The following. quote from a manager demonstrates this: Well, the director told me that my project was at the
top of his list of priorities. After another few weeks of frustration and no action I went back to remind him. "Yes," he'said, "your project is still at the top Qf my listbut the list isn't necessarily in order."
Organizational research into the media of
communication has tended to concentrate on the merits and drawbacks of written and spoken messages~ Baker and his colleagues of.Princeton University found low reader interest' in the employee's handbook of the company they studied, and Professor Maier, in the study mentioned earlier, found that written job descriptions did not affect the degree of agreement over job details between superior-subordinate managers, and that firms without this system were rated as highly as finns with it. In general, interest in company magazines increases as the style becomes more informal. Where the company literature is stiff, precise, and full of company jargon, employees prefer to obtain their infonnation from personal contacts.
Many managers recognize these factors although it may be argued that few apply them. In one survey of 100 company presidents, 98 thought the spoken word at least as important as the written word and 40 felt that it was more important. On the other hand, Higgin and Jessop, in a study of the British building industry, pointed out some of the difficulties which resulted from the use of informal spoken communication. They found that many vital pieces of information were committed to memory or the backs of cigarette packets, and that sometimes detail became blurred. These snippets of research, taken in isolation, may seem to contradict each other. Company presidents favour
Tuesday, January 15, 2008
Actions themselves are often looked upon as a method of communication.
could be expected to transmit messages accurately without any extra organizational help. Many people would not subscribe to this belief and suggest that benefits would be gained by clarifying company terminology through the media of 'terminology dictionaries. Others, however, warn against undue reliance on the written word in the form of bulletins, booklets, magazines, etc., in that they can be looked upon a substitute for face-to-face communication and not as they should be-an aid.
Another difficulty is that more than one media may be used at the same time. Depending on their interpretation, they can reinforce or contradict each other. Consider an applicant at a job interview. If he is telling of his keenness to obtain the opposition but at the same time looks bored, yawns frequently and sports a two-day stubble, then the interviewer may find it difficult to reconcile the conflicting symbols. The whole area of communication through gesture or appearance is fraught with possible errors. Such imprecise meanings exist that perceptual factors can playa large part in the assessment of meaning. These weaknesses can be compounded since gestures and the use of more than one media are often used to create uncertainty deliberately.
Actions themselves are often looked upon as a method of communication. The managing director who informs all and sundry that foremen are his key managers may have difficulty in having his beliefs accepted by the foremen themselves. If they do their paper work at a space temporarily cleared on an oily work-bench while he has a large office, or if they have to walk through a muddy car park in the rain while he is driven past in a chauffeured Rolls-Royce, the credibility gap may be difficult to span.
Another difficulty is that more than one media may be used at the same time. Depending on their interpretation, they can reinforce or contradict each other. Consider an applicant at a job interview. If he is telling of his keenness to obtain the opposition but at the same time looks bored, yawns frequently and sports a two-day stubble, then the interviewer may find it difficult to reconcile the conflicting symbols. The whole area of communication through gesture or appearance is fraught with possible errors. Such imprecise meanings exist that perceptual factors can playa large part in the assessment of meaning. These weaknesses can be compounded since gestures and the use of more than one media are often used to create uncertainty deliberately.
Actions themselves are often looked upon as a method of communication. The managing director who informs all and sundry that foremen are his key managers may have difficulty in having his beliefs accepted by the foremen themselves. If they do their paper work at a space temporarily cleared on an oily work-bench while he has a large office, or if they have to walk through a muddy car park in the rain while he is driven past in a chauffeured Rolls-Royce, the credibility gap may be difficult to span.
One might imagine that language-a system of symbols formalized through education, dictionaties, etc.,
Britain. From a similar study, in which managers kept a detailed log of their activities over a period of several weeks, Tom Burns, Professor of Sociology at Edinburgh University, writes:
more important is the picture-the moving picture
such studies give of the management system seen as a communication network. The production of this information itself yields comparative data of considerable interest. For the seven manufacturing concems, to take one instance, the proportion of all management time spent in spoken communication ran as follows:
80-71-68-56-55-44-42 per cent
The order is significant. The firms are arranged from left to right also in terms of their... environmental change. Moreover, the direction of communication changes: in the first firm slightly more than half the communication was lateral, i.e. with colleagues and this proportion dropped until. in the seventh firm, virtually all communication was vertical.
Media
In Western society large numbers of people spend a considerable part of their waking hours in organizations of one sort or another. It is not surprising, therefore, to discover that their main communication media tend to be the same inside or outside the organization, namely speech, writing, gesture, and appearance. Communication may be described as unsuccessful when the received message does not match the transmitted message. As many of the failures have been discovered in the 'coding' and 'decoding' processes, the media involved have come under careful scrutiny.
One might imagine that language-a system of symbols formalized through education, dictionaties, etc.,
more important is the picture-the moving picture
such studies give of the management system seen as a communication network. The production of this information itself yields comparative data of considerable interest. For the seven manufacturing concems, to take one instance, the proportion of all management time spent in spoken communication ran as follows:
80-71-68-56-55-44-42 per cent
The order is significant. The firms are arranged from left to right also in terms of their... environmental change. Moreover, the direction of communication changes: in the first firm slightly more than half the communication was lateral, i.e. with colleagues and this proportion dropped until. in the seventh firm, virtually all communication was vertical.
Media
In Western society large numbers of people spend a considerable part of their waking hours in organizations of one sort or another. It is not surprising, therefore, to discover that their main communication media tend to be the same inside or outside the organization, namely speech, writing, gesture, and appearance. Communication may be described as unsuccessful when the received message does not match the transmitted message. As many of the failures have been discovered in the 'coding' and 'decoding' processes, the media involved have come under careful scrutiny.
One might imagine that language-a system of symbols formalized through education, dictionaties, etc.,
Despite these barriers it was reported of one top executive:
Other writers think it is a common mistake to imagine that all organizational ailments can be cured by large doses of official communication. Many wellpublicized 'communication improvement' and 'management information' programmes are ineffective because they overload the formal system. It would seem that effective organizational functioning depends not upon a maximum but on an optimum of information exchange. The communication studies mentioned already amply illustrate that once a hierarchy of virtually any kind comes into existence, information exchange is no longer 'free' but restricted; shaped, and con!folled. The moment a task is delegated the administrator is to some extent insulated from some important aspects of that task. The point is that he not only is insulated but should be. Professor Jaques, who did some highly praised work with the Glacier Metal Company, emphasizes that certain barriers
, to communication frequency are actually necessary if an organization is to get its business done. He refers to 'adaptive segregation' as the automatic process by which barriers are set up, more or less by mutual consent, by sections or levels of a company to keep channels clear for crucial information.
Despite these barriers it was reported of one top executive: "In the sheer volume of all activities demanded of him, verbal interaction is the number one form of contact, consuming upward of 80 per cent of all the executives' time... only 12 times in 35 days of observation was this chief executive able to work undisturbed alone in his office during intervals of 23 minutes or longer.
This seems to be general in industry as identical findings have been reported in America, Sweden, and
, to communication frequency are actually necessary if an organization is to get its business done. He refers to 'adaptive segregation' as the automatic process by which barriers are set up, more or less by mutual consent, by sections or levels of a company to keep channels clear for crucial information.
Despite these barriers it was reported of one top executive: "In the sheer volume of all activities demanded of him, verbal interaction is the number one form of contact, consuming upward of 80 per cent of all the executives' time... only 12 times in 35 days of observation was this chief executive able to work undisturbed alone in his office during intervals of 23 minutes or longer.
This seems to be general in industry as identical findings have been reported in America, Sweden, and
Communication frequency
improved conditions, etc. What little research has been done seems to indicate that speed and accuracy in communication are complementary-as that competent general the Duke of Wellington demanded of his commanders: "Do the business of the day in the day."
Communication frequency
While frequent communication may not cause better leadership behavior, good leadership behaviour and frequent communication seem to be associated. A person who is communicating with another is receiving recognition, and his sense of well-being may be enhanced.
As one of the managers in a discussion on the context said: "Those two are just a couple of empire builders-they know all calls are 'supposed to come through here so that we can keep tabs on everything. But no, they keep giving out their office number. I wish they'd give out their home numbers. There's no empire building at night-Oh, no-we get all the calls then of course!'
. One of the two supervisors mentioned above said, after putting the telephone down, 'People are always phoning up about this or that. They see this office as the centre of operations.'
A subordinate's well-being may not be enhanced, however, if he feels that the wall around his boss's office is a mile high. Presumably this is one problem which open-plan areas try to reduce by removing the physical barriers of walls. It is interesting to note here that a
common complaint made against open-plan factories is that too much communication occurs. In this study only one firm had complete open planning, and their frequency of communication was the lowest of all the firms studiednot the highest as might have been predicted.
Communication frequency
While frequent communication may not cause better leadership behavior, good leadership behaviour and frequent communication seem to be associated. A person who is communicating with another is receiving recognition, and his sense of well-being may be enhanced.
As one of the managers in a discussion on the context said: "Those two are just a couple of empire builders-they know all calls are 'supposed to come through here so that we can keep tabs on everything. But no, they keep giving out their office number. I wish they'd give out their home numbers. There's no empire building at night-Oh, no-we get all the calls then of course!'
. One of the two supervisors mentioned above said, after putting the telephone down, 'People are always phoning up about this or that. They see this office as the centre of operations.'
A subordinate's well-being may not be enhanced, however, if he feels that the wall around his boss's office is a mile high. Presumably this is one problem which open-plan areas try to reduce by removing the physical barriers of walls. It is interesting to note here that a
common complaint made against open-plan factories is that too much communication occurs. In this study only one firm had complete open planning, and their frequency of communication was the lowest of all the firms studiednot the highest as might have been predicted.
An interesting case in the diffusion of information was the work of the sociologist Dodd, who had leaflets randomly introduced into isolated communiti
from what is actually going on. Though most directors like to think of a pyramid of communication centres beneath them, labyrinth of commun~cation barriers might be a more apt description.
Speed
An interesting case in the diffusion of information was the work of the sociologist Dodd, who had leaflets randomly introduced into isolated communities by air-drops. In a series of studies the researcher 'planted' information of various kinds and then traced the speed and range of transmission with a corps of on-the-spot int.erviewers.
His studies considered the effects of the size of the. community; the potency of messages; the time factor; the space factor and the stimulation factor. This last factor is of considerable relev~nce to politicians and managers alike. In Britain, for example, samples of the population taken over a 2-year period showed little increased understanding of the term 'productivity agreements' despite its frequent occurr~nce on the news media as one of the keys to Britain's economic recovery.
Other studies have shown the effects on industrial relations when communication is delayed. In one factory it was found that management-union agreements were taking an average of 2.8 days to reach the shop floor via union channels but 12.7 days via formal management lines. Many
of the first-line supervisors resented this type of information coming to them from their workers rather than their superiors. Typically, workers complained about delays in adjusting pay and working conditions following national agreements. The unions quickly let them know, but the foremen had to wait for their managerial channels to advise them before authorizing increased rates,
Speed
An interesting case in the diffusion of information was the work of the sociologist Dodd, who had leaflets randomly introduced into isolated communities by air-drops. In a series of studies the researcher 'planted' information of various kinds and then traced the speed and range of transmission with a corps of on-the-spot int.erviewers.
His studies considered the effects of the size of the. community; the potency of messages; the time factor; the space factor and the stimulation factor. This last factor is of considerable relev~nce to politicians and managers alike. In Britain, for example, samples of the population taken over a 2-year period showed little increased understanding of the term 'productivity agreements' despite its frequent occurr~nce on the news media as one of the keys to Britain's economic recovery.
Other studies have shown the effects on industrial relations when communication is delayed. In one factory it was found that management-union agreements were taking an average of 2.8 days to reach the shop floor via union channels but 12.7 days via formal management lines. Many
of the first-line supervisors resented this type of information coming to them from their workers rather than their superiors. Typically, workers complained about delays in adjusting pay and working conditions following national agreements. The unions quickly let them know, but the foremen had to wait for their managerial channels to advise them before authorizing increased rates,
Replacing the concept of qu.antity' of communication by rate.
of Zipf was confinned and extended by Cavanaugh in the fifties. Replacing the concept of qu.antity' of communication by rate. of interaction, Cavanaugh extended Zipf's hypothesis to cover human transportation.
All of these factors, demonstrated in such a wide variety of contexts, would seem to be relevant in planning the layout of a factory or busine~s premises and in establishing a chain of command-especially in an overseas operation. As Peter Drucker puts it: 'Every additiona). administrative level makes the attainment of common direction and mutual understanding more difficult. Every additional level distorts objectives and misdirects attention. Every link in the chain sets up additional stresses, and creates one more source of inertia, friction and slack.'
Although many managers would agree with this statement, few companies have gone to the lengths of ffiM when they reduced the number of levels in all of their units in the forties. Their grievance procedure, for example, was speeded up by recognizing only three divisions-man, manager, management. The occasional dispute not settled at the man-manager level went straight to the man-board level for settlement. Other see the effects of the problem as being concentrated at the top of an organisation. The top executives have the greatest amount of decision-making power and hence a greater need for information. There may be a tendency for the message flow to them to get increasingly heavy, while they have proportionally less time available to digest the information.. In these circumstalICeS they may soon come to depend on briefed-down communication usually interpreted by their assistants. Because of their very position, many chief executives may be totally insulated
All of these factors, demonstrated in such a wide variety of contexts, would seem to be relevant in planning the layout of a factory or busine~s premises and in establishing a chain of command-especially in an overseas operation. As Peter Drucker puts it: 'Every additiona). administrative level makes the attainment of common direction and mutual understanding more difficult. Every additional level distorts objectives and misdirects attention. Every link in the chain sets up additional stresses, and creates one more source of inertia, friction and slack.'
Although many managers would agree with this statement, few companies have gone to the lengths of ffiM when they reduced the number of levels in all of their units in the forties. Their grievance procedure, for example, was speeded up by recognizing only three divisions-man, manager, management. The occasional dispute not settled at the man-manager level went straight to the man-board level for settlement. Other see the effects of the problem as being concentrated at the top of an organisation. The top executives have the greatest amount of decision-making power and hence a greater need for information. There may be a tendency for the message flow to them to get increasingly heavy, while they have proportionally less time available to digest the information.. In these circumstalICeS they may soon come to depend on briefed-down communication usually interpreted by their assistants. Because of their very position, many chief executives may be totally insulated
degree of agreement over the details of the subordinate's tasks.
degree of agreement over the details of the subordinate's tasks. The results showed that in many ways the communication gaps among managers were often considerably wider than with the more routine positions
.they controlled. Only on the topic of job duties did the pairs show more agreement than disagreement. More typically, on the important area of the subordinates' work problems, the pattern was reversed. These results occurred despite the fact that all four companies involved had written job descriptions and that two of the companies had performance appraisal programmes. These results indicate that communication failures are not limited to periods of major organizational change but can be an every-day occurrence. Furthermore, these failures seem to occur at
all levels of the organization and in a variety of contexts.
Distance
One major cause of these breakdowns is the underestimation of the effects of technical limitations on communication. Research in the forties by Allport and Postman considering distance in terms of the number of links involved in a communication act, proved the commonly held belief that rumours tend to become more inaccurate as the number of links increases-each link liable to produce some distortion. Soon after, Zipf went on to show that physical distance can also reduce the quantity of communication between two locations. He found that the number of long-distance telephone calls between pairs of cities was directly proportional to their populations but inversely proportional to the distance between them. Although cost is a likely factor, it seems reasonable to assume that the exu'a time involved in connecting distant callers is another factor reducing communication quantity over longer distances. The work
.they controlled. Only on the topic of job duties did the pairs show more agreement than disagreement. More typically, on the important area of the subordinates' work problems, the pattern was reversed. These results occurred despite the fact that all four companies involved had written job descriptions and that two of the companies had performance appraisal programmes. These results indicate that communication failures are not limited to periods of major organizational change but can be an every-day occurrence. Furthermore, these failures seem to occur at
all levels of the organization and in a variety of contexts.
Distance
One major cause of these breakdowns is the underestimation of the effects of technical limitations on communication. Research in the forties by Allport and Postman considering distance in terms of the number of links involved in a communication act, proved the commonly held belief that rumours tend to become more inaccurate as the number of links increases-each link liable to produce some distortion. Soon after, Zipf went on to show that physical distance can also reduce the quantity of communication between two locations. He found that the number of long-distance telephone calls between pairs of cities was directly proportional to their populations but inversely proportional to the distance between them. Although cost is a likely factor, it seems reasonable to assume that the exu'a time involved in connecting distant callers is another factor reducing communication quantity over longer distances. The work
Having established a frame of reference about the problem, we can proceed to examine research canied out
operational or administrative failures, e.g. mistrust can lead to bad communication which in turn intensifies the mistrust.
Having established a frame of reference about the problem, we can proceed to examine research canied out
in attempts to measure the extent of these communication
. .
gaps.
In a study of two factories, 25 per cent and 66 per cent respectively of the labour force did not understand the calculation of their bonus awards. The workers in the less well-informed factory were consistently more hostile to the incentive scheme and produced less. Another shopfloor communication study found that among the work people studied:
35 per cent worried over a lack of clarity about scope
and responsibilities;
29 per cent worried over the ambiguity of the
expectations of other departments;
38 per cent worried over the lack of adequate
information for their job and future prospects.
The research suggests that this feeling of a lack of downward communication might lead to withholding of upward communication.
N or are white-collar workers immune; in an assurance office 20 per cent of the employees requiring a precise understanding of the operating instructions displayed varying degrees of misunderstanding of the instructional memorandum.
Even among manager,> the same gaps occur. Maier studied fifty-eight superior-subordinate pairs to assess their
Having established a frame of reference about the problem, we can proceed to examine research canied out
in attempts to measure the extent of these communication
. .
gaps.
In a study of two factories, 25 per cent and 66 per cent respectively of the labour force did not understand the calculation of their bonus awards. The workers in the less well-informed factory were consistently more hostile to the incentive scheme and produced less. Another shopfloor communication study found that among the work people studied:
35 per cent worried over a lack of clarity about scope
and responsibilities;
29 per cent worried over the ambiguity of the
expectations of other departments;
38 per cent worried over the lack of adequate
information for their job and future prospects.
The research suggests that this feeling of a lack of downward communication might lead to withholding of upward communication.
