. Who needs to file an ITR 3. Filing requirements 4. Benefits of timely filing & more
SFT is a critical tool for tax compliance, designed to monitor and report high-value financial transactions within the Indian financial system.
Here’s what you will learn in our detailed guide: 1. Introduction to SFTs and their role in the financial system 2. Entities required to file SFTs 3. Key filing requirements 4. Consequences of non-compliance 5. Advantages of timely filing
In the ever-evolving landscape of entrepreneurship, startups and established companies alike seek guidance and mentorship from seasoned advisors, often industry experts or business leaders. Advisor equity has emerged as a powerful mechanism that aligns the interests of these advisors with the success of the company. By offering equity, startups can tap into the expertise of advisors who contribute their knowledge in exchange for potential future ownership. This not only creates a strong incentive for advisors to provide ongoing support but also fosters a deeper commitment to the company’s long-term success. This article delves into the intricacies of advisor equity, exploring its benefits, types, and the key players involved in its issuance.
What is Advisor Equity?
Advisor equity refers to a form of compensation offered to company advisors in the form of stock or stock options. This incentivizes advisors by aligning their interests with the long-term success of the company. Unlike a traditional retainer fee, the value of advisor equity is directly tied to the company’s growth and potential future acquisition or IPO.
Advisor equity, also referred to as advisory shares, are a form of equity compensation given to company advisors in place of (or in addition to) a professional fee. They serve as a means of rewarding advisors for providing valuable insights, guidance, and connections to a startup, especially during the early stages. They provide no formal ownership rights like voting or dividends but allow advisors to benefit from the future success of the company. Advisory shares can be stock options or other forms of equity and are often used when startups require expertise but are low on funds.
Types of Advisor Equity
Stock Options: The advisor receives the right to buy shares of company stock at a predetermined price in the future. The advisor only profits if the company’s stock price increases.
Restricted Stock Units (RSUs): The advisor receives actual shares of company stock that vest over time according to a predetermined schedule. This gives the advisor a stake in the company’s success even if the stock price doesn’t rise.
Who issues advisor equity?
The issuance of advisory equity typically comes from the company itself. When a company decides to compensate advisors with equity, it typically involves the company’s founders, board of directors, or executive team making the decision to allocate a certain percentage of the company’s ownership to advisors in exchange for their services, expertise, or guidance. This issuance is usually documented through legal agreements such as advisory agreements or equity compensation plans outlining the terms and conditions of the equity grants, including vesting schedules, rights, and responsibilities.
The Granting Process of Advisor Equity
Board Approval: The startup’s board of directors, which usually consists of the founders and potentially some investors, needs to approve the issuance of advisor equity. They will consider factors like the advisor’s experience, the value they bring to the company, and the overall equity pool available.
The Granting Process: Once approved, the startup and the advisor will sign a formal equity grant agreement. This document outlines the specific details of the advisor equity, including:
Type of Equity: Stock options (right to buy shares) or restricted stock units (actual shares vesting over time).
Number of Shares: The total number of shares granted to the advisor.
Vesting Schedule: The timeframe over which the advisor gains full ownership of the shares (e.g., 4 years with 25% vesting each year).
Exercise Price: The price the advisor pays to purchase the shares (applicable only to stock options).
Exercise Window: The timeframe during which the advisor can buy the shares (applicable to stock options).
Vesting Acceleration Clauses (Optional): Allow faster vesting under specific conditions (e.g., company acquisition).
Advisor’s Role and Responsibilities: This outlines the specific services or guidance the advisor will provide in exchange for the equity.
Issuing Equity: Once the agreement is signed, the company will officially issue the advisor equity through a process determined by the company’s jurisdiction and chosen equity management platform. This might involve electronically recording the shares or issuing stock certificates.
Note: It’s important to note that advisor equity is not a replacement for traditional compensation methods. Advisors might still receive retainer fees for ongoing services or project-based payments for specific deliverables. However, equity offers the potential for a significant long-term reward if the startup succeeds.
Who Receives Advisor Equity?
Advisory equity is granted to startup advisors, typically not full-time employees. These advisors bring a wealth of experience and connections to the table, helping founders navigate the complexities of running a startup.
Types of Startup Advisors Who Might Receive Equity
Industry Experts & Subject Matter Specialists: These advisors possess deep knowledge in a specific field relevant to the startup’s business, such as marketing strategy or intellectual property law. Their expertise can be invaluable, and equity incentivizes their ongoing commitment.
Business Mentors: Seasoned entrepreneurs who have successfully built companies can provide invaluable guidance on strategy, fundraising, and overcoming common challenges. Equity allows the startup to show appreciation and keep these mentors invested in the company’s success.
Strategic Investors: Some investors, particularly angel investors who provide early-stage funding, might receive a small amount of equity in exchange for their expertise and network. This creates a win-win situation, aligning the investor’s interests with the long-term success of the startup.
How Much Equity for Advisors?
The amount of equity offered to an advisor typically falls within a range of 0.25% to 5% of the company’s total ownership. This range depends on several factors:
Advisor’s Contribution: Advisors who actively participate and provide significant value to the company’s growth can expect a higher equity stake. This could include board advisors who offer strategic guidance or industry experts with deep market knowledge. Conversely, general advisors with a less hands-on role might receive a lower percentage.
Advisor Expertise: The specific expertise and experience an advisor brings to the table also influences their equity grant. Advisors with highly sought-after skills or a proven track record of success may command a larger ownership stake.
Company’s Willingness: Ultimately, the company needs to determine how much ownership it’s comfortable giving away. Balancing advisor compensation with maintaining sufficient control for founders is crucial.
Understanding Dilution
As a company raises capital through funding rounds, it often issues new shares to investors. This increases the total number of outstanding shares, which dilutes the ownership percentage of all existing shareholders, including advisors.
For example, an advisor who initially receives 0.5% equity might see their ownership decrease to around 0.25% after the first round of seed funding. This doesn’t necessarily mean a loss of value. The advisor’s remaining ownership stake can still appreciate significantly if the company experiences strong growth and its valuation increases.
Other key aspects:
Vesting Schedule: This outlines the timeframe over which the advisor earns full ownership of their granted shares. A common approach is to vest equity over a period of several years, incentivizing the advisor to remain engaged with the company for the long term.
Dilution: Clearly explain the concept of dilution and how it might impact the advisor’s ownership percentage over time. Transparency helps manage expectations and fosters a stronger relationship with the advisor.
By carefully considering these factors companies can develop a fair and effective strategy for compensating advisors with equity while ensuring founders maintain control over the company’s future.
Pros & Cons of Issuing Advisor Equity in Start-Ups
Advisor equity, where advisors receive shares in a startup company in exchange for their expertise and guidance, is a common practice. But like most things, it has both advantages and disadvantages for both the startup and the advisor.
Pros
Alignment of Interests: When advisors are compensated with equity, their interests are aligned with the company’s success. They have a vested interest in providing valuable guidance and support since the growth of the company directly benefits them financially.
Cost-Effective: Offering equity as compensation can be more cost-effective for startups and small businesses, especially when they may have limited cash flow. Instead of paying high consulting fees, they can offer equity, conserving their cash reserves.
Access to Expertise: Equity compensation can attract high-quality advisors who may be otherwise inaccessible due to high fees or limited availability. This can provide startups with valuable expertise and networks they wouldn’t have had access to otherwise.
Long-Term Commitment: Advisors who receive equity are often more likely to commit to the company over the long term. They have a vested interest in the company’s success beyond just short-term consulting engagements.
Increased Motivation: Equity can incentivize advisors to go above and beyond their contracted duties. Knowing they have a stake in the company’s success can motivate them to put in extra effort and contribute valuable insights.
Cons
Dilution of Ownership: Issuing equity to advisors dilutes the ownership stakes of existing shareholders, including founders and early investors. This can be a significant concern as the company grows and takes on more equity stakeholders.
Complexity in Management: Managing equity compensation for advisors can be administratively complex, requiring legal and accounting expertise. This complexity can increase as the number of advisors and the complexity of the equity structure grows.
Valuation Challenges: Determining the fair market value of the equity offered to advisors can be challenging, especially for early-stage start-ups. Misvaluation can lead to dissatisfaction and potential disputes.
Impact on Future Fundraising: The equity granted to advisors is part of the company’s overall equity pool. Excessive issuance can complicate future fundraising efforts by reducing the amount of available equity to offer new investors.
Conclusion
Issuing advisor equity can be a strategic move for startups, offering a cost-effective way to attract and retain high-quality advisors whose interests are aligned with the company’s success. The long-term commitment and increased motivation that come with equity can be invaluable as startups navigate their growth journey. However, this approach is not without its challenges. Companies must manage the complexities of equity compensation, including dilution of ownership, valuation difficulties, and the potential impact on future fundraising efforts. By understanding and carefully considering these pros and cons, startups can effectively leverage advisor equity to build a strong foundation for success while maintaining a balanced and sustainable ownership structure.
FAQs on Advisor’s Equity
What is advisor equity? Advisor equity refers to a form of compensation offered to company advisors in the form of stock or stock options. It incentivizes advisors by aligning their interests with the long-term success of the company, providing them with potential future ownership in exchange for their expertise and guidance.
How is advisor equity different from traditional compensation? Traditional compensation typically involves cash payments, such as retainer fees or project-based payments. Advisor equity, on the other hand, ties the advisor’s compensation to the company’s performance and growth, offering stock or stock options instead of or in addition to cash.
Who decides to issue advisor equity? The issuance of advisor equity is typically decided by the company’s founders, board of directors, or executive team. They allocate a percentage of the company’s ownership to advisors in exchange for their services, expertise, or guidance.
What types of advisor equity are there? The two most common types of advisor equity are:
Stock Options: The advisor receives the right to buy shares of company stock at a predetermined price in the future.
Restricted Stock Units (RSUs): The advisor receives actual shares of company stock that vest over time according to a predetermined schedule.
Who can receive advisor equity? Advisor equity is typically granted to startup advisors who are not full-time employees. These advisors can include industry experts, business mentors, strategic investors, and subject matter specialists who provide valuable insights and guidance to the company.
What is a vesting schedule? A vesting schedule outlines the timeframe over which the advisor earns full ownership of their granted shares. A common vesting schedule might be over a period of several years, incentivizing the advisor to remain engaged with the company long-term.
What are the potential downsides of issuing advisor equity? The potential downsides include:
Dilution of Ownership: Issuing equity dilutes the ownership stakes of existing shareholders.
Management Complexity: Managing equity compensation requires legal and accounting expertise.
Valuation Challenges: Determining the fair market value of equity can be difficult.
Impact on Future Fundraising: Excessive issuance of equity can complicate future fundraising efforts.
What happens to advisor equity during a company acquisition or IPO? Advisor equity typically includes vesting acceleration clauses that can allow faster vesting under specific conditions, such as a company acquisition or IPO. This ensures that advisors can benefit from the company’s success during significant events.
This post unpacks the essentials of Tax Deducted at Source (TDS). We’ll guide you through:
1. What TDS is and why it matters 2. When it applies to you & the different forms involved 3. How to file & the benefits of proper TDS compliance ✅ 4. Avoiding penalties for non-compliance ❌
Master your tax knowledge & share with your network who might benefit.
The business landscape is ever-evolving, and companies may face economic downturns, strategic shifts, or other reasons that necessitate closure. In India, the strike-off process provides a clear path for companies to formally shut down and remove their names from the Register of Companies (RoC). This mechanism offers a more efficient and cost-effective alternative to the lengthier winding-up process. However, a successful strike-off requires a clear understanding of its different facets. This article delves into the types of Strike-Offs for Companies in India, the process involved, and the key requirements companies must meet to ensure a smooth and compliant closure.
What is a strike off?
In India, a company strike-off refers to the formal process of removing a company’s name from the official RoC. It’s an alternative method for closing a company’s operations compared to the traditional, lengthier winding-up process.
Note: The Ministry of Corporate Affairs (MCA) in India has established the Centre for Processing Accelerated Corporate Exit (C-PACE) to handle the process of striking off companies. This initiative aims to make company closure faster and more efficient. The C-PACE may initiate the strike-off for non-compliance, or the company itself can apply for voluntary strike-off.
Section 248 to 252 of the Companies Act, 2013 (hereinafter the ‘Act’) define the procedures for striking off a company’s name. This process offers a faster and simpler way to dissolve a defunct company.
Types of Strike Off
In India, there are indeed two main types of strike offs for companies: Voluntary Strike Offs and Mandatory Strike Offs
Voluntary Strike-Off
This is when the company itself decides to close down and takes the initiative to initiate the strike-off process. It’s ideal for companies that are:
No longer operational or have no plans to operate in the future.
Financially sound with no outstanding debts or liabilities.
Prepared to meet specific eligibility criteria set by the Act.
Key Requirements for Voluntary Strike-Off:
Settled Finances: All dues like taxes, loans, and employee salaries must be paid off.
Clean Legal Status: No ongoing lawsuits or government penalties should be present.
Shareholder Approval: A special resolution passed by at least 75% of shareholders is required.
Inactivity or Dormancy: The company may need to demonstrate it hasn’t been actively trading for a while. In some cases, obtaining “dormant company” status might be necessary.
Mandatory Strike-Off
This is when the C-PACE initiates the strike-off process due to the company’s non-compliance with regulations:
Failure to File Financial Statements: The company fails to file its annual financial statements (balance sheet and profit & loss) for consecutive years. This indicates a lack of transparency about the company’s financial health.
Inactivity in the Business: The C-PACE suspects the company hasn’t conducted any business activities for a significant period. This might be identified during physical verification by the C-PACE. A company that isn’t actively conducting business goes against its purpose of registration.
Dormant Functions: The company hasn’t commenced business operations within one year of incorporation. This suggests the company might have been registered for illegitimate purposes or simply never got off the ground.
Which companies can go for Strike off?
The strike-off process in India allows companies to formally close their operations and remove their names from the RoC (Registrar of Companies). However, not all company types are eligible for this option.
Eligible Companies:
Private Companies: These companies with a limited number of shareholders (maximum 200) can initiate a voluntary strike off if they meet the eligibility criteria.
One Person Companies: Similar to private companies, but with a single shareholder-director, OPCs can also undergo a voluntary strike off if they qualify.
Section 8 Companies: These non-profit companies can also pursue strike off if they comply with the regulations.
Ineligible Companies:
Public Companies : Due to their larger size and public accountability, public companies with more than 200 shareholders cannot utilize the strike off process. They must follow the more complex winding-up procedure.
Limited Liability Partnerships (LLPs): India has a separate legal structure for LLPs, which are not eligible for company strike-off. They have their own dissolution process.
Additional Considerations:
Regardless of the company type, both voluntary and mandatory strike-off (initiated by the C-PACE) are subject to specific eligibility criteria defined in the Act. These conditions include financial solvency, shareholder approval (for voluntary strike-off), and business inactivity.
Companies that are not eligible for strike off
Listed Companies
Delisted companies due to non-compliance
Vanishing Companies – Companies that cease to file their statements of return after raising capital, and whereabouts of their registered office or directors are not known.
Companies that are subject to investigation or have pending cases in court
Companies that have outstanding public deposits, or defaulted in repayment
Companies that have secured a loan or where repayment of debt is outstanding to banks or other financial institutions and in this regard no objection certificate is not obtained
Companies with pending charges
Companies with outstanding tax dues
Procedure for Striking Off
The procedure for striking off a company in India involves several steps, whether it’s a voluntary strike-off initiated by the company itself or a compulsory strike-off initiated by the (C-PACE) due to non-compliance or other legal reasons. Here’s a comprehensive outline of the process:
Procedures for Voluntary Strike-Off
The procedure for striking off a company in India involves several steps, depending on whether it’s a voluntary strike-off initiated by the company itself or a compulsory strike-off initiated by the C-PACE due to non-compliance with regulations. Here’s a comprehensive outline of the process:
1. Board Meeting and Resolution: Convene a board meeting to pass a resolution authorizing the strike-off. This resolution will require approval of the majority of the Directors through a board meeting.
2. Extinguishment of all the Liabilities: Following the board’s approval for striking off the Company, the Company shall be required to extinguish all its liabilities.
3. General Meeting and Special Resolution: Hold a General Meeting (AGM or EGM) where shareholders approve a special resolution for strike-off by a 75% majority vote or obtain consent of 75% of the shareholders in terms of Paid-up share capital for striking off. Following this meeting, file the special resolution or consent in e-Form MGT-14 with the C-PACE. Within 30 days of passing the resolution or obtaining the consent, whichever the case may be.
4. Application Preparation: Prepare the necessary documents required by the C-PACE. These may include:
Board Resolution for Strike-Off: Certified True copy of the board resolution authorizing the strike-off process.
Shareholders resolution or Consent for Strike-Off: Certified True copy of the shareholders resolution or consent for striking-off the Company.
Statement of Accounts: A statement demonstrating the assets and liabilities of the Company up to the day not more than 30 days before the date of application which shall be certified by a Chartered Accountant .
Indemnity Bond (STK-3): A notarized document by directors indemnifying all the lawful claims against the Company and any losses of any person arising in future after the striking of the name of the Company..
Affidavit (STK-4): By directors, confirming the company’s eligibility for strike-off and no dues towards any statutory authorities.
Statement of Pending Litigation (if any): Details of any ongoing legal disputes.
5. Filing Application: File the application for strike-off (e-Form STK-2) with the C-PACE along with the required documents and pay the prescribed fee. This form is critical as it formally requests the C-PACE to remove the company’s name from the register.
6. Public Notice: Upon receiving the application, the C-PACE will scrutinize the documents and, if satisfied, publish a public notice inviting objections to the proposed strike-off. This notice will be published in the Official Gazette and on the MCA website, providing a period of 30 days for any objections to be raised by stakeholders or other interested parties.
7. Objections and Scrutiny: If objections are received, they must be addressed by the company within a stipulated time frame. If no objections are received or they are resolved satisfactorily, the C-PACE will proceed to issue a strike-off order.
8. Strike-Off Order: If no objections are received or resolved satisfactorily, the C-PACE issues a strike-off order, removing the company’s name from the Register of Companies and the company gets dissolved.
Procedures for Mandatory Strike-Off
Notice from C-PACE: The C-PACE may issue a notice to the company and all its directors informing them of the intent to strike off the company’s name from the Register of Companies due to non-compliance.
Opportunity to Respond: The company will be given a chance to respond to such notice along with the relevant backup documents within a period of 30 days from the date of the notice..
