SEBI Notifies modifications to Master Circular on Anti-Money Laundering/Combating the Financing of Terrorism

On Wednesday, 12^th March, 2014, Securities and Exchange Board of India (“SEBI”) has notified a circular through which the Master Circular on Anti Money Laundering (AML) Standards/ Combating the Financing of Terrorism (CFT), issued on December 31, 2010 (“Master Circular”), has been modified. The circular, issued in view of the amendments to the Prevention of Money-laundering Act, 2002 (“PML Act”) and related rules, has modified the obligations of intermediaries with respect to risk assessment, recording keeping requirement etc. Following points provide a brief overview of the modifications, as stipulated under the circular:

1.Risk Assessment: In clause 5 (Client Due Diligence), Part II (Detailed Directives), of the Master Circular, a new sub-clause (5.3.2.) has been inserted which requires the registered intermediaries to carry out risk assessment for mitigating its money laundering and terrorist financing risk w.r.t. its clients, countries or geographical area etc. The risk assessment, carried out by the concerned intermediary, shall be updated regularly.

2.Reliance on Third Party for carrying out Client Due Diligence (“CDD”): Again in clause 5, Part II, of the Master Circular, a new sub-clause (5.6) has been inserted to allow registered intermediaries to rely on third party for identification and verification of the client, including the determination as to whether client is acting on behalf of a beneficial owner. Such third party should be regulated and supervised; however, the ultimate responsibility for CDD and due diligence will be that of the registered intermediary.

3. Record Keeping Requirements: Instead of maintaining and preserving transaction records for ‘ten years’ from the date of cessation of the transactions with clients, intermediaries will now have to maintain transaction records, including that of unusual and complex transactions, for a period of ‘five years'. Intermediaries will also have to maintain and preserve records evidencing the identity of clients and the beneficial owners (apart from maintain records of concerned account files and business correspondence). They will have to maintain and preserve records of documents such as passports, driving licenses etc.).

Principle of ‘International Exhaustion’ and Marlboro Cigarette’s Trademark Violation

On Monday, a single-judge bench of the High Court of Delhi (“High Court”), in two similar suits, had granted an ex-parte injunctions in favour of the Plaintiffs, proprietor of trademark ‘MARLBORO’ and ‘ROOF DEVICE’ (“suit trademarks”). While one dispute was related to sale of infringing cigarette products in Mumbai, other dispute was related to its sale in Kolkata. In both the actions, the High Court restrained the defendants from selling counterfeit and grey versions of the cigarette. In Philip Morris Products S.A. & Anr. v. Sameer & Ors ("first suit") and Philip Morris Products S.A. & Anr. v. Anil Kumar Singh & Ors ("second suit") [both dated 10/03/2014], the High Court had awarded damages of Rs. 10,000 against some of the defendants and Rs. 5,000 against other. In reaching its judgment, the High Court also discussed the principle of ‘international exhaustion’ with respect to section 30(3)(b) of The Trade Marks Act, 1999 (“TM Act”).Through both the suits, Plaintiffs had sought to restrain the defendants from using suit trademarks and had sought Rs. 20,00,000/- as damages (apart from punitive damages). The suit(s) were originally filed by Philips Morris Products S.A., the original proprietor of suit trademarks. Later, suit trademarks were assigned in favour of Philip Morris Brands Sarl – by virtue of this, the latter become the substituted Plaintiff No.1.

(Image Source: cgtrader.com)

Factual Background: Sometime in May 2010, it came to the knowledge of the Plaintiffs that some retailers in Mumbai and Kolkata were selling, stocking & distributing the counterfeit as well as grey market versions of Plaintiff’s products (cigarettes). While grey market version products were not meant for sale in India, counterfeit products were duplication of Plaintiff’s products. That is, grey market version is imported through another country, either legally or illegally (e.g., smuggling). On becoming aware of these activities and finding the cigarette products to be infringing, Plaintiffs filed two suits before the High Court. The defendants, in both the proceedings, preferred not to appear or file written statement. As a result, the High Court, apart from considering Plaintiff’s evidence ex-parte, also allowed their application for passing an ex parte decree.

In both the suits, the High Court had appointed two commissioners to inspect the premises of the defendants. With respect to second suit, concerned commissioner found substantial amount of infringing products in the premises of defendant no. 7. (9660 cigarettes); certain amount of infringing product was also found in the premises of defendant no.5. However, in the premises of some of the other defendants (defendants no. 1,2&4 in first suit and defendants no. 1,3,5 & 6), not much infringing product(s) were found. In the premises of the remaining defendants, nothing incriminating was found. Among all the defendants, only defendant no.7 maintained books of accounts, ledger etc.

Statutory Bar Precludes the Applicability of Arbitration and Conciliation Act, 1996

Under section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), the concerned judicial authority is obliged to refer the parties to arbitration, if the action brought before it is also the subject matter of an arbitration agreement.  Recently, Supreme Court of India (“Supreme Court”), while delivering the judgment in Ranjit Kumar Bose & Anr v. Anannya Chowdhury & Anr, has held that a statutory bar (in other legislation) would preclude the applicability of Arbitration Act. That is, if a legislation prohibits reference of a matter to arbitration, the Arbitration Act will not be applicable [see: sec. 2(3), Arbitration Act]. 