N or are white-collar workers immune; in an assurance office 20 per cent of the employees requiring a precise understanding of the operating instructions displayed varying degrees of misunderstanding of the instructional memorandum.
Even among manager,> the same gaps occur. Maier studied fifty-eight superior-subordinate pairs to assess their
Nor do these problems seem restricted to industry alone. The following comments from a study of American
would agree that this ideal state seldom occurs. Some refer to the lack of common awareness of goals, others see the head of an organization nes!ling on a pyramid of communication barriers, many of which are intended to insulate one level from another, while sociologist Dalton refers to a 'fog of uncertainty' which characterizes executive work.
Nor do these problems seem restricted to industry alone. The following comments from a study of American
nurses resemble those of many industrial writers:
A prime factor in any organizational scheme is ease and accuracy of communication both vertically and horizontally. Nursing service, traditionally rigidly disciplined and authoritarian, appears in the observed situation to provide little opportunity or communication except for strictly specified types of information in strictly specified channels and in strictly specified fashion. Not only are such channels cumbersome but they are often insufficient. Nurses apparently find it difficult to secure full information about drugs or medications that may be prescribed. Information placed on the charts is often reduced to a minimum set of hieroglyphics, often illegible, standardized for routine custodial care. The development of personalized nursing plans individual patients would seem to demand that nurses have adequate and pertinent information from appropriate sources. In the situation observed, there appeared to be little communication between units, except via a 'grape-vine' route. It was felt that certain aspects of such communication problems may be related to morale level and job satisfaction.
..
In the broadest sense, every difficulty encountered within an organization contains some ingredient of distorted, insufficient, or poorly timed information exchange. Communication problem~ can be the cause and effect of
Nor do these problems seem restricted to industry alone. The following comments from a study of American
nurses resemble those of many industrial writers:
A prime factor in any organizational scheme is ease and accuracy of communication both vertically and horizontally. Nursing service, traditionally rigidly disciplined and authoritarian, appears in the observed situation to provide little opportunity or communication except for strictly specified types of information in strictly specified channels and in strictly specified fashion. Not only are such channels cumbersome but they are often insufficient. Nurses apparently find it difficult to secure full information about drugs or medications that may be prescribed. Information placed on the charts is often reduced to a minimum set of hieroglyphics, often illegible, standardized for routine custodial care. The development of personalized nursing plans individual patients would seem to demand that nurses have adequate and pertinent information from appropriate sources. In the situation observed, there appeared to be little communication between units, except via a 'grape-vine' route. It was felt that certain aspects of such communication problems may be related to morale level and job satisfaction.
..
In the broadest sense, every difficulty encountered within an organization contains some ingredient of distorted, insufficient, or poorly timed information exchange. Communication problem~ can be the cause and effect of
Monday, January 14, 2008
promote the development of and to regulate the securities market by such measures as it thinks fit.
promote the development of and to regulate the securities market by such measures as it thinks fit.
With the aforesaid object in view, under Section 11 (2)the Board has been entrusted
with the following functions :
'-fZff Reguj!iting the.l>!!sin~!n s~2-cJs.exchanges and any other securities markets.
(b) Registering and ~gulating the working of stock brokers, sub-brokers, share transfer
./ agents, bankers to issue, trustees of trust deeds, registrars to issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other inter
mediaries who may be associated with securities markets in any manner.
(c) Registering and regulating working of depositories, custodians of securities,
Foreign Institutional Investors, credit rating agencies and such other inter
mediaries as Board may, by notification, specify.
(d) Registering and regulating working of venture capital funds and collective
I investmen~ schemes, induding mutual funds.
(e) Registering and regulating self-regulatory organisations (like stock exchanges).
.,Aft Prohibiting fraudulent and unfair trade practices relating to securities market.
(g) Promoting investors education and training of intermediaries of securities markets.
(h) Prohibiting insider trading in securiJies.
(i) Regulating"substantialacquisiHon of shares and take over of companies.
(j) Calling for information from undertaking under inspection, conducting
enquiries and audits of stock exchanges, mutual funds and intermediaries and
self-regulatory organisations in the securities market.
(kt Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or ProvinciallAct in respect of any transaction in securities which are under investigation or inquiry by the Board.
(l) Performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government.
(m) Conducting research for the above purposes.
(n) Calling information from agencies or furnishing information to agencies as
may be specified by the Board.
Ao) Performing such other functions as may be assigned to SE,BI.
(p) "ide the SEBI (Amendment) Act 2002 (w.eJ. 29.10.2002), SEBI has also been empowered to inspect any book or register or other document or record of any listed public company or a public company (not being intermediaries referred to in Section 12) which intends to get its securities listed on any recognized stock exchange. Such inspection may be ordered if the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market [Sec. 11(2A)].
Powers of SEBI
A. Under SEBI Act, 1992
1. Sub-section (4) of Section 11, added by SEBI (Amendment) Act, 2002 (w.e.f.
29.10.2002) empowers SEBI, in the interest of investors or securities market, to
With the aforesaid object in view, under Section 11 (2)the Board has been entrusted
with the following functions :
'-fZff Reguj!iting the.l>!!sin~!n s~2-cJs.exchanges and any other securities markets.
(b) Registering and ~gulating the working of stock brokers, sub-brokers, share transfer
./ agents, bankers to issue, trustees of trust deeds, registrars to issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other inter
mediaries who may be associated with securities markets in any manner.
(c) Registering and regulating working of depositories, custodians of securities,
Foreign Institutional Investors, credit rating agencies and such other inter
mediaries as Board may, by notification, specify.
(d) Registering and regulating working of venture capital funds and collective
I investmen~ schemes, induding mutual funds.
(e) Registering and regulating self-regulatory organisations (like stock exchanges).
.,Aft Prohibiting fraudulent and unfair trade practices relating to securities market.
(g) Promoting investors education and training of intermediaries of securities markets.
(h) Prohibiting insider trading in securiJies.
(i) Regulating"substantialacquisiHon of shares and take over of companies.
(j) Calling for information from undertaking under inspection, conducting
enquiries and audits of stock exchanges, mutual funds and intermediaries and
self-regulatory organisations in the securities market.
(kt Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or ProvinciallAct in respect of any transaction in securities which are under investigation or inquiry by the Board.
(l) Performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government.
(m) Conducting research for the above purposes.
(n) Calling information from agencies or furnishing information to agencies as
may be specified by the Board.
Ao) Performing such other functions as may be assigned to SE,BI.
(p) "ide the SEBI (Amendment) Act 2002 (w.eJ. 29.10.2002), SEBI has also been empowered to inspect any book or register or other document or record of any listed public company or a public company (not being intermediaries referred to in Section 12) which intends to get its securities listed on any recognized stock exchange. Such inspection may be ordered if the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market [Sec. 11(2A)].
Powers of SEBI
A. Under SEBI Act, 1992
1. Sub-section (4) of Section 11, added by SEBI (Amendment) Act, 2002 (w.e.f.
29.10.2002) empowers SEBI, in the interest of investors or securities market, to
Constitution and Management of the Board
Since the passing of the SEBI Act, 1992, the Central Government has, vide its powers under Section 3 of the Act, established the SEBI (Board) with its headquarters at Mittal Court, 'B' Wing, 1st Floor, 224, Narimanpoint, Mumbai-400 021. The Board has been constituted as a body corporate by the name 'Securities and Exchange Board of India' having perpetual succession and a common seal, with powers, subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued [Section 3(2)].
The Board has been empowered to establish offices at other places in India.
Constitution and Management of the Board
Section 4 of the Act provides for the constitution of the Board of members, powers and
qualifications of the chairman and members of the Board.
SEBI shall consist of the following members, namely:
(a) a chairman to be appointed by the Central Government;
(b) two members from ,amongst the officers of the Ministry of the Central
Government dealing with Finance and administration of the Companies Act, 1956', to be nominated by the Central Government;
(c) one !TIember from amongst the officers of the Reserve Bank of India, to be
n,9minated by RBI; and ,
(d) five o~er memberS-of whom at least three sJ.1all be the whole time members
to be appointed by the Central Government.
The members of the Board have been vested with the power of general superintendence, direction and management of the affairs of the Board. Accordingly, the members of the Board shall exercise all powers and do all acts and things which may be exercised or done by the SEBI. Their position is similar to that of directors in a company.
The chairman of the Board shall also have powers of general superintendence, direction and management of the affairs of SEBI. The chairman may also exercise all powers and do all kinds of things which may be exercised or done by SEBI.
Thus, the powers of the Board of members can also be exercised by the chairman. However, ~powerscl~~~be~~~~~~~~~~Boardillm~rscl
SEBI. The ~tion to be made bySEBI ~lay down the specific powers to ~exercised by the ~ and ~ powers that can be exercised only by the members of ~ Board.
Sub-section (5) of Section 4 provides that the chairman and other members of the Board to be appointed by the Central Government should be persons of ability, integrity and standing having capability in dealing with problems relating to securities market, or possessing special knowledge or experience of law, finance, economics, accountancy, administration or any other discipline which, in the opinion of the Central Government, shall be useful to the Board.
~ 3. What are the functions and powers assigned to SEBI under the SEBI Act, 1992? .9l.ns .
Functions of SEBI
Section 11 of the SEBI Act, 1992 provides that, subject to the provisions of the Act, it shall be the duty of the Board to protect the interest of investors in securities and to
The Board has been empowered to establish offices at other places in India.
Constitution and Management of the Board
Section 4 of the Act provides for the constitution of the Board of members, powers and
qualifications of the chairman and members of the Board.
SEBI shall consist of the following members, namely:
(a) a chairman to be appointed by the Central Government;
(b) two members from ,amongst the officers of the Ministry of the Central
Government dealing with Finance and administration of the Companies Act, 1956', to be nominated by the Central Government;
(c) one !TIember from amongst the officers of the Reserve Bank of India, to be
n,9minated by RBI; and ,
(d) five o~er memberS-of whom at least three sJ.1all be the whole time members
to be appointed by the Central Government.
The members of the Board have been vested with the power of general superintendence, direction and management of the affairs of the Board. Accordingly, the members of the Board shall exercise all powers and do all acts and things which may be exercised or done by the SEBI. Their position is similar to that of directors in a company.
The chairman of the Board shall also have powers of general superintendence, direction and management of the affairs of SEBI. The chairman may also exercise all powers and do all kinds of things which may be exercised or done by SEBI.
Thus, the powers of the Board of members can also be exercised by the chairman. However, ~powerscl~~~be~~~~~~~~~~Boardillm~rscl
SEBI. The ~tion to be made bySEBI ~lay down the specific powers to ~exercised by the ~ and ~ powers that can be exercised only by the members of ~ Board.
Sub-section (5) of Section 4 provides that the chairman and other members of the Board to be appointed by the Central Government should be persons of ability, integrity and standing having capability in dealing with problems relating to securities market, or possessing special knowledge or experience of law, finance, economics, accountancy, administration or any other discipline which, in the opinion of the Central Government, shall be useful to the Board.
~ 3. What are the functions and powers assigned to SEBI under the SEBI Act, 1992? .9l.ns .
Functions of SEBI
Section 11 of the SEBI Act, 1992 provides that, subject to the provisions of the Act, it shall be the duty of the Board to protect the interest of investors in securities and to
State the objects and reasons of SEBI Act, 1992.
1. State the objects and reasons of SEBI Act, 1992. .9lns .
Objects and Reasons
In the approach paper for comprehensive legislation of SEBI, the objects of the legislation are explained as : healthy and orderly development of the security market and adequate investors protection. To this end, it is necessary to promote market which ensures:
1. Fairness. The market must promote integrity in dealings, high standard of conduct
and good business practice. .
2. Efficiency. The market should be professionalised and well informed, offering high standard of service at reasonable cost.
3. Confidence. The market must inspire confidence in both investors and issuers to actively participate in and rely more on the securities market.
4. Flexibility. The market should be resilient, innovative and be continuously responsive to the needs of all market participants.
Statement of objects and reasons as stated in the Securities and Exchange Board of India Bill, 1992 brings out the objects of the legislation in the following words:
"The capital market in India has witnessed tremendous growth in recent times particularly by the increasing partiCipation of the public. Investors' confidence in the capital market can be sustained only by ensuring investors' protection. With this end in view, Government decided to vest SEBI with statutory powers required to deal effectively with all matters relating to the capital market."
Accordingly, the preamble to the SEBI Act, 1992 spells out its objects in the
following words:
"An Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto."
~ 2. Discuss the constitution and management of Securities and Exchange Board of India.
.9lns .
Establishment of the SEBI (Board)
Securities and Exchange Board of India (SEBI) was established in 1988 through a Government resolution to promote orderly and healthy growth of the securities market and for investors' protection. SEBI has been established on the lines of Securities and Exchange Commission of USA which was set up in terms of the Securities Exchange Act, 1934 with a view to regulate the securities market and check unfair trade practices on the stock exchanges.
Objects and Reasons
In the approach paper for comprehensive legislation of SEBI, the objects of the legislation are explained as : healthy and orderly development of the security market and adequate investors protection. To this end, it is necessary to promote market which ensures:
1. Fairness. The market must promote integrity in dealings, high standard of conduct
and good business practice. .
2. Efficiency. The market should be professionalised and well informed, offering high standard of service at reasonable cost.
3. Confidence. The market must inspire confidence in both investors and issuers to actively participate in and rely more on the securities market.
4. Flexibility. The market should be resilient, innovative and be continuously responsive to the needs of all market participants.
Statement of objects and reasons as stated in the Securities and Exchange Board of India Bill, 1992 brings out the objects of the legislation in the following words:
"The capital market in India has witnessed tremendous growth in recent times particularly by the increasing partiCipation of the public. Investors' confidence in the capital market can be sustained only by ensuring investors' protection. With this end in view, Government decided to vest SEBI with statutory powers required to deal effectively with all matters relating to the capital market."
Accordingly, the preamble to the SEBI Act, 1992 spells out its objects in the
following words:
"An Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental thereto."
~ 2. Discuss the constitution and management of Securities and Exchange Board of India.
.9lns .
Establishment of the SEBI (Board)
Securities and Exchange Board of India (SEBI) was established in 1988 through a Government resolution to promote orderly and healthy growth of the securities market and for investors' protection. SEBI has been established on the lines of Securities and Exchange Commission of USA which was set up in terms of the Securities Exchange Act, 1934 with a view to regulate the securities market and check unfair trade practices on the stock exchanges.
The ,Securities and ExchaI.ge Board of India (SEBI) Act, 1992
The ,Securities and ExchaI).ge Board of India (SEBI) Act, 1992
8-67
17. What is the specific advantage of Book-building process in connection with issue of securities by a company? State the guidelines issued by SEBI in this regard in respect of the following matters:
(i) Deteqnination of issue price and that of successful bidders. (ii) Reservation for individual investors who have not participated in the
bidding process and basis of allotment to such investors.
[May, 2000]
18. What are the Securities and Exchange Board of India's important guidelines
regarding pricing of first issue of equity shares of new companies?
[November, 2000]
19. What provision has been made under Section 15G of the SEBI Act, 1992, in
connection with penalty for insider trading? [November, 2000]
20. State, what is Employees Stock Option Scheme. Are promoters and the part-time
directors entitled to receive securities under the Scheme? Give Reasons.
8-67
17. What is the specific advantage of Book-building process in connection with issue of securities by a company? State the guidelines issued by SEBI in this regard in respect of the following matters:
(i) Deteqnination of issue price and that of successful bidders. (ii) Reservation for individual investors who have not participated in the
bidding process and basis of allotment to such investors.
[May, 2000]
18. What are the Securities and Exchange Board of India's important guidelines
regarding pricing of first issue of equity shares of new companies?
[November, 2000]
19. What provision has been made under Section 15G of the SEBI Act, 1992, in
connection with penalty for insider trading? [November, 2000]
20. State, what is Employees Stock Option Scheme. Are promoters and the part-time
directors entitled to receive securities under the Scheme? Give Reasons.
guidelines issued by the Securities and Exchange Board of India
audulent encashment of refund orders.
(ji) l!}
6. Answer the following on the basis of guidelines issued by SEBI :
(i) When will an advertisement relating to issue of shares be considered as
misleading?
(ii) Precautions to be taken while drafting financial data to be included in the
issue advertisement. [May, 19961
7. Answer the following:
Explain the guidelines issued by the Securities and Exchange Board of India
for the purpose of protecting the investors from unrealis?c projection of future
profitability in the prospectus. issued by a company. [Nov., 19961
8. Explain the manner in which the SEBI regulates the pricing of the issue of shares
on preferential basis arising out of warrants (Le.,.rights of holders of warrants
to apply for allotment of shares). -- [Nov. 19961
9. A Public Limited Company going for a public issue of shares desires to make preferential allotment of shares to certain Foreign Institutional Investors. Explain the conditions such a company wiH have to comply with as per the guidelines framed by the Securities and Exchange Board of India in this regard.
[May, 1997]
10. Describe briefly the guidelines issued by the Securities and Exchange Board of
India relating to book-build~£process. t [May, 19971
11. Under what circumstances can the Securities and Exchange Board of India, under
the provisions of the SEBI Act, 1992 take penal action against a stock bI'9!5.er for defaults
and against the different persons for insider trading? [Nov., 1997]
12. Explain the procedure as prescribed under the Securities and Exchange Board of
India Act, 1992 for determining the penalty for insider trading and the factors to
be taken into account in this regard. [May, 1998]
13. Briefly examine the powers vested in the Securities and Exchange Board of India
to regulate and prevent undesirable transactions in securities under the
Securities Contracts (Regulation) Act, 1956, by virtue of the SEBI Act, 1992.
. [May, 1998])
14. Pine Company Ltd. is a new company. Its commercial operation started on Jan. 1,1998 and its audited operative results are not yet available. State the guidelines (for the protection of investors) of the SEBI which would be applicable to Pine
Ltd. in respect of its first issue of shares. [Nov., 1998]
What would be your answer if Pine Ltd. is set up by Long Jones Co. Ltd. and Short Henry Co. Ltd. incorporated in 1987 and 1988 respe
15. Explain the guidelines issued by SEBI for the purpose of preventing fraudulent
encashment of refund orders in the case of public issues of shares and debentures.
, [May, 19991
16. Explain briefly the guidelines issued by SEBI to prevent the unscrupulous promoters
. from making preferential allotment of shares at prices favourable to themselves and
against the interest of other shareholders. [November, 1999]
(ji) l!}
6. Answer the following on the basis of guidelines issued by SEBI :
(i) When will an advertisement relating to issue of shares be considered as
misleading?