Publication of Notice: Unless any cause to such notice is shown by the Company, the C-PACE shall publish a notice in the Official Gazette about the striking-off of the company and on such publication the Company shall stand dissolved.
Objections and Scrutiny: Similar to the voluntary process, interested parties can file objections with the C-PACE within a specified period . The C-PACE will consider these objections.
Strike-Off Order: If no objections are raised or resolved satisfactorily, the C-PACE will issue a strike-off order, removing the company’s name from the Register of Companies and dissolving the company.
Effects of strike off on a company
The strike-off process effectively shuts down a company by revoking its operating license. However, it allows the company to address any outstanding financial obligations and legal issues, ensuring a cleaner closure for all parties involved.
Key Effect: Company Ceases Operations and Legal Existence (for most purposes)
Following a strike-off notice published in the Official Gazette by the C-PACE under Section 248 of the Companies Act, a company undergoes a significant transformation:
The company officially ceases all operations on the specific date mentioned in the Strike-Off notice. This marks the end of its legal existence for most purposes.
Limited Validity of Certificate of Incorporation:
While the certificate of incorporation issued to the company is generally considered canceled from the dissolution date, it retains some validity for specific purposes:
Settling Debts: The company can still use the certificate to settle outstanding financial obligations to creditors, employees, or other parties.
Collecting Funds: Any receivables owed to the company can be collected using the certificate.
Fulfilling Legal Obligations: The certificate remains valid for addressing any legal matters associated with the dissolved company, such as tax filings or ongoing lawsuits.
Conclusion
The strike-off process in India provides a clear and efficient mechanism for companies to formally close their operations. The legal framework outlined in the Act offers a comprehensive guide to determine eligibility and navigate the process effectively. Compared to the more complex and expensive winding-up procedure, strike-off presents a streamlined and cost-effective solution for company closure.
Understanding the different types of strike-off (voluntary and mandatory) and their respective requirements is crucial for companies considering this option. Whether a company chooses to pursue voluntary strike-off due to planned closure, or faces a mandatory strike-off initiated by the C-PACE, a successful outcome hinges on meeting the specific criteria.
Ultimately, a successful strike-off allows a company to achieve a clean closure. It removes the company’s name from C-PACE, preventing future liabilities and ensuring transparency throughout the process. By following the established procedures, companies can responsibly conclude their operations while maintaining accountability to stakeholders.
A One Person Company (OPC) in India is a business structure that allows a single individual to establish and operate a company under the provisions of the Companies Act, 2013. This concept was introduced to support entrepreneurs who are capable of starting a venture by allowing them to create a single-person economic entity. Before this Act, at least two directors and shareholders were required to form a company.
Here are some key features of an OPC:
Single Shareholder: An OPC has only one member or shareholder, distinguishing it from other types of companies which require at least two shareholders.
Management and Ownership: The same individual holds complete control over the company, managing its operations while also owning all the company’s shares.
Directors: While an OPC can have only one member, it can appoint up to fifteen directors to facilitate its business operations, a number that can be increased beyond fifteen through a special resolution.
Legal Status: An OPC is registered as a private limited company. This classification subjects it to all legal provisions applicable to private limited companies, including specific compliance requirements related to annual filings, financial statement audits, and more.
Advantages Over Sole Proprietorship: An OPC provides limited liability protection to its sole owner, separating personal assets from the business’s liabilities. This is a significant advantage over a sole proprietorship, where personal assets can be at risk in case of business failure.
Compliance Requirements: Like other private limited companies, an OPC must comply with various statutory requirements set out by the Companies Act. These include filing annual returns, maintaining books of accounts, and other regulatory compliances.
In essence, an OPC combines the simplicity of a sole proprietorship with the protective features of a company, making it an attractive option for entrepreneurs who prefer to work independently while enjoying the corporate veil.
What are Compliances for One Person Company (OPC) in India?
Compliances for a One Person Company (OPC) in India are legal requirements that every company with a single owner must meet to maintain its status as a separate legal entity. These obligations, overseen by the Ministry of Corporate Affairs (MCA), are essential for the company to uphold its operational integrity and meet the regulatory standards established by the government. Annually, every registered OPC is required to fulfill these duties, which include the filing of an annual return and audited financial statements that provide a detailed account of the company’s activities and financial status over the previous financial year. The deadlines for these filings are determined by the date of the Annual General Meeting (AGM). Failure to comply can result in severe repercussions, including the removal of the company from the Registrar of Companies (RoC) register and the disqualification of its directors. Therefore, adhering to these annual compliance requirements is crucial for the sustainability and legal compliance of an OPC in India.
List of Important Compliances for One Person Company in India
Compliance Name
Compliance Description
Associated Forms
Deadline
Penalty
Additional Notes
Appointment of First Auditor
Appoint a practicing Chartered Accountant as the first auditor within 30 days of incorporation.
ADT-1 (for subsequent auditors only)
Within 30 days of incorporation
Not Applicable (for first auditor)
Commencement of Business (Form INC-20A)
File a declaration for commencement of business within 180 days of OPC incorporation.
INC-20A
Within 180 days of incorporation
The Company shall be liable to a penalty of Rs. 50,000/- and every officer who is in default shall be liable to a penalty of Rs. 1,000/- for each day during which such default continues but not exceeding Rs. 1,00,000/-.
If no such declaration has been filed with the RoC and the RoC has reasonable cause to believe that the Company is not carrying on any business or operations, he may initiate action for the removal of the name of the Company From the register of Companies
Annual Board Meetings
Conduct a minimum of one board meeting in each half of the calendar year, with a gap of at least 90 days between the meetings.
Not Applicable
– At least once a year – Minimum 90 days gap between meetings
– Every officer whose duty was to give notice of Board Meeting and who fails to do so shall be liable to a penalty of Rs. 25,000/- Rs. 25,000 for the company – Rs. 5,000 for officer in default
Not mandatory to hold Board Meeting where there is only one director in such One Person Company
Not mandatory to hold an AGM, but recommended for good corporate governance.
Annual Return (Form MGT-7A)
File the annual return with the Registrar of Companies (ROC) within 60 days 180 days of the September 30 of every year financial year-end. Includes details about shareholders/members and directors.
MGT-7A
Within 60180 days of September 30financial year-end
Company and every officer who is in default shall be liable to a penalty of Rs. 10,000/- and in case of continuing failure, with a further penalty of Rs. 100/- for each day during which such failure continues subject to a maximum of Rs. 2,00,000/- in case of Company and Rs. 50,000/- in case of an officer who is in default. Not Specified
Appointment of Subsequent Auditor
Appoint a new auditor using Form ADT-1 within 15 days of the conclusion of the first Annual General Meeting (AGM).
ADT-1
Within 15 days of concluding the first AGM
The Company shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/- and every officer who is in default shall be punishable with fine which shall not be less than Rs. 10,000/- but may extend to Rs. 1,00,000/-Not Applicable
Auditor Tenure
The appointed auditor holds office until the conclusion of the 6th AGM.
Not Applicable
Not Applicable
Auditor rotation provision doesn’t apply to OPCs.
Commencement of Business (Form INC-20A)
File a declaration for commencement of business within 180 days of OPC incorporation.
INC-20A
Within 180 days of incorporation
The Company shall be liable to a penalty of Rs. 50,000/- and every officer who is in default shall be liable to a penalty of Rs. 1,000/- for each day during which such default continues but not exceeding Rs. 1,00,000/-Not Specified
Director KYC (Form DIR-3 KYC)
Individuals holding Director Identification Number (DIN) as of March 31st of the financial year must submit KYC for the respective financial year by September 30th of the next financial year.
DIR-3 KYC
By September 30th of the next financial year
Rs. 5,000/-Not Specified
Disclosure of Interest (Form MBP-1)
Directors must disclose their interest in other entities at the first board meeting in each financial year.
MBP-1
First board meeting of the financial year
The Director shall be liable to a Penalty of Rs. 1,00,000/-Up to 1 year imprisonment for non-compliance
E-form DPT-3 (Return of Deposits)
File a return annually detailing deposits and particulars not considered deposits as of March 31st. Deadline for filing is on or before June 30th.
DPT-3
On or before June 30th
The Company and every officer of the Company who is in default or such other person shall be liable to a penalty of Rs. 10,000/- and in case of continuing contravention, with a further penalty of Rs. 1000/- for each day after the first during which the contravention continues, subject to a maximum of Rs. 2,00,000/- in case of a Company and Rs. 50,000/- in case of an officer who is in default or any other person. Not Specified
Financial Statements (Form AOC-4)
File audited financial statements electronically with the ROC within 180 days of the financial year-end. Includes balance sheet, profit and loss account, audit report, and notes to accounts.
AOC-4
Within 180 days of financial year-end
The Company shall be liable to a penalty of Rs. 10,000/- and in case of a continuing failure, with a further penalty of Rs. 100/- per day during which such failure continues, subject to a maximum of Rs. 2,00,000/- and the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and in the absence of any such director, all the directors of the Company, shall be liable to a penalty of Rs. 10,000/- and in case of a continuing failure, with further penalty of Rs. 100/- for each day after the first during which such failure continues subject to a maximum of Rs. 50,000/- Rs. 100 daily (maximum Rs. 10,000,000)
OPC statutory audit involves a review report certification.
Income Tax Filing
File income tax returns (ITR) annually by the due date (July 31st for individuals, September 30th for businesses). Reports income, expenses, and deductions for the financial year.
Not Applicable
– July 31st for individuals – September 30th for businesses
Rs. 10,000 for non-filing
OPC requires a valid Permanent Account Number (PAN).
Maintenance of Statutory Registers
Maintain statutory registers as required by Section 88 of the Companies Act 2013. Update for events like share transfer, director changes, etc.
Respective provisions of the Companies Act, 2013Not Applicable
These are the internal documents of the Company and are to be maintained and updated by the Company.Ongoing
Not Specified
Non Maintenance of such registers can attract liabilities under respective provisions of the Companies Act, 2013Includes registers like Register of Members, Register of Directors, and Register of Share Certificates.
Payment of Stamp Duty on Share Certificates
Pay stamp duty on share certificates within 30 days from the date of issue.
Not Applicable
Within 30 days of issuing share certificates
Not Specified
Statutory Audit
A Chartered Accountant firm conducts an audit of the company’s accounts and issues a review report certification using Form AOC-4 for filing.
Not ApplicableAOC-4
Before filing the accounts of OPC in Form AOC-4 Not Applicable (but filing of AOC-4 is mandatory)
The Auditor shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 1,00,000/-Not Applicable
OPCs are exempt from a full statutory audit, but a review report is required.
TDS, GST, PF, and ESI Compliance
Comply with regulations concerning Tax Deducted at Source (TDS), Goods and Services Tax (GST), Provident Fund (PF), and Employees’ State Insurance (ESI) based on the
Board Meeting Requirements for OPC
According to Section 173 of the Companies Act 2013, a One-Person Company (OPC) is required to hold at least 1 meeting of the Board of Directors in each half of a calendar year and the gap between 2 meetings shall be not less than 90 days. must conduct at least one Board meeting annually. These meetings should occur every six months and be spaced at least 90 days apart. It is important to note that the usual requirements regarding the quorum for meetings of the Board of Directors do not apply if the OPC has only one director. Every officer whose duty is to give notice of Board meeting and who fails to do so shall be liable to a penalty of Rs. 25,000/-. Should an OPC fail to meet compliance requirements, the company faces a penalty of ₹25,000. Additionally, any officer in default will incur a penalty of ₹5,000.
Note: An OPC is not required to hold any Board meeting if there is only one Director on its Board of Directors
Appointment of Auditor
Under Section 139 of the Companies Act, an OPC must appoint an auditor. This auditor, typically a Chartered Accountant firm, is responsible for auditing the company’s accounts and issuing an audit report. The rules regarding auditor rotation do not apply to OPCs.
Filing of Annual Return
An OPC is required to file its Annual Return within 180 days from the end of the Financial Year using Form MGT-7. This return includes details about the company’s shareholders or members and its directors.
Financial Statement Submission
OPCs must file Financial Statements including the Balance Sheet, Profit and Loss Account, and Director’s Report using Form AOC-4, within 180 days from the financial year-end.
Disclosure of Interest by Directors
Directors must disclose any interest in other entities annually, during the first Board meeting of the year, using Form MBP-1. Failure in compliance could lead to imprisonment for up to one year for any director in default.
KYC Compliance for Directors
Directors holding a Director Identification Number (DIN) must submit Form DIR-3-KYC by September 30th of the following financial year.
Filing Form DPT-3
Form DPT-3, detailing returns of deposits and particulars not considered as deposits as of March 31st, must be filed by June 30th annually.
Maintaining Statutory Registers
OPCs must maintain statutory registers and comply with event-based requirements such as share transfers, director appointments or resignations, changes in nominee or bank signatories, and auditor changes. Non-compliance in filing the annual financial statements using Form AOC-4 can attract a daily penalty of ₹100, with a maximum fine up to ₹10,00,000.
Income Tax Filing
OPCs must file income tax returns (ITR) annually by July 31st for individuals and September 30th for businesses, reporting their income, expenses, and deductions. Failure to file ITR can result in a fee of ₹10,000.
GST Compliance
OPCs registered under GST must file returns periodically through the GST portal. OPCs with an annual turnover up to ₹5 crores file quarterly returns, while those above ₹5 crores file monthly. If annual turnover exceeds ₹2 crores, OPCs must also file an annual return and have their accounts audited. Timely and accurate filing is essential to avoid penalties and interest charges.
Annual Compliance Checklist for One Person Company (OPC)
Annual compliance for a One Person Company (OPC) in India involves fulfilling a set of mandatory regulatory obligations to maintain its legal standing and operational legitimacy. These requirements include the filing of annual returns and financial statements with the Registrar of Companies (RoC), tax filings, and ensuring adherence to statutory record-keeping practices. This guide outlines the critical annual tasks that OPCs must complete, aiming to help business owners navigate through these legal complexities efficiently and effectively.
✔ Form INC-20A – Declaration for commencement of business within 180 days of incorporation.
✔ Board Meetings – Minimum one meeting annually, with at least 90 days gap between meetings. (Not mandatory to hold an AGM, but recommended for good corporate governance)
✔ Statutory Registers – Maintain registers as required by the Companies Act, including register of members, directors, and share certificates.
✔ E-form DPT-3 (Return of Deposits) – File annually, detailing deposits and particulars not considered deposits as of March 31st. Deadline for filing is on or before June 30th.
✔ DIR-3 KYC – KYC for Directors (by September 30th of the next financial year for DIN holders as of March 31st).
✔ Income Tax Return of the Company – File annually by the due date (July 31st for individuals, September 30th for businesses).
✔ Form AOC-4 – Financial Statements – File audited financial statements electronically within 180 days of the financial year-end (includes balance sheet, profit/loss, and director report).
✔ ADT-1 (for subsequent auditors only) – Appointment of Auditor – Appoint a new auditor within 15 days of concluding the first AGM (not required for the first auditor).
Benefits of Compliances for One Person Company
There are numerous advantages to ensuring your One-Person Company (OPC) adheres to all required compliances. Here’s a breakdown of the key benefits:
Enhanced Credibility and Investor Confidence: Following compliance regulations, including those related to the Companies Act, Income Tax, and GST, demonstrates transparency and good governance. This builds trust with potential investors, making it easier to secure financial backing for your OPC.
Smoother Operations and Active Status: Timely and proper compliance helps maintain your OPC’s active status with the government. This ensures smooth business operations and avoids potential disruptions.
Accurate Financial Records and Reduced Penalties: Regular compliance procedures necessitate accurate data collection and record-keeping. This not only provides valuable insights for your own decision-making but also helps you avoid hefty fines and penalties associated with non-compliance.
Easier Access to Funds: Financial institutions are more likely to consider loan applications from OPCs that demonstrate a history of compliance. Proper annual filings project a responsible image and make it easier to raise capital.
Simplified Compliance Burden: Compared to other company structures, OPCs benefit from fewer compliance requirements. The Companies Act of 2013 offers exemptions for certain tasks, reducing administrative burdens for the director.
Perpetual Succession: Even with a single member, OPCs must follow the principle of perpetual succession. This ensures business continuity by designating a nominee who takes over company operations in case of the sole member’s absence or demise.
Straightforward Incorporation Process: Setting up an OPC is relatively simple. It requires only a director (who can also be the nominee) and a minimum authorized capital of Rs. 1 lakh, with no mandatory paid-up capital requirement. This makes OPCs a more accessible structure compared to other company types.
Increased Funding Opportunities: Compliance opens doors to various funding options. OPCs that demonstrate responsible compliance practices are more likely to attract venture capital, angel investors, and even secure loans from financial institutions with a streamlined process.
Documents Required for One Person Company(OPC) Compliance in India
For a One Person Company (OPC) in India, adhering to annual compliance is essential for maintaining its legal standing and financial transparency. The following documents are crucial for OPC compliance:
Receipts of Purchases and Sales: All receipts related to purchases and sales throughout the financial year must be documented and submitted. This helps in verifying the financial transactions the company has engaged in.
Invoices of Expenses: All invoices for expenses incurred during the year need to be collected and submitted. These invoices provide a clear account of the outflows and are necessary for financial audits and tax calculations.
Bank Statements: Bank statements from April 1st to March 31st for all bank accounts held in the name of the company are required. These statements are used to reconcile financial records and verify the cash flows of the company.
Details of GST Returns: If the OPC is registered under GST, details of all GST returns filed during the year must be submitted. This includes sales and purchase invoices linked to GST filings.
Details of TDS Challans and TDS Returns: If applicable, details of all TDS (Tax Deducted at Source) challans deposited and TDS returns filed need to be submitted. This is essential for compliance with the tax laws and helps in claiming tax credits.
Financial Statements: The preparation and submission of financial statements, including a balance sheet and a profit & loss account, are mandatory. These documents provide a snapshot of the company’s financial health and performance over the financial year.
Director’s Report: A director’s report is required, outlining the overall health of the company, its compliance with various statutory requirements, and other relevant details concerning the company’s operations during the year.
Details of the Member/Shareholder: Since an OPC usually has a single member, detailed information about the member/shareholder, including their shareholding pattern, must be maintained and submitted.
Details of Directors: Information about the director(s) of the OPC, including their responsibilities and activities throughout the year, must be documented.
These documents collectively help in maintaining a transparent and compliant operational framework for the OPC. They are crucial not only for fulfilling statutory obligations but also for enhancing the credibility of the company with financial institutions, investors, and other stakeholders.