Facts: Through an unregistered tenancy agreement [“Tenancy Agreement”], the Appellants (Rajnit Kumar Bose & Anr.) had inducted the Respondents (Anannya Chowdhury & Anr) as tenants with respect to a shop room. Later, the Appellants terminated the Tenancy Agreement and sought the vacation of the shop premises. The Respondents did not vacate the premises; as a consequence, the Appellants filed a Title Suit against the Respondents (in a Civil Court) for eviction, arrears of rent etc. As there existed an arbitration clause in the tenancy agreement, the Respondents filed an application under section 8 of the Arbitration Act for referring the matter to arbitration. The Civil Judge dismissed the Respondent’s application; however, on filing an application against Civil Judge’s order, the High Court held in favour of the Respondents. The High Court further held that issue of arbitrability, if any, will be decided by the arbitral tribunal.

In reaching its conclusion, the High Court had relied on the decision(s) of the Supreme Court in, (i) Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums [(2003) 6 SCC 503]; (ii) Agri Gold Exims Ltd. v. Sri Lakshmi Knits & Wovens & Ors.[(2007) 3 SCC 686];  and (iii) Branch Manager, Magma Leasing & Finance Limited & Anr. v. Potluri Madhavilata & Anr. [(2009) 10 SCC 103]

Relevant Legislations: the West Bengal Premises Tenancy Act, 1997; Arbitration and Conciliation Act, 1996

‘One Person Company’ and ‘Small Company’ under Companies Act, 2013

The Companies Act, 2013 (“Act”), which received the assent of the President of India last year, has introduced two important concepts in (Indian) Company Law Jurisprudence – Small Company and One Person Company (“OPC”). As can be understood from the reply of Sachin Pilot, Minister of State (I/C) Corporate Affairs, to Starred Question no. 507 (2^nd May, 2013, Lok Sabha) and Unstarred Question no. 90 (5^th Dec., 2013, Lok Sabha), the concept of ‘small company’, along with ‘one person company’, have been introduced to allow new entrepreneurs to take advantage of corporate form of business. In the Companies Act, 1956 (“1956 Act”), there were no such concept(s) and those, intending to incorporate a business entity under the 1956 Act, had the option to incorporate companies in other forms.

Both Small Company and OPC are special form of private companies. While existence of the former company is determined in accordance with the value of share capital or turnover, existence of the latter company is determined in accordance with the number of members. There can also be a possibility where both the forms of companies may overlap. For instance, consider a situation where an OPC also satisfies the definition of a Small Company. These companies are different from other companies because of the simplified procedure available for them, both in terms of administration and responsibilities.

The 21^st Report [Companies Bill, 2009 (“2009 Bill”)] of the Standing Committee on Finance noticed that the 2009 Bill contained scattered provisions for providing exemptions to OPC and Small Companies [see: clause 421, 2009 Bill – it was later removed]. While Ministry of Corporate Affairs (“MCA”) was of the opinion that further exemptions, if any, could be provided vide notifications, the Standing Committee opined that such exemptions should be provided in the bill itself. In fact, Standing Committee recommended that such exemptions should be provided by way of a schedule or be appended to the main Act. Once again in its 57^th Report [Companies Bill, 2011 (“2011 Bill”), the Standing Committee reiterated that exemptions available to different classes of companies should be clearly specified.

Consultation Paper on ADR in Civil Aviation Sector Issued - Comments to reach by 15th April

Recently, Ministry of Civil Aviation (Government of India) has issued a Consultation Paper on “Ombudsman for Civil Aviation”. The paper has been issued to explore the possibility of creating  an  alternative  dispute  settlement mechanism for Aviation sector in India. If established, the same would serve as an effective grievance redressal for passengers and other stakeholders.

The paper has been divided into six chapters with last chapter enlisting the Issues for Discussions. The issues, as enumerated in Chapter 6, are as follows:

(i)   Whether there is sufficient legal basis for the Central govt.  to  take  measures  for  protecting  the  interests  of  consumers  including  creating  alternative  dispute  settlement  machinery  like  Ombudsman  without  resorting  to amendment of the Aircraft Act, 1934?

(ii) Whether inclusion of disputes between users of airports like cargo agents  and  the  airport  operator/  custodian/  ground  handling  agent/carrier  etc  under  the domain of Ombudsman will be consistent with the provisions of AERA Act?

A New Regime "Contracts of Adhesion": Unconscionability of Bargain?