(ii) Precautions to be taken while drafting financial data to be included in the
issue advertisement. [May, 19961
7. Answer the following:
Explain the guidelines issued by the Securities and Exchange Board of India
for the purpose of protecting the investors from unrealis?c projection of future
profitability in the prospectus. issued by a company. [Nov., 19961
8. Explain the manner in which the SEBI regulates the pricing of the issue of shares
on preferential basis arising out of warrants (Le.,.rights of holders of warrants
to apply for allotment of shares). -- [Nov. 19961
9. A Public Limited Company going for a public issue of shares desires to make preferential allotment of shares to certain Foreign Institutional Investors. Explain the conditions such a company wiH have to comply with as per the guidelines framed by the Securities and Exchange Board of India in this regard.
[May, 1997]
10. Describe briefly the guidelines issued by the Securities and Exchange Board of
India relating to book-build~£process. t [May, 19971
11. Under what circumstances can the Securities and Exchange Board of India, under
the provisions of the SEBI Act, 1992 take penal action against a stock bI'9!5.er for defaults
and against the different persons for insider trading? [Nov., 1997]
12. Explain the procedure as prescribed under the Securities and Exchange Board of
India Act, 1992 for determining the penalty for insider trading and the factors to
be taken into account in this regard. [May, 1998]
13. Briefly examine the powers vested in the Securities and Exchange Board of India
to regulate and prevent undesirable transactions in securities under the
Securities Contracts (Regulation) Act, 1956, by virtue of the SEBI Act, 1992.
. [May, 1998])
14. Pine Company Ltd. is a new company. Its commercial operation started on Jan. 1,1998 and its audited operative results are not yet available. State the guidelines (for the protection of investors) of the SEBI which would be applicable to Pine
Ltd. in respect of its first issue of shares. [Nov., 1998]
What would be your answer if Pine Ltd. is set up by Long Jones Co. Ltd. and Short Henry Co. Ltd. incorporated in 1987 and 1988 respe
15. Explain the guidelines issued by SEBI for the purpose of preventing fraudulent
encashment of refund orders in the case of public issues of shares and debentures.
, [May, 19991
16. Explain briefly the guidelines issued by SEBI to prevent the unscrupulous promoters
. from making preferential allotment of shares at prices favourable to themselves and
against the interest of other shareholders. [November, 1999]
The Securities and Exchange Board of India (SEE!) Act, 1992
The Securities and Exchange Board of India (SEE!) Act, 1992
[Including SEBI Guidelines]
C.A. (Final) Past Examinations Questions (SCANNER)
1. An existing Public Company, the shares of which are not listed in any Stock Exchange, seeks your advice on the possibility of issuing equity shares to public at a premium. State when such companies can issue shares at a premium in the light of guidelines issued by the Securities and Exchange Board of India. What must be the minimum Promoter's contribution in such cases?
[May, 1994]
2. A company proposes to issue to public fully convertible debentures providing for conversion into equity shares at premium at different stages. Advise the company on the following matters in the light of guidelines issued by the Securities and Exchange Board of India:
(i) Terms of Issue.
(ii) Compulsory Conversion into Equity Shares.
(iii) Promoters' Contribution. [Nov., 1994]
3. A company, the shares of which are listed in a stock exchange, proposes to issue warrants on a preferential basis to directors, their friends and companies controlled by them. The warrant holders have an option to apply for shares at a future date. Advise t!1e company on the terms of issue of warrants in the light of guidelines issued by the Securities and Exchange Board of India.
[May, 199;.5]
4. An existing public limited company, proposing to issue equity shares and the
Partially Convertible Debentures, seeks your advise on the following matters:
(i) Preferential allotment of shares to be made in favour of Foreign Institution
al Investors registered with SEBI; and
(ii) Buy-back arrangements for Partially Convertible Debentures. Advise the
company in the light of the guidelines issued by the Securities and Ex
change Board of India. [May, 1995]
5. State the guidelines issued by SEBI for the purpose of protection of the investors
in respect of the following:
[Including SEBI Guidelines]
C.A. (Final) Past Examinations Questions (SCANNER)
1. An existing Public Company, the shares of which are not listed in any Stock Exchange, seeks your advice on the possibility of issuing equity shares to public at a premium. State when such companies can issue shares at a premium in the light of guidelines issued by the Securities and Exchange Board of India. What must be the minimum Promoter's contribution in such cases?
[May, 1994]
2. A company proposes to issue to public fully convertible debentures providing for conversion into equity shares at premium at different stages. Advise the company on the following matters in the light of guidelines issued by the Securities and Exchange Board of India:
(i) Terms of Issue.
(ii) Compulsory Conversion into Equity Shares.
(iii) Promoters' Contribution. [Nov., 1994]
3. A company, the shares of which are listed in a stock exchange, proposes to issue warrants on a preferential basis to directors, their friends and companies controlled by them. The warrant holders have an option to apply for shares at a future date. Advise t!1e company on the terms of issue of warrants in the light of guidelines issued by the Securities and Exchange Board of India.
[May, 199;.5]
4. An existing public limited company, proposing to issue equity shares and the
Partially Convertible Debentures, seeks your advise on the following matters:
(i) Preferential allotment of shares to be made in favour of Foreign Institution
al Investors registered with SEBI; and
(ii) Buy-back arrangements for Partially Convertible Debentures. Advise the
company in the light of the guidelines issued by the Securities and Ex
change Board of India. [May, 1995]
5. State the guidelines issued by SEBI for the purpose of protection of the investors
in respect of the following:
The Foreign Exchange Management Act (FEMA), 1999
The Foreign Exchange Management Act (FEMA), 1999
authorised in this behalf by the Central Government in such manner as may be prescribed. However, no contravention shall be compounded unless the amount involved in such contravention is quantifiable. Where a contravention has been compounded, no proceeding can continue or be initiated against the person in respect of the contravention so compounded.
Q28. Mr. G., an Indian national desires to obtain Foreign Exchange on current account transactions for the following purposes:
(i) Payment of commission on exports made towards equity investment in wholly
owned subsidiary abroad of an Indian company.
(ii) Remittance of hiring charges of transponder. (iii) Remittance for use of trade mark in India.
Advise G whether he can obtain Foreign Exchange and, if so, under what
conditions? fC.A. (Final) Nov. 2001J
.9Lns. Under Section 5 of the Foreign Exchange Management Act, 1999, certain Rules have been framed for drawal of foreign exchange on current account. According to the said rules, drawal of foreign exchange for certain transactions is prohibited. In respect of certain transactions drawal of foreign exchange is permissible with the prior approval of the Central Government. In respect of some of the transactions, prior permission of RBI is necessary for drawal of foreign exchange.
(i) In respect of item No.1, Le., payment of commission on exports made towards equity investment in wholly owned subsidiary abroad of an Indian company is prohibited.
(m Orawal of foreign exchange for remittance of hiring charges of transponder,
can be made with the prior approval of the Central Government.
(iii) So far as remittance for use of Trade Mark in India is concerned, the necessary
foreign exchange can be obtained with the prior permission of the Reserve
Bank of India.
In the case of (ii) and (iii) above, approval of concerned authority is not required if the payment is made out of funds held in Resident Foreign Currency (RFC) Account or Exchange Earner's Foreign Currency (EEFC) Account of the remitter. Alternatively, foreign exchange can be drawn from an authorised person.
authorised in this behalf by the Central Government in such manner as may be prescribed. However, no contravention shall be compounded unless the amount involved in such contravention is quantifiable. Where a contravention has been compounded, no proceeding can continue or be initiated against the person in respect of the contravention so compounded.
Q28. Mr. G., an Indian national desires to obtain Foreign Exchange on current account transactions for the following purposes:
(i) Payment of commission on exports made towards equity investment in wholly
owned subsidiary abroad of an Indian company.
(ii) Remittance of hiring charges of transponder. (iii) Remittance for use of trade mark in India.
Advise G whether he can obtain Foreign Exchange and, if so, under what
conditions? fC.A. (Final) Nov. 2001J
.9Lns. Under Section 5 of the Foreign Exchange Management Act, 1999, certain Rules have been framed for drawal of foreign exchange on current account. According to the said rules, drawal of foreign exchange for certain transactions is prohibited. In respect of certain transactions drawal of foreign exchange is permissible with the prior approval of the Central Government. In respect of some of the transactions, prior permission of RBI is necessary for drawal of foreign exchange.
(i) In respect of item No.1, Le., payment of commission on exports made towards equity investment in wholly owned subsidiary abroad of an Indian company is prohibited.
(m Orawal of foreign exchange for remittance of hiring charges of transponder,
can be made with the prior approval of the Central Government.
(iii) So far as remittance for use of Trade Mark in India is concerned, the necessary
foreign exchange can be obtained with the prior permission of the Reserve
Bank of India.
In the case of (ii) and (iii) above, approval of concerned authority is not required if the payment is made out of funds held in Resident Foreign Currency (RFC) Account or Exchange Earner's Foreign Currency (EEFC) Account of the remitter. Alternatively, foreign exchange can be drawn from an authorised person.
Appellate Tribunal and the Special Director (Appeals) shall have powers to regulate its own procedure [Section 28 (1)].
Appellate Tribunal and the Special Director (Appeals) shall have powers to regulate its own procedure [Section 28 (1)].
The Appellate Tribunal and the Special Director (Appeals) shall have, for the purposes of discharging its functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit, in respect of the following matters, namely:
(a) summoning and enforcing the attendance of any person and examining him
on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) subject to the provisions of sections 123 and 124 of the Indian Evidence Act,
1872 requisitioning any public record or document or copy of such record or
document from any office;
(e) issuing commissions for the examination of witnesses or documents;
(ft reviewing its decisions;
(g) dismissing a representation of default or deciding it ex parte;
(h) setting aside any order of dismissal of any representation for default or any
order passed by it ex parte; and
(i) any other matter which may be prescribed by the Central Government.
[Section 28(2)]
An Order made by the Appellate Tribunal or the Special Director (Appeals) under this Act shall be executable by the Appellate Tribunal or the Special Director (Appeals) as a decree of civil court and, for this purpose, the Appellate Tribunal and the Special Director (Appeals) shall have all powers of a civil court [Section 28(3)].
Notwithstanding anything contained in sub-section (3), the Appellate Tribunal or the Special Director (Appeals) may transmit cmy order made by it to a civil court having local jurisdiction and such civil court shall execute the orders as if it were a decree made by that court [Section 28(4)].
All proceedings before the Appellate Tribunal and the Special Director (Appeals) shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code and the Appellate Tribunal shall be deemed to be a civil court for the purposes of sections 345 and 346 of the Code of Criminal Procedure, 1973 [Section 28(5)].
Q 27. Mr. X. an Indian national has failed to realise and repatriate foreign exchange worth more than Rs.2 crores. Mr. X having realised that he had committed a contravention of the provisions of the Foreign Exchange Management Act. 1999.
desires to compound the said offence. Advise Mr. X. [CA. (Final) Nov. 2001J
f4.ns. Because of his failure to realise and repatriate foreign exchange, Mr. X has contravened the provisions of Section 8 of FEMA, 1999 and he is liable to the penalties leviable under Section 13, followed by adjudication proceedings. Section 15 of FEMA permits the offending party to compound the contravention within 180 days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank of India as may be
The Appellate Tribunal and the Special Director (Appeals) shall have, for the purposes of discharging its functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit, in respect of the following matters, namely:
(a) summoning and enforcing the attendance of any person and examining him
on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) subject to the provisions of sections 123 and 124 of the Indian Evidence Act,
1872 requisitioning any public record or document or copy of such record or
document from any office;
(e) issuing commissions for the examination of witnesses or documents;
(ft reviewing its decisions;
(g) dismissing a representation of default or deciding it ex parte;
(h) setting aside any order of dismissal of any representation for default or any
order passed by it ex parte; and
(i) any other matter which may be prescribed by the Central Government.
[Section 28(2)]
An Order made by the Appellate Tribunal or the Special Director (Appeals) under this Act shall be executable by the Appellate Tribunal or the Special Director (Appeals) as a decree of civil court and, for this purpose, the Appellate Tribunal and the Special Director (Appeals) shall have all powers of a civil court [Section 28(3)].
Notwithstanding anything contained in sub-section (3), the Appellate Tribunal or the Special Director (Appeals) may transmit cmy order made by it to a civil court having local jurisdiction and such civil court shall execute the orders as if it were a decree made by that court [Section 28(4)].
All proceedings before the Appellate Tribunal and the Special Director (Appeals) shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code and the Appellate Tribunal shall be deemed to be a civil court for the purposes of sections 345 and 346 of the Code of Criminal Procedure, 1973 [Section 28(5)].
Q 27. Mr. X. an Indian national has failed to realise and repatriate foreign exchange worth more than Rs.2 crores. Mr. X having realised that he had committed a contravention of the provisions of the Foreign Exchange Management Act. 1999.
desires to compound the said offence. Advise Mr. X. [CA. (Final) Nov. 2001J
f4.ns. Because of his failure to realise and repatriate foreign exchange, Mr. X has contravened the provisions of Section 8 of FEMA, 1999 and he is liable to the penalties leviable under Section 13, followed by adjudication proceedings. Section 15 of FEMA permits the offending party to compound the contravention within 180 days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank of India as may be
Appeal to Appellate Tribunal [Section 19]
Appeal to Appellate Tribunal [Section 19]
The Central Government or any person aggrieved by an Order made by an Adjudicating Authority, other than those referred to in sub-section (1) of Section 17, or the Special Director (appeals) may prefer an appeal to the Appellate Tribunal.
However, any person appealing against the Order of the Adjudicating Authority or the Special Director (Appeals) levying any penalty, shall while filing the appeat deposit the amount of such penalty with such authority as may be notified by the
Central Government. .
But where in any particular case, the Appellate Tribunal is of the opinion that the deposit of such penalty would cause undue hardship to such person, the Appellate Tribunal may dispense with such deposit subject to such conditions as it may deem fit to impos~ so as to safeguard the realisation of penalty [Section 19(1)].
Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which a copy of the order made by the Adjudicating Authority or the Special Director (Appeals) is received by the aggrieved person or by the Central Government and it shall be in such form, verified in such manner and be accompanied
- by such fee as may be prescribed [Section 19(2)].
However, the Appellate Tribunal may entertain an appeal after the expiry of the
said period of forty five days if it is satisfied that there was sufficient cause for not
filing it within that period.
On receipt of an appeal under sub-section (n the Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit confirming, modifying or setting aside the order appealed against [Section 19(3)].
The Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal and to the concerned Adjudicating Authority or the Special Director (Appeals), as the case may be [Section 19(4)].
The appeal filed before the Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within one hundred and eighty days from the date of receipt of the aPB~al [Section 19(5)].
Where any appeal could not be disposed of within the said period of one hundred and eighty days, the Appellate Tribunal shall record its reasons in writing for not disposing of the appeal within the said period.
Q 26. State the powers of Special Director (Appeals) and of the Appellate Tribunal in disposing off the appeals.
.9Lns .
Powers of Appellate Tribunal and Special Director [Section 28] f
The Appellate Tribunal and the Special Director (Appeals) shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 but shall be guided by the principles of natural justice and, subject to the other provisions of this Act, the
The Central Government or any person aggrieved by an Order made by an Adjudicating Authority, other than those referred to in sub-section (1) of Section 17, or the Special Director (appeals) may prefer an appeal to the Appellate Tribunal.
However, any person appealing against the Order of the Adjudicating Authority or the Special Director (Appeals) levying any penalty, shall while filing the appeat deposit the amount of such penalty with such authority as may be notified by the
Central Government. .
But where in any particular case, the Appellate Tribunal is of the opinion that the deposit of such penalty would cause undue hardship to such person, the Appellate Tribunal may dispense with such deposit subject to such conditions as it may deem fit to impos~ so as to safeguard the realisation of penalty [Section 19(1)].
Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which a copy of the order made by the Adjudicating Authority or the Special Director (Appeals) is received by the aggrieved person or by the Central Government and it shall be in such form, verified in such manner and be accompanied
- by such fee as may be prescribed [Section 19(2)].
However, the Appellate Tribunal may entertain an appeal after the expiry of the
said period of forty five days if it is satisfied that there was sufficient cause for not
filing it within that period.
On receipt of an appeal under sub-section (n the Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit confirming, modifying or setting aside the order appealed against [Section 19(3)].
The Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal and to the concerned Adjudicating Authority or the Special Director (Appeals), as the case may be [Section 19(4)].
The appeal filed before the Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within one hundred and eighty days from the date of receipt of the aPB~al [Section 19(5)].
Where any appeal could not be disposed of within the said period of one hundred and eighty days, the Appellate Tribunal shall record its reasons in writing for not disposing of the appeal within the said period.
Q 26. State the powers of Special Director (Appeals) and of the Appellate Tribunal in disposing off the appeals.
.9Lns .
Powers of Appellate Tribunal and Special Director [Section 28] f
The Appellate Tribunal and the Special Director (Appeals) shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 but shall be guided by the principles of natural justice and, subject to the other provisions of this Act, the
Saturday, January 12, 2008
State the penalties prescribed under FEMA for contravention of its provisions.
(i) that the payment for the goods or -software is made otherwise than in the
specified manner; or
(ii) that the payment is delayed beyond the period specified under these Regula
tions; or
(iii) that the proceeds of sale of the goods or software exported do not represent the full export value of the goods or software subject to such deductions, if any, as may be allowed by the Reserve Bank or, subject to the directions of the Reserve Bank, by an authorised dealer.
Exemption from Realisation and Repatriation (Section 9)
Section 9 seeks to provide for exemption from the provisions of section 4 and section
8 in respect of the following transactions:
(a) Possession of foreign currency or foreign coins by any person upto such limit
as the Reserve Bank may specify;
(b) foreign currency account held or operated by such person or class of persons
and the limit upto which the Reserve Bank may specify;
(c) foreign exchange acquired or received before July 8, 1947 or any income
arising or accruing thereon which is held outside India by any person in
pursuance of a general or special permission granted by the Reserve Bank;
(d) foreign exchange held by a person resident in India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred to in clause (c), including any income arising therefrom;
(e) foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means upto such limit as the Reserve Bank may specify; and
(I> such other receipts in foreign exchange as the Reserve Bank ma i specify.