Conclusion and Way Ahead
Compliance for One Person Companies (OPCs) in India represents a vital aspect of maintaining the integrity and operational efficacy of these entities. The streamlined compliance requirements, while simpler than those of larger corporations, play a crucial role in safeguarding the legal and financial aspects of the company. Through meticulous documentation and adherence to regulatory norms, OPCs ensure limited liability protection, increased investor confidence, and enhanced opportunities for financial growth. The systematic approach to maintaining detailed financial records, annual filings, and transparency not only fortifies the company’s standing but also builds a foundation of trust with stakeholders.
Looking ahead, the landscape for OPCs in India is poised for evolution. With ongoing reforms in corporate governance and compliance regulations, OPCs can anticipate more streamlined processes and perhaps even further reductions in compliance burdens. This could encourage more entrepreneurs to adopt the OPC structure as it becomes increasingly conducive to innovative business models and rapid scaling. Additionally, as digital transformation continues to permeate the regulatory framework, OPCs might find it easier to manage their compliances through automated systems, reducing manual effort and increasing accuracy. The future holds a promising prospect for OPCs to not only flourish in a dynamic economic environment but also to drive forward the entrepreneurial spirit of India with robust compliance and governance as their backbone.
In the business landscape, term sheets play a vital role in facilitating agreements, particularly for investments and acquisitions. In the event of any corporate action, a term sheet is one of the vital documents that is executed by both the Parties to capture the important provisions and the basic framework of the proposed transaction. It lays down a broader framework for the parties to have meaningful commercial discussions towards the execution of definitive agreements and eventually, the closure of the transaction. While typically non-binding, certain provisions within the term sheet can be enforceable, making it a key element in the negotiation process. But what exactly are they, and how legally binding are they? This article dives into the world of term sheets in India, explaining the concept and the distinction between binding and non-binding versions.
What is a Term Sheet?
A term sheet is a pre-contractual agreement that outlines the key terms of a proposed transaction between two parties. It is generally non-binding. Nevertheless, term sheets frequently include legally binding clauses to protect sensitive information and prevent either party from pursuing other options during the negotiation period, often related to non-solicitation, exclusivity, secrecy, and more. Before signing final agreements, a term sheet is created. Think of a term sheet as a handshake that signifies a mutual interest in moving forward with a deal. It summarizes the core principles agreed upon by both sides, paving the way for a more comprehensive contract. The first crucial stage in a transaction is the creation of a term sheet.
What Does Term Sheets typically contain?
The specific content of a term sheet will vary depending on the nature of the transaction. For instance, an angel investment term sheet will differ significantly from a Series B and above transaction round. However, some common elements are frequently included in investment-related term sheets:
Type of Security
It is important to determine the type of security, whether equity, debt, derivatives, or hybrid securities, to be offered to the other party in a deal.
Capital Structure
This clause contains the paid-up capital, share capital which include face value of equity, preference shares, etc. It also mentions the shareholding pattern of the company as on the effective date of the term sheet.
Valuation
This clause mentions the valuation of the company prior to the investment or financing, for the purpose of the proposed transaction.
Investment Amount
This clause sets out the proposed amount to be invested into the company where post investment shareholding structure is also laid down.
Stake Percentage
This specifies the ownership stake the investor will receive in the company in exchange for their investment.
Conversion Rights
This clause gives the shareholders the ability to convert preferred shares to equity where the investor would get certain key rights.
Anti-Dilution Protection
This right protects the investor from dilution of equity from future issues of stock if the stock is sold at a lower price than the initially invested price.
Board Composition
This clause mentions the composition of board members immediately after closing the deal where the investor may be given the right to nominate directors.
Transfer Restrictions
This clause provides any condition or restriction on the ability of the shareholder to sell or transfer such securities, protecting the interests of the investors.
Conditions Precedent
This clause mentions the list of conditions or obligations that need to be performed by the obligated party prior to a certain date, as agreed, to give effect to the term sheet.
Pre-emptive Rights
This clause provides a right to the investors to participate in the future fund raise, where the first option is given to buy before public offering or whatsoever the case may be.
Confidentiality
This clause obligates the parties to maintain confidentiality with respect to the term sheet, its terms, negotiations, and such other details.
Anti-dilution
These clauses protect investors from their ownership stake being reduced if the company issues new shares at a lower valuation in future funding rounds.
Voting Rights
The term sheet may outline the voting rights associated with the investor’s stake. This can be a point of negotiation, particularly for startups where venture capitalists might seek greater control over decision-making.
Liquidation Preference
This provision specifies how proceeds from the sale of the company or its assets will be distributed among shareholders in the event of a liquidation event.
Governing Law and Jurisdiction
This clause would determine the jurisdiction governing the term sheet as it may be entered between companies governed under the laws of two different jurisdictions.
Binding and Non-Binding Term Sheets in India
A common misconception surrounds term sheets in India – are they legally binding or not? The answer is nuanced. While a term sheet typically isn’t enforceable in its entirety, it can contain pockets of legally binding provisions.
Non-Binding Term Sheets
In India, a non-binding term sheet is typically used in the early stages of negotiation to outline the broad terms of a potential deal, such as a business partnership, investment, or acquisition. This document serves as an expression of intent rather than a legally enforceable agreement. Non-binding term sheets are instrumental in facilitating discussions between parties by identifying key deal points and areas of agreement and divergence without committing either party to final terms. Although the term sheet itself is non-binding, it often contains a few binding clauses related to confidentiality, exclusivity, and sometimes, dispute resolution mechanisms to protect the interests of the parties during negotiations. The primary advantage of a non-binding term sheet is its flexibility, allowing parties to explore potential cooperation with minimal legal risk and costs before committing significant resources to due diligence and contract drafting.
This is the more prevalent type of term sheet in India.
It serves as a roadmap for negotiations, outlining key deal points without legal enforceability.
Both parties have the flexibility to walk away or renegotiate terms before finalizing a binding contract.
However, some clauses within a non-binding term sheet can be legally binding. These typically include:
Confidentiality: Protects sensitive information disclosed during negotiations.
Non-Solicitation: Prevents either party from soliciting business from the other’s counterparties during the negotiation period.
Exclusivity: Limits the ability of both parties to pursue other deals for a specific timeframe.
Governing Law and Jurisdiction: Specifies the legal framework and courts that will govern any disputes arising from the term sheet’s binding clauses.
Binding Term Sheets
A binding term sheet is a preliminary document used in various business transactions, including mergers, acquisitions, and venture capital financing, that outlines the key terms and conditions of an agreement between parties. Unlike a non-binding term sheet, which serves merely as a framework for discussions, a binding term sheet legally obligates the involved parties to adhere to the terms specified within it, except those specifically designated as non-binding. It typically includes essential details such as the structure of the deal, pricing, timelines, confidentiality obligations, and conditions precedent that must be met for the transaction to proceed. By signing a binding term sheet, parties demonstrate their commitment to moving forward under the outlined terms, subject to due diligence and final contract negotiations. This document helps streamline subsequent negotiations by clarifying the critical elements of the deal, reducing ambiguity, and facilitating a smoother path to the final agreement.
Less common in India, a Binding term sheet implies that the parties are bound to follow the obligations contained therein, and it can be enforceable in a court of law.
The partially binding nature is usually indicated in the ‘preamble’ of a term sheet where it states, “this term sheet is non-binding except for Clause XYZ which shall be legally binding on the parties”. Below are term sheet sample clauses for your reference:
Binding Term Sheet Preamble (Sample Binding Term Sheet Clause):
“This Binding Term Sheet (“Term Sheet”) is entered into as of [Date], by and between [Party A], a [Type of Entity] organized and existing under the laws of [Jurisdiction], and [Party B], a [Type of Entity] organized and existing under the laws of [Jurisdiction]. This Term Sheet sets forth the principal terms and conditions agreed upon by the Parties with respect to [brief description of the transaction], and constitutes a binding agreement between the Parties hereto, subject to the terms and conditions set forth herein. Each Party acknowledges that it is entering into this Term Sheet with the intention of being legally bound hereby, and agrees to negotiate in good faith to finalize the definitive agreements contemplated hereby.”
Non-Binding Term Sheet Preamble (Sample Non-Binding Term Sheet Clause):
“This Non-Binding Term Sheet (“Term Sheet”) is entered into as of [Date], by and between [Party A], a [Type of Entity] organized and existing under the laws of [Jurisdiction], and [Party B], a [Type of Entity] organized and existing under the laws of [Jurisdiction]. This Term Sheet sets forth the principal terms and conditions agreed upon by the Parties with respect to [brief description of the transaction], and serves as a framework for further discussions and negotiations between the Parties. The Parties acknowledge and agree that this Term Sheet does not create any legally binding obligations, rights, or liabilities on either Party, except as otherwise expressly provided herein. The Parties further acknowledge that they are not obligated to proceed with the transaction contemplated hereby unless and until mutually acceptable definitive agreements are executed and delivered by the Parties.”
Case Law: Zostel Hospitality Pvt. Ltd. vs. Oravel Stays Pvt. Ltd. (Oyo)
Factual Background
Zostel Hospitality Private Limited, a startup offering backpacker hostel accommodations in India, entered into negotiations with Oravel Stays Private Limited (OYO), a company providing hotel rooms through its platform. Oyo expressed interest in acquiring Zostel’s business, leading to the signing of a Term Sheet. This Term Sheet outlined the transfer of Zostel’s business assets, customer data, key employees, software, and IP rights to Oyo in exchange for a 7% shareholding in Oyo. Notably, the Term Sheet was explicitly stated as non-binding in its preamble.
Dispute
The acquisition hinged on several conditions, including Oyo’s successful completion of due diligence, necessary approvals from Zostel, and the signing of definitive agreements. Zostel claimed to have fulfilled all prerequisites mentioned in the Term Sheet, but Oyo refrained from formalizing the acquisition. Oyo countered that due diligence revealed liabilities that deterred them from finalizing the deal. They argued that the non-binding nature of the Term Sheet meant it was not enforceable.
Arbitral Tribunal Observations
The sole arbitrator found that despite the non-binding declaration in the preamble, the contents and the parties’ actions suggested a commitment to complete the transaction. The detailed conditions and the progress towards fulfilling them implied a de facto binding agreement. Zostel’s transfer of key assets and information, alongside Oyo’s engagement with the due diligence, created expectations protected by the arbitral tribunal.
Analysis of the Arbitral Award
The tribunal highlighted that the conduct of both parties and the substantial completion of transactional obligations effectively negated the stated non-binding nature of the Term Sheet. The arbitrator ruled that such conduct, coupled with the definitive nature of the obligations undertaken, amounted to a binding agreement, warranting enforcement.
This case illustrates that even a “non-binding” Term Sheet can lead to enforceable obligations if the parties act in a manner that indicates a clear intention to complete the transaction. The specific terms and the extent of actions taken by the parties in reliance on these terms play a crucial role in determining the binding nature of a Term Sheet.
Broader Implications for Drafting Term Sheets
From a drafting perspective, clarity about the binding or non-binding nature of each clause can prevent ambiguities. Typically, certain clauses like exclusivity, confidentiality, and governing law are binding, even in a non-binding Term Sheet. The enforceability of a Term Sheet often depends on how it is drafted and the nature of obligations explicitly stated or implied through conduct.
This case serves as a critical reminder of the legal implications that can arise from the practical execution of terms agreed upon in a Term Sheet, highlighting the importance of precise language and a clear understanding of the terms’ enforceability.
Conclusion
Term sheets in India serve as pivotal documents in facilitating business agreements, providing a roadmap for negotiations and potential partnerships. While traditionally non-binding, their enforceability can hinge on specific clauses and the actions of the involved parties, as exemplified in the Zostel vs. Oyo case.
This duality stems from the intent and actions of the parties involved, which can transform an ostensibly non-binding document into a legally enforceable commitment. The critical analysis of such cases in India underlines the importance of careful drafting, explicit stipulations of binding and non-binding clauses, and the profound implications of the parties’ conduct post-agreement.
Frequently Asked Questions about Term Sheets in India
What is a term sheet?
A term sheet is a pre-contractual agreement outlining the basic terms and conditions under which an investment will be made. It serves as a template to develop more detailed legally binding documents.
Are term sheets legally binding?
Generally, term sheets are not legally binding in terms of the investment or acquisition itself. However, they often contain binding provisions such as confidentiality, exclusivity, and governing law clauses.
What are the essential elements of a term sheet?
Essential elements typically include the type of security being offered, valuation, investment amount, capital structure, stake percentage, voting rights, anti-dilution protections, and any rights to future capital sales.
How is a binding term sheet different from a non-binding term sheet?
A binding term sheet obligates the parties to proceed with the transaction under the terms laid out, subject to due diligence and definitive agreements. A non-binding term sheet serves as a preliminary agreement with some binding clauses but does not compel the parties to finalize the transaction.
What makes a term sheet binding?
A term sheet becomes binding if both parties engage in actions that indicate a commitment to proceed based on the terms outlined, such as transferring assets or sensitive information, or if specific clauses in the term sheet are expressly stated to be binding.
What is the importance of confidentiality in a term sheet?
Confidentiality protects the sensitive information exchanged during negotiations from being disclosed to third parties. It is one of the commonly binding clauses in a term sheet to ensure that business details and negotiations remain private.
In the world of corporate finance, buybacks are a tactical instrument that businesses use to maximize shareholder value and optimize their capital structure. The complexities of buyback transactions, however, increase when foreign shareholders are involved, requiring a careful comprehension of regulatory frameworks and tax ramifications. Such transactions are governed by the Foreign Exchange Management Act (FEMA), which places stringent compliance measures in place to guarantee legality and transparency in cross-border transactions. A further degree of complexity is added by the tax treatment of repurchase profits, which takes into account dividend income and capital gains. This necessitates careful navigating of tax regulations and double taxation avoidance agreements (DTAA).
In light of this, businesses need to approach buyback from foreign shareholders thoughtfully and strategically. Companies can unlock value for shareholders and ensure compliance with legal demands while navigating the regulatory maze and optimizing tax efficiency by adopting transparency, adhering to compliance standards, and obtaining expert help. Companies and shareholders alike may handle repurchase transactions in the global arena with confidence and clarity by having a thorough awareness of the regulatory subtleties and tax ramifications, which will ultimately encourage sustainable growth and shareholder value.
Buyback by a private company from its shareholders
Private companies can buy back their own shares from foreign shareholders, but the process is subject to specific regulations depending on the jurisdiction. In India, for example, the Reserve Bank of India (RBI) has streamlined the process, making it automatic for companies to buy back shares from foreign investors under certain conditions.
Section 68 of the Companies Act, 2013
This section outlines the legal framework for buybacks by Indian companies. It specifies requirements such as shareholder approval, funding sources, and limitations on the amount of shares that can be repurchased. Additionally, it mandates disclosures that the company must make to its shareholders and regulatory authorities.
The Buyback Process from Foreign Shareholders in India
Indian companies often utilize share buybacks to enhance shareholder returns and optimize their capital structure. In cases where a company has foreign shareholders, the buyback process is governed by relevant regulations and carries unique complexities. Let’s break down the steps involved:
1) Determining Eligibility
Company Eligibility: Indian companies must meet specific criteria outlined by SEBI and the Companies Act, 2013, to conduct a buyback. These include sufficient free reserves, limited debt-to-equity ratio, and compliance with previous buyback conditions.
Foreign Shareholder Eligibility: Foreign shareholders must confirm their eligibility to participate. Regulations generally permit participation, but there may be specific restrictions depending on the shareholder’s investment structure.
2) Choosing the Buyback method
Tender Offer: The company makes a direct offer to foreign shareholders to purchase their shares at a predetermined price within a specified time frame. This method is often used for targeted buybacks from a select group of shareholders.
Open Market Purchase: The company buys back shares through the stock exchange over a period of time. This method offers flexibility, but the company cannot guarantee the number of shares it will repurchase or the price.
3) Regulatory Approvals
Board consent: To start the repurchase program, the board of directors of the company’s consent. Get shareholder approval for the repurchase program by submitting a special resolution to the shareholders.
RBI and FEMA: In accordance with the provisions of the Foreign Exchange Management Act (FEMA), clearances from the Reserve Bank of India (RBI) may be necessary, contingent upon the extent of the repurchase and the characteristics of the foreign shareholders.
4) Execution of the Buyback
Tender Offer Execution: If using the tender offer method, the company will formally announce the offer to foreign shareholders with details on pricing, timeline, and documentation requirements. Shareholders would need to respond within the stipulated time frame.
Open Market Execution: If proceeding with the open market route, the company engages brokers to buy back shares on the stock exchange over time.
5) Repatriation of Funds
Foreign shareholders can repatriate the proceeds of the buyback after the necessary tax deductions, subject to certain RBI guidelines.
Exchange rate fluctuations at the time of repatriation may impact the amount finally received by shareholders in their home currency.
Compliance under FEMA
When a private company in India intends to buy back shares held by foreign shareholders, compliance with the Foreign Exchange Management Act (FEMA) becomes crucial. Here’s a breakdown of the key aspects:
Automatic Route: The Reserve Bank of India (RBI) has placed buybacks from foreign investors on an automatic route, eliminating the need for prior approval. However, this route comes with certain conditions.
FEMA Regulations: The buyback must comply with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (FEMA 20(R)/2017-RB). These regulations specify the manner of fund receipt, pricing, and reporting requirements for buybacks involving foreign investors.
FDI Policy: The buyback should not violate the existing Foreign Direct Investment (FDI) policy applicable to the specific sector in which the company operates. Certain sectors like defense, media, etc., have specific restrictions on foreign shareholding.
Form FC-TRS: The company must file Form FC-TRS (Transfer of Shares) with an authorized dealer within 30 days of the buyback transaction. This form reports the details of the transaction, including the number of shares bought back, the price paid, and the foreign investor’s information.
Additional Considerations: a) Valuation: The buyback price must be determined based on an independent valuation conducted by a registered valuer. The valuation report should be submitted to the authorized dealer along with Form FC-TRS. b) Who needs valuation? Valuation is mandatory for all buybacks from foreign investors, regardless of the size of the transaction or the company’s listing status. c) Limitations: This automatic route is not available for companies with specific restrictions under FEMA or facing any enforcement action by the RBI.
Tax Implications
When a buyback transaction occurs, tax implications take place for both the Company as well as the Investors. Here’s a breakdown of the key points :-
Company’s Tax Liabilities
Buyback Tax (BT): The company is liable to pay Buyback Tax (BT) on the amount paid to shareholders for buyback. The current rate is 20%, with surcharges and cess, resulting in an effective tax rate of 23.296%.
