RELC - Textbook

insolvency resolution. IBC is applicable to the corporate, partnership firms and individuals as well. It seeks to balance the interests of all the stakeholders in the ecosystem and incorporates feedback to amend the IBC. The central proposition is to conduct the insolvency resolution in a time bound and unbiased manner in order that the value of assets could be protected for a possible turnaround, and for ensuring the availability of credit in the ecosystem. IBBI shall oversee the functioning of infrastructure of IBC which includes insolvency professionals, insolvency professional agencies, information utilities, values and like institutions. The information utilities are tasked to build a storehouse of financial and other information on the corporate that will be supplied to the financial institutions providing credit to the corporate, to the insolvency professionals and the adjudicating authorities, and to the businesses themselves. Section 2 of the Insolvency and Bankruptcy Code, 2016 as amended vide the Insolvency and Bankruptcy Code (Amendment) Act, 2018 provides that the provisions of the Code shall apply to – a. any company incorporated under the Companies Act, 2013 or under any previous company law, b. any other company governed by any special Act for the time being in force, c. any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008, d. such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf, e. personal guarantors to corporate debtors, f. partnership firms and proprietorship firms; and g. individuals, other than persons referred to in clause (e) Key Objectives of the Insolvency and Bankruptcy Code, 2016 The objects clause of the Insolvency and Bankruptcy Code lays down the following key objectives: 1. To consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals 2. To provide for a time bound insolvency resolution mechanism 3. To ensure maximisation of value of assets, 4. To promote entrepreneurship, 5. To increase availability of credit 6. To balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and 7. To establish an Insolvency and Bankruptcy Board of India as a regulatory body 8. To provide procedure for connected and incidental matters IBC enforces the statutory rights of creditors and follows a quick and systematic pathway to revive a debtor company. It differentiates between financial creditors, whose relationship with the company is CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 145

a pure financial contract, from the operational creditors, who provide goods and services to the company. A company which is unable to pay its creditors, can as well approach the National Company Law Tribunal (NCLT) to avail the mechanism of revival or liquidation. As per the IBC, the property includes land and every description of property situated in India or abroad; present interest, vested or contingent interest arising out of or incidental to property, money, goods, etc. The security interest includes a charge, a mortgage, a hypothecation, an assignment or an encumbrance provided for a secured creditor which conveys a right, title, interest or claim to property. It also includes all transactions which secure either a payment or performance or any other obligation related to the property, however it excludes a performance guarantee. (IBC; Section3; clause 27 & 31; p.4, p.5) The process under IBC can be initiated by a financial creditor against a corporate debtor on the occurrence of default. The process can be initiated jointly also with other financial creditors. The Adjudicating Authority, being National Company Law Tribunal (NCLT) shall, within fourteen days of the receipt of the application towards corporate insolvency resolution, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor. Once the resolution application is admitted at NCLT, a moratorium follows on the continuation of all legal proceedings against the debtor, as well as opening of fresh lawsuits towards debt recovery. The Board of the corporate debtor is suspended and it is restrained to create a charge on any asset, or sell any asset. An interim resolution professional (IRP) is appointed by NCLT who takes the charge of the management and all the assets of the corporate debtor. IRP assesses the financial position of the debtor by collating all information on assets and liabilities, operations, as well as all claims of creditors. IRP also determines a fair value as well as the liquidation value of the corporate debtor. A resolution professional (RP) is appointed to take over the proceedings and a committee of creditors (CoC) is constituted towards adopting a cohesive approach towards resolution over individual pursuit of credit recovery. The CoC decides by a majority of voting share. The appropriate strategy would revolve around the repayment of the debts of the corporate debtor, while at the same time maximizing the prospects of survival of the corporate debtor as a going concern. If it is not viable to strike resolution of debts, NCLT may direct to initiate the process of dissolution of the corporate debtor. The liquidation process involves a complete assessment of the inventory of all assets of the corporate debtor. Within a period of thirty days, a list of all claims by the creditors is prepared, such claims verified before a decision is taken to admit them. The repudiation of claims, if any, can be appealed against. A secured creditor always has the option to withdraw from the process and enforce their security to recover its debts. The liquidator, however, is empowered to sell the corporate debtor as a going concern. IBC establishes the priority of settlement of outstanding claims after first deducting the fees and costs incurred in the insolvency resolution process. The secured creditors who prefer their claim through the resolution process are given priority, followed by workmen’s dues, employee wages CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 146

and then unsecured creditors. A feature of IBC which overrides the provisions of the Companies Act, 2013 is that government dues come to be settled only after unsecured creditors. After yet discharging any other outstanding debt, the balance proceeds are distributable among preference equity shareholders and then ordinary shareholders. Negotiable Instruments Act, 1881 The term “negotiable instrument” means a document transferable from one person to another. However the Act has not defined the term. It merely says that “A negotiable instrument” means a promissory note, bill of exchange or Cheque payable either to order or to bearer. [Section 13(1)] A negotiable instrument may be defined as “an instrument, the property in which is acquired by anyone who takes it bona fide, and for value, notwithstanding any defect of title in the person from whom he took it, from which it follows that an instrument cannot be negotiable unless it is such and in such a state that the true owner could transfer the contract or engagement contained therein by simple delivery of instrument” (Willis—The Law of Negotiable Securities, Page 6). According to this definition the following are the conditions of negotiability: 1. The instrument should be freely transferable. An instrument cannot be negotiable unless it is such and in such state that the true owner could transfer by simple delivery or endorsement and delivery. 2. The person who takes it for value and in good faith is not affected by the defect in the title of the transferor. 3. Such a person can sue upon the instrument in his own name. Negotiability involves two elements namely, transferability free from equities and transferability by delivery or endorsement (Mookerjee J. In Tailors Priya v. Gulab Chand, AIR 1965 Cal). But the Act recognises only three types of instruments viz., a Promissory Note, a Bill of Exchange and a Cheque as negotiable instruments. Important Characteristics of Negotiable Instruments Following are the important characteristics of negotiable instruments: 1. The holder of the instrument is presumed to be the owner of the property contained in it. 2. They are freely transferable. 3. A holder in due course gets the instrument free from all defects of title of any previous holder. 4. The holder in due course is entitled to sue on the instrument in his own name. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 147