Penalties
~ 24. State the penalties prescribed under FEMA for contravention of its provisions.
Jtns.
Penalty (Section 13)
If any person contravenes any provision of the FEMA, 1999 or any rule, regulation, notification, direction or order issued in exercise of the powers under FEMA, he shall be liable to penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh of rupees where the amount is not quantifiable. In case contravention is a continuing one, then a further fine of up to Rs. 5,000 per day till the contravention continues, may be levied (Section 13). However, almost all offences under the FEMA are compoundable.
The Government will appoint Adjudicating Authorities to hord enquiry for contravention of any provisions of the FEMA or FEMA Rules (Section 16). Again, Section 13 provides that any adjudicating authority may, in addition to
specified manner; or
(ii) that the payment is delayed beyond the period specified under these Regula
tions; or
(iii) that the proceeds of sale of the goods or software exported do not represent the full export value of the goods or software subject to such deductions, if any, as may be allowed by the Reserve Bank or, subject to the directions of the Reserve Bank, by an authorised dealer.
Exemption from Realisation and Repatriation (Section 9)
Section 9 seeks to provide for exemption from the provisions of section 4 and section
8 in respect of the following transactions:
(a) Possession of foreign currency or foreign coins by any person upto such limit
as the Reserve Bank may specify;
(b) foreign currency account held or operated by such person or class of persons
and the limit upto which the Reserve Bank may specify;
(c) foreign exchange acquired or received before July 8, 1947 or any income
arising or accruing thereon which is held outside India by any person in
pursuance of a general or special permission granted by the Reserve Bank;
(d) foreign exchange held by a person resident in India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred to in clause (c), including any income arising therefrom;
(e) foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means upto such limit as the Reserve Bank may specify; and
(I> such other receipts in foreign exchange as the Reserve Bank ma i specify.
Penalties
~ 24. State the penalties prescribed under FEMA for contravention of its provisions.
Jtns.
Penalty (Section 13)
If any person contravenes any provision of the FEMA, 1999 or any rule, regulation, notification, direction or order issued in exercise of the powers under FEMA, he shall be liable to penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh of rupees where the amount is not quantifiable. In case contravention is a continuing one, then a further fine of up to Rs. 5,000 per day till the contravention continues, may be levied (Section 13). However, almost all offences under the FEMA are compoundable.
The Government will appoint Adjudicating Authorities to hord enquiry for contravention of any provisions of the FEMA or FEMA Rules (Section 16). Again, Section 13 provides that any adjudicating authority may, in addition to
Realisation and Repatriation of Foreign Exchange (Section 8)
has been or will within the specified period, be paid in the specified manner.
Declaration shall be executed in sets of such number as may be specified.
(ii) Though the Act gives powers to the Reserve Bank to specify a Form for
declaration for export of services, no such Form has been prescribed.
(iii) Regulation No.4 specifies the categories of exports for which declaration of
Regulation No.3, need not be made. The exemptions, among others,
include
(a) export of goods/software not exceeding Rs. 25,000 in value.
(b) export.by way of gift not exceeding Rs. one lakh in value.
(c) export of goods not exceeding US $1,000 or its equivalent per transaction
to Myanmar under Barter Trade Agreement.
(iv) In terms of Regulation No.9, the export proceeds are required to be realised within a period of 6 months from the date of shipment. In the case of exports to a warehouse established abroad with the approval of the Reserve Bank, the proceeds have to be realised within 15 months from the date of shipment. The requirement of repatriation of proceeds on due date has been dispensed with. An enabling provision has been made in this regulation to delegate powers to authorised dealers to allow extension of time.
(v) Export of goods on credit terms beyond six months requires prior approval
of Reserve Bank, in terms of Regulation No. 10.
(vi) No person shall, except with the prior permission of the Reserve Bank, take or send out by land, sea or air any goods from India to any place outside India on lease or hire or under any arrangement or in any manner other than by way of sale or disposal of such goods (Regulation 14).
(vii) Any arrangement involving adjustment of value of goods imported into India, against value of goods exported from India, shall require prior approval of the Reserve Bank (Regulation 14).
(viii) Bank or authorised dealer would be required for export of goods or services on deferred payment terms or for execution of a turnkey project or civil construction contracts to comply with terms of Regulation No. 18. These proposals would be considered by the authority concerned in accordance with the guidelines issued by Reserve Bank.
~ 23. State the duties of an exporter with respect to realisation and repatriation of foreign exchange regarding goods and services exported out of India. Give exemptions, if any.
.9L1I.5 .
Realisation and Repatriation of Foreign Exchange (Section 8)
Section 8 provides that where any amount of foreign exchange is due or has been accrued to any person resident in India, such person should take all reasonable steps to realise and repatriate to India such foreign exchange, within such time and in such a manner as may be specified by the Reserve Bank.
Regulation No. 13 of Exports of Goods and Services Regulations, 2000 provides that no person shall do anything which has the effect of securing
Declaration shall be executed in sets of such number as may be specified.
(ii) Though the Act gives powers to the Reserve Bank to specify a Form for
declaration for export of services, no such Form has been prescribed.
(iii) Regulation No.4 specifies the categories of exports for which declaration of
Regulation No.3, need not be made. The exemptions, among others,
include
(a) export of goods/software not exceeding Rs. 25,000 in value.
(b) export.by way of gift not exceeding Rs. one lakh in value.
(c) export of goods not exceeding US $1,000 or its equivalent per transaction
to Myanmar under Barter Trade Agreement.
(iv) In terms of Regulation No.9, the export proceeds are required to be realised within a period of 6 months from the date of shipment. In the case of exports to a warehouse established abroad with the approval of the Reserve Bank, the proceeds have to be realised within 15 months from the date of shipment. The requirement of repatriation of proceeds on due date has been dispensed with. An enabling provision has been made in this regulation to delegate powers to authorised dealers to allow extension of time.
(v) Export of goods on credit terms beyond six months requires prior approval
of Reserve Bank, in terms of Regulation No. 10.
(vi) No person shall, except with the prior permission of the Reserve Bank, take or send out by land, sea or air any goods from India to any place outside India on lease or hire or under any arrangement or in any manner other than by way of sale or disposal of such goods (Regulation 14).
(vii) Any arrangement involving adjustment of value of goods imported into India, against value of goods exported from India, shall require prior approval of the Reserve Bank (Regulation 14).
(viii) Bank or authorised dealer would be required for export of goods or services on deferred payment terms or for execution of a turnkey project or civil construction contracts to comply with terms of Regulation No. 18. These proposals would be considered by the authority concerned in accordance with the guidelines issued by Reserve Bank.
~ 23. State the duties of an exporter with respect to realisation and repatriation of foreign exchange regarding goods and services exported out of India. Give exemptions, if any.
.9L1I.5 .
Realisation and Repatriation of Foreign Exchange (Section 8)
Section 8 provides that where any amount of foreign exchange is due or has been accrued to any person resident in India, such person should take all reasonable steps to realise and repatriate to India such foreign exchange, within such time and in such a manner as may be specified by the Reserve Bank.
Regulation No. 13 of Exports of Goods and Services Regulations, 2000 provides that no person shall do anything which has the effect of securing
Export of Goods and Services
Export of Goods and Services
Q 21. What are the obligations of an exporter of goods and services out of India? Explain.
J4.ns .
Obligations of Exporters
Section 7 deals with export of goods and services. Sub-section (1) of Section 7 provides that every exporter of goods shall furnish to the Reserve Bank or to such other authority a declaration, in such form and in such manner as may be specified, containing true and correct material particulars including the amount representing th~ full export value of the goods. Every exporter has to furnish such other information as may be required by the Reserve Bank. This provision is made for the purpose of ensuring that the export value of goods is received without any delay.
Sub-section (3) of Section 7 provides that every exporter of services shall,furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified by the regulations made under the FEMA containing true and correct material particulars in relation to payment for such services.
Q 22. State the provisions of FEMA and the regulations made thereunder with respect to regulation of export of goods and services out of India.
J4.ns .
Regulation of Exports
The Reserve Bank has framed the Foreign Exchange Management (Export of goods
and Services) Regulations, 2000. Salient features of these Regulations are:
(i) In terms of Section 7 of the Act the Reserve Bank has been empowered to regulate receipt of payments for goods or services exported from India by prescribing a Form of declaration. Accordingly, the Reserve Bank has in terms of the above referred regulations prescribed the following Forms for declaration of goods/software as specified in the schedule annexed to the Regulations:
(a) Form GR
(b) Form SOF
(c) Form PP
(d) Form SOFTEX
As per Regulation No.3, the aforesaid declaration shall include the amount representing
(i) the full export value of the goods or software; or
(ii) if the full export value is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods or the software in overseas market, and affirms in the said declaration that the full export value of goods (whether ascertainable at the time of export or not) or the software
Q 21. What are the obligations of an exporter of goods and services out of India? Explain.
J4.ns .
Obligations of Exporters
Section 7 deals with export of goods and services. Sub-section (1) of Section 7 provides that every exporter of goods shall furnish to the Reserve Bank or to such other authority a declaration, in such form and in such manner as may be specified, containing true and correct material particulars including the amount representing th~ full export value of the goods. Every exporter has to furnish such other information as may be required by the Reserve Bank. This provision is made for the purpose of ensuring that the export value of goods is received without any delay.
Sub-section (3) of Section 7 provides that every exporter of services shall,furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified by the regulations made under the FEMA containing true and correct material particulars in relation to payment for such services.
Q 22. State the provisions of FEMA and the regulations made thereunder with respect to regulation of export of goods and services out of India.
J4.ns .
Regulation of Exports
The Reserve Bank has framed the Foreign Exchange Management (Export of goods
and Services) Regulations, 2000. Salient features of these Regulations are:
(i) In terms of Section 7 of the Act the Reserve Bank has been empowered to regulate receipt of payments for goods or services exported from India by prescribing a Form of declaration. Accordingly, the Reserve Bank has in terms of the above referred regulations prescribed the following Forms for declaration of goods/software as specified in the schedule annexed to the Regulations:
(a) Form GR
(b) Form SOF
(c) Form PP
(d) Form SOFTEX
As per Regulation No.3, the aforesaid declaration shall include the amount representing
(i) the full export value of the goods or software; or
(ii) if the full export value is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods or the software in overseas market, and affirms in the said declaration that the full export value of goods (whether ascertainable at the time of export or not) or the software
A person resident outside India wants to make investment in a partnership firm/proprietorship concern. Advise.
b~ duly complied with. The person acquiring property should file with the Reserve Bank a declaration in the prescribed Form within 90 days.
The property can be transferred by way of mortgage to an authorised dealer as a security for any borrowing. If the asset is sold, sale proceeds can be repatriated only with prior permission of RBI.
Q 19. A person resident outside India wants to make investment in a partnership firm/proprietorship concern. Advise.
.9Lns .
Investment in Firm/Proprietary Concern in India
Provisions for investment in Firm or Proprietary concern in India are contained in Foreign Exchange Management (Investment in Firm or Proprietary concern in India) Regulations, 2000. These include:
Automatic Permission for Investment. A NRI/PIO can invest by way of contribution to the capital of a firm or a proprietary concern in India, provided that remittance is received from abroad and the finn or the proprietary concern is not engaged in any agricultural! plantation activity or real estate business, i.e., dealing in land and immovable property with a view to earning profit or earning income therefrom.
The amount invested shall not be eligible for repatriation outside India. [However, interest
is repatriable).
Where investment is made out of NRSR account of the non-resident investor, the income earned on investment or proceeds of investment shall be credited only to the NRSR account of the investor.
A firm or a proprietary concern in India may make payment to or for the credit of a non-resident Indian or a person of Indian origin the sum invested by such person in that firm or the proprietary concern or the income accruing to such person by way of profit on such investment.
Q 20. A person resident outside India has secured from an Indian company a contract to execute a project in India. Advise as to whether he needs the permission of the Reserve Bank.
.9Lns. Where a person resident outside India has secured from an Indian company a contract to execute a project in India, and
(a) the project is funded directly by inward remittance from abroad; or
(b) the project is funded by a bilateral or multilateral international funding
agency; or
(e) the project has been cleared by an appropriate authority; or
(d) a company or entity in India awarding the contract has been granted term loan
by a Public Financial Institution or a Bank in India for the project;
su~h person shall apply to the Reserve Bank in Form FNC 2 for permission to establish a project or site office in India.
Thus, permission of the Reserve Bank is a mandatory requirement for execution of a project by a person outside India in case the aforementioned conditions are present.
The property can be transferred by way of mortgage to an authorised dealer as a security for any borrowing. If the asset is sold, sale proceeds can be repatriated only with prior permission of RBI.
Q 19. A person resident outside India wants to make investment in a partnership firm/proprietorship concern. Advise.
.9Lns .
Investment in Firm/Proprietary Concern in India
Provisions for investment in Firm or Proprietary concern in India are contained in Foreign Exchange Management (Investment in Firm or Proprietary concern in India) Regulations, 2000. These include:
Automatic Permission for Investment. A NRI/PIO can invest by way of contribution to the capital of a firm or a proprietary concern in India, provided that remittance is received from abroad and the finn or the proprietary concern is not engaged in any agricultural! plantation activity or real estate business, i.e., dealing in land and immovable property with a view to earning profit or earning income therefrom.
The amount invested shall not be eligible for repatriation outside India. [However, interest
is repatriable).
Where investment is made out of NRSR account of the non-resident investor, the income earned on investment or proceeds of investment shall be credited only to the NRSR account of the investor.
A firm or a proprietary concern in India may make payment to or for the credit of a non-resident Indian or a person of Indian origin the sum invested by such person in that firm or the proprietary concern or the income accruing to such person by way of profit on such investment.
Q 20. A person resident outside India has secured from an Indian company a contract to execute a project in India. Advise as to whether he needs the permission of the Reserve Bank.
.9Lns. Where a person resident outside India has secured from an Indian company a contract to execute a project in India, and
(a) the project is funded directly by inward remittance from abroad; or
(b) the project is funded by a bilateral or multilateral international funding
agency; or
(e) the project has been cleared by an appropriate authority; or
(d) a company or entity in India awarding the contract has been granted term loan
by a Public Financial Institution or a Bank in India for the project;
su~h person shall apply to the Reserve Bank in Form FNC 2 for permission to establish a project or site office in India.
Thus, permission of the Reserve Bank is a mandatory requirement for execution of a project by a person outside India in case the aforementioned conditions are present.
Can a person resident outside India acquire immovable property in India
(e) any borrowing or lending in rupees in whatever form or by whatever name
called between a person resident in India and a person resident outside India;
(I> deposits between persons resident in India and persons resident outside India; (g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not exceeding
five years, by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not
exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other
liability incurred
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.
Q 18. Can a person resident outside India acquire immovable property in India? Explain.
.9Lns .
Acquisition and Transfer of Immovable Property in India
Restrictions in respect of acquisition and transfer of immovable property in India by non-resident are covered in Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000. These are:
(i) Acquisition and Transfer of property in India by an Indian Citizen Resident outside India. A person resident outside India who is a citizen of India may acquire any immovable property in India other than agricultural/plantation/farm house.
He can transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India.
If asset is sold after three years, amount equivalent to foreign exchange brought in can be repatriated.
(ii) Acquisition and Transfer of Property in India by a Person of Indian origin (PIO). A person of Indian origin resident outside India may acquire immovable property other than agricultural land/farm house/plantation property in India by purchase, from out of funds received in India by way of inward remittance from any place outsi?e India or funds held in any non-resident account in India.
He can also acquire property by gift/ inheritance. It can be transferred to citizen of India. If asset is sold after three years, amount equivalent to foreign exchange bro:ught
in can be repatriated.
Citizens of Bangladesh, Pakistan, Sri Lanka, Afghanistan, China, Nepal, Iran or Bhutan cannot acquire immovable property without prior permission of Reserve Bank of India. However, he can acquire by lease for a period upto five years.
(iii) Acquisition of Immovable Property for Carrying on Business. A person resident outside India who has established in India a branch or place of business (but not a mere liaison office) in accordance with RBI regulations, can acquire any immov
able property in India, which is nec2ssary for or incidental to carrying on such activity. All applicable laws, rules, regulations or directions for the time being in force should
called between a person resident in India and a person resident outside India;
(I> deposits between persons resident in India and persons resident outside India; (g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not exceeding
five years, by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not
exceeding five years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other
liability incurred
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.
Q 18. Can a person resident outside India acquire immovable property in India? Explain.
.9Lns .
Acquisition and Transfer of Immovable Property in India
Restrictions in respect of acquisition and transfer of immovable property in India by non-resident are covered in Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000. These are:
(i) Acquisition and Transfer of property in India by an Indian Citizen Resident outside India. A person resident outside India who is a citizen of India may acquire any immovable property in India other than agricultural/plantation/farm house.
He can transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India.
If asset is sold after three years, amount equivalent to foreign exchange brought in can be repatriated.
(ii) Acquisition and Transfer of Property in India by a Person of Indian origin (PIO). A person of Indian origin resident outside India may acquire immovable property other than agricultural land/farm house/plantation property in India by purchase, from out of funds received in India by way of inward remittance from any place outsi?e India or funds held in any non-resident account in India.
He can also acquire property by gift/ inheritance. It can be transferred to citizen of India. If asset is sold after three years, amount equivalent to foreign exchange bro:ught
in can be repatriated.
Citizens of Bangladesh, Pakistan, Sri Lanka, Afghanistan, China, Nepal, Iran or Bhutan cannot acquire immovable property without prior permission of Reserve Bank of India. However, he can acquire by lease for a period upto five years.
(iii) Acquisition of Immovable Property for Carrying on Business. A person resident outside India who has established in India a branch or place of business (but not a mere liaison office) in accordance with RBI regulations, can acquire any immov
able property in India, which is nec2ssary for or incidental to carrying on such activity. All applicable laws, rules, regulations or directions for the time being in force should
What is a capital account transaction? State the provisions of FEMA with respect to regulation of such transactions.
(ii) Gifts remittance exceeding US Dollars 5/000 per beneficiary per annum
(gift contemplated here is gift made to family members or relatives).
(iii) Donations exceeding US Dollars 5/000 per annum per beneficiary (the
donations contemplated here are donations to charitable/educational!
religious/ cultural organisations).
( iv) Exchange facilities exceeding US Dollars 5,(XX) for persons going abroad for employment
(v) Remittance for maintenance of close relatives abroad exceeding US Dollars
5/000 per year per recipient.