No Dividend Distribution Tax (DDT): Unlike dividends, BT isn’t subject to Dividend Distribution Tax (DDT). This can be advantageous for the company compared to distributing profits as dividends, especially if the tax rate in the foreign shareholder’s jurisdiction is higher.
Shareholder’s Tax Implications
Exemption from Income Tax: The amount received by foreign shareholders from the buyback is generally exempt from income tax in India under Section 10(34A) of the Income Tax Act. This exemption aims to avoid double taxation, as the shareholders might be taxed on the gain in their home country.
Section 14A: However, even though the income is exempt, Section 14A comes into play. This section requires the shareholders to add the exempt income to their total income and adjust their tax liability accordingly. This might not affect their final tax payment if their tax rate in their home country is higher than India’s.
Buyback Gains Tax
The exemption under Section 10(34A) applies to both long-term and short-term capital gains arising from the buyback. Therefore, there is no separate buyback gains tax in India
Additional Considerations
Foreign shareholders might still be subject to taxes in their home country on the capital gain arising from the buyback, as per the tax laws there.
The specific tax implications can vary depending on the individual circumstances and the tax treaty between India and the foreign shareholder’s country. Consulting a tax expert is recommended for accurate and personalized advice.
Tax filings
Form 15CA: This form is filed by the Indian company purchasing the shares to deduct tax at source (TDS) from the buyback amount payable to foreign shareholders. The applicable tax rate is determined by the India-Mauritius Double Taxation Avoidance Agreement (DTAA) or other relevant treaties, if applicable.
Form 15CB: This certificate is issued by the Indian company to the foreign shareholder, certifying the TDS deduction and the applicable tax rate. The foreign shareholder then submits this certificate to their home country tax authorities to claim any tax credit or relief available.
Conclusion
While buybacks offer immense value for companies and shareholders, navigating the complexities associated with foreign involvement requires a cautious and well-informed approach. This blog has explored the key regulatory and tax considerations for private companies in India undertaking buybacks from foreign shareholders.
Key Takeaways:
Compliance is paramount: Adherence to FEMA regulations, including the automatic route conditions and Form FC-TRS filing, is essential.
Tax implications: While buyback tax applies for the company, certain exemptions benefit foreign shareholders. Consulting a tax expert is crucial.
Transparency and expertise: Maintaining transparency throughout the process and seeking expert guidance ensure smooth execution and mitigate potential risks.
Frequently Asked Questions (FAQ’s)
Q. What are the key regulations governing buybacks involving foreign shareholders in India?
FEMA regulations, particularly the automatic route and Form FC-TRS filing.
Companies Act, 2013, outlining buyback procedures and limitations.
FDI policy relevant to the company’s sector.
Q. What are the conditions for using the automatic route for buybacks from foreign investors?
Company eligibility (non-restricted sector, etc.).
Pricing compliance with RBI norms.
Transaction reporting within 30 days.
Q. What are the tax implications for the company when buying back shares from foreign shareholders?
Buyback Tax (BT) applies at 20% with surcharges.
No Dividend Distribution Tax (DDT).
Q. Are foreign shareholders taxed on the buyback proceeds in India?
Generally exempt under Section 10(34A) of Income Tax Act.
Section 14A requires adjusting total income for tax purposes.
They might still be taxed in their home country.
Q. What forms need to be filed for tax purposes?
Form 15CA for tax deduction at source (TDS) by the company.
Form 15CB issued by the company to the shareholder for TDS details.
Q. What are the key steps involved in a buyback from foreign shareholders?
Compliance with regulations, including Form FC-TRS.
Shareholder approval (if required).
Valuation by a registered valuer.
Tax considerations and form filings.
Q. What documents are required for a buyback involving foreign shareholders?
Board resolution approving the buyback.
Shareholder approval documents (if applicable).
Valuation report.
Form FC-TRS and other regulatory filings.
Tax forms (15CA, 15CB).
Q. When is it advisable to seek expert help for a buyback involving foreign shareholders?
For complex transactions, regulatory compliance, and tax optimization.
Q. Are there any recent changes or updates to the regulations for buybacks with foreign shareholders?
Staying updated on regulatory changes is crucial for compliance.
Q. What are the potential risks associated with buybacks involving foreign shareholders?
Non-compliance with regulations, inaccurate tax calculations, and disputes.
Despite the social taboos associated with the purchase and use of adult toys in India, a market survey found a 65% increase in the sale of these products on online marketplaces within the first six months of 2020. As the world’s 7th largest market for e-commerce, changing consumer attitudes and increased accessibility to the sex toy business in India has propelled a meteoric boom, with the market value for adult toys in India estimated at around USD 112.45 Million in 2023 and growing at a compounded annual growth rate (CAGR) of 15.24% during the forecast period of 2025-2029.
With the global market for sex toys projected to reach USD 54.6 Billion by 2026, the Indian market shows no sign of slowing this tremendous growth, making this an attractive business venture for a rising number of startups. However, the legal landscape surrounding the manufacture, import, storage, marketing, sale and distribution of adult toys in India is murky and complex, leading to numerous challenges for companies seeking to capitalise on the increasing demand for quality products and sex positive marketing. This article Legality of Sex Toys in India, sheds light on recent developments that signal a shift in the legal and social understanding of sex toy business in India. It aims to navigate the complex regulatory environment, offering insights into the challenges and solutions for adult toy sellers in this evolving landscape.
The adult toys market in India is experiencing a period of significant growth, fueled by a number of social and economic trends.
Shifting Attitudes: Social media and increased openness about sex are leading to a normalization of adult toys, particularly among younger generations. This is chipping away at traditional stigmas.
E-commerce Boom: The rise of shopping platforms to purchase sex toys online in India provides a discreet and convenient way for people to purchase adult toys, bypassing potential embarrassment in physical stores.
Increasing Disposable Income: A growing middle class with more spending power creates a larger market for these products.
Focus on Sexual Wellness: Adult toys are increasingly seen as tools for enhancing sexual pleasure and intimacy, not just taboo items.
Dominant Products and Users: Vibrators currently hold the largest market share, but rings and other male-oriented products are showing promising growth. Women are the primary users, but the male segment is catching up.
Distribution Channels: Purchasing sex toys online in India is the preferred method of purchase, accounting for over 59% of the market. Discreet packaging and secure transactions are key factors. Key players include Besharam, Snapdeal, LoveTreats, and ThatsPersonal.
Legal Framework for Sex Toys in India
While there is no express legislation banning the manufacture/import and sale of adult toys in India, the applicable regulatory framework relies primarily on obscenity laws, followed by laws which generally regulate the quality of goods and protect consumer interests. In India, the topic of sex doll laws order is characterized by a lack of clear legal guidelines, resulting in an ambiguous status for these products. The fundamental challenge under this framework is that these legislations contain language that is sufficiently vague enough that authorities are left to exercise their own discretion in its interpretation, often leading to an adverse outcome:
Indian Penal Code, 1860 (“IPC”): Section 292(1) of the IPC deems an object to be ‘obscene’ if “it is lascivious or appeals to the prurient interest” or if its effect is “such as to tend to deprave and corrupt a person”. In essence, an object is considered obscene if it’s seen as offensive or appeals to sexual desires in a way that could harm people’s morals. This includes selling, distributing, or advertising these objects. The sale, distribution, import, conveyance, profit from and advertisement of “obscene objects” is also punishable by fine and imprisonment, upon conviction under Section 292(2) of the IPC. Given the inherent subjectivity in determining whether content is “obscene”, Indian courts have adopted a ‘Community Standard Test’ to determine whether a product and its marketing caters to such a deviant mindset. The problem is that what’s “obscene” can be a matter of opinion. Indian courts consider what most people in India would think, not just a small group of susceptible or sensitive people. Consequently what’s considered obscene can change over time. However, many people in India still see sex and obscenity as the same thing; this continues to present a challenge in determining an objective standard of obscenity.
Indecent Representation of Women (Prohibition) Act, 1986 (“IRW”): The IRW explicitly defines “indecent representation of women” to mean a “depiction in any manner of the figure of a woman, her form or body or any part thereof in such a way as to have the effect of being indecent, or derogatory to, or denigrating women, or is likely to deprave, corrupt or injure the public morality or morals”, with the promotion of such representation (through books, pamphlets, etc.) being punishable under Section 4 of IRW with imprisonment and fine (including upon a company and its directors/key managerial personnel). The problem is, what’s “indecent” can be a matter of opinion. The law also says this kind of content can’t harm public morals and consequently impacts the manner in which sex toys – especially how sex dolls and dildos in India are marketed to the consumer base.
Information Technology Act, 2000 (“IT Act”) and Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“ IT Rules”): Section 67 of the IT Act expressly prohibits the publication or transmission of “lascivious or prurient material” (defined as material that is sexually explicit or arousing in nature) in electronic form. The responsibility to prevent such publication or transmission is further imposed specifically on intermediaries (i.e., online platforms listing adult toys in India, in the present case) in the IT Rules, where intermediaries are required to not only prevent obscene materials from being hosted on their platform, but requires implementation of effective content removal mechanisms.
Customs Act, 1962 (“CA”): Section 11 of the CA empowers the government to prohibit the import or export of certain goods for the purpose of “maintenance of public order and standards of decency or morality”, with the competent officer further empowered to seize such goods that may be liable for confiscation under the CA. Further, customs officers typically rely on a 60 years old Notification as of 2024 (the “Customs Notification”), whereunder the import of any “obscene book, pamphlet, paper, drawing, painting, representation, figure or article” was prohibited. Given existing social taboos around the discussion of sex – adult toys purchased overseas by Indian consumers are often seized by customs officials, under the grounds that such products are “obscene” and violative of the “standards of decency or morality”. Adult toys also do not fall in a class of products by themselves (and do not have an explicit Harmonized System of Nomenclature classification), leading to these products being marketed as “massagers” and such other nomenclature that does not expressly identify that the product is marketed for private enjoyment.
Patents Act, 1970 (“PA”): Section 3(b) of PA empowers the government to reject applications for patents on the grounds that the product sought to be patented went against the principles of public order and morality. The provision has even been invoked to reject a plea by a Canadian company seeking to patent a vibrator in India, stating “the law has never engaged positively with the notion of sexual pleasure”.
Consumer Protection (E-Commerce) Rules, 2020 (“E-Commerce Rules”) read with the Consumer Protection Act, 2019 and the IT Act: The E-Commerce Rules were enacted to protect consumer interests in the rapidly burgeoning e-commerce marketplace in India. To this effect, the E-Commerce Rules place an onus on online platforms to ensure sellers offer precise and truthful product information. This creates an added burden on sellers of sex toys online in India and online platforms listing such adult toys, in order to prevent misrepresentation and requiring accurate labelling and imagery to distinguish between adult toys and other items, directly influencing the sale and marketing of such products in India.
The Evolving Legal Position for Sex Toys in India
The alleged illegality of adult toys in India has been a subject of judicial study on numerous occasions, with intermediaries like Snapdeal.com and Ohmysecret.com being taken to court for sale of “obscene” products on their website even as recently as 2015. However, the notion that the “State has no place in the bedrooms of the nation” is one that is increasingly reflected in judicial precedents surrounding, inter alia, the legality of sex toys in India.
Critics of the ambiguous legal position regulating the sex toy market in India have relied on the Supreme Court’s landmark rulings in the cases of: (i) Justice K S Puttaswamy (Retd.) v Union of India, where the apex court categorically held that “privacy includes at its core the preservation of personal intimacies, the sanctity of family life, marriage, procreation, the home and sexual orientation.”; and (ii) Navtej Singh Johar & Ors. v Union of India, where it was held that “human sexuality cannot be limited to its role solely in procreation” and that the Constitution “safeguards the diverse and changing nature of sexual experiences”.
The High Court of Calcutta, while hearing a case where sex toys purchased by a woman were confiscated by the Customs Authority of Calcutta, held that “Regard being had to the prevailing social mores and standards of morals in our country the goods and items do not reflect anything obscene. Merely because the rules of some of the games may have an erotic and aphrodisiac content or may have a titillating effect for arousing sexual desires, these items, without anything more, cannot be labelled as obscene. The rules of the game have not employed any offensive language. In our opinion, an article or instruction suggesting various modes for stimulating the enjoyment of sex, if not expressed in any lurid or filthy language, cannot be branded as obscene. If that not be so, books like Kama Sutra should also be banned on the charge of obscenity as this ancient Sanskrit treatise on the art of love and sexual techniques also candidly contains various instructions for heightening the pleasures of sexual enjoyment.”The High Court emphasizes that sex toys cannot be classified as “obscene” just because they give sexual pleasure is a welcome assertion and the Honourable Court’s rationale rings particularly true in face of the exemptions contained in the legislations outline earlier in this manual, where “obscene” content produced is not violative of the IPC or IRW, where it is justifiable as being for the public good by contributing to art or culture.
As part of the evolving judicial trends, companies seeking to enter the sex toys market in India can feel bolstered by the March 2024 ruling of the High Court of Bombay in Commissioner of Customs NS-V v DOC Brown Industries LLP. The case in question revolved around an appeal by the company, challenging a confiscation order from the Commissioner of Customs. This order had seized a shipment of body massagers, labeling them as “adult sex toys” which were “prohibited for import” and that the applicant company had mis-declared the description of the goods (relying upon Section 292 of the IPC and the Customs Notification). The Commissioner further relied upon testimony from medical experts who opined that while the products were in fact body massagers, they could be used for sexual pleasure.
In quashing the impugned order of the Commissioner, the High Court held that:
Body massagers cannot be legally equated with items explicitly banned under Customs Notifications, which traditionally cover materials like books and pamphlets. This differentiation highlighted a misinterpretation of the law by the customs authority.
It was determined that the classification of these massagers as prohibited items stemmed from the subjective viewpoint of the Commissioner, rather than any solid legal basis. The judgement clarified that customs notifications do not categorise body massagers as obscene or contraband.
Significantly, the court pointed out that since body massagers are legally sold within India, it contradicts logic to ban their import. This acknowledgment serves as a reminder of the need for consistency in regulatory approaches.
Lastly, the court refuted the argument that the potential for an alternative sexual use of these massagers could justify their prohibition. It stressed that such a criterion is not valid for deeming goods as banned, provided they meet the standard requirements for import and sale.
Challenges and Solutions around Legality of Sex Toys in India
The market for adult toys, particularly for sex toys online in India, is booming, but the legal landscape is still a bit cloudy. Wherever the discussions around topics like sex doll laws order or legality of sex toys in India occur, the law regulations appear hazy. Here’s a breakdown of the challenges companies face and some creative solutions they’re using:
Challenges:
Obscenity Laws: The primary challenge lies in the ambiguity surrounding the classification of sex toys under Section 292 of the IPC and the Customs Act, 1962. The subjective nature of “obscenity” creates uncertainty for businesses, as customs officials may confiscate adult toys in India deemed obscene at their discretion. This rings particularly true for items such as dildos and sex dolls in India.
Misleading Marketing: To circumvent legal complexities, companies often resort to marketing adult toys under alternative names like “massagers.” While this allows them to operate, it raises concerns about consumer protection laws. Misrepresenting a product’s purpose could be misleading and lead to subsequent actions.
Importation Issues: The absence of specific Harmonized System of Nomenclature (HSN) codes for adult toys creates difficulties in importation procedures. Classification as “obscene” can lead to confiscation by customs authorities. Additionally, misclassifying adult toys can result in penalties for importers.
Medical Device Registration: While some adult toys with therapeutic applications may be registered as medical devices under the Medical Devices Rules, 2017, most pleasure-oriented sex toys lack inherent therapeutic value. Obtaining medical device approval based solely on disclosure, without a genuine therapeutic application, raises concerns about the integrity of the system.
Solutions:
Judicial Clarity: A definitive ruling by the Supreme Court on the legality of sex toy business in India would provide much-needed clarity for the industry. This would eliminate the subjective interpretation of obscenity laws and provide a clear framework for businesses to operate within.
Legislative Reform: Enacting specific legislation regulating adult toys would address current ambiguities. This could involve creating a separate category for adult toys within the HSN code and establishing clear guidelines for their marketing and sale; or creating legislation specifically addressing the legality of the sex toy business in India (particularly of sale of products like sex dolls and dildos in India).
Ethical Marketing: Companies can navigate the current environment by adopting ethical marketing practices. Utilizing neutral product descriptions and focusing on potential wellness benefits associated with certain adult toys can help avoid legal issues related to obscenity.
Transparent Disclosures: When registering adult toys in India for medical device approval, companies should ensure transparency in disclosures. This ensures the integrity of the system and avoids misuse of the medical device classification for products lacking a genuine therapeutic purpose.
The adult toys market in India exhibits tremendous potential. However, the legal ambiguity surrounding these products necessitates creative strategies and cautious navigation by companies. In India, adult toys that are not presented or advertised in an indecent manner are generally considered legally acceptable. However, if these products have packaging or marketing materials that are deemed obscene according to Indian obscenity laws, they may be in violation of those laws. This creates confusion regarding whether or not sale of products such as dildos and sex dolls in India can be lawfully sold in India. The legal ambiguity surrounding these products necessitates creative strategies and cautious navigation by companies. Until a definitive legal framework or a Supreme Court ruling emerges, the industry will likely rely on a combination of ethical marketing practices, judicious use of medical device registration, and a continued push for legislative reform to ensure a more stable and transparent business environment.
Frequently Asked Questions (FAQs) on Legal Status of Sex Toys in India
Are sex toys (adult toys) legal in India? Yes, adult toys that are not presented or advertised in an indecent or obscene manner are generally considered legally acceptable in India.
Is there a sex dolls legislation in India? No, there is no specific law that directly governs the sale of sex dolls or other adult toys in India. This has resulted in a gap in the legal framework where the interpretation of the law is subjective and dependent on legislations that were enacted decades ago.
Can I bring sex toys to India? Yes, there is no law that directly bans this. However, as seen in the case of Commissioner of Customs NS-V v DOC Brown Industries LLP, where the interpretation of the sex toy legislation (or lack thereof) is in itself subjective, there can be practical issues posed by customs officials at the port of entry into India.
Are sex toys banned in India? No, there is no law that expressly bans sex toys. Conversely however, there is also no law explicitly stating that the sex toy business in India is legal. As such, sale of sex toys online in India operates in murky waters.