(The author of this post is Paridhi Poddar, a 1st year student of the West Bengal National University of Juridical Sciences, Kolkata. She can be contacted at paridhipari04@gmail.com)

Introduction: Adhesion Contracts

Contracts of adhesion, simply put, are contracts containing a set of standard terms and conditions presented on a take-or-leave basis thereby eliminating the scope and need for negotiations between the contracting parties. In the day-to-day sense, one comes across such contracts during the purchase of insurance policies, license agreements, online software etc. Adhesion contracts incorporate terms which are derived from common business experience and do not allow for any customisation as per the needs of the other party. Sometimes, such contracts are formed through shrink wrap or click wrap agreements.[1] As a result, such contracts are sometimes also termed as “boilerplate contracts” or “private legislation.”[2] In its 103^rd report of 1984, the Law Commission of India has even gone to the extent of calling these as “pretended contracts.” This is true because such contracts become problematic to the basic tenets of contract law when they evince unconscionable manipulation of the bargaining powers of the contracting parties. On the other hand, since adhesion contracts evolve through business usage and practice, they import efficacy in commercial bargains by reducing costs in transactions to a large extent. Even after having some of these advantages, the probable presence of unconscionability in adhesive contracts has urged the judges to critically think about the notions of freedom of contract and “pact sunt servanda”. This article would introduce you to the position of Indian law on the enforceability and the binding nature of such contracts.

Unconscionability of bargain: The test

A contract comes into existence on the grounds of consensus-ad-idem when the consumer “accepts” or “agrees” to the terms. Hence, when firms in the market intend to do business on the basis of standard contracts, the presumption of the court is that there is nothing unconscionable about such a transaction per se.[3] Thus, the courts have never held that all forms of standard contracts would be struck down as unenforceable. For instance, in Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board,[4] where the terms of the contract provided that no interest would be provided on the security deposit made by the consumers with the board, the court held that such a term was not arbitrary but reasonable on the grounds of statutory validation. As a result, since such a term did not shock the conscience of the Court, it was not declared to be void.

Companies (Corporate Social Responsibility Policy) Rules, 2014: An Overview

In exercise of the powers conferred under section 135 and section 469 [sub-sections (1) and (2)] of the Companies Act, 2013 (“Act”), the Central Government, on February 27^th (2014), has notified Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”). The Rules, which provides for the implementation for Corporate Social Responsibility ("CSR") obligations,  will come into force on 1^st April, 2014.

Section 135 of the Act mandates a company, falling under the provided criteria, to constitute a CSR Committee. The function of the CSR Committee is to formulate and recommend CSR Policy.The provision also provides that the CSR committee should consist of two or more director, out of which one shall be an ‘independent director’. So far as section 469 of the Act is concerned, it empowers the Central Government to make rules for carrying out the provisions of the Act.

The CSR Rules, as notified by the Ministry of Corporate Affairs (“MCA”), consist of 9 rules. Among the important ones, it contains the descriptive rules for CSR Activities, CSR Committees, CSR Policy, CSR Reporting etc. In this blog post, I intend to explain and summarise the CSR Rules in brief.

Important Definitions:

1.   Definition of ‘Corporate Social Responsibility’: One of the most important features of the CSR Rules is that it defines the term ‘Corporate Social Responsibility’; according to Rule 2(c), CSR means and includes but is not limited to:

(i)           Projects or programs relating to activities specified in Schedule VII to the Act; or

(ii)         Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act

From both the above clauses, it becomes apparent that a company has to focus on the subjects specified under Schedule VII of the Act. Schedule VII of the Act contains a list of activities which a company may purse for discharging its CSR obligations. Among other things, the list contains subjects such as ‘promotion of education’, ‘eradicating extreme hunger and poverty’, ‘social business projects’ etc.

“Individual Communication” to Searched Person Required under Section 50, NDPS Act

In one of my previous blog posts, I had reported a decision of the Supreme Court of India (“Supreme Court”) wherein the importance of section 50, Narcotics Drugs and Psychotropic Substances Act, 1985 (“NDPS Act”), was emphasised. In that case, it was held by the court that requirement under section 50 of the NDPS Act cannot be considered as a mere formality. Under Section 50 of the NDPS Act, the concerned officer is required to give a notice to the suspected person of his right to be searched in the presence of a Gazetted Officer or a Magistrate.

In a recent development, Supreme Court has yesterday delivered a judgment [State of Rajasthan v. Parmanand & Anr., dated 28/02/2014] opining that in order to comply with the requirement under section 50 of the NDPS Act, the suspected person should be served with an ‘individual notice’. In the present case, a joint notice was provided to the two suspected persons; this, in opinion of the court, would not fulfil the requirement under section 50.

Facts: On receiving information that Parmanand and Suraj (“Respondents”) were to hand over 10 Kg of opium to a smuggler, a police raid was conducted and the Respondents were caught. One of the Respondents, Paramanad, was carrying a gunny bag. Expressing his intention to search, Sub-Inspector (S.I. Qureshi), through a written notice, informed the Respondents of their right under section 50 of the NDPS Act. S.I. Qureshi informed the Respondent that they have a right to get searched in the presence of any nearest Magistrate or any gazetted officer or in the presence of Superintendent (J.S. Negi) of the raiding party.