(vi) Release of foreign exchange exceeding US Dollars 25/000 to a person for
business travel or attending a conference or for maintenance expenses of a
patient going abroad for medical treatment, etc.
(vii) Release of exchange for studies abroad exceeding the estimate from the
institution abroad or US Dollars 30/000 whichever is higher.
(viii) Commission to agents abroad for sale of residential plots/ commercial plots
in India exceeding 5 per cent of the inward remittance.
(ix) Remittance of royalty and payment of lump sum fees under technical
collaboration agreement which is not registered with Reserve Bank.
(x) Remittance for use and/or purchase of trade mark in India. The maximum
amount of royalty payable on this account can not exceed 1 per cent of net sales
(earlier 1 per cent of gross sales) and 2 per cent of exports [ET, 4th Jan. 2002]
Capital Account Transactions
~ 17. What is a capital account transaction? State the provisions of FEMA with respect to regulation of such transactions.
.9L1l.5 .
Capital Account Transactions
Capital account transactions relate to movement of capital. These include transactions
in property and investments and lending and borrowing money.
Capital account transaction is defined in Section 2 (e) as a transaction which alters the assets or liabilities outside India of persons resident in India or assets or liabilities in India of persons resident outside India.
Regulation of Capital Account Transactions (Section 6)
Section 6 provides that the Reserve Bank may, in consultation with the Central Government, specify the permissible capital account transactions and the limits up to which foreign exchange will be allowed for such transactions. Sub-section (3) of Section 6 empowers tl1.e Reserve Bank to make regulations to prohibit or restrict or regulate the following:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of security by a person resident outside India;
(c) transfer or issue of any security or foreign security by any branch, office or
agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by
whatever nam~ called;
(gift contemplated here is gift made to family members or relatives).
(iii) Donations exceeding US Dollars 5/000 per annum per beneficiary (the
donations contemplated here are donations to charitable/educational!
religious/ cultural organisations).
( iv) Exchange facilities exceeding US Dollars 5,(XX) for persons going abroad for employment
(v) Remittance for maintenance of close relatives abroad exceeding US Dollars
5/000 per year per recipient.
(vi) Release of foreign exchange exceeding US Dollars 25/000 to a person for
business travel or attending a conference or for maintenance expenses of a
patient going abroad for medical treatment, etc.
(vii) Release of exchange for studies abroad exceeding the estimate from the
institution abroad or US Dollars 30/000 whichever is higher.
(viii) Commission to agents abroad for sale of residential plots/ commercial plots
in India exceeding 5 per cent of the inward remittance.
(ix) Remittance of royalty and payment of lump sum fees under technical
collaboration agreement which is not registered with Reserve Bank.
(x) Remittance for use and/or purchase of trade mark in India. The maximum
amount of royalty payable on this account can not exceed 1 per cent of net sales
(earlier 1 per cent of gross sales) and 2 per cent of exports [ET, 4th Jan. 2002]
Capital Account Transactions
~ 17. What is a capital account transaction? State the provisions of FEMA with respect to regulation of such transactions.
.9L1l.5 .
Capital Account Transactions
Capital account transactions relate to movement of capital. These include transactions
in property and investments and lending and borrowing money.
Capital account transaction is defined in Section 2 (e) as a transaction which alters the assets or liabilities outside India of persons resident in India or assets or liabilities in India of persons resident outside India.
Regulation of Capital Account Transactions (Section 6)
Section 6 provides that the Reserve Bank may, in consultation with the Central Government, specify the permissible capital account transactions and the limits up to which foreign exchange will be allowed for such transactions. Sub-section (3) of Section 6 empowers tl1.e Reserve Bank to make regulations to prohibit or restrict or regulate the following:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of security by a person resident outside India;
(c) transfer or issue of any security or foreign security by any branch, office or
agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by
whatever nam~ called;
Rule 4 of these Rules provides that no person can draw foreign exchange for the
Foreign Exchange Management (Current Account Transactions) Rules, 2000
The rules in this regard have been divided into three parts namely:
(i) Prohibition of drawal of foreign exchange; (ii) Drawal of foreign exchange with the prior approval of the Central Govern
ment;
(iii) Drawal of foreign exchange with the approval of the Reserve Bank of India. Rule 3 of the FEMA (Current Account Transactions) Rules, 2000 prohibits drawal of
foreign exchange by any person for the following purposes:
. Travel to Nepal or Bhutan.
. Remittance out of lottery winnings.
. Remittance of income from racing, riding, etc., or any other hobby.
. Remittance for purchase of lottery tickets, banned magazines, etc.
. Payment of commission on exports made towards equity investment in joint
ventures/wholly owned subsidiaries abroad of Indian companies.
. Payment of dividend by any company to which the requirement of dividend
balancing is applicable.
. Payment related to 'Call back services' of telephones (some overseas communication organisations offer 'call back services', i.e., where the receiver of call has to make payment). In such cases as per Indian Telegraph Rules, a subscriber has to make all payments in respect of call charges made or received by his telephone to telegraph authorities only. Hence, such remittance in respect of call back charges to overseas organisations is not permissible unless they are licensed/ authorised by the Department of Telecommunications. In view of this, the Rule prohibits drawal of foreign exchange for' call back services'.
. Remittance of interest on funds held in Non-Resident Special Rupees (NRSR)
Account Scheme.
Rule 4 of these Rules provides that no person can draw foreign exchange for the
following transactions without Government's prior approval.
(i) Cultural tours.
(ii) Remittance under technical collaboration arrangements where royalty
exceeds 5 per cent on local sales and 8 per cent on exports and lump sum
payment exceeding 2 million US Dollars.
(iii) Payment for securing insurance for health from a company abroad.
(iv) Remittance for membership of overseas protection and indemnity clubs
(P & I Clubs) by shipping companies.
(v) Multi-modal transport operators making remittance to their Agents abroad.
(vi) Remittance of container detention charges exceeding the rates prescribed by
Director General of Shipping:
Rule 5 provides that no person can draw foreign exchange for the following
transactions without the RBI's approval:
(i) Release of exchange exceeding US$10,OOOw.e.f.18.1l.2002 (earlier US $ 5,000) in a calendar year for one or more visits to any country (other than Nepal and Bhutan). Again, credit card limit on an international credit card shall not be covered under the ceiling of US $ 10,000 [ET 31.01.2003]
The rules in this regard have been divided into three parts namely:
(i) Prohibition of drawal of foreign exchange; (ii) Drawal of foreign exchange with the prior approval of the Central Govern
ment;
(iii) Drawal of foreign exchange with the approval of the Reserve Bank of India. Rule 3 of the FEMA (Current Account Transactions) Rules, 2000 prohibits drawal of
foreign exchange by any person for the following purposes:
. Travel to Nepal or Bhutan.
. Remittance out of lottery winnings.
. Remittance of income from racing, riding, etc., or any other hobby.
. Remittance for purchase of lottery tickets, banned magazines, etc.
. Payment of commission on exports made towards equity investment in joint
ventures/wholly owned subsidiaries abroad of Indian companies.
. Payment of dividend by any company to which the requirement of dividend
balancing is applicable.
. Payment related to 'Call back services' of telephones (some overseas communication organisations offer 'call back services', i.e., where the receiver of call has to make payment). In such cases as per Indian Telegraph Rules, a subscriber has to make all payments in respect of call charges made or received by his telephone to telegraph authorities only. Hence, such remittance in respect of call back charges to overseas organisations is not permissible unless they are licensed/ authorised by the Department of Telecommunications. In view of this, the Rule prohibits drawal of foreign exchange for' call back services'.
. Remittance of interest on funds held in Non-Resident Special Rupees (NRSR)
Account Scheme.
Rule 4 of these Rules provides that no person can draw foreign exchange for the
following transactions without Government's prior approval.
(i) Cultural tours.
(ii) Remittance under technical collaboration arrangements where royalty
exceeds 5 per cent on local sales and 8 per cent on exports and lump sum
payment exceeding 2 million US Dollars.
(iii) Payment for securing insurance for health from a company abroad.
(iv) Remittance for membership of overseas protection and indemnity clubs
(P & I Clubs) by shipping companies.
(v) Multi-modal transport operators making remittance to their Agents abroad.
(vi) Remittance of container detention charges exceeding the rates prescribed by
Director General of Shipping:
Rule 5 provides that no person can draw foreign exchange for the following
transactions without the RBI's approval:
(i) Release of exchange exceeding US$10,OOOw.e.f.18.1l.2002 (earlier US $ 5,000) in a calendar year for one or more visits to any country (other than Nepal and Bhutan). Again, credit card limit on an international credit card shall not be covered under the ceiling of US $ 10,000 [ET 31.01.2003]
Current Account Transactions
(v) The amount of deposit shall be received either by inward remittance from outside India through normal banking channels or by debit to NRE/FCNR (B) /NRO /NRNR or NRSR account. Where, however, the deposit is made out of funds held in NSRS account of the depositor, payment of interest as also the repayment of deposit shall be made only by credit to NRSR account of the depositor concerned. In all other cases, the maturity proceeds/interest shall be credited to NRO Account.
(vi) The proprietorship concern/firm/company accepting the deposit should comply with provisions of any other law, rules, regulations or orders made by Government or any other competent authority, as are applicable to it in regard to acceptance of deposits.
(vii) The proprietorship concern, firm or company accepting the deposit shall not utilise the amount of deposits for re-Iending (not applicable to a Non-Banking Finance Company) or for undertaking agricultural/plantation activities or real estate business or for investing in any other concern or firm or company engaged in or proposing to engage in agricultural/plantation activities or real estate business.
(viii) The amount of deposits accepted shalInotbe allowed to be repatriated outside India.
Current Account Transactions
~ 15. What is meant by 'Current Account Transaction' under FEMA,1999? 5lns.
Meaning of Current Account Transaction [Section 2 (j)]
"Current account transaction" means a transaction other than a capital account transaction. Without prejudice to the generality of the foregoing such transaction includes
(i) payments due in connection with foreign trade, other current business, ser
vices, and short-term banking and credit facilities in the ordinary course of business ,
(ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of parents, spouse and children residing
abroad, and
(iv) expenses in connection with foreign travel, education and medical care of
parents, spouse and children.
~ 16. State provisions of FEMA and the Rules made thereunder with respect to regulation of 'Current Account Transactions'.
5lns .
Section 5 provides that any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction. The same Section empowers the Central Government to impose reasonable restrictions for current account transactions in the public interest in consultation with the Reserve Bank by making appropriate rules.
(vi) The proprietorship concern/firm/company accepting the deposit should comply with provisions of any other law, rules, regulations or orders made by Government or any other competent authority, as are applicable to it in regard to acceptance of deposits.
(vii) The proprietorship concern, firm or company accepting the deposit shall not utilise the amount of deposits for re-Iending (not applicable to a Non-Banking Finance Company) or for undertaking agricultural/plantation activities or real estate business or for investing in any other concern or firm or company engaged in or proposing to engage in agricultural/plantation activities or real estate business.
(viii) The amount of deposits accepted shalInotbe allowed to be repatriated outside India.
Current Account Transactions
~ 15. What is meant by 'Current Account Transaction' under FEMA,1999? 5lns.
Meaning of Current Account Transaction [Section 2 (j)]
"Current account transaction" means a transaction other than a capital account transaction. Without prejudice to the generality of the foregoing such transaction includes
(i) payments due in connection with foreign trade, other current business, ser
vices, and short-term banking and credit facilities in the ordinary course of business ,
(ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of parents, spouse and children residing
abroad, and
(iv) expenses in connection with foreign travel, education and medical care of
parents, spouse and children.
~ 16. State provisions of FEMA and the Rules made thereunder with respect to regulation of 'Current Account Transactions'.
5lns .
Section 5 provides that any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction. The same Section empowers the Central Government to impose reasonable restrictions for current account transactions in the public interest in consultation with the Reserve Bank by making appropriate rules.
Acceptance of Deposits on Non-Repatriation Basis from NRl/PIO/OCBs
Resident (External) Account or Foreign Currency (Non-Resident) (Bank) Account maintained with an authorised dealer / authorised bank in India.
(iv) If the deposit accepting company is a NBFC, the rate of interest payable on deposits shall be in conformity with the guidelines/ directions issued by Reserve Bank for such companies. In other cases, the rate of interest payable on deposits shall not exceed the ceiling rate prescribed from time to time under the Companies (Acceptance of Deposit) Rules, 1975.
(v) The maturity period of deposits shall not exceed 3 years.
(vi) The company accepting the deposits shall comply with the provisions of any other law, rules, regulations, orders issued by the Government of India or any other competent authority, as are applicable to it in regard to acceptance of deposits.
(vii) The amount of aggregate deposits accepted by the company shall not exceed
35% of its net owned funds.
(viii) The payment of interest net of taxes may be made by the company to the
depositor by remittance through an authorised dealer or by credit to the
depositor's NRE/FCNR (B)/NRNR/NRO /NRSR account as desired by him.
(ix) The amount of deposits so collected shall not be utilised by the company for re-Iending (not applicable to a Non-Banking Finance Company) or for undertaking agricultural/plantation activities or real estate business or for investing in any other concern, firm or a company engaged in or proposing to engage in agricultural/plantation activities or real estate business.
(x) The repayment of the deposit may be made by the company to the depositor by remittance from India through an authorised dealer or by credit to the depositor's NRE/FCNR (B) account maintained with an authorised dealer in India provided the depositor continues to be a non-resident at the time of repayment.
(xi) The amount representing repayment of deposit may also be credited to the
depositor's NRNR/NRO or NRSR account, at the depositor's option.
Acceptance of Deposits on Non-Repatriation Basis from NRl/PIO/OCBs
A company incorporated in India (including a non-banking finance company registered with Reserve Bank) may accept deposits on non-repatriation basis from NRIsjOCBs, subject to the following conditions:
(i) In the case of a company, the deposits may be accepted either under private
arrangement or under a public deposit scheme.
(ii) If the deposit accepting company is a non-banking finance company, it should be registered with the Reserve Bank and should have obtained the required credit rating as stipulated under the guidelines issued by Reserve Bank for such companies.
(iii) The maturity period of deposit shall not exceed 3 years.
(iv) If the deposit accepting company is a non-banking finance company the rate
of interest payable on deposits shall be in conformity with the guidelines/directions issued by Reserve Bank for such companies. In other cases, the rate of interest payable on deposits shall not exceed the ceiling rate prescribed from time to time under the Companies (Acceptance of Deposit) Rules, 1975.
(iv) If the deposit accepting company is a NBFC, the rate of interest payable on deposits shall be in conformity with the guidelines/ directions issued by Reserve Bank for such companies. In other cases, the rate of interest payable on deposits shall not exceed the ceiling rate prescribed from time to time under the Companies (Acceptance of Deposit) Rules, 1975.
(v) The maturity period of deposits shall not exceed 3 years.
(vi) The company accepting the deposits shall comply with the provisions of any other law, rules, regulations, orders issued by the Government of India or any other competent authority, as are applicable to it in regard to acceptance of deposits.
(vii) The amount of aggregate deposits accepted by the company shall not exceed
35% of its net owned funds.
(viii) The payment of interest net of taxes may be made by the company to the
depositor by remittance through an authorised dealer or by credit to the
depositor's NRE/FCNR (B)/NRNR/NRO /NRSR account as desired by him.
(ix) The amount of deposits so collected shall not be utilised by the company for re-Iending (not applicable to a Non-Banking Finance Company) or for undertaking agricultural/plantation activities or real estate business or for investing in any other concern, firm or a company engaged in or proposing to engage in agricultural/plantation activities or real estate business.
(x) The repayment of the deposit may be made by the company to the depositor by remittance from India through an authorised dealer or by credit to the depositor's NRE/FCNR (B) account maintained with an authorised dealer in India provided the depositor continues to be a non-resident at the time of repayment.
(xi) The amount representing repayment of deposit may also be credited to the
depositor's NRNR/NRO or NRSR account, at the depositor's option.
Acceptance of Deposits on Non-Repatriation Basis from NRl/PIO/OCBs
A company incorporated in India (including a non-banking finance company registered with Reserve Bank) may accept deposits on non-repatriation basis from NRIsjOCBs, subject to the following conditions:
(i) In the case of a company, the deposits may be accepted either under private
arrangement or under a public deposit scheme.
(ii) If the deposit accepting company is a non-banking finance company, it should be registered with the Reserve Bank and should have obtained the required credit rating as stipulated under the guidelines issued by Reserve Bank for such companies.
(iii) The maturity period of deposit shall not exceed 3 years.
(iv) If the deposit accepting company is a non-banking finance company the rate
of interest payable on deposits shall be in conformity with the guidelines/directions issued by Reserve Bank for such companies. In other cases, the rate of interest payable on deposits shall not exceed the ceiling rate prescribed from time to time under the Companies (Acceptance of Deposit) Rules, 1975.
. In the Companies Act, 1956 and in FEMA, 1999, there are several provisions
Similarly, if one part of the document is in conflict with another part, an attempt should always be made to read the two parts of the document harmoniously, if possible. If that is not possible, then the earlier part will prevail over the latter one which should, therefore, be disregarded.
Q 7. In the Companies Act, 1956 and in FEMA, 1999, there are several provisions
which start with the words "without prejudice" and "notwithstanding". Explain (in not more than 1 0 lines each) the nature and significance thereof, applying the principles of statutory interpretation.
5'l.ns. It is true that there are a number of provisions in the Companies Act, 1956 and
the FEMA, 1999, which commence with the opening words "without prejudice" and "notwithstanding", depending on the subject regulated by, or the context in which the statutory provision is drafted. For example, Section 6(1) of the FEMA, commences with the words" Without prejudice to the generality of the provising of sub-section. (2) ...... Also, Section 9(a) of the Companies Act, provides that the Act would override memorandum, articles etc., of a company, and goes on to state that the provisions of this Act, shall, save as otherwise expressly provided in the Act have effect "notwithstanding anything to the contrary contained in the memorandum or articles of a
company ".
The word "notwithstanding" is often referred to in leading law lexicons as a "non-obstante clause". A non-obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.
On the other hand, the words "without prejudice" are used to indicate that when that expression is used, anything contained in the provisions following that expression is not intended to cut down the generality of the meaning of the preceding provision.