Micro, Small and Medium Enterprises (MSMEs) contribute significantly to the nation’s GDP, generate vast employment opportunities, and foster innovation across various industries. Recognizing their critical role, the Government of India established the National Board for Micro, Small and Medium Enterprises (NBMSME) under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).MSMEs are the backbone of the Indian economy, playing a vital role in production, exports, and overall economic health. Their contributions are essential for the nation’s success. Recognizing this immense potential, the Government of India (GOI) has actively supported the MSME sector through various initiatives in recent years. In this article ahead, we explore various MSME Registration Benefits & Tax Benefits for Businesses in India. These maybe established business organizations or startups.
The NBMSME serves a three-fold purpose:
Examining Growth Factors:The NBMSME acts as a strategic advisor, constantly examining factors that impact MSME growth. This includes analyzing market trends, infrastructure needs, and policy regulations. By understanding these growth drivers, the NBMSME can advocate for policies and initiatives that directly benefit MSMEs.
Facilitating Benefits: Businesses registering under the MSME Act gain access to a multitude of advantages, including:
Easier Access to Credit: While not all MSME loans are collateral-free, the NBMSME’s advocacy has led to schemes offering easier credit access with relaxed collateral requirements. This can significantly improve your MSME’s financial flexibility.
Reduced Interest Burden: Some loan schemes provide exemptions on overdraft interest, easing your financial burden and allowing you to reinvest profits back into the business.
Protection Against Delayed Payments (for Micro and Small Enterprises): Late payments can cripple cash flow. The NBMSME works towards initiatives that safeguard MSMEs from delayed customer payments, ensuring a smoother financial flow.
A Voice for MSMEs: The NBMSME acts as a bridge between the government and MSMEs. By representing various MSME segments, including women entrepreneurs and regional associations, the NBMSME ensures your concerns are heard. This allows the government to tailor policies and programs that directly address the needs of MSMEs.
MSME Classification and Support
The MSMED Act further categorizes MSMEs based on their investment in plant and machinery (for manufacturing enterprises) or investment in equipment (for service enterprises), along with their annual turnover. This classification system allows the government to tailor support initiatives and benefits to the specific needs of each category. Here’s a breakdown of the MSME classification:
Enterprise Category
Investment in Plant & Machinery/Equipment
Turnover
Micro
Does not exceed INR 1 Crore
Does not exceed INR 5 Crore
Small
Does not exceed INR 10 Crore
Does not exceed INR 50 Crore
Medium
Does not exceed INR 50 Crore
Does not exceed INR 250 Crore
What is MSME Udyam Registration?
Udyam Registration is a free, online, and mandatory process for all MSMEs in India. It eliminates the complexities of earlier registration procedures by implementing a self-declaration system. There’s no need to submit any documents or verification for registration. To streamline the registration process for MSMEs, the Government of India (GOI) implemented a user-friendly online system called Udyam Registration. Following the notification issued under the MSMED Act, any aspiring MSME owner can apply for a Udyam Registration Certificate (URC) – essentially an MSME registration certificate – through the Udyam registration portal.
Steps for Udyam Registration:
The Udyam Registration process is simple and can be completed online through the official Udyam Registration portal (https://udyamregistration.gov.in/). Here’s a basic overview of the steps involved:
Visit the Udyam Registration portal.
Enter your Aadhaar number and PAN details.
Fill in the required information about your business, including its nature, activity, and investment details.
Self-declare your business category (Micro, Small, or Medium) based on the prescribed turnover criteria.
Submit the online application.
Upon successful registration, you’ll receive a URN electronically. This registration never expires, eliminating the need for renewals.
What is the Benefit of MSME Registration in India?
To empower these crucial businesses, the Indian government offers a compelling incentive: MSME registration.
From easier access to credit to financial grants and subsidies, MSME registration offers a significant edge in today’s competitive marketplace. MSME registration unlocks a multitude of advantages designed to empower your business. These benefits can be categorized into key areas:
Financial Advantages:
Reduced Interest Rates: MSMEs benefit from lower interest rates on loans and overdrafts compared to unregistered businesses. Government programs further subsidize interest costs, easing financial burdens.
Easier Access to Credit: Registration facilitates access to collateral-free loans and government credit guarantee schemes, making it easier to secure funding at competitive rates.
Operational Improvements:
Free or Discounted ISO Certification: Government schemes offer financial assistance for obtaining ISO Certification, a globally recognized symbol of quality that enhances brand image.
Electricity Bill Rebates: Reduce operational costs with rebates on electricity bills offered to registered MSME.
Feasible Complaint Portal: The MSME Samadhan Portal empowers you to file complaints against delayed payments, ensuring a healthy cash flow.
Market Expansion Opportunities:
Government Tender Participation: Registration facilitates participation in government tenders and e-Procurement marketplaces, expanding your customer base.
Reduced Government Security Deposits: Waived security deposits for tenders ease the financial burden of bidding on government projects.
International Trade Facilitation: Government support includes funding for attending international trade fairs, providing opportunities to gain global exposure.
Marketing and Technology Upgradation: Government initiatives offer assistance with marketing and technology upgrades, propelling your business towards greater success.
Additional Benefits:
Industrial Promotion Subsidy: This subsidy assists in acquiring new technology and machinery, enhancing production processes, efficiency, and market competitiveness.
By leveraging these comprehensive benefits, MSME registration empowers you to overcome financial hurdles, foster innovation, enhance credibility, and unlock new market opportunities.
Tax Benefits of MSME Registration in India
MSME registration unlocks a treasure trove of tax benefits designed to incentivize and support small businesses in India. These advantages translate to significant cost savings, improved cash flow, and a more competitive business environment. Let’s delve deeper into some key tax benefits:
Reduced Taxable Income: Interest on business loans is deductible under Section 36(1)(iii) of the Income Tax Act, 1961, effectively reducing taxable income and potentially the overall tax liability.
Increased Depreciation Benefits: For “Qualifying Assets” with extended readiness times, capitalized interest on borrowed funds can be added to the acquisition cost. This increases the base for depreciation deductions, reducing taxable income under the Income Tax Act.
Employment Generation Incentive: Under Section 80JJAA of the Income Tax Act, MSMEs creating new jobs can claim deductions for additional employee costs.
Tax Holiday for Specific Sectors (Limited Applicability): This benefit, relevant to manufacturing MSMEs in specific sectors like mineral oil and natural gas, offered a tax holiday under Section 80-IB. It’s important to note that this section has been phased out and now primarily applies only to certain older cases that are still under its tenure.
Reduced Tax Rates: Manufacturing MSMEs can opt for a reduced corporate tax rate of 25% under Section 115BA if their turnover is under Rs 400 crore. This requires giving up various exemptions and deductions. Additionally, under Section 115BAA, any company, not restricted to MSMEs, can opt for a tax rate of 22% (effective rate approximately 25.17% including surcharges and cess), also with the forfeiture of most other tax exemptions and deductions.
GST Composition Scheme: MSMEs with a turnover of up to INR 1.5 crore can benefit from the simplified GST Composition Scheme, reducing tax compliance burdens and offering lower tax rates.
Capital Gains Tax Exemption: Section 54GB allows exemptions on capital gains tax if the gains from long-term asset sales are reinvested in eligible startups, subject to conditions.
Investment Allowance: Under Section 32AC, businesses investing in new plant and machinery can claim an investment allowance, reducing taxable income.
Maximizing Deductions: Routine business expenses like rent, salaries, and depreciation are deductible, which helps in further reducing taxable income.
Startup India Tax Benefits: Startups, including those in the MSME sector, can avail of benefits like exemption from income tax for three consecutive years out of their first ten years under the Startup India initiative and capital gains tax exemption for investments in startups.
Presumptive Taxation Scheme: For small businesses meeting certain conditions, the Presumptive Taxation Scheme under Section 44AD simplifies tax filings by allowing them to declare income at a prescribed rate on total turnover. The threshold for eligibility under this scheme was increased to INR 2 crore, not INR 3 crore.
Timely Payment Incentive: The introduction of Section 43B(h) in the Income Tax Act incentivizes timely payments to MSMEs, allowing deductions for such payments only if they are made within the prescribed timeframe.
Extended Carry Forward Period for MAT: The carry forward period for Minimum Alternate Tax (MAT) credit for MSMEs has been extended to 15 years, aiding in better financial planning and utilization of MAT credits.
By leveraging these tax benefits, MSME registration empowers you to retain more of your hard-earned profits, invest in growth, and contribute significantly to the Indian economy.
Conclusion
The MSME sector stands as a pillar of the Indian economy, not only bolstering economic growth but also fostering innovation and providing substantial employment opportunities. The Government of India, recognizing the sector’s potential, has put forth numerous initiatives under the MSME registration framework to support these enterprises. MSME registration offers a gateway to myriad opportunities that can transform a small or medium enterprise into a robust, competitive business. These opportunities range from financial benefits like easier access to credit and tax reliefs to operational advantages such as international trade facilitation and technological upgrades. As MSMEs continue to evolve, the continuous support from the government is vital to ensure their growth and sustainability, thereby powering India’s progress on a global scale.
FAQ on MSME Registration Benefits & Tax Benefits for Business in India
Q1: What is MSME? A: MSME stands for Micro, Small and Medium Enterprises. These businesses play a vital role in the Indian economy, contributing significantly to its growth and development. Entities are classified either as micro, small or medium on the basis of their turnover and investments.
Q2: What is The National Board for Micro, Small and Medium Enterprises (NBMSME)? A: The NBMSME is a board established by the Government of India under the MSME Development Act, 2006. It works to examine the factors affecting promotion and development of MSME and recommends policies to the government for the growth of the MSME sector.
Q3: What are the benefits of registering under MSME? A: The benefits of MSME registration include (a) easy access to collateral-free loans; ; (b) protection against delayed payments (only to micro and small enterprises); (c) subsidies on patent and trademark applications; (d) reimbursement of ISO certification charges; and (e) reduced electricity bills.
Q4: How can I register my business under MSME? A: You can register your business under MSME by visiting the Udyam registration website and filing the registration form.
Q5: Can a business change its MSME classification after registration? A: Yes, a business can change its MSME classification anytime (based on its growth and investment) through the Udyam registration portal.
Q6: What qualifies a business as an MSME in India? A: Businesses are classified as Micro, Small, or Medium Enterprises based on investment in plant and machinery for manufacturing units or equipment for service units, along with annual turnover, according to the MSMED Act.
Q7: How does MSME registration help in tax reduction? A: Registered MSMEs can avail themselves of various tax deductions such as increased depreciation, investment allowances, and specific incentives under the Income Tax Act, which reduce taxable income and overall tax liability.
Q8: Is MSME registration mandatory for all small and medium businesses? A: While MSME registration is not mandatory, it is highly beneficial and recommended as it provides access to several government benefits, schemes, and subsidies designed to support business growth and sustainability.
Q9: Can MSME benefits be availed immediately after registration? A: Most benefits can be availed immediately post-registration, although some might require specific conditions to be met or additional documentation, particularly those related to tax benefits or financial subsidies.
An anti-dilution clause is a contractual provision typically found in investment agreements, particularly in the context of equity financing for startups. Its primary purpose is to protect existing investors from the dilutive effects of subsequent equity issuances at a lower valuation.
Anti-dilution provisions are incorporated in a company’s transactional documents that aim at protecting the value of an investor’s shares in the event of a future equity financing round. The anti dilution provisions in the term sheet often state that when an investor invests in a company, they are designed to protect the investor’s equity stake in the company if the company issues additional shares at a lower price in the future.
Why is the Anti-Dilution Clause Important?
Anti-dilution provisions play a crucial role in safeguarding the interests of both startups and investors within the dynamic world of startup financing.
Benefits of anti-dilution clause for startups:
Preserves Founder Control: By granting founders additional shares at a lower price point in a down round, anti-dilution clauses for founders help maintain a significant ownership stake. This ensures they retain control over company decisions and guide the venture towards its goals.
Attracts and Retains Talent: Equity-based compensation plans are essential for attracting top talent in the startup ecosystem. Anti-dilution provisions mitigate excessive dilution, ensuring these equity incentives remain valuable and motivating for employees, thereby minimizing the risk of talent loss.
Enhanced Investment Appeal: The stability and fairness instilled by anti-dilution clauses make the startup more attractive to potential investors and strategic partners, facilitating future fundraising efforts.
Benefits for anti-dilution clause for Investors:
Protects Stake Value: These clauses shield investors from a decrease in ownership percentage (dilution) when a company issues new shares at a lower valuation in a subsequent financing round.
Maintains Investment Worth: They play a major role in ensuring the value of an investor’s stake remains stable even if the company’s overall valuation goes down. This is particularly crucial for investors making significant investments.
Increased Confidence: Anti-dilution provisions offer investors a level of protection and predictability, fostering greater confidence in their investment decisions.
What does an anti-dilution clause include?
Anti-dilution clauses for a startup or an investor typically include several key elements:
Trigger Events: Anti-dilution clauses are activated by specific trigger events, most commonly subsequent equity financings at a lower valuation than the original investment. These trigger events can also include stock splits, mergers, or acquisitions that may dilute the ownership stakes of existing investors.
Adjustment Mechanism: Once triggered, the anti-dilution clause adjusts the number of shares or the conversion price of existing investor holdings to compensate for the dilution. The adjustment mechanism aims to maintain the proportional ownership of existing investors relative to the new shares issued.
Full Ratchet vs. Weighted Average: There are two primary types of anti-dilution mechanisms which acts as an essential for the corporation while incorporating such a clause: full ratchet and weighted average. a) Full Ratchet: This type of anti-dilution clause typically functions to adjust the conversion price of existing holdings to the price of the new issuance, essentially providing the most protection to existing investors by completely offsetting the dilution. b) Weighted Average: This type mainly takes into account both the price and the number of shares issued in the new financing round, offering a more balanced approach to anti-dilution protection. It considers the dilution on a weighted average basis, mitigating the severity of adjustment compared to full ratchet.
Exceptions and Limitations: Anti-dilution clauses may include exceptions or limitations to their application. For example, certain issuances, such as employee stock options or convertible debt, may be excluded from triggering the clause. Additionally, there may be caps or limits on the extent of adjustment to prevent excessive dilution of future investors.
Negotiation and Customization: Anti-dilution clauses are subject to negotiation between the company and investors. The specific terms and conditions, including the type of anti-dilution mechanism used, the trigger events, and any exceptions or limitations, are customized based on the negotiating leverage and preferences of the parties involved.
Types of Anti-Dilution Provisions
There are two main types of anti-dilution provisions: full-ratchet and weighted average.
Full-Ratchet: For investors seeking maximum protection against dilution, full-ratchet anti-dilution provisions provide the most comprehensive safeguards. They fully compensate an investor for dilution caused by a future equity financing round by adjusting the investor’s share count and conversion price to the same extent as the dilution caused by the new financing round.For example, if a company issues new shares at a price that is 50% lower than the price at which the investor’s shares were issued, a full-ratchet provision would adjust the investor’s share count and conversion price by 50%. This means that the investor’s share count would increase by 50% and the conversion price would decrease by 50%, effectively nullifying the dilution caused by the new financing round.
Weighted-Average: Weighted average anti-dilution provisions are less protective for investors than full-ratchet provisions, but they are also less disruptive to a company’s capital structure. These provisions adjust the investor’s share count and conversion price based on a formula that takes into account the size of the new financing round and the price at which the new shares are issued. The formula used to calculate the adjustment may vary, but it typically involves multiplying the investor’s existing share count by a weighted average of the old and new share prices, and then dividing the result by the new share price. This results in a smaller adjustment to the investor’s share count and conversion price than a full-ratchet provision would provide.The weighted average provision uses the following formula to determine new conversion prices: C2 = C1 x (A + B) / (A + C) Where: C2 = new conversion price C1 = old conversion price A = number of outstanding shares before a new issue B = total consideration received by the company for the new issue C = number of new shares issuedBoth full-ratchet and weighted average anti-dilution provisions are designed to protect the value of an investor’s equity stake in a company by compensating them for dilution caused by future equity financing rounds. However, the extent of protection provided by these provisions can vary significantly, and the choice of which type of provision to include in a company’s financing documents can have significant consequences for both the company and its investors.
There are both pros and cons to anti-dilution provisions in a company’s transaction agreements:
Pros of Anti-Dilution Provisions for startups:
Maintains Founder Control: By protecting against dilution, anti-dilution provisions for founders help retain a significant ownership stake in the company. This ensures they have a strong voice in shaping the company’s future and making critical decisions.
Enhanced Investment Appeal: The stability and predictability offered by anti-dilution clauses can make the company more attractive to potential investors and strategic partners. Investors seeking protection against dilution are more likely to be drawn to such opportunities, and strategic partners might value the reduced risk associated with a company’s capital structure.
Cons of Anti-Dilution Provisions for startups:
Increased Complexity: Anti-dilution provisions can introduce complexities into a company’s capital structure. Managing these provisions might involve adjusting investor share conversion prices based on various trigger events. Additionally, dealing with multiple investors who have different anti-dilution clauses in their agreements can lead to intricate calculations and potential disagreements.
Potential Financial Strain: To compensate investors for future dilution, a company might need to issue additional shares or make cash payouts. This can be financially burdensome, especially for startups with limited resources or cash flow constraints. However, companies can negotiate limitations or exceptions in anti-dilution clauses to mitigate this risk.
Pros of Anti-Dilution Provisions for investors
Protects Investment Value: Shields against dilution and safeguards the value of your investment, especially crucial for larger investments.
Stronger Negotiating Position: Offers leverage during financing discussions, potentially leading to more favorable terms.
Cons of Anti-Dilution Provisions for investors
Limited Control: May restrict your ability to negotiate for increased ownership in future rounds, potentially limiting your returns.
Exit Strategy Concerns: Strong provisions could signal higher risk for the company, hindering future financing and limiting your exit options.
Conclusion
Anti-dilution provisions offer investors valuable protection against dilution, safeguarding the value of their investment in a startup. This can be particularly important for early-stage companies where the risk of future down-round financing is higher. However, these provisions can also introduce complexity and potentially limit a company’s ability to attract future investors or strategic partners. Investors should carefully consider the potential benefits and drawbacks of anti-dilution clauses when evaluating investment opportunities in startups. Companies, on the other hand, need to weigh these considerations against the importance of attracting investors, especially in the crucial early stages. Ultimately, the decision to include anti-dilution provisions should be based on a careful analysis of the company’s specific situation and its investor landscape.
Frequently Asked Questions on Anti-Dilution
Q. What is an anti-dilution clause?
A. An anti-dilution clause is a provision in an investment agreement that protects investors from the dilution of their equity stake in the event that a company issues more shares at a lower valuation in the future.