Q 8. Explain the rule of 'Reasonable construction' while interpreting the Statutes. How would you reconcile in case one part of the executed lease deed is in conflict with
the other part? [CA. (Final), May 99J
5'l.ns. For discussion on 'Rule of Reasonable Construction' -See under Ans. 2. Conflict Between Two Clauses of a Lease Deed
In case there is a conflict between two or more clauses in the Lease Deed, an effort should be made to resolve the conflict by interpreting the clauses so that both the
clauses are given effect to. . 4
Thus, an effort should be made to read both the parts of the Lease Deed har- . moniously, if possible. If that is n~ossible, then the earlier part will prevail over the
latter one which should be disregardea:
Q 7. In the Companies Act, 1956 and in FEMA, 1999, there are several provisions
which start with the words "without prejudice" and "notwithstanding". Explain (in not more than 1 0 lines each) the nature and significance thereof, applying the principles of statutory interpretation.
5'l.ns. It is true that there are a number of provisions in the Companies Act, 1956 and
the FEMA, 1999, which commence with the opening words "without prejudice" and "notwithstanding", depending on the subject regulated by, or the context in which the statutory provision is drafted. For example, Section 6(1) of the FEMA, commences with the words" Without prejudice to the generality of the provising of sub-section. (2) ...... Also, Section 9(a) of the Companies Act, provides that the Act would override memorandum, articles etc., of a company, and goes on to state that the provisions of this Act, shall, save as otherwise expressly provided in the Act have effect "notwithstanding anything to the contrary contained in the memorandum or articles of a
company ".
The word "notwithstanding" is often referred to in leading law lexicons as a "non-obstante clause". A non-obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.
On the other hand, the words "without prejudice" are used to indicate that when that expression is used, anything contained in the provisions following that expression is not intended to cut down the generality of the meaning of the preceding provision.
Q 8. Explain the rule of 'Reasonable construction' while interpreting the Statutes. How would you reconcile in case one part of the executed lease deed is in conflict with
the other part? [CA. (Final), May 99J
5'l.ns. For discussion on 'Rule of Reasonable Construction' -See under Ans. 2. Conflict Between Two Clauses of a Lease Deed
In case there is a conflict between two or more clauses in the Lease Deed, an effort should be made to resolve the conflict by interpreting the clauses so that both the
clauses are given effect to. . 4
Thus, an effort should be made to read both the parts of the Lease Deed har- . moniously, if possible. If that is n~ossible, then the earlier part will prevail over the
latter one which should be disregardea:
Discuss the Rules af Interpretatian af Deeds and Dacuments.
It is a cardinal rule o.f interpretatio.n that a proviso. to. a particular pro.visio.n o.f a statute o.nly embraces the field which is co.vered by the main pro.visio.n. It carves o.ut an exceptio.n to. the main"pro.visio.n to. which it has been enacted as a proviso. and to. no. o.ther. (Ram Narain Sons Ltd. Vs. Assistant Commissioner of Sales Tax, AIR 1955 SC 765).
(h) Explanation
An explanatio.n is at times appended to. a sectio.n to. explain the meaning o.f the text o.f the sectio.n. An Explanatio.n may be added to. include so.mething within the sectio.n o.r to. exclude so.mething fro.m it. An Explanatio.n sho.uld no.rmally be so. read as to. harmo.nise with and clear up any ambiguity in the main section. It sho.uld no.t be so. co.nstrued as to. widen the ambit o.f the sectio.n.
(i) Schedules
The Schedules fo.rm part o.f an Act. Therefo.re, they must be read to.gether with the Act fo.r all purpo.ses o.f Co.nstructio.n. Ho.wever, the expressio.ns in the Schedule canno.t co.ntro.l o.r prevail o.ver the express enactment. If there appears to. be any inco.nsistency
. between the schedule and the enactment, the enactment shall always prevail.
~ 6. Discuss the Rules af Interpretatian af Deeds and Dacuments.
.9Lns .
Rules of Interpretation of Deeds and Documents
The first and fo.remo.st Po.int that has to. be bo.rne in mind is that o.ne has to. find o.ut reaso.nable what a man, who. has taken care to. info.rm himself o.f the surro.unding circumstances o.f a deed o.r a do.cument, and o.f its sco.pe and intendments, wo.uld understand by the wo.rds used in the at deed o.r do.cument.
It is inexpedient to. co.nstrue the terms o.f o.ne deed by reference to. the terms af
ano.ther.
Further, it is well established that the same wo.rd canno.t have two. different meanings
in the same document, unless the co.ntext co.mpels the ado.ptio.n o.f such a rule.
The Go.lden Rule is to. ascertain the intentio.n o.f the parties to. the instrument after co.nsidering all the wo.rds in the do.cument/deed co.ncerned in their o.rdinary, natural sense. Fo.r this purpo.se, the relevant po.rtio.ns o.f the document have to. be co.nsidered as a who.le. The circumstances in which the particular wo.rds had been used have also. to. be taken into. acco.unt. Very o.ften, the status and training o.f the parties using the wo.rds have also. to. be taken into. acco.unt as the same wo.rds may be used by an o.rdinary perso.n in o.ne sense and by a trained perso.n o.r a specialist in quite ano.ther and a special senSe. It has also. to. be co.nsidered that very many wo.rds are used in mo.re than o.ne sense. It may happen that the same wo.rd understo.o.d in o.ne sense will give effect to. all the clauses in the deed while taken in ano.ther sense might render o.ne o.r mo.re o.f the clauses ineffective. In such a case the wo.rd sho.uld be understo.o.d in the fo.rmer and no.t the latter sense.
It may also. happen that there is a Co.nflict between two. o.r mo.re clauses o.f the same do.cument. An effo.rt must be made to. reso.lve the co.nflict by interpreting the clauses so. that all the clauses are given effect to.. If, ho.wever, it is no.t po.ssible to. give effect to. all o.f them, then it is the earlier clause that will o.ver-ride the latter one.
(h) Explanation
An explanatio.n is at times appended to. a sectio.n to. explain the meaning o.f the text o.f the sectio.n. An Explanatio.n may be added to. include so.mething within the sectio.n o.r to. exclude so.mething fro.m it. An Explanatio.n sho.uld no.rmally be so. read as to. harmo.nise with and clear up any ambiguity in the main section. It sho.uld no.t be so. co.nstrued as to. widen the ambit o.f the sectio.n.
(i) Schedules
The Schedules fo.rm part o.f an Act. Therefo.re, they must be read to.gether with the Act fo.r all purpo.ses o.f Co.nstructio.n. Ho.wever, the expressio.ns in the Schedule canno.t co.ntro.l o.r prevail o.ver the express enactment. If there appears to. be any inco.nsistency
. between the schedule and the enactment, the enactment shall always prevail.
~ 6. Discuss the Rules af Interpretatian af Deeds and Dacuments.
.9Lns .
Rules of Interpretation of Deeds and Documents
The first and fo.remo.st Po.int that has to. be bo.rne in mind is that o.ne has to. find o.ut reaso.nable what a man, who. has taken care to. info.rm himself o.f the surro.unding circumstances o.f a deed o.r a do.cument, and o.f its sco.pe and intendments, wo.uld understand by the wo.rds used in the at deed o.r do.cument.
It is inexpedient to. co.nstrue the terms o.f o.ne deed by reference to. the terms af
ano.ther.
Further, it is well established that the same wo.rd canno.t have two. different meanings
in the same document, unless the co.ntext co.mpels the ado.ptio.n o.f such a rule.
The Go.lden Rule is to. ascertain the intentio.n o.f the parties to. the instrument after co.nsidering all the wo.rds in the do.cument/deed co.ncerned in their o.rdinary, natural sense. Fo.r this purpo.se, the relevant po.rtio.ns o.f the document have to. be co.nsidered as a who.le. The circumstances in which the particular wo.rds had been used have also. to. be taken into. acco.unt. Very o.ften, the status and training o.f the parties using the wo.rds have also. to. be taken into. acco.unt as the same wo.rds may be used by an o.rdinary perso.n in o.ne sense and by a trained perso.n o.r a specialist in quite ano.ther and a special senSe. It has also. to. be co.nsidered that very many wo.rds are used in mo.re than o.ne sense. It may happen that the same wo.rd understo.o.d in o.ne sense will give effect to. all the clauses in the deed while taken in ano.ther sense might render o.ne o.r mo.re o.f the clauses ineffective. In such a case the wo.rd sho.uld be understo.o.d in the fo.rmer and no.t the latter sense.
It may also. happen that there is a Co.nflict between two. o.r mo.re clauses o.f the same do.cument. An effo.rt must be made to. reso.lve the co.nflict by interpreting the clauses so. that all the clauses are given effect to.. If, ho.wever, it is no.t po.ssible to. give effect to. all o.f them, then it is the earlier clause that will o.ver-ride the latter one.
Definitional Sections/Clauses
a Section cannot be used for construing the Section. In c.!. T. V s. Ahmedbhai Umarbhai & Co. (AIR 1950 SC 134 at 141), Patanjali Shastri, J., had declared: "Marginal notes in an Indian statute, as in an Act of Parliament cannot be referred to for the purpose of construing the statute", and the :same view has been taken in many other cases.
However, marginal notes appended to Articles of the Constitution have been held to be part of the Constitution as passed by the Constituent Assembly and, therefore, have been made use of in construing the Articles.
(e) Definitional Sections/Clauses
The legislature has the power to embody in a statute itself the definitions of its language and it is quite common to find in the statutes 'definitions' of certain ~ords and expressions used in the body of the statute. When a word or phrase is defined as having a particular meaning in the enactment, it is that meaning alone which must be given to it in interpreting a Section of the Act unless there be anything repugnant in the context. The Court cannot ignore the statutory definition and try and extract what it considers to be the true meaning of the expression independehtly of.it.
The purpose of a definition clause is two-fold: (i) to provide a key to the proper interpretation of the enactment, and (ii) to shorten the language of the enacting part by avoiding repetition of the same words contained in the definition part every time the legislature wants to refer to the expressions contained in the definition.
The definition of a word or expression in the definition section may either be restricting of its ordinary meaning or may be extensive of the sarne. When a word is defined to 'mean' such and such, the definition is 'prima facie' restrictive and exhaustive-we must restrict the meaning of the word to that given in the definition section. But where the word is defined to 'include' such and such, the definition is 'prima facie' extensive: here the word defined is not restricted to the meaning assigned to it but has extensive meaning which also includes the meaning assigned to it in the definition section. We may also find a word being defined as 'means and includes' such and such: here again the definition would be exhaustive.
It has been a universally accepted principle that where an expression is defined in an Act, it must be taken to have, throughout the Act, the meaning assigned to it by the definition, unless by doing so any repugnancy is created in the subject or context.
if) Illustrations
We would find that many, though not all, sections have illustrations appended to them. These illustrations follow the text of the Sections and, therefore, do.not form a part of the Sections. However, illustrations. do form a part of the statute and are considered to be of relevance and value in construing the text of the sections. I-Jowever, illustrations cannot have the effect of modifying the language of the section and can neither curtail nor expand the ambit of the section.
(g) Proviso
The normal function of a proviso is to except something out of the enactment or to qualify something stated in the enactment which would be within its purview if the proviso were not there. The effect of the proviso is to qualify the preceding enactment which is expressed in terms which are too general. As a general rule, a proviso is added
. to an enactment to qualify or create an exception to what is in the enactment: ordinarily a proviso is not interpreted as stating a general rule.
However, marginal notes appended to Articles of the Constitution have been held to be part of the Constitution as passed by the Constituent Assembly and, therefore, have been made use of in construing the Articles.
(e) Definitional Sections/Clauses
The legislature has the power to embody in a statute itself the definitions of its language and it is quite common to find in the statutes 'definitions' of certain ~ords and expressions used in the body of the statute. When a word or phrase is defined as having a particular meaning in the enactment, it is that meaning alone which must be given to it in interpreting a Section of the Act unless there be anything repugnant in the context. The Court cannot ignore the statutory definition and try and extract what it considers to be the true meaning of the expression independehtly of.it.
The purpose of a definition clause is two-fold: (i) to provide a key to the proper interpretation of the enactment, and (ii) to shorten the language of the enacting part by avoiding repetition of the same words contained in the definition part every time the legislature wants to refer to the expressions contained in the definition.
The definition of a word or expression in the definition section may either be restricting of its ordinary meaning or may be extensive of the sarne. When a word is defined to 'mean' such and such, the definition is 'prima facie' restrictive and exhaustive-we must restrict the meaning of the word to that given in the definition section. But where the word is defined to 'include' such and such, the definition is 'prima facie' extensive: here the word defined is not restricted to the meaning assigned to it but has extensive meaning which also includes the meaning assigned to it in the definition section. We may also find a word being defined as 'means and includes' such and such: here again the definition would be exhaustive.
It has been a universally accepted principle that where an expression is defined in an Act, it must be taken to have, throughout the Act, the meaning assigned to it by the definition, unless by doing so any repugnancy is created in the subject or context.
if) Illustrations
We would find that many, though not all, sections have illustrations appended to them. These illustrations follow the text of the Sections and, therefore, do.not form a part of the Sections. However, illustrations. do form a part of the statute and are considered to be of relevance and value in construing the text of the sections. I-Jowever, illustrations cannot have the effect of modifying the language of the section and can neither curtail nor expand the ambit of the section.
(g) Proviso
The normal function of a proviso is to except something out of the enactment or to qualify something stated in the enactment which would be within its purview if the proviso were not there. The effect of the proviso is to qualify the preceding enactment which is expressed in terms which are too general. As a general rule, a proviso is added
. to an enactment to qualify or create an exception to what is in the enactment: ordinarily a proviso is not interpreted as stating a general rule.
Illustrations Proviso Explanation Schedules
Illustrations Proviso Explanation Schedules
(a) Long Title
An enactment would have what is known as a 'Short Title' and also a 'Long Title'. The 'Short Title' merely identifies the enactment and is chosen merely for convenience. The 'Long Title', on the other hand, describes the enactment and does not merely identify it.
lt is now settled that the Long Title of an Act is a part of the Act. We can, therefore, refer to it to ascertairi the object, scope and purpose of the Act.
(b) Preamble
The Preamble expresses the scope, object and purpose of the Act more comprehensively than the Long Title. The Preamble may recite the ground and the cause of making a statute and the evil which is sought to be remedied by it.
Like the Long Title, the Preamble of a Statute is a part of the enactment and can legitimately be used for construing it. However, the Preamble does not over-ride the plain provisions of the Act but if the wording of th~ statute gives rise to doubts as to its proper construction, e.g., where the word or phrase has more than one meaning and a doubt arises as to which of the two meanings is intended in the Act, the Preamble can and ought to be referred to in order to arrive at the proper construction.
In short, the Preamble to an Act discloses the primary intention of the legislature but can only be brought in as an aid to construction if the language of the statute is not clear. However, it cannot override the provisions of the enactment.
(c) Heading and Title of a Chapter
If we glance through any Act, we would generally find that a number of its Sections applicable to any particular object are grouped together, sometimes in the form of Chapters, prefixed by Headings and/ or Titles. These Headings and Titles prefixed to sections or groups of sections can legitimately be referred to for the purpose of construing the enactment or its parts. However, there is a conflict of opinion about the weightage to be given to them. While one section of opinion considers that a heading to be regarded as giving the key to the interpretation of the clauses ranged under it and might be treated as 'preambles to the provisions following it', the other section of opinion is emphatic that resort to the heading can only be taken when the enacting words are ambiguous. According to this view heading or titles prefixed to sections or group of sections may be referred to as to construction of doubtful expressions, but cannot be used to restrict the plain terms of an enactment.
We must, however, note that the heading to one group of sections cannot be used to interpret another group of sections.
(d) Marginal Notes
Although there is difference of opinion regarding resort to Marginal Notes for construing an enactment, the generally held view is that the Marginal Notes appended to
(a) Long Title
An enactment would have what is known as a 'Short Title' and also a 'Long Title'. The 'Short Title' merely identifies the enactment and is chosen merely for convenience. The 'Long Title', on the other hand, describes the enactment and does not merely identify it.
lt is now settled that the Long Title of an Act is a part of the Act. We can, therefore, refer to it to ascertairi the object, scope and purpose of the Act.
(b) Preamble
The Preamble expresses the scope, object and purpose of the Act more comprehensively than the Long Title. The Preamble may recite the ground and the cause of making a statute and the evil which is sought to be remedied by it.
Like the Long Title, the Preamble of a Statute is a part of the enactment and can legitimately be used for construing it. However, the Preamble does not over-ride the plain provisions of the Act but if the wording of th~ statute gives rise to doubts as to its proper construction, e.g., where the word or phrase has more than one meaning and a doubt arises as to which of the two meanings is intended in the Act, the Preamble can and ought to be referred to in order to arrive at the proper construction.
In short, the Preamble to an Act discloses the primary intention of the legislature but can only be brought in as an aid to construction if the language of the statute is not clear. However, it cannot override the provisions of the enactment.
(c) Heading and Title of a Chapter
If we glance through any Act, we would generally find that a number of its Sections applicable to any particular object are grouped together, sometimes in the form of Chapters, prefixed by Headings and/ or Titles. These Headings and Titles prefixed to sections or groups of sections can legitimately be referred to for the purpose of construing the enactment or its parts. However, there is a conflict of opinion about the weightage to be given to them. While one section of opinion considers that a heading to be regarded as giving the key to the interpretation of the clauses ranged under it and might be treated as 'preambles to the provisions following it', the other section of opinion is emphatic that resort to the heading can only be taken when the enacting words are ambiguous. According to this view heading or titles prefixed to sections or group of sections may be referred to as to construction of doubtful expressions, but cannot be used to restrict the plain terms of an enactment.
We must, however, note that the heading to one group of sections cannot be used to interpret another group of sections.
(d) Marginal Notes
Although there is difference of opinion regarding resort to Marginal Notes for construing an enactment, the generally held view is that the Marginal Notes appended to
Explain the rule of 'beneficial construction' while interpreting the statute quoting
(2) Expressio Unius Exclusio Alterius. This principle, 'Expressio Unius Exclusio Alterius' states that express mention of one is the exclusion of other e.g., if statute refers to 'lands, house and coal-mines', other mines except coal mines are excluded and, 'other mines' cannot be made to fall within the general term 'lands'-Gilmore Vs. Baker-Carr (1962) 1 WLR 1165. In Kemka and Co. Vs. State of Maharashtra-1975(2) see 22, this rule was applied. In this case, the first part of sub-section talked of enforcement of tax payable under the eST Act while second part of sub-section talked about tax and penalties payable under the eST Act. It was held that the first part of sub-section was not applicable for 'penalties' as the word has been specifically excluded in the first part. By expressly mentioning only 'taxes', it may be regarded as silently excluding 'penalties' from its application.