Q. Why are anti-dilution clauses important?
A. Anti-dilution clauses help preserve the value of investments by adjusting the number of shares or the conversion price to compensate for dilution caused by subsequent equity issuances. This ensures that investors maintain a proportional ownership relative to new shares issued, safeguarding their investment’s value.
Q. What are the main types of anti-dilution provisions?
A. There are two primary types of anti-dilution provisions: full-ratchet and weighted-average. Full-ratchet provisions offer the most protection by adjusting the investor’s share count and conversion price to match the price of new shares issued, while weighted-average provisions take into account the price and number of new shares, resulting in a less drastic adjustment.
Q. How do anti-dilution provisions benefit startups?
A. For startups, these provisions can attract and retain top talent by ensuring that equity-based compensation plans remain valuable. They also help preserve founder control and enhance the startup’s appeal to potential investors by stabilizing the capital structure.
Q. What are the potential drawbacks of anti-dilution provisions for companies?
A. While beneficial in protecting founders and early investors, anti-dilution provisions can complicate the capital structure and make future fundraising more challenging. They may also impose financial strains on startups by requiring additional shares or cash payouts to compensate for dilution.
Q. Can anti-dilution clauses be negotiated?
A. Yes, anti-dilution clauses are typically subject to negotiation between investors and the company. The specific terms, including the type of mechanism used and any exceptions or limitations, are often tailored based on the negotiating power and preferences of the parties involved.
Q. What triggers an anti-dilution clause?
A. Trigger events for anti-dilution clauses commonly include subsequent equity financings at a lower valuation than the original investment. Other events might include stock splits, mergers, or acquisitions that could dilute the ownership stakes of existing shareholders.
In today’s digital landscape, where personal data is both a valuable asset and a subject of concern, a robust privacy policy is paramount. A well-crafted privacy policy serves as a guiding document outlining how an organization collects, uses, and protects user information. Let’s delve into the intricacies of a privacy policy, drawing insights from a comprehensive framework commonly found in such documents.
Introduction: A privacy policy typically begins with an introduction that underscores the organization’s commitment to safeguarding user privacy and complying with relevant laws and regulations. This section aims to establish trust and transparency from the outset, laying the foundation for user confidence in the organization’s data practices.
Consent and Updates: User consent forms the cornerstone of data collection and processing activities. A robust privacy policy should clarify that by using the organization’s services or accessing its platform, users implicitly agree to its terms. Furthermore, the policy should outline procedures for notifying users of any material changes, ensuring ongoing consent and transparency.
Opt-Out Provision: Respecting user autonomy is paramount. A privacy policy should include provisions for users to opt out of data collection and processing activities. By providing clear instructions on how to do so, organizations empower users to assert control over their personal information.
Collection of Personal Information: The policy should detail the types of personal information collected and the methods used for its acquisition. Importantly, it should clarify that only information provided voluntarily or available in the public domain is collected, fostering transparency and user trust.
Use of Personal Information: The policy should articulate the purposes for which personal information is collected and used, ensuring alignment with specific organizational objectives. By providing clarity on data usage, organizations demonstrate transparency and accountability in their data practices.
Sharing Personal Information with Third Parties: Instances where personal information may be shared with third parties should be clearly delineated in the policy. By stipulating the conditions under which data is shared, organizations establish transparency and accountability in their data-sharing practices.
Use of Cookies: If cookies are used for enhancing user experience or analyzing site traffic, the policy should address their usage and implications for user privacy. By informing users about cookie management options, organizations empower users to make informed decisions about their privacy preferences.
Retention and Security of Personal Information: The policy should outline the organization’s approach to data retention and the security measures employed to protect user information. By reassuring users of robust security measures, organizations foster trust and confidence in their data handling practices.
International Data Transfer: If data processing involves international transfer, the policy should clarify the jurisdictions involved and the measures taken to ensure compliance with relevant laws and regulations. Transparent communication about data transfer practices enhances user trust and confidence.
Disclaimers and Limitations of Liability: The policy may include disclaimers regarding external links and user-contributed content, mitigating the organization’s liability for third-party actions. By setting clear boundaries, organizations minimize legal risks associated with user-generated content and external links.
User Rights: Users should be empowered with rights to access, rectify, and erase their personal information, as well as to withdraw consent and lodge complaints. The policy should pledge to facilitate the exercise of these rights while upholding legal obligations, fostering trust and accountability.
Grievance Officer: Designating a grievance officer to address user concerns and complaints promptly demonstrates the organization’s commitment to resolving privacy-related issues effectively. Providing a dedicated point of contact enhances accountability and transparency in conflict resolution.
Legal Compliance: In compliance with relevant legislation, such as the Digital Personal Data Protection Act of 2023, organizations should ensure that their privacy policy aligns with stipulated requirements for data protection and privacy. Adhering to legislative provisions enhances legal compliance and user trust in the organization’s data handling practices.
In conclusion, a comprehensive privacy policy plays a pivotal role in navigating the complexities of data protection and privacy regulation in the digital age. By prioritizing transparency, user consent, and data protection, organizations can foster trust, enhance user experiences, and maintain compliance with regulatory standards. In doing so, they uphold privacy as a fundamental right in the modern digital landscape.
The Reserve Bank of India issued the Reserve Bank of India (Outsourcing of Information Technology Services) Directions, 2023 (“Directions”), which have come into effect on and from October 1st, 2023 and are applicable to Schedule Commercial Bank including Foreign Banks located in India, Local Banks, Small Finance Banks, and Payments Banks but excluding Regional Rural Banks, Primary (Urban) Co-operative Banks excluding Tier 1 and Tier 2 Urban Co-operative Banks, Credit Information Companies (CICs), Non- Banking Financial Companies (“NBFCs”) but excluding Base Layer NBFCs and All India Financial Institutions (EXIM Bank, NABARD, NaBFID, NHB and SIDBI) (“REs”). It is essential to note that foreign banks operating in India through branch mode must interpret references to the ‘Board’ or ‘Board of Directors’ as pertaining to the head office or controlling office overseeing branch operations in India.
RETROSPECTIVE AND PROSPECTIVE EFFECT
Outsourcing Agreements
Particulars
Timelines
Existing Agreements
Due for renewal before October 1, 2023
Must comply with the Directions on the renewal date (preferably) but no later than April 9th, 2024.
Due for renewal on or after October 1, 2023
Must comply with the Directions on the renewal date or by April 9th, 2026, whichever is earlier.
New Agreements
Will come into force before October 1, 2023
Must comply with the Directions as on the effective date of the agreement (preferably) or by April 9th, 2024, whichever is earlier.
Will come into force on or after October 1, 2023
Must comply with the Directions from the effective date of the agreement.
APPLICABILITY
These Directions shall apply to Material Outsourcing of IT Services arrangements entered by the REs. The term “Material Outsourcing of IT Services” shall include any such services which:
(a) if disrupted or compromised will significantly impact the RE’s business operations; or
(b) may have material impact on the RE’s customers in the event of any unauthorised access, loss or theft of customer information.
The “Outsourced IT Services” will include the following:
S.No.
IT Services
Inclusions (not an exhaustive list)
1.
IT infrastructure management, maintenance and support (hardware, software or firmware)
Hardware/ Software installation and configuration, OS management, network setup and configuration, server management, data backup and recovery, technical support services, security management, performance monitoring and optimization, IT asset management and vendor management
2.
Network and security solutions, maintenance (hardware, software or firmware)
Firewall, IDS/IPS, VPN, NAC and WAF management, network monitoring and traffic analysis, patch management, security policy management and security audits and compliance
3.
Application Development, Maintenance and Testing; Application Service Providers (ASPs) including ATM Switch ASPs
Requirements analysis, application design and architecture, programming and development, software testing, bug fixing and maintenance, performance optimization, version development, application security and hosting, application development, integration and customization
4.
Services and operations related to Data Centres
Installation, setup, design, consulting, networking, security, compliance and auditing, maintenance and upgrades and server and storage management of Data Centres.
5.
Cloud Computing Services
SaaS, PaaS, IaaS, DBaaS, cloud storage, monitoring and management, cloud networking, IAM management and data analytics and machine learning
6.
Managed Security Services
Security monitoring and incident response, vulnerability management, security device management, security assessments and audits, security incident handling and forensics, security policy and governance and managed encryption services
7.
Management of IT infrastructure and technology services associated with payment system ecosystem
Payment Gateway management, merchant account management, fraud detection and prevention, payment processor management and infrastructure management
ROLES AND RESPONSIBILITIES OF THE REs
The guidelines underscore the critical responsibility of REs in overseeing outsourced activities. The Board and Senior Management bear ultimate accountability and must ensure that service providers adhere to the same standards and obligations as the REs themselves. To this end, REs are mandated to maintain a robust grievance redressal mechanism and compile an inventory of services provided by service providers.
Governance Framework: A comprehensive governance framework is essential for effective oversight of outsourcing activities. REs intending to outsource IT activities must formulate a board-approved IT outsourcing policy encompassing roles and responsibilities, selection criteria for service providers, risk assessment methodologies, disaster recovery plans, and termination processes. The Board is entrusted with approving policies and establishing administrative frameworks, while Senior Management is responsible for policy formulation and risk evaluation.
Evaluation and Engagement of Service Providers: Prior to engaging service providers, REs must conduct meticulous due diligence to assess their capabilities and suitability. Evaluation criteria should span qualitative, quantitative, financial, operational, legal, and reputational factors. The subsequent agreement between REs and service providers should be legally binding and encompass critical aspects such as service level agreements, data confidentiality, and liability clauses.
Risk Management: Mitigating risks associated with outsourcing activities requires a robust risk management framework. REs must identify, measure, mitigate, and manage risks comprehensively. Additionally, they are required to establish business continuity plans (BCP) and disaster recovery plans (DRP) to ensure uninterrupted operations during emergencies.
Monitoring and Control of Outsourced Activities: Maintaining effective oversight of outsourced IT activities is paramount for REs. Regular audits, performance monitoring, and periodic reviews of service providers are essential components of this oversight. Access to relevant data and business premises must be granted for oversight purposes.
Outsourcing within a Group / Conglomerate: While REs are permitted to outsource IT activities within their business group or conglomerate, they must ensure the adoption of appropriate policies and service level agreements. Maintaining an arm’s length relationship with group entities and adhering to identical risk management practices is imperative.
Cross-Border Outsourcing: Engaging service providers based in different jurisdictions necessitates a thorough understanding of associated risks. REs must closely monitor country risks, political, social, economic, and legal conditions, and ensure compliance with regulatory requirements. Contingency and exit strategies must be in place to mitigate potential disruptions.
Exit Strategy: Incorporating a clear exit strategy in outsourcing policies is essential for ensuring business continuity during and after termination of outsourcing arrangements. Alternative arrangements and procedures for data removal, transition, and cooperation between parties must be clearly defined.
EXCLUSIONS
The following services/ activities are excluded from the ambit of “Outsourcing IT Services” (non-exhaustive list):
Corporate Internet Banking services obtained by regulated entities as corporate customers/ sub members of another regulated entity
External audit such as Vulnerability Assessment/ Penetration Testing (VA/PT), Information Systems Audit, security review
SMS gateways (Bulk SMS service providers)
Procurement of IT hardware/ appliances
Acquisition of IT software/ product/ application (like CBS, database, security solutions, etc.,) on a licence or subscription basis and any enhancements made to such licensed third-party applications by its vendor (as upgrades) or on specific change requests made by the RE.
Any maintenance service (including security patches, bug fixes) for IT Infra or licensed products, provided by the Original Equipment Manufacturer (OEM) themselves, in order to ensure continued usage of the same by the RE.
Applications provided by financial sector regulators or institutions like CCIL, NSE, BSE, etc.
Platforms provided by entities like Reuters, Bloomberg, SWIFT, etc.
Any other off the shelf products (like anti-virus software, email solution, etc.,) subscribed to by the regulated entity wherein only a license is procured with no/ minimal customisation
Services obtained by a RE as a sub-member of a Centralised Payment Systems (CPS) from another RE
Business Correspondent (BC) services, payroll processing, statement printing
In addition to the above, certain vendors/ entities will not be considered as a third-party service provider for these Directions. A non-exhaustive list is provided below:
Vendors providing business services using IT. Example – BCs
Payment System Operators authorised by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 for setting up and operating Payment Systems in India
Partnership based Fintech firms such as those providing co-branded applications, service, products (would be considered under outsourcing of financial services)
Services of Fintech firms for data retrieval, data validation and verification services such as (list is not exhaustive): (a) bank statement analysis; (b) GST returns analysis; (c) fetching of vehicle information; (d) digital document execution; and (e) data entry and call centre services.
Telecom Service Providers from whom leased lines or other similar kind of infrastructure are availed and used for transmission of the data
Security/ Audit Consultants appointed for certification/ audit/ VA-PT related to IT infra/ IT services/ Information Security services in their role as independent third-party auditor/ consultant/ lead implementer.
The RBI’s IT Outsourcing Directions represent a significant regulatory milestone aimed at enhancing the resilience and integrity of IT outsourcing practices within the financial sector. By delineating clear roles, responsibilities, and standards, these guidelines seek to foster transparency, accountability, and risk mitigation in outsourcing arrangements. Compliance with these directives is essential for REs to maintain operational stability and safeguard customer interests in an increasingly digitalized financial landscape.
Phantom stock, also known as shadow stock, is a financial incentive mechanism designed for companies—especially those that are privately held—to reward selected employees with the benefits of stock ownership, without the actual transfer of company stock. This approach has been increasingly adopted by various firms aiming to compensate senior management and key employees, thus offering them a stake in the company’s future success without diluting the equity of existing shareholders.
By aligning the interests of employees with the goals of the company and its shareholders, phantom stock motivates employees to contribute actively to the company’s success. It works by granting participants “phantom shares” that mimic the performance of the company’s actual stock, thereby allowing employees to enjoy financial rewards parallel to those of shareholders. These rewards are typically doled out in cash or cash equivalents, based on the number of phantom units awarded and the stock’s price at the end of a vesting period.
This innovative compensation strategy not only incentivizes employees by tying their rewards directly to the company’s growth and success but also fosters a strong sense of ownership and dedication towards achieving corporate objectives. With its built-in vesting period, phantom stock encourages a long-term commitment, rewarding employees for their loyalty and contributions towards the company’s enduring success. As a strategic tool for retention and motivation in competitive markets, it presents a flexible solution for companies looking to customize their compensation plans to meet specific corporate goals, while also navigating the unique tax implications associated with such programs.
Why do Indians companies use phantom stock?
Companies in India are increasingly turning to phantom stock plans as a strategic tool for employee compensation, offering significant advantages both for the organization and its workforce.
Alignment of Interests: Phantom stock plans align employees’ interests with the company’s objectives, motivating them to work harder for the collective success of the organization.
Employee Loyalty: By feeling financially invested in the company’s future, employees are likely to develop a sense of loyalty, increasing their tenure with the firm to maximize their compensation through phantom stock.
Avoidance of Share Dilution: Companies opt for phantom stock plans when they wish to incentivize employees without issuing additional shares, thus avoiding dilution of existing shareholders’ equity.
Legal Flexibility: Phantom stock provides a viable alternative in situations where legal constraints might limit the issuance of actual equity to employees.
Merit-based Compensation: The allocation of phantom shares can be based on an employee’s role, seniority, and performance, promoting a culture of meritocracy within the organization.
Long-term Incentives: With payouts often scheduled over a period of years and possibly contingent upon reaching certain milestones, phantom stock plans incentivize long-term commitment and contribution to the company’s goals.
Types of phantom stocks in India
In the dynamic startup landscape, attracting and retaining top talent is crucial. To address this challenge, companies are increasingly turning to innovative compensation structures. Among these, phantom stock plans are gaining significant traction due to their versatility. This flexibility allows companies to design plans that cater to their specific needs, each with distinct mechanisms and advantages.
Full Value Phantom Stock Plans: Under this type, employees receive the full value of the stock at the time of payout, reflecting the stock’s appreciation from the grant date. For instance, if an employee receives phantom units corresponding to 100 shares at a grant price of ₹100 per share, and the stock price climbs to ₹150 per share at vesting, the employee would be entitled to a cash payout of ₹5,000 (₹150 – ₹100) multiplied by 100 units.
Appreciation Only Phantom Stock Plans: This type of plan focuses solely on the appreciation in the stock price, not the full value at the time of grant. Employees benefit solely from the increase in the stock price upon vesting. This structure proves advantageous for startups seeking to reward employees for their contribution to the company’s growth trajectory, while mitigating the initial financial burden associated with issuing full-value stock options.
How Phantom Stock Works?
Phantom stock plans offer a unique way for employees to gain the financial benefits of stock ownership without holding actual shares in the company. Through a formal agreement, employees are granted phantom stock units that mirror the performance of the company’s real stock. As the company’s stock value increases, so does the value of the phantom shares.
The key difference between phantom stock and traditional stock options lies in the nature of ownership and compensation. While stock options may lead to actual equity ownership upon exercise, phantom stock always results in cash compensation, without transferring any company shares to the employees. This mechanism benefits both the company, by avoiding equity dilution, and the employee, by offering a simplified and direct financial reward tied to the company’s performance.
Granting Units: Employees are awarded a specific number of phantom units. These units don’t translate to ownership rights in the company.
Vesting Schedule: A vesting schedule dictates when employees gain the right to receive the phantom stock payout. This period can range from a few years to the entirety of their employment.
Performance Metric: The most common performance measure is the stock price appreciation. Some plans might consider other factors like company profitability.
Payout Calculation: Upon vesting, the employee receives a cash payment based on the predetermined number of units multiplied by the difference between the grant price (stock price at the time of grant) and the exercise price (stock price at the time of vesting).
What is a Phantom Stock Agreement?
A phantom stock agreement is a legal contract between an employer and employee, allowing the latter to benefit from stock ownership perks without holding actual company shares. The agreement details how phantom shares track the company’s stock price and the process for calculating payouts. Importantly, these payouts don’t affect shareholder equity. This document acts as a guide for its execution and administration. Employees receive artificial shares that track the actual stock’s price movements, providing payouts from profits without affecting shareholder equity.
Phantom stock agreements are crucial for outlining plan terms and dispute resolution, ensuring a smooth experience for both companies and employees. These agreements act as a safety net, protecting both parties’ interests while adhering to best practices.
Clarity and Transparency: The agreement ensures clarity and transparency for both parties. Employees understand the conditions for earning a payout, and companies have a legal framework for managing the plan.
Dispute Resolution: A well-drafted agreement addresses potential issues and outlines dispute resolution mechanisms in case of disagreements.
Compliance with Regulations: Although India doesn’t have specific regulations governing phantom stock plans, the agreement ensures compliance with broad company and tax related laws and best practices.