However, this maxim is a merely auxiliary rule and should be applied with great caution. It is a 'valuable servant but dangerous master'. In Parbhani Transport Vs. RT A-AIR 1960 se 801, it was said that this principle can be used only for ascertaining intention of legislature. If the statutory language is plain and clear, there is 1<0 scope for applying this rule.
Q 3. Explain the rule of 'beneficial construction' while interpreting the statute quoting
an example [CA (Final) May, 2000]
.9l.11.5 See Il11der Ans. to Q. 2.
Q4fixplain the principle of grammatical interpretation vis-a-vis logical interpretation ~cially in the context that the duty of the Court is to administer the law as it stands and not to find out whether the law is just or reasonable.
[C.A. (Final) Nov.2001]
.9l.11.5. Interpretation may be either grammatical or logical. Grammatical interpretation concerns itself exclusively with the verbal expression of law. It does not go beyond the letter of the law. Logical interpreFiirion onthe other hand, seeks more satisfactory evidence ofthe true intention of the legislature. In all ordinary cases; the grammatical interpretation is the sole form allowable. rThe court cannot take from or add to or modify the letter of the law. However, where the letter of the law is logically defective on account of ambiguity, inconsistency or incompleteness, the court is under a duty to travel beyond the letter of law so as to determine from the other sources, the true intentions of the legislature. Further, a statute is enforceable at law, however, unreasonable it may be. The duty of the court is to administer the law as it stands. It is not within its jurisdiction to see whether the law is just or unreasonable. However, if there are two possible constructions of a clause, one a mere mechanical construction based on the rules of grammar and the other which emerges from the setting in which the clause appears and the circumstances in which it came to be enacted and also the words used therein, the courts may prefer the second construction which though may not be literal may be a better one. (Arora vs. State of UP)
Q 5. How do the following help in Interpretation/Construction of Statutes? (a) Long Title
(b) Preamble
(e) Heading and Title of a Chapter
(d) Marginal notes
(e) Definitional Sections/Clauses
However, this maxim is a merely auxiliary rule and should be applied with great caution. It is a 'valuable servant but dangerous master'. In Parbhani Transport Vs. RT A-AIR 1960 se 801, it was said that this principle can be used only for ascertaining intention of legislature. If the statutory language is plain and clear, there is 1<0 scope for applying this rule.
Q 3. Explain the rule of 'beneficial construction' while interpreting the statute quoting
an example [CA (Final) May, 2000]
.9l.11.5 See Il11der Ans. to Q. 2.
Q4fixplain the principle of grammatical interpretation vis-a-vis logical interpretation ~cially in the context that the duty of the Court is to administer the law as it stands and not to find out whether the law is just or reasonable.
[C.A. (Final) Nov.2001]
.9l.11.5. Interpretation may be either grammatical or logical. Grammatical interpretation concerns itself exclusively with the verbal expression of law. It does not go beyond the letter of the law. Logical interpreFiirion onthe other hand, seeks more satisfactory evidence ofthe true intention of the legislature. In all ordinary cases; the grammatical interpretation is the sole form allowable. rThe court cannot take from or add to or modify the letter of the law. However, where the letter of the law is logically defective on account of ambiguity, inconsistency or incompleteness, the court is under a duty to travel beyond the letter of law so as to determine from the other sources, the true intentions of the legislature. Further, a statute is enforceable at law, however, unreasonable it may be. The duty of the court is to administer the law as it stands. It is not within its jurisdiction to see whether the law is just or unreasonable. However, if there are two possible constructions of a clause, one a mere mechanical construction based on the rules of grammar and the other which emerges from the setting in which the clause appears and the circumstances in which it came to be enacted and also the words used therein, the courts may prefer the second construction which though may not be literal may be a better one. (Arora vs. State of UP)
Q 5. How do the following help in Interpretation/Construction of Statutes? (a) Long Title
(b) Preamble
(e) Heading and Title of a Chapter
(d) Marginal notes
(e) Definitional Sections/Clauses
Explain the rule of 'beneficial construction' while interpreting the statute quoting
(2) Expressio Unius Exclusio Alterius. This principle, 'Expressio Unius Exclusio Alterius' states that express mention of one is the exclusion of other e.g., if statute refers to 'lands, house and coal-mines', other mines except coal mines are excluded and, 'other mines' cannot be made to fall within the general term 'lands'-Gilmore Vs. Baker-Carr (1962) 1 WLR 1165. In Kemka and Co. Vs. State of Maharashtra-1975(2) see 22, this rule was applied. In this case, the first part of sub-section talked of enforcement of tax payable under the eST Act while second part of sub-section talked about tax and penalties payable under the eST Act. It was held that the first part of sub-section was not applicable for 'penalties' as the word has been specifically excluded in the first part. By expressly mentioning only 'taxes', it may be regarded as silently excluding 'penalties' from its application.
However, this maxim is a merely auxiliary rule and should be applied with great caution. It is a 'valuable servant but dangerous master'. In Parbhani Transport Vs. RT A-AIR 1960 se 801, it was said that this principle can be used only for ascertaining intention of legislature. If the statutory language is plain and clear, there is 1<0 scope for applying this rule.
Q 3. Explain the rule of 'beneficial construction' while interpreting the statute quoting
an example [CA (Final) May, 2000]
.9l.11.5 See Il11der Ans. to Q. 2.
Q4fixplain the principle of grammatical interpretation vis-a-vis logical interpretation ~cially in the context that the duty of the Court is to administer the law as it stands and not to find out whether the law is just or reasonable.
[C.A. (Final) Nov.2001]
.9l.11.5. Interpretation may be either grammatical or logical. Grammatical interpretation concerns itself exclusively with the verbal expression of law. It does not go beyond the letter of the law. Logical interpreFiirion onthe other hand, seeks more satisfactory evidence ofthe true intention of the legislature. In all ordinary cases; the grammatical interpretation is the sole form allowable. rThe court cannot take from or add to or modify the letter of the law. However, where the letter of the law is logically defective on account of ambiguity, inconsistency or incompleteness, the court is under a duty to travel beyond the letter of law so as to determine from the other sources, the true intentions of the legislature. Further, a statute is enforceable at law, however, unreasonable it may be. The duty of the court is to administer the law as it stands. It is not within its jurisdiction to see whether the law is just or unreasonable. However, if there are two possible constructions of a clause, one a mere mechanical construction based on the rules of grammar and the other which emerges from the setting in which the clause appears and the circumstances in which it came to be enacted and also the words used therein, the courts may prefer the second construction which though may not be literal may be a better one. (Arora vs. State of UP)
Q 5. How do the following help in Interpretation/Construction of Statutes? (a) Long Title
(b) Preamble
(e) Heading and Title of a Chapter
(d) Marginal notes
(e) Definitional Sections/Clauses
However, this maxim is a merely auxiliary rule and should be applied with great caution. It is a 'valuable servant but dangerous master'. In Parbhani Transport Vs. RT A-AIR 1960 se 801, it was said that this principle can be used only for ascertaining intention of legislature. If the statutory language is plain and clear, there is 1<0 scope for applying this rule.
Q 3. Explain the rule of 'beneficial construction' while interpreting the statute quoting
an example [CA (Final) May, 2000]
.9l.11.5 See Il11der Ans. to Q. 2.
Q4fixplain the principle of grammatical interpretation vis-a-vis logical interpretation ~cially in the context that the duty of the Court is to administer the law as it stands and not to find out whether the law is just or reasonable.
[C.A. (Final) Nov.2001]
.9l.11.5. Interpretation may be either grammatical or logical. Grammatical interpretation concerns itself exclusively with the verbal expression of law. It does not go beyond the letter of the law. Logical interpreFiirion onthe other hand, seeks more satisfactory evidence ofthe true intention of the legislature. In all ordinary cases; the grammatical interpretation is the sole form allowable. rThe court cannot take from or add to or modify the letter of the law. However, where the letter of the law is logically defective on account of ambiguity, inconsistency or incompleteness, the court is under a duty to travel beyond the letter of law so as to determine from the other sources, the true intentions of the legislature. Further, a statute is enforceable at law, however, unreasonable it may be. The duty of the court is to administer the law as it stands. It is not within its jurisdiction to see whether the law is just or unreasonable. However, if there are two possible constructions of a clause, one a mere mechanical construction based on the rules of grammar and the other which emerges from the setting in which the clause appears and the circumstances in which it came to be enacted and also the words used therein, the courts may prefer the second construction which though may not be literal may be a better one. (Arora vs. State of UP)
Q 5. How do the following help in Interpretation/Construction of Statutes? (a) Long Title
(b) Preamble
(e) Heading and Title of a Chapter
(d) Marginal notes
(e) Definitional Sections/Clauses
Rules made under a Statute are legitimate aid for construction of statute as
(1) Contemporanea Expositio. After an Act is passed, the department which has to implement the Act understands it in its own way. Often, circulars and trade notices are issued. These are issued on the basis of their understanding of the law and the interpretation stated in the circular/trade notice is called 'Contemporanea Expositio'. This means 'contemporary exposition. "Contemporanea expositio est optima et fortissima in lege'-Best the surest mode of construing an instrument is to read it in the sense which would have been applied when it was drawn up the principle states that Courts in interpreting the statute will give much weight to the interpretation put upon it at the time of enactment by those whose duty was to construe, execute and apply the said enactment.-K.P. Varghese Vs. ITO (1982) 1 SCR 629 = (1981) 131 ITR 597 (sq = AIR 1981 SC 1922-reiterated in CCE, Guntur Vs. Andhra Sugar Ltd. (1989) 1 CLA 130 (sq = 1988 (38) ELT 564 (sq = 1989 (Supp) 1 sec 144 = 1989 (19) ECC 46 (sq. "'Indian
Metal and Ferro Alloys Ltd. Vs. CCE-1991 (51) ELT 165 (SC) 1028 = JT (1990) 4 se 763-followed in CCEVs. HMM Ltd.-1993 (67) ELT 436 (CECA T-5 member bench order). Interpretation accepted and acted upon for a long time should not be altered unless there are compelling reasons to do so.
In Indian Metals and Ferro Alloys Ltd. Vs. CCE-1991 (51) ELT 165 (sq, it was held that a contemporaneous exposition by the administrative authorities is a useful guide to the interpretation of the expression used in statutory instrument. SC in Deslzbandhu Gupta Vs. Delhi Stock Exchange 1979 (3) SCR 373 = AIR 1979 SC 1049 = (1979) 50 Compo Cas 84 (sq held: "Contemporaneous Construction placed by the administrative or Executive Officers charged with execufmg the statute, though not controlling, is nevertheless entitled to considerable weight as highly persuasive. However, if interpretation is found to be erroneous, Court would refuse to follow such construction. Its application is restricted to 01..1 legislation and not to a recent statute in first few years of its enforcement." In State of Tamilnadu Vs. Malzi Traders-(1989) 73 STC 228 (sq, it
. was held that contemporaneous exposition of administrative authorities is a very useful and relevant guide. Such interpretation should be overruled only if shown to be clearly wrong. In Municipal corporation ofPune Vs. Blzarat Forge Co. Ltd.-(1995) 3 sec 434 (3-member bench), it was observed that principle of 'Contemporanea Expositio' is not decisive or controlling the question of construction. It has only persuasive value. In clear case of error, Courts would refuse to follow such construction.
Rules made under a Statute are legitimate aid for construction of statute as 'Contelllporanea Expositio' -P Knslingam V s. PSG College ofTecl1l1ology-1995(2) SCALE 387 = AIR 1995 SC 1395.
Thus, CBDT (Central Board of Direct Taxes) had issued circulars in 1972 that Section 194-C regarding deduction of income-tax at source is applicable to only works contract and not labour contracts. The circular also clarified that the provisions of TDS will not apply to supply of material and contracts for rendering professional services by lawyers, physicians, surgeons, accountants, consultants, etc. However, suddenly, CBDT issued a fresh circular dt. 8th March, 1994/ stating that the section is applicable to all service contracts, transport contracts etc. It was clarified in the circular that the provisions of Section 194-C will apply to all payments to professionals, advertising agents and transport contractors. It was hold that principle of Contemporanea Expositio is applicable and the Department cannot suddenly change an interpretation which it has been consistently following since 1972-Chamber of Income- Tax Consultants V s. CBDT
(1994) 209 ITR 660.
Metal and Ferro Alloys Ltd. Vs. CCE-1991 (51) ELT 165 (SC) 1028 = JT (1990) 4 se 763-followed in CCEVs. HMM Ltd.-1993 (67) ELT 436 (CECA T-5 member bench order). Interpretation accepted and acted upon for a long time should not be altered unless there are compelling reasons to do so.
In Indian Metals and Ferro Alloys Ltd. Vs. CCE-1991 (51) ELT 165 (sq, it was held that a contemporaneous exposition by the administrative authorities is a useful guide to the interpretation of the expression used in statutory instrument. SC in Deslzbandhu Gupta Vs. Delhi Stock Exchange 1979 (3) SCR 373 = AIR 1979 SC 1049 = (1979) 50 Compo Cas 84 (sq held: "Contemporaneous Construction placed by the administrative or Executive Officers charged with execufmg the statute, though not controlling, is nevertheless entitled to considerable weight as highly persuasive. However, if interpretation is found to be erroneous, Court would refuse to follow such construction. Its application is restricted to 01..1 legislation and not to a recent statute in first few years of its enforcement." In State of Tamilnadu Vs. Malzi Traders-(1989) 73 STC 228 (sq, it
. was held that contemporaneous exposition of administrative authorities is a very useful and relevant guide. Such interpretation should be overruled only if shown to be clearly wrong. In Municipal corporation ofPune Vs. Blzarat Forge Co. Ltd.-(1995) 3 sec 434 (3-member bench), it was observed that principle of 'Contemporanea Expositio' is not decisive or controlling the question of construction. It has only persuasive value. In clear case of error, Courts would refuse to follow such construction.
Rules made under a Statute are legitimate aid for construction of statute as 'Contelllporanea Expositio' -P Knslingam V s. PSG College ofTecl1l1ology-1995(2) SCALE 387 = AIR 1995 SC 1395.
Thus, CBDT (Central Board of Direct Taxes) had issued circulars in 1972 that Section 194-C regarding deduction of income-tax at source is applicable to only works contract and not labour contracts. The circular also clarified that the provisions of TDS will not apply to supply of material and contracts for rendering professional services by lawyers, physicians, surgeons, accountants, consultants, etc. However, suddenly, CBDT issued a fresh circular dt. 8th March, 1994/ stating that the section is applicable to all service contracts, transport contracts etc. It was clarified in the circular that the provisions of Section 194-C will apply to all payments to professionals, advertising agents and transport contractors. It was hold that principle of Contemporanea Expositio is applicable and the Department cannot suddenly change an interpretation which it has been consistently following since 1972-Chamber of Income- Tax Consultants V s. CBDT
(1994) 209 ITR 660.
Golden Rule of Interpretation
7. Golden Rule of Interpretation
This is also called 'Rule of Reasonable Construction'. The rule states that exclusive reliance on dictionary meaning or literal meaning may not indicate proper intention of legislature. Occasionally, literal meaning gives absurd or inconsistent results. In such cases, the statute should be construed so as to give sensible meaning that is rational and fair, for which, some violence to language and some modification in grammatical ~nd ordinary sense of the words may be done. (Gray Vs. Putron (1857) 6 H.L.-Old British case). When plain literal interpretation produces absurd result, which could never have been intended by Legislature, Court might modify the language or even do some violence to it, so as to achieve the obvious intention of the Legislature
and produce a rational construction-K. P. Varghese Vs. fTO-(1981) 131 ITR 597similar view in ClT Vs. J.H. Gotla AIR 1985 SC 1698.
Normally, it is not permissible to read words in statute which ,ue not there. However, if certain words in the statute become meaningless if such words are not supplied, it would be permissible to supply the words-Surjit Singh Kalra Vs. UOI-1991 (2) SCC 87.
In Tilkayat Shri Govindlalji V s. State of Rajasthan-AIR 1963 SC 1638, it was held that where two interpretations are possible, Court should adopt the construction which upholds validity of the Act rather than one which affects its validity.
While 'literal rule' is general rule in construing a statute, it should not be adopted if it leads to discriminatory or incongruous result. Where a literal interpretation leads to an absurd or unintended result, the language of the statute can be modified to accord with the intention of Parliament and to avoid absurdity-Co W.S. (India) Ltd. Vs. CfT (1994) 208 ITR 649 (sq.
In CCE Vs. Parle Exports (P.) Ltd.-AIR 1989 SC 644, it was observed that primacy is to be given to the text. However, regard shall be had to the words, context, subject-matter, effects and consequences, as well as spirit and reason of the law.
In an intuesting case, newspapers were excluded from the definition of 'goods' under CST Act by an amendment, obviously with intention to ensure that news papers, which are vital for democracy and freedom of speech, are not taxed. Under CST Act, raw materials can be purchased at concessional rates on submission of prescribed form if the raw materials are to be used for manufacture. Since 'newspapers' are excluded from definition of goods', obviously, the manufacturers of newspaper 'would not be able to purchase newsprint at concessional rate of Central Sales Tax, if the provision is applied mechanically. This was an unexpected result of the amendment to CST Act in definition of 'goods'. it is obvious that while granting exemption of CST to newspapers, Parliament would never have intended to penalise them by not allowing purchase of newsprint at concessional rate. it was held that while granting exemption to newspapers from Central Sales Tax, it was never intention of Parliament to create burden of levy of tax on the newspaper. Hence, it was held that the newspapers can buy newsprint at concessional rate-[Printers (Mysore) Ltd. Vs. Asst., CTO-IT 1994 (1) SC 692].
Subsidiary Rules of Interpretation
Various conventions and concepts have been developed over the years for interpretation of Statute, which can be termed as 'Subsidiary Rules for Interpretation'. These are summarised below.
This is also called 'Rule of Reasonable Construction'. The rule states that exclusive reliance on dictionary meaning or literal meaning may not indicate proper intention of legislature. Occasionally, literal meaning gives absurd or inconsistent results. In such cases, the statute should be construed so as to give sensible meaning that is rational and fair, for which, some violence to language and some modification in grammatical ~nd ordinary sense of the words may be done. (Gray Vs. Putron (1857) 6 H.L.-Old British case). When plain literal interpretation produces absurd result, which could never have been intended by Legislature, Court might modify the language or even do some violence to it, so as to achieve the obvious intention of the Legislature
and produce a rational construction-K. P. Varghese Vs. fTO-(1981) 131 ITR 597similar view in ClT Vs. J.H. Gotla AIR 1985 SC 1698.
Normally, it is not permissible to read words in statute which ,ue not there. However, if certain words in the statute become meaningless if such words are not supplied, it would be permissible to supply the words-Surjit Singh Kalra Vs. UOI-1991 (2) SCC 87.
In Tilkayat Shri Govindlalji V s. State of Rajasthan-AIR 1963 SC 1638, it was held that where two interpretations are possible, Court should adopt the construction which upholds validity of the Act rather than one which affects its validity.
While 'literal rule' is general rule in construing a statute, it should not be adopted if it leads to discriminatory or incongruous result. Where a literal interpretation leads to an absurd or unintended result, the language of the statute can be modified to accord with the intention of Parliament and to avoid absurdity-Co W.S. (India) Ltd. Vs. CfT (1994) 208 ITR 649 (sq.
In CCE Vs. Parle Exports (P.) Ltd.-AIR 1989 SC 644, it was observed that primacy is to be given to the text. However, regard shall be had to the words, context, subject-matter, effects and consequences, as well as spirit and reason of the law.
In an intuesting case, newspapers were excluded from the definition of 'goods' under CST Act by an amendment, obviously with intention to ensure that news papers, which are vital for democracy and freedom of speech, are not taxed. Under CST Act, raw materials can be purchased at concessional rates on submission of prescribed form if the raw materials are to be used for manufacture. Since 'newspapers' are excluded from definition of goods', obviously, the manufacturers of newspaper 'would not be able to purchase newsprint at concessional rate of Central Sales Tax, if the provision is applied mechanically. This was an unexpected result of the amendment to CST Act in definition of 'goods'. it is obvious that while granting exemption of CST to newspapers, Parliament would never have intended to penalise them by not allowing purchase of newsprint at concessional rate. it was held that while granting exemption to newspapers from Central Sales Tax, it was never intention of Parliament to create burden of levy of tax on the newspaper. Hence, it was held that the newspapers can buy newsprint at concessional rate-[Printers (Mysore) Ltd. Vs. Asst., CTO-IT 1994 (1) SC 692].
Subsidiary Rules of Interpretation
Various conventions and concepts have been developed over the years for interpretation of Statute, which can be termed as 'Subsidiary Rules for Interpretation'. These are summarised below.
Amar Chandra Vs. Excise Collector, Tripura-AIR 1972 SC 1863
Where there was prohibition on importation of' arms, ammunition, or gun powder or any other goods', the words 'any other goods' were construed as referring to goods similar to 'arms, ammunition or gun powder' (A.G. Vs. Brown (1920), 1 KB 773).
Jii)1( the particular words used e~~the ~hole g~~s (cate&.ory), then the general words are to be construed as covering a larger genus.
We must note, however, that the general principle of 'ejusdem generis' applies only where the specific words are all of the same nature. When they are of different categories, then the meaning of the general words following those specific words remains unaffected-those general words then would not take colour from the earlier specific words.
In Amar Chandra Vs. Excise Collector, Tripura-AIR 1972 SC 1863, it was observed that the doctrine is applicable when (i) the statute contains an enumeration of specific words, (ii) the subjects of the enumeration constitute a class or category, (iii) that class or category is not exhausted by the enumeration, (iv) the general term follows the enumeration, and (v) there is no indication of a different legislative intent-quoted with approval in Housing Board of Haryana Vs. Haryana Housing Board Employees Union-(1996) 1 SCC 95-where it was observed that if three is no 'genus' and if collection of items are 'heterogeneous', the rule does not apply.
In other words, general words following particular or specific words should
confine to things of same kind. This is termed 'Ejusdem Generis'.
This is on the assumption that the general words are inserted in case something which
ought to have been included among the specifically enumerated items had been omitted.
In Vikas Enterprises Vs. CTO-(1992) 84 STC 226 (WBTT), an entry in Schedule read 'Cushions, mattresses, pillows and other arti~les made from artificial or synthetic resin'. It was held that the term 'other articles' would cover only 'bedding materials'. It cannot cover 'Thermocell' made of resin, though it works as 'shock absorbent'. The 'thermocell' is used for packing and insulation and cannot be classified along with other bedding material.
In another case, the wording was 'No suit, prosecution or other legal proceeding shall be instituted for ...'. It was held that the word 'other legal proceeding can cover only judicial or legal proceedings in Court of law as the word suit and prosecution are used only in that connection. Hence, 'other legal proceedings cannot cover departmental adjudication and appeals. Asst., Collector, C Ex, Guntur Vs. Ramdev Tobacco Company(1991) 2 SCC 119. In this case, Hon. Supreme Courrc>bserved as follows: "General words must normally bear their normal and natural and larger meaning, unless the language of statute gives a different intention, or such meaning as is likely to lead to absurd results. In such cases, their meaning can be restricted by application of rule of 'Ejusdem Generis'. But unless there is a genus which can be comprehended from the preceding words, this rule cannot be invoked. This principle is also not applicable if specific words follow general words." Further, in Siddeshwari Cotton Mills (P.) Ltd. Vs. UOI-(1989) 75 STC 75 (sq Mangalore Electric Supply Co. Ltd. Vs. CIT - (1978) 113 ITR 655 (sq, and UPSEB Vs. Hari Shanker Jain-AIR 1979 SC 65, it was held that the principle must be applied with caution and not pushed too far.
In other words, the general words should be given restricted meaning only if using its normal and natural meaning gives' absurd results or language of the statute indicates that its meaning should'~«:.restricted.
Jii)1( the particular words used e~~the ~hole g~~s (cate&.ory), then the general words are to be construed as covering a larger genus.
We must note, however, that the general principle of 'ejusdem generis' applies only where the specific words are all of the same nature. When they are of different categories, then the meaning of the general words following those specific words remains unaffected-those general words then would not take colour from the earlier specific words.
In Amar Chandra Vs. Excise Collector, Tripura-AIR 1972 SC 1863, it was observed that the doctrine is applicable when (i) the statute contains an enumeration of specific words, (ii) the subjects of the enumeration constitute a class or category, (iii) that class or category is not exhausted by the enumeration, (iv) the general term follows the enumeration, and (v) there is no indication of a different legislative intent-quoted with approval in Housing Board of Haryana Vs. Haryana Housing Board Employees Union-(1996) 1 SCC 95-where it was observed that if three is no 'genus' and if collection of items are 'heterogeneous', the rule does not apply.
In other words, general words following particular or specific words should
confine to things of same kind. This is termed 'Ejusdem Generis'.
This is on the assumption that the general words are inserted in case something which
ought to have been included among the specifically enumerated items had been omitted.
In Vikas Enterprises Vs. CTO-(1992) 84 STC 226 (WBTT), an entry in Schedule read 'Cushions, mattresses, pillows and other arti~les made from artificial or synthetic resin'. It was held that the term 'other articles' would cover only 'bedding materials'. It cannot cover 'Thermocell' made of resin, though it works as 'shock absorbent'. The 'thermocell' is used for packing and insulation and cannot be classified along with other bedding material.
In another case, the wording was 'No suit, prosecution or other legal proceeding shall be instituted for ...'. It was held that the word 'other legal proceeding can cover only judicial or legal proceedings in Court of law as the word suit and prosecution are used only in that connection. Hence, 'other legal proceedings cannot cover departmental adjudication and appeals. Asst., Collector, C Ex, Guntur Vs. Ramdev Tobacco Company(1991) 2 SCC 119. In this case, Hon. Supreme Courrc>bserved as follows: "General words must normally bear their normal and natural and larger meaning, unless the language of statute gives a different intention, or such meaning as is likely to lead to absurd results. In such cases, their meaning can be restricted by application of rule of 'Ejusdem Generis'. But unless there is a genus which can be comprehended from the preceding words, this rule cannot be invoked. This principle is also not applicable if specific words follow general words." Further, in Siddeshwari Cotton Mills (P.) Ltd. Vs. UOI-(1989) 75 STC 75 (sq Mangalore Electric Supply Co. Ltd. Vs. CIT - (1978) 113 ITR 655 (sq, and UPSEB Vs. Hari Shanker Jain-AIR 1979 SC 65, it was held that the principle must be applied with caution and not pushed too far.
In other words, the general words should be given restricted meaning only if using its normal and natural meaning gives' absurd results or language of the statute indicates that its meaning should'~«:.restricted.
Rule of Ejusdem Generis
Coming to the word.'shall'. The use of the word 'shall' would Hut of itself make a provision of the Act mandatory. It has to be construed with reference to' the context in which it is used. Thus, as against the Government the word 'shall' when used in statutes is to be construed as 'may' unless a contrary intention is manifest. Hence, a provision in a criminal statute that the offender shall be punished as prescribed in the statute is not necessarily to be taken as against the Government to direct prosecution under that provision rather than under some other applicable statute.
Therefore, generally speaking when a statute uses the word 'shall', prima facie it is mandatory but it is sometimes not so interpreted if the context or intention of the legislature otherwise demands. Thus, under certain circumstances the expression 'shall' is construed as 'may'. Yet, it has to be emphasized that the term 'shall', in its ordinary significance, is mandatory and the Court shall ordinarily give that interpretation to the term, unless such an interpretation leads to some absurd or inconvenient consequence or be at variance with the intent of the legislature to be collected from other parts of the Act. For ascertaining the real intention of the legislature, the Court may consider, amongst other things,
. the nature and design of the statute,
. the consequence which would flow from construing it one way or the other, . the impact of other provisions by resorting to which the necessity of comply
ing with the provisions in question can be avoided,
. whether or not the statute provides any penalty if the provision in question is
not complied with,
. if the provision in question is not complied with, whether the consequences
would be trivial or serious, and
. most important of all, whether the object of the legislation will be defeated or
furthered.
Where a specific penalty is provided in a statute itself for non-compliance with the particular provision of the Act, no discretion is left to the Court to determine whether such provision is directory or mandatory-it has to be taken as mandatory.
6. Rule of Ejusdem Generis
The term' ejusdem generis' means' of the same kind or species'. Simply stated, the rule means :
(i) Where any Act enumerates different subjects, general words following specific words are to be construed (and understood) with reference to the words that precede them. Those general words are to be taken as applying to things of the same kind as
. the specific words previously mentioned, unless there is something to show that a wider sense was intended. Thus, the rule of ejusdem generis means th~ ~here §Pecific ~ords are used and after those speCiffc woras, spme general words are__used, the general words would take their colour from the specific words used earlier. For instance, iii. the expression 'in consequence of war, disturbance or any Other cause', the words 'any other cause' would take colour from the earlier words '~ar, disturbance' and, therefore, would be limited to causes of the same kind as the two named instances. Similarly, where an Act permits keeping of dogs, cats, cows, buffaloes and other animals, the expression 'other animals' would not include wild animals like lions and tigers, but would mean only domesticated animals like horses, etc.
Therefore, generally speaking when a statute uses the word 'shall', prima facie it is mandatory but it is sometimes not so interpreted if the context or intention of the legislature otherwise demands. Thus, under certain circumstances the expression 'shall' is construed as 'may'. Yet, it has to be emphasized that the term 'shall', in its ordinary significance, is mandatory and the Court shall ordinarily give that interpretation to the term, unless such an interpretation leads to some absurd or inconvenient consequence or be at variance with the intent of the legislature to be collected from other parts of the Act. For ascertaining the real intention of the legislature, the Court may consider, amongst other things,
. the nature and design of the statute,
. the consequence which would flow from construing it one way or the other, . the impact of other provisions by resorting to which the necessity of comply
ing with the provisions in question can be avoided,
. whether or not the statute provides any penalty if the provision in question is
not complied with,
. if the provision in question is not complied with, whether the consequences
would be trivial or serious, and
. most important of all, whether the object of the legislation will be defeated or
furthered.
Where a specific penalty is provided in a statute itself for non-compliance with the particular provision of the Act, no discretion is left to the Court to determine whether such provision is directory or mandatory-it has to be taken as mandatory.
6. Rule of Ejusdem Generis
The term' ejusdem generis' means' of the same kind or species'. Simply stated, the rule means :
(i) Where any Act enumerates different subjects, general words following specific words are to be construed (and understood) with reference to the words that precede them. Those general words are to be taken as applying to things of the same kind as
. the specific words previously mentioned, unless there is something to show that a wider sense was intended. Thus, the rule of ejusdem generis means th~ ~here §Pecific ~ords are used and after those speCiffc woras, spme general words are__used, the general words would take their colour from the specific words used earlier. For instance, iii. the expression 'in consequence of war, disturbance or any Other cause', the words 'any other cause' would take colour from the earlier words '~ar, disturbance' and, therefore, would be limited to causes of the same kind as the two named instances. Similarly, where an Act permits keeping of dogs, cats, cows, buffaloes and other animals, the expression 'other animals' would not include wild animals like lions and tigers, but would mean only domesticated animals like horses, etc.
Friday, January 11, 2008
Contingent or conditional liability.
(a) If Mr. A had ceased to be a member of the company within a period of one
year before the commencement of the winding up.
(b) If the debt or liability of the company was contracted or incurred while he was
a member.
(c) If the present members are unable to meet the liabilities in respect of the debts
incurred while he was a member (Section 426).
b this case since one year has not elapsed, Mr. A will be liable to contribute to the
assets of the company provided other two conditions are also satisfied.
In any case, the liability of the past or present member cannot exceed the unpaid amount on the shares and if the shares are full paid-up, no contribution is required to be made by the members, past or present [Section 426 of the Companies Act, 1956].
P. 3. State, with reasons, whether the following are 'debts' for the purpose of Section 433 (e) of the Companies Act, 1956:
(i) Contingent or conditional liability.
(ii) Non-payment of dividend declared. (iii) Non-payment of salary to an employee. (iv) Non-payment to a creditor of a disputed liability.
[C.S. (Final) June, 2001J
.9Lns. Section 433 of the Companies Act, 1956 provides for the circumstances in which the company may be wound up by the court. Clause (e) of Section 433 provides that company may be wound up by the court if the company is unable to pay its debts.
(i) Contingent or conditional liability is not a debt unless the contingency or the condition has already happened or has been satisfied and debt has crystallised. So long as the matter remains as a contingent or its crystallisation depends on fulfilment of a condition and such condition has not been satisfied, it is not a debt under Section 433 (e).
(ii) Non-payment of dividend declared-Dividend once declared at the annual general meeting of the company, becomes a debt and it is to be paid in the manner laid down in the Companies Act-Hari Prasad v. Amalgamated Commercial Traders (Pvt.) Ltd. (1964) 34 Compo Cas. 209 (Madras). Hence, non-payment of a declared dividend is a debt under Section 433 (e).
(iii) Non payment of Salary to an employee-See Pg. AII-l48 (What is Debt?)
(iv) Non-payment to a creditor of a disputed liability-The Supreme Court of India in
the case of Madhusudan Goverdhandas and Co. v. Madhuwoolen Industries Pvt. Ltd. (1972) 42 Compo Cases. 125, had held that where the petition for the winding up of the company is based on the ground of the inability of the company to pay its debts, if the debt is bona fide disputed and the defence is a substantial one, the Court will not order winding up. Hence it is not a debt
under Section 433 (0).
P.4. The High Court a~ Mumbai appointed the Official Liquidator as the Liquidator of Imprudent Engineering Company Ltd. Some of the creditors have brought to the notice of the Liquidator that though the company is in liquidation for the past several years, nothing worthwhile has been done to speed up the winding-up and no documents have been filed to indicate the progress of Liquidation. Examine in this connec
year before the commencement of the winding up.
(b) If the debt or liability of the company was contracted or incurred while he was
a member.
(c) If the present members are unable to meet the liabilities in respect of the debts
incurred while he was a member (Section 426).
b this case since one year has not elapsed, Mr. A will be liable to contribute to the
assets of the company provided other two conditions are also satisfied.
In any case, the liability of the past or present member cannot exceed the unpaid amount on the shares and if the shares are full paid-up, no contribution is required to be made by the members, past or present [Section 426 of the Companies Act, 1956].
P. 3. State, with reasons, whether the following are 'debts' for the purpose of Section 433 (e) of the Companies Act, 1956:
(i) Contingent or conditional liability.
(ii) Non-payment of dividend declared. (iii) Non-payment of salary to an employee. (iv) Non-payment to a creditor of a disputed liability.
[C.S. (Final) June, 2001J
.9Lns. Section 433 of the Companies Act, 1956 provides for the circumstances in which the company may be wound up by the court. Clause (e) of Section 433 provides that company may be wound up by the court if the company is unable to pay its debts.
(i) Contingent or conditional liability is not a debt unless the contingency or the condition has already happened or has been satisfied and debt has crystallised. So long as the matter remains as a contingent or its crystallisation depends on fulfilment of a condition and such condition has not been satisfied, it is not a debt under Section 433 (e).
(ii) Non-payment of dividend declared-Dividend once declared at the annual general meeting of the company, becomes a debt and it is to be paid in the manner laid down in the Companies Act-Hari Prasad v. Amalgamated Commercial Traders (Pvt.) Ltd. (1964) 34 Compo Cas. 209 (Madras). Hence, non-payment of a declared dividend is a debt under Section 433 (e).
(iii) Non payment of Salary to an employee-See Pg. AII-l48 (What is Debt?)
(iv) Non-payment to a creditor of a disputed liability-The Supreme Court of India in
the case of Madhusudan Goverdhandas and Co. v. Madhuwoolen Industries Pvt. Ltd. (1972) 42 Compo Cases. 125, had held that where the petition for the winding up of the company is based on the ground of the inability of the company to pay its debts, if the debt is bona fide disputed and the defence is a substantial one, the Court will not order winding up. Hence it is not a debt
under Section 433 (0).
P.4. The High Court a~ Mumbai appointed the Official Liquidator as the Liquidator of Imprudent Engineering Company Ltd. Some of the creditors have brought to the notice of the Liquidator that though the company is in liquidation for the past several years, nothing worthwhile has been done to speed up the winding-up and no documents have been filed to indicate the progress of Liquidation. Examine in this connec
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