Protection for Both Parties: The agreement defines expectations and safeguards the interests of both the company (financial management) and employees (benefit clarity).
Phantom Stock Plan vs Stock Option Plan
Feature
Phantom Stock Plan
Stock Option Plan (ESOP)
Ownership
Employee doesn’t own actual shares
Employee becomes a shareholder
Payout
Cash based on stock price appreciation
Owns company stock (potential for capital gains)
Cost to Employee
No upfront cost
May require exercise price payment
Company Cost
Cash payout at vesting/exit event
Lower upfront cost, potential dilution later
Risk for Employee
Lower – only benefits from appreciation
Higher – risk of stock price decline
Risk for Company
Higher – obligated to cash payout
Lower – no upfront cost, dilution risk
Focus
Aligns interests with company growth
Provides ownership & potential capital gains
Regulation (India)
No specific regulations
Governed by Companies Act & SEBI rules
Tax Implications
Yes, for both company & employee
Yes, for both company & employee
Legal Framework for Phantom Stocks in India
In India, the regulatory landscape for phantom stocks remains largely uncharted, with the concept still relatively novel and formal legal frameworks yet to be fully established. This ambiguity in regulation leaves companies navigating a somewhat grey area when implementing phantom stock plans as part of their compensation strategies.
The Companies Act of 2013, a cornerstone of corporate law in India, does not explicitly address phantom stocks, focusing instead on the rules and regulations governing the issuance of stock options. This silence leaves a gap in the legal framework for companies looking to offer phantom stocks, a mechanism that allows employees to benefit from the appreciation of the company’s stock without actually owning the shares.
SEBI (Securities and Exchange Board of India), the regulatory authority overseeing securities and commodity markets in India, offers guidance primarily to listed companies through its regulations. These rules, in conjunction with the Companies Act, provide a structure for issuing employee stock options and equity-settled SARs but stop short of covering non-equity financial incentives like phantom stocks for unlisted companies and startups.
However, an instance of informal guidance by SEBI in 2015 sheds some light on the regulatory stance towards phantom stocks. When Mindtree Limited sought clarification on SARs and Phantom Stock, SEBI indicated that its regulations would apply to an employee benefit scheme involving any form of securities dealing, subscription, or purchase, directly or indirectly. Since Mindtree’s phantom stock plan was based on cash payments reflecting share price appreciation without involving actual share transactions, SEBI’s regulations were deemed not applicable.
Tax Implications for Phantom Stocks in India
Navigating the tax implications of phantom stocks in India requires a nuanced understanding of the income tax landscape, particularly as it pertains to employee compensation. Phantom stocks present a unique case for taxation, distinguished by three pivotal events: the issuance, the fulfillment of conditions (vesting), and the redemption of the phantom stock.
Issuance of Phantom Stock: At the moment phantom stocks are issued to employees, they acquire merely the right to receive a future payment, contingent upon specific conditions being met. At the time of issuance and vesting, employees don’t incur any immediate tax liability. These stages establish the right to a future benefit but don’t involve actual income realization.
Vesting of Phantom Stock: As the conditions preset in the phantom stock plan are fulfilled over time, the employee’s right to the future payment is reaffirmed. However, similar to the issuance phase, the vesting event does not initiate a tax event for the employee. The vesting merely solidifies the employee’s claim to future payment under the plan, without any real-time financial transaction or income realization occurring.
Redemption of Phantom Stock: The taxation dynamics shift significantly upon the redemption of phantom stock. It is at this juncture that the employee receives a cash payout, either reflecting the full value of the stock or the appreciation in stock value, depending on the plan’s structure. This payout is taxable in the hands of the employee as perquisites, falling under the income from salaries category. This is the point at which the tax implications come into full effect, with the amount received being subject to the prevailing income tax rates applicable to the employee’s total income. The taxation dynamics shift upon redemption, when employees receive a cash payout. This payout is taxable as perquisites under income from salaries and subject to the prevailing income tax rates applicable to the employee’s total income.
For employers, the primary tax obligation concerns deducting TDS (Tax Deducted at Source) at the applicable rates on payouts, following income from salaries provisions. Beyond this, there are no specific tax liabilities imposed on the company in relation to the phantom stock payouts.
Pros and Cons of Phantom Stock
Phantom stock can be a tempting incentive, but it’s important to understand both the potential rewards and drawbacks before diving in.
Pros:
Broad Applicability: Phantom stock works for both public and private companies, offering greater flexibility than traditional stock options.
Alignment with Growth: The rewards arising out of phantom stocks directly tied to the company’s success, incentivizing the employee to contribute to its company’s growth.
No Dilution: Phantom stock doesn’t affect the company’s ownership structure, unlike traditional options.
Cons:
Performance-Dependent: The benefit is directly dependent on the increased performance, hence the cumulative growth of a company as an organization is necessary for an individual to receive benefits such as phantom stocks.
No Ownership Rights: Employees don’t become shareholders and don’t receive voting rights or dividends associated with actual stock ownership.
Cash Flow Concerns: Cash-strapped startups may struggle to meet payout obligations in the future.
Conclusion
In conclusion, phantom stock represents a strategic and flexible compensation tool within the Indian corporate landscape, offering companies a novel way to align employees’ interests with organizational growth without diluting equity. While the regulatory framework remains underdeveloped, the concept has gained traction among Indian companies, from startups to established corporations, due to its ability to incentivize key employees effectively. The tax implications and legal nuances of phantom stock require careful navigation, but the benefits, including enhanced employee loyalty and performance, make it an increasingly popular choice. As the Indian market evolves, it’s likely that we’ll see a more defined regulatory and legal framework emerge, further solidifying phantom stock’s role in the broader compensation strategy of Indian businesses.
Frequently Asked Questions (FAQs) on Phantom Stocks in India
Q: What are Phantom Stocks in India? A: Phantom stocks, also known as shadow stock, are a form of equity incentive plan. They offer employees a cash payment based on the company’s stock price performance without granting actual ownership of shares. Think of them as mimicking real stocks, but with cash settlements.
Q: How do Phantom Stock Units (PSU) work in India? A: Companies grant PSUs to employees, specifying a number of units and a vesting period. These units are linked to the company’s stock price. Upon vesting, employees receive a cash payout equal to the appreciation (increase) in the stock price multiplied by the number of PSUs.
Q: What are the tax implications of Phantom Stocks in India? A: The cash payout received from vested PSUs is considered income and taxed accordingly. The company can claim a tax deduction for the cash paid out to employees. It’s advisable to consult a tax advisor for specific details.
Q: Are Phantom Stocks beneficial for employees in India? A: Yes, phantom stocks can be attractive for employees. They offer a chance to benefit from the company’s growth without the risks associated with owning stock directly. However, they don’t grant voting rights or dividends like actual shares.
Q: Are Phantom Stocks the same as Stock Options in India? A: No, phantom stocks and stock options are different. Stock options grant the right to buy company shares at a predetermined price within a specific timeframe. With phantom stocks, employees receive cash based on stock price performance, not ownership.
Q: How are Phantom Stocks valued in India? A: The value of a PSU is determined by multiplying the number of units by the difference between the grant price (stock price when PSUs were issued) and the fair market value of the company’s stock on the vesting date.
Q: What are the accounting standards for Phantom Stocks in India? A: Indian Accounting Standards (Ind AS) don’t have specific guidelines for phantom stocks. However, companies typically follow Ind AS 102 (“Share Based Payment”) for accounting purposes.
Q: What are the legal considerations for issuing Phantom Stocks in India? A: Companies should have a formal Phantom Stock Plan policy/agreement outlining terms, conditions, and employee eligibility for issuing Phantom Stocks in India.
In the ever-evolving landscape of innovation, intellectual property rights (IPR) serve as the cornerstone of creativity and progress. It’s the shield that protects original ideas, inventions, and brand identity, to reap the rewards of one’s hard work and rightfully enjoy the reputational credit of being the first, original creator of a certain intangible property.
India’s decision to be a signatory to international intellectual property conventions, like the Berne Convention for the Protection of Literary and Artistic Works and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), signifies its commitment to upholding a global framework for protecting creativity and innovation. These conventions establish a set of rules and minimum standards that member countries, including India, agree to implement within their legal systems.
This article aims to explain Difference between Copyrights, Trademarks and Patents and their associated legal intricacies which are the three most widely implemented types of intellectual property protection. From safeguarding original works of authorship to securing exclusive rights for groundbreaking inventions, and establishing a recognizable brand identity, this research article will equip you to choose the most effective form of IP protection for the specific needs of your creation.
What is Intellectual Property?
Intellectual property (IP) refers to creations of the mind. These creations are intangible, meaning they can’t be physically held and can include inventions; literary and artistic works; designs; and symbols, names, and images used in commerce, as defined by the World Intellectual Property Organization (WIPO). Intellectual property rights (IPR) serve as the cornerstone for fostering innovation and creativity across various industries, by providing legal protection to inventors, creators, and businesses for their unique ideas and creations. The importance of intellectual property rights lies in their ability to promote a fair competitive environment, encouraging the development of new technologies, artistic expressions, and brands. By securing exclusive rights to use, share, and monetize their creations, individuals and companies are incentivized to invest in research and development, leading to economic growth and the advancement of human knowledge.
A)Types of Intellectual Property: The most common types of Intellectual Property Rights (IPR) include:
Copyright: Protects original works of authorship like books, music, software, and artistic designs.
Patents: Grants exclusive rights for new and inventive products or processes.
Trademarks: Distinguishes the source of goods or services, allowing consumers to identify a particular brand.
Trade secrets: Confidential information that provides a competitive advantage, such as a unique formula or manufacturing process.
B)Importance of Intellectual Property: IPR protection plays a vital role in:
Protects Innovation and Creativity: IPR incentivizes people to create new things by giving them control over their inventions, designs, and creative works. Knowing their work is protected encourages investment in research and development, which fosters innovation.
Competitive Advantage: IPR can be a significant source of competitive advantage for businesses. A unique product design protected by a trademark or a groundbreaking invention with a patent can set a business apart from competitors.
Monetization: IPR can be a way to generate income. Owners can license their rights to others for a fee, or they can sell their rights altogether. This can be a valuable revenue stream for individuals and businesses.
Builds Brand Reputation: Strong trademarks can help build brand recognition and customer loyalty. Customers associate a trademark with a certain level of quality and trust, and IPR helps ensure that only the authorized owner can use that mark.
Promotes Fair Trade: IPR enforcement helps prevent counterfeiting and piracy. This protects consumers from getting lower-quality goods and helps ensure that creators are fairly compensated for their work.
The meaning of copyright is mentioned under the Indian Copyright Act, 1957 (hereinafter ‘Copyright Act’) in Section 14 which essentially states that exclusive rights are granted to the owner of a copyright.
Section 14:Meaning of copyright – This section defines the exclusive rights granted to copyright owners. These rights typically include reproduction, distribution, public performance, and adaptation of the copyrighted work.
Section 13:Acts not infringing copyright – This section outlines certain actions that don’t constitute copyright infringement. These may include fair dealing for purposes like research, criticism, or review.
Sections 15-21:Deal with specific rights and limitations – These sections cover various aspects of copyright ownership and limitations on those rights. They delve deeper into specific rights for certain types of creative works, like cinematograph films, sound recordings, and performer’s rights.
What are the rights protected under copyright?
Here are the main types of rights protected by copyright:
Reproduction rights: This allows the copyright owner to control how their work is copied, whether in physical form (printing a book) or digital form (downloading music).
Distribution rights: This grants the copyright owner control over how copies of their work are distributed to the public. This could include selling books, distributing movies, or making music available online.
Public performance or communication rights: The copyright owner controls how their work is performed or communicated to the public. This could involve public readings of a book, screenings of a film, or online transmissions of music.
Adaptation rights: This allows the copyright owner to control the creation of derivative works based on their original work. This could include translations, adaptations for films, or other modifications.
Copyright primarily protects two main categories of rights: economic rights and moral rights.
Economic rights These are the exclusive rights that allow the copyright owner to financially benefit from their work. They encompass the reproduction, distribution, public performance, and adaptation rights as mentioned earlier.
Moral rights Moral rights are distinct. These rights are personal and non-economic. They protect the creator’s non-financial interests in their work: a) The right of attribution: This ensures the creator is identified as the author of the work. b) The right of integrity: This allows the creator to object to any distortion or modification of their work that could damage their reputation.
Moral rights are separate from economic rights and continue to belong to the author and cannot be transferred or sold. They remain with the creator even if they assign their economic rights to someone else.
What does copyright include?
The Copyright Act protects original expressions in various creative works. Section 13 of the Act specifies the types of works that can be copyrighted:
Literary works: This includes written materials like books, articles, poems, scripts, computer programs, and compilations like databases.
Dramatic works: Plays, screenplays, and other works intended for performance fall under this category.
Musical works: Original musical compositions, with or without lyrics, are protected.
Artistic works: This broad category encompasses paintings, sculptures, drawings, photographs, architectural works, and any other artistic creations.
Cinematograph films: Movies and films are included in this section.
Sound recordings: Recordings of music, speeches, or other sounds are protected. It’s important to note that copyright protects the original form of expression in these works, not the ideas themselves.
What is not protected under copyright?
While the Copyright Act safeguards creative expression, it doesn’t encompass everything under the sun. This law grants copyright protection to specific categories of original works. Let’s delve into what elements fall outside the scope of copyright. Here’s a list of things that generally fall outside the copyright ambit:
Ideas, concepts, and methods: Copyright protects the way something is expressed, not the underlying idea, concept, or method itself. For instance, the concept of a love story cannot be copyrighted, but the specific expression of that story in a novel can be.
Facts and information: Factual information, common knowledge, and news items are not copyrightable.
Short phrases, names, and titles: Copyright doesn’t typically protect short phrases like slogans, names, titles, or common expressions.
Official documents and symbols: Government reports, emblems, and other official documents are not protected by copyright. Simple formats and arrangements: Standard calendars, height and weight charts, or phone directory layouts wouldn’t be copyrightable.
Works that haven’t been fixed in a tangible form: Copyright protects things that are expressed in a physical or digital medium. Improv comedy or a speech wouldn’t be protected until written down or recorded.
Public domain works: Works whose copyright term has expired or that were never copyrighted in the first place fall into the public domain and can be freely used by anyone.
Benefits of Copyright
Copyright offers several benefits that incentivize creativity and protect the rights of creators. Here are some key advantages:
Encourages Creativity: Copyright grants creators exclusive control and the potential for financial gain from their work. This incentive fuels the creation of new and original works across various fields.
Protects Investment: The creative process often requires substantial time, effort, and resources. Copyright safeguards these investments by allowing creators to control how their work is used and potentially earn royalties or licensing fees.
Fair Compensation: Copyright ensures creators are fairly compensated for their work. They control commercial use and can choose to license their work for a fee or sell copies directly.
Builds Brand Reputation: Strong copyright protection allows creators to manage how their work is presented to the public. This helps them build and maintain a positive reputation associated with their brand or style.
Promotes Innovation: Copyright protection extends to areas like software and computer programs. This incentivizes investment in research and development, fostering innovation that benefits society as a whole.
Duration of Copyright
Copyright protection in India grants creators a set time frame of exclusive rights over their original works. The duration of copyright protection varies depending on the type of work:
Literary, Dramatic, Musical, and Artistic Works: For these works, copyright protection lasts for the lifetime of the author plus 60 years from the year following the author’s death. If the work is created by multiple authors (joint authorship), the duration is 60 years from the death of the last surviving author.
Cinematograph Films, Sound Recordings, Photographs: The copyright term for these works is 60 years from the year of their publication. For unpublished works in these categories, the duration is 60 years from the year of creation.
Posthumous Publications, Anonymous and Pseudonymous Publications: These works are protected for 60 years from the year of their publication.
Works of Government and Works of International Organizations: These works have a copyright term of 60 years from the year of their publication.
Section 22 of the Indian Copyright Act focuses on the term of copyright for published literary, dramatic, musical, and artistic works. Here’s a breakdown of what it says:
General Rule: Copyright in these types of works subsists during the lifetime of the author and for 60 years after the beginning of the calendar year following the year in which the author dies. In simpler terms, the copyright protection for these works lasts for the author’s lifetime plus 60 years after their death.
Joint Authorship: The explanation included in Section 22 clarifies that for works with multiple authors (joint authorship), the 60-year period starts after the death of the last surviving author. So, if a book is written by two authors and one passes away in 2020, copyright protection continues until 2080 (60 years after the second author’s death, assuming they die in 2040).
Fair Use Doctrine
The Copyright Act, 1957, recognizes the concept of fair dealing, a crucial doctrine that carves out exceptions to copyright infringement. This doctrine allows for the limited use of copyrighted material without the copyright holder’s permission, fostering a balance between protecting creators’ rights and enabling public access to information. Section 52 of the Act lays the groundwork for fair dealing. It specifies that “fair dealing with any literary, dramatic, musical or artistic work for private use, research, criticism or review, whether of that work or any other work” shall not constitute copyright infringement. The Act, however, doesn’t provide a rigid definition of “fair dealing.”
In the judicial pronouncement of, Folsom vs Marsh, the doctrine of fair use emerged for the first time in the USA, wherein, Justice Story set forth the following four factors to determine a work to be of Fair Use, which later went to be codified under the Copyright Act, 1976:
“The nature and objects of the selections made;
The nature of the original work;
The amount is taken; and
The degree in which the use may prejudice the sale, or diminish the profits, or supersede the objects, of the original work.”
It was through the Copyright (Amendment) Act, 2012 that fair dealing as a concept brought within its scope musical recordings and cinematograph films, as laid down in the ruling of India TV Independent News Services Pvt. Ltd. vs Yashraj Films Pvt. Ltd. This case established a crucial precedent for fair use of copyrighted material in India, particularly for news reporting, criticism, and commentary. It allows for limited use of excerpts from musical recordings and films without permission from the copyright holder, as long as the use falls under the fair dealing ambit.
Landmark Cases & Judgements in India concerning Copyrights
1)Super Cassettes Industries Limited vs Google and YouTube (2008): This case addressed the issue of online copyright infringement. The court held that online platforms like YouTube have a duty to take down infringing content if they are notified by the copyright owner. This case played a significant role in shaping the online copyright landscape in India.
2)R.G. Anand vs. Deluxe Films and Ors. (1978):This case established the principle that copyright protects the expression of ideas, not the ideas themselves. The plaintiff, a playwriter, sued a film producer for copyright infringement because the film’s plot was similar to his play. The court ruled that while the themes might be similar, the way they were expressed in the play and film were distinct.
3)Ratna Sagar (P) Ltd. vs. Trisea Publications and Ors. (1996): This case dealt with copyright infringement of children’s educational books. The court ruled that copying the substantial and original elements of the book’s layout, illustrations, and content constituted copyright infringement. This case highlighted the protection extended to creative elements beyond just the text in a work.
4)Shree Venkatesh Films Pvt. Ltd. vs. Vipul Amrutlal Shah and Ors. (2009):This case involved a dispute over the copyright of the iconic Hindi film dialogue “Mogambo khush hua” (Mogambo is pleased). The court ruled that short phrases or slogans might not be protected by copyright on their own, but they could be protected if they are unique and distinctive elements within a larger copyrighted work (the film in this case).
What is a Trademark?
A trademark ™ is a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others.It can include the shape of goods, their packaging, and combinations of colors. In other words, trademarks can be almost anything that distinguishes the products and/or services from others and signifies their sources. Brand names, taglines, and logos are some examples.
The definition of a trademark according to the Trademark Act, 1999 of India (hereinafter ‘Trademark Act’) is provided in Section 2(zb). It states: “trademark means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include the shape of goods, their packaging, and combination of colors.”
Breaking down the definition, following are the the key elements:
capable of being represented graphically;
capable of distinguishing the goods or services of one person from those of others;
may include the shape of goods, their packaging, and combinations of colors.
Under the Trademark Act, the word “mark” is defined under Section 2(1)(i)(V)(m) as “a device, brand, heading, label, ticket, name, signature, word, letter, numeral”. The term “Mark” under the Act also includes the shape of goods, packaging, or combination of colors or any other type of combination.
What does a trademark protect?
A trademark protects various elements that act as identifiers for your brand, not the product or service itself. Following are the aspects that are covered under the umbrella protection of trademark:
Logos, Symbols, and Designs: This is the most common type of trademark. It encompasses logos, symbols, or even unique product designs that visually represent your brand. For instance, the swoosh symbol identifies Nike and the golden arches represent McDonald’s. Registering these visual elements as trademarks prevents competitors from using confusingly similar designs that could mislead consumers.
Words, Phrases, and Slogans: Catchy brand names, slogans, or even short phrases can be registered as trademarks. Think of “Just Do It” by Nike or “Melts in Your Mouth, Not in Your Hand” by M&M’s. Trademark registration protects these unique word combinations and ensures they’re solely associated with your brand.
Sounds and Audio Elements: While less common, distinctive sounds or audio elements associated with a brand can also be trademarked. For example, the MGM lion’s roar or the Netflix startup sound are registered trademarks that instantly bring a brand to mind.
Packaging and Color Combinations: The unique design or color scheme of your product packaging can be protected as a trademark if it’s distinctive enough to identify your brand. For instance, the distinctive yellow color of BIC pens or the Tiffany blue packaging are registered trademarks.
What is not protected under trademark?
However, there are certain categories of marks that generally cannot be registered as trademarks:
Generic Terms: Words or phrases that have become synonymous with the product or service itself cannot be trademarked. For instance, “computer” or “running shoes” wouldn’t be protectable trademarks because they are generic terms for those products.
Descriptive Marks: Marks that merely describe the qualities, ingredients, functions, or characteristics of the product or service are not registrable. For example, “shiny shoes” for footwear or “long-lasting battery” for a mobile phone wouldn’t qualify as trademarks.
Deceptive or Misleading Marks: Marks that could mislead consumers about the nature, place of origin, or qualities of the product or service cannot be registered. For instance, a trademark for woolen clothing depicting a tropical island would be considered deceptive.
Immoral or Scandalous Marks: Marks that are considered offensive, indecent, or against public morality cannot be registered. The Trademark Office would likely reject such applications.
Marks Lacking Distinctiveness: Marks that are too common, generic, or lack any inherent distinctiveness wouldn’t be registrable. For example, a simple geometric shape or a common letter wouldn’t qualify as a trademark unless it has acquired distinctiveness through use in association with a specific brand.
Flags and Emblems: The use of national flags, emblems, or official symbols is restricted and cannot be registered as trademarks without proper authorization from the relevant authorities.
Types of Trademark
The Trademark Act serves as the foundation for protecting and registering trademarks in India. While the Trademark Act doesn’t explicitly categorize types of trademarks, the following are the most common types categorized based on their utility:
Product Marks: Product marks represent the brand name, logo, or symbol associated with a specific product. They are the first point of contact for consumers, helping them identify the source and quality of the goods. Examples: The iconic Apple logo instantly identifies Apple smartphones and computers.
Service Marks: Service Marks act as identifiers in a world of intangible offerings, allowing consumers to choose between various service providers. Examples: Think of “Uber” for ride-hailing services or “FedEx” for delivery services. These service marks help consumers differentiate between different transportation options available.
Collective Marks: Collective marks are used by a group of entities, typically an association or organization, to identify their members or the goods or services offered by its members. Examples: A prominent example in India is the “Khadi Mark” used by certified producers of khadi fabric. This mark signifies that the fabric adheres to specific production methods and ethical practices promoted by the Khadi and Village Industries Commission.
Certification Marks: Certification marks act as a seal of approval for certain characteristics of a product or service. They function as independent third-party endorsements, assuring consumers that the product or service meets specific quality standards. Examples: The ISI mark (Bureau of Indian Standards) is a well-known certification mark in India. It signifies that a product has undergone rigorous testing and meets established quality standards.
Shape Marks: The Trademark Act allows for the registration of the shape of goods or their packaging as a trademark if it’s distinctive enough to identify the source. This opens doors for creative branding strategies that go beyond traditional logos and symbols. Examples: The bottle shape of Coca-Cola or the triangular Toblerone chocolate packaging. These unique shapes have become synonymous with the respective brands, allowing for instant recognition on store shelves.
Sound Marks: While less common, distinctive sounds or audio elements associated with a brand can be registered as trademarks in India. This allows businesses to leverage the power of sound to create a unique brand identity. Examples: Imagine the iconic MGM lion’s roar before a movie or the familiar Netflix startup sound.
Benefits of Trademark Protection
Trademark protection under the Trademark Act offers a multitude of benefits for businesses, fostering brand growth and safeguarding their hard-earned reputation. Here are some key advantages to consider:
Brand Protection: Trademark registration prevents competitors from using confusingly similar marks that could mislead consumers and dilute your brand’s reputation. This ensures your brand identity is protected.
Builds Brand Recognition: A strong trademark becomes synonymous with the quality and trust associated with your brand. Consumers can easily recognize your trademark and rely on it when making purchasing decisions.
Controls Brand Image: Trademark protection allows you to control how your brand is presented to the public. This ensures consistency and prevents unauthorized use that could damage your brand’s image.
Market Differentiation: A unique and well-protected trademark sets your brand apart from competitors. It allows you to establish a distinct market presence and attract customers seeking a specific brand experience.
Legal Action: Trademark registration provides a legal basis for taking action against infringers. This can involve stopping the infringement, seeking compensation for damages, and recovering attorney fees. It strengthens your legal position and deters counterfeiting.
Trademark Duration
Unlike copyright, trademarks in India don’t have a set expiration date. However, they require renewal every 10 years to maintain exclusive rights. Here’s a breakdown of how trademark duration works in India:
Initial Registration: A trademark registration in India is valid for 10 years from the date of filing.
Renewal: To maintain exclusive rights after the initial 10 years, the trademark needs to be renewed every 10 years. Renewal applications can be submitted within six months before the current registration expires or six months after the expiry date with an additional fee.
Indefinite Protection: As long as a trademark is properly renewed and in use, it can be protected indefinitely.
Landmark Cases & Judgements in India concerning Trademarks
1)McDonalds Corporation & Ors vs. Supermac’s Restaurants Ltd. & Ors (1996): This case dealt with the concept of distinctiveness in trademarks. McDonalds sued a fast-food chain named “Supermac’s” for trademark infringement. The court ruled that while “Supermac” was similar to “McDonald’s,” it wasn’t deceptively similar due to the addition of the “‘s” This case highlights the importance of considering the degree of similarity and the likelihood of consumer confusion while evaluating trademark infringement.
2)Britannia Industries Ltd. vs. Hindustan Lever Ltd. (1995): This case centered around the concept of descriptive marks. Britannia Industries, known for their “50-50” biscuits, sued Hindustan Lever for using “Treat” in their biscuit brand name “Treat Perfect.” The court ruled that “Treat” was a descriptive term for a biscuit and couldn’t be exclusively owned by any brand. This case emphasizes the limitations on registering generic or descriptive terms as trademarks.
3)Cadila Health Care Ltd. vs. Zydus Cadila Ltd. (2008): This case dealt with the concept of deceptive similarity. The court ruled that even slight similarities in trademarks can lead to confusion if the products are closely related. In this case, “Cadila” for pharmaceuticals could mislead consumers regarding the source of the drugs.
4)RK Cables vs. DG Cables (2009): This case emphasized the importance of distinctiveness in trademarks. The court ruled that a combination of weak elements (like common words) wouldn’t be a strong trademark because it lacked the necessary distinctiveness to identify the source.
5)Havmor Ice Cream Ltd. vs. Arjun Ice Cream Pvt. Ltd. (2010): This case addressed the concept of passing off. The court ruled that even if a mark isn’t registered, a company can still take action if a competitor’s mark is so similar that it deceives consumers into believing they are purchasing the well-known brand’s product.
What is a Patent?
A patent (Pat.) is an exclusive right for an invention provided by the law for a limited time to an inventor or their legal representatives. By patenting an invention, the patentee can control the making, using, selling, or importing of the patented product or process for producing that product without his/her consent.
The Indian Patents Act, 1970 (hereinafter ‘Patent Act’), defines a patent under Section 2(m) as: “patent” means a patent for any invention granted under this Act.
Patentability and Non-Patentability of Inventions
The Patents Act defines a patentable invention as one that fulfills three key criteria:
Novelty (Section 2(1)(d)): The invention must be new and not have been disclosed to the public anywhere in the world before the patent application date. This includes: Public knowledge or use description in printed publications; prior filing of a patent application for the same invention. Disclosures made by the inventor within one year before filing don’t necessarily preclude patentability.
Inventive Step (Section 2(1)(ja)): The invention must not be obvious to a person skilled in the art (someone with knowledge in the relevant field). It should involve a non-trivial technical advancement over existing knowledge.
Industrial Applicability (Section 2(1)(g)): The invention must be capable of being produced or used in an industry. This means it should have practical use and be capable of being manufactured or implemented using readily available technologies.
An invention must fulfill all three requisites – novelty, inventive step, and industrial applicability – to be considered patentable under the Patents Act. The onus of proving these requirements lies with the applicant.
What all can be Patented?
The Act also specifies various categories of inventions that can be patented, including:
New products or processes – Machines, articles of manufacture, compositions of matter, or processes for producing them, as long as they meet the criteria of novelty, inventive step, and industrial application (Section 2(j)).
Improvements to existing products or processes – Improvements to existing inventions can also be patentable if they meet the aforementioned criteria (Section 2(j)).
Machines, apparatus, and methods of manufacture
Computer software (subject to certain conditions)
What all cannot be patented?
While patents encourage innovation, there are certain categories of inventions that are excluded from protection. These exclusions ensure that fundamental principles and abstract ideas remain freely available for further innovation. Here are some key categories of non-patentable inventions:
Discoveries: Simply discovering a new scientific principle or phenomenon wouldn’t qualify for a patent.
Scientific theories: Abstract theories or mathematical methods are not patentable.
Mere juxtaposition of known devices: Combining existing devices in a known way without any inventive step wouldn’t be patentable.
Schemes, rules, and methods for performing mental acts, playing games, or doing business: Business methods or algorithms in their abstract form are not patentable.
Plants and animals (other than microorganisms): Naturally occurring plants and animals cannot be patented. However, new varieties of plants or genetically modified organisms might be patentable under specific conditions.
Methods for the treatment of human beings or animals: Medical and surgical procedures cannot be patented. However, inventions related to medical devices or pharmaceuticals might be patentable.
Immoral or scandalous inventions: Inventions that are deemed offensive or against public order are not patentable.
Types of Patents
The Patents Act doesn’t explicitly categorize patents into different types. However, based on the nature of the invention and the provisions within the Act, we can identify two main categories:
Utility Patents: This is the most common type of patent in India and covers new inventions, involves an inventive step, and is capable of industrial application (as defined in Section 2(j) of the Act). These patents protect the functionality of an invention, encompassing:
Machines (e.g., a new engine design) Articles of manufacture (e.g., a unique type of packaging) Compositions of matter (e.g., a new chemical formula)
Processes for producing these products (e.g., a method for manufacturing a specific material) Utility patents are the workhorses of the patent system, granting inventors exclusive rights to prevent others from making, using, selling, offering to sell, or importing their invention for a specific period (typically 20 years from the filing date).
Patent of Addition: This is a special type of patent used to protect improvements or modifications made to an existing invention that is already covered by a granted utility patent. The main invention must have a valid utility patent in place, and the improvement must be directly related to the original invention. The term of a patent of addition expires along with the term of the original utility patent to which it relates.
Patent Duration
The duration of a patent in India depends on the type of patent:
Utility Patent: The most common type of patent in India, a utility patent grants exclusive rights for 20 years from the date of filing the application.
Patent of Addition: This special type of patent protects improvements on an existing utility patent. The duration of a patent of addition is tied to the original utility patent. It expires along with the original patent, not necessarily after 20 years from filing the addition.
Landmark Cases & Judgements in India involving Patents
Novartis AG & Ors vs. Union of India & Ors (2013)
This landmark case in 2013 centered on a dispute regarding the patentability of a new form (polymorph) of an existing medication.
Novartis, a pharmaceutical company, challenged the Indian government’s rejection of their patent application for a specific form of a known drug.
The Supreme Court of India issued a critical judgment, establishing a stricter standard for granting patents in the pharmaceutical industry.
The court ruled that simply creating a new form (polymorph) of an existing drug wouldn’t be sufficient for a patent. The new form must demonstrate a significant improvement in effectiveness (efficacy) to be considered a patentable invention.
This decision aimed to strike a balance between encouraging innovation in drug development and ensuring access to affordable medicines for the public.
F. Hoffmann-La Roche Ltd vs Cipla Ltd. (2008)
This case decided in 2008, marked a significant turning point for patent litigation in India, particularly concerning pharmaceutical products.
Following the introduction of product patents for pharmaceuticals in 2005, this case was the first major legal dispute related to such patents.
F. Hoffmann-La Roche Ltd., a pharmaceutical giant, sued Cipla Ltd., a leading Indian generic drug manufacturer, for allegedly infringing their patent on the anti-cancer drug Erlotinib.
The Delhi High Court, while acknowledging the validity of Roche’s patent, delivered a nuanced judgment.
The court recognized the importance of intellectual property rights but also emphasized the need to consider public health concerns, such as ensuring the availability of affordable medicines, when dealing with patents for life-saving drugs.
Copyright vs Trademark vs Patent
Here are the core differences between copyright, trademark and patent –
Feature
Copyright
Trademark
Patent
Governed Under
The Copyright Act, 1957
Trademark Act, 1999
The Patent Act, 1970
Protects
Original works of authorship (literary, artistic, musical, cinematographic, and sound recordings)
Distinctive signs that identify a source of goods/services
New and inventive products, processes, or methods
Grants Exclusive Right
To reproduce, distribute, adapt, perform, or display the copyrighted work
To control the use of the trademark and prevent others from using confusingly similar marks
To prevent others from making, using, selling, importing, or exporting the invention for a limited period.
Duration of Protection
Generally lasts for the author’s lifetime + 60 years after their death (automatic upon creation)
Can be protected indefinitely as long as the mark is used and renewed every 10 years.
Typically 20 years from the date of filing (no renewal required)
Focus
Originality and expression of ideas
Distinctiveness and consumer identification of the source
Novelty, inventive step, and industrial applicability
Registration
Not required for copyright protection, but registration offers benefits (e.g., easier enforcement)
Recommended for stronger legal protection and enforcement
Required to obtain exclusive rights and enforce protection.
New drug formula, manufacturing process, software, integrated circuit layout
Additional Points
* Copyright protects the expression of an idea, not the idea itself.
* Trademarks can be words, symbols, designs, or sounds, or combinations of these.
* Patents can be utility patents (functional inventions), design patents (appearance of an article), or plant patents (new varieties of plants).
Common FAQs on Copyrights, Trademarks and Parents
1. Q: What is copyright protection in India?
A: Copyright safeguards your original creative work, like a song or painting, from being copied by others in India. It grants you exclusive rights for your lifetime + 60 years.
2. Q: Do I need to register copyright in India?
A: Copyright protection arises automatically upon creation. However, registering with the Copyright Office offers benefits like easier enforcement in case of infringement.
3. Q: What can be trademarked in India?
A: You can trademark logos, brand names, slogans, or even product packaging designs in India. It safeguards your unique identifier from being used by competitors.
4. Q: Is trademark registration mandatory in India?
A: While not compulsory, registering your trademark strengthens legal protection and allows you to take legal action against infringement more effectively.
5. Q: What is patentable in India?
A: You can patent new inventions or processes in India, as long as they are novel, inventive, and have industrial application. This protects your innovation for 20 years.
6. Q: How much does a patent cost in India?
A: Patent filing fees in India vary depending on the complexity of the invention. The Indian Patent Office website provides a fee calculator for estimates https://www.ipindia.gov.in/.
7. Q: What are some trending copyright issues in India?
A: Copyright issues related to online content sharing and piracy are gaining attention in India. The government is actively working on strengthening copyright laws.
8. Q: Are there any government resources for IPR in India?
A: Yes, the Indian Patent Office (IPO) is a valuable resource for information and registration processes related to patents, trademarks, and copyrights https://www.ipindia.gov.in/.
9. Q: How long is a trademark valid in India?
A: Trademarks in India can be protected indefinitely as long as they are actively used and renewed every 10 years. Non-use for five years can lead to revocation.
10. Q: What are the benefits of registering a trademark in India?
A: Trademark registration strengthens your brand identity, deters imitation, and allows you to sue for infringement. It also helps establish ownership in case of disputes.
11. Q: Can an idea be patented in India?
A: No, ideas alone cannot be patented in India. The invention must be a concrete product, process, or design that meets specific criteria for novelty and functionality.
12. Q: What happens after a patent expires in India?
A: Once a patent expires in India (typically 20 years), the invention becomes public domain and anyone can use it without permission.