5. The instrument is transferable till maturity and in case of cheques till it becomes stale (on the expiry of 6months from the date of issue). 6. Certain equal presumptions are applicable to all negotiable instruments unless the contrary is proved. Classification of Negotiable Instruments The negotiable instruments may be classified as under: (i) Bearer Instruments: A promissory note, bill of exchange or cheque is payable to bearer when (i) it is expressed to be so payable, or (ii) the only or last endorsement on the instrument is an endorsement in blank. A person who is a holder of a bearer instrument can obtain the payment of the instrument. (ii) Order Instruments: A promissory note, bill of exchange or cheque is payable to order (i) which is expressed to be so payable; or (ii) which is expressed to be payable to a particular person, and does not contain any words prohibiting transfer or indicating an intention that it shall not be transferable. (iii) Inland Instruments (Section 11): A promissory note, bill of exchange or cheque drawn or made in India, and made payable, or drawn upon any person, resident in India shall be deemed to be an inland instrument. Since a promissory note is not drawn on any person, an inland promissory note is one which is made payable in India. Subject to this exception, an inland instrument is one which is either: (a) drawn and made payable in India, or (b) drawn in India upon some persons resident therein, even though it is made payable in a foreign country. (iv) Foreign Instruments: An instrument which is not an inland instrument, is deemed to be a foreign instrument. The essentials of a foreign instrument include that: (a) it must be drawn outside India and made payable outside or inside India; or (b) it must be drawn in India and made payable outside India and drawn on a person resident outside India. (v) Demand Instruments (Section 19): A promissory note or a bill of exchange in which no time for payment is specified is an instrument payable on demand. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 148

(vi) Time Instruments: Time instruments are those which are payable at sometime in the future. Therefore, a promissory note or a bill of exchange payable after a fixed period, or after sight, or on specified day, or on the happening of an event which is certain to happen, is known as a time instrument. The expression “after sight” ina promissory note means that the payment cannot be demanded on it unless it has been shown to the maker. In the case of bill of exchange, the expression “after sight” means after acceptance, or after noting for non-acceptance or after protest for non- acceptance. (vii) Ambiguous Instruments (Section 17): An instrument, which in form is such that it may either be treated by the holder as a bill or as a note, is an ambiguous instrument. Section 5(2) of the English Bills of Exchange Act provides that where in a bill, the drawer and the drawee are the same person or where the drawee is a fictitious person or a person incompetent to contract, the holder may treat the instrument, at his option, either as a bill of exchange or as a promissory note. Negotiable instruments are of substantial advantage in commerce as they have several features to facilitate commercial activity, e.g. the advantage of negotiable instruments being used as a substitute for money, facilitates the very logistics of trade in size and turnover apart from sheer convenience and safety. Hence, they serve as a medium of exchange. Other important characteristic is the very negotiability which confers an absolute and good title on the transferee. Also, the transferability by delivery, in case of bearer instrument, or by endorsement and delivery, if it is an instrument payable to order, makes a negotiable instrument amenable to indefinite transfers within the prescribed maturity period. The rule of evidence confers indebtedness, unconditional transfer and requires that negotiable instruments must be in writing and also signed by the maker or drawer. Negotiable Instruments Act which came into force from 1st March 1882 is still largely valid. It defines negotiable instruments to mean “a promissory note, bill of exchange or cheque payable either to order or to bearer.” (The Negotiable Instrument Act; Chapter II, Section 13; p.10). (i) Promissory Note A “promissory note” is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a certain person, or only to bearer of the instrument. (Section 4) Parties to a Promissory Note: A promissory note has the following parties: a. The Maker: the person who makes or executes the note promising to pay the amount stated therein. b. The Payee: one to whom the note is payable. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 149

c. The Holder: is either the payee or some other person to whom he may have endorsed the note. d. The Endorser. e. The Endorsee. Essentials of a Promissory Note To be a promissory note, an instrument must possess the following essentials: a. It must be in writing. An oral promise to pay will not do. b. It must contain an express promise or clear undertaking to pay. A promise to pay cannot be inferred. A mere acknowledgement of debt is not sufficient. If A writes to B “I owe you (I.O.U.) Rs. 500”, there is no promise to pay and the instrument is not a promissory note. c. The promise or undertaking to pay must be unconditional. A promise to pay “when able”, or “as soon as possible”, or “after your marriage to D”, is conditional. But a promise to pay after a specific time or on the happening of an event which must happen, is not conditional, e.g. “I promise to pay Rs. 1,000 ten days after the death of B”, is unconditional. d. The maker must sign the promissory note in token of an undertaking to pay to the payee or his order. e. The maker must be a certain person, i.e., the note must show clearly who is the person engaging himself to pay. f. The payee must be certain. The promissory note must contain a promise to pay to some person or persons ascertained by name or designation or to their order. g. The sum payable must be certain and the amount must not be capable of contingent additions or subtractions. If A promises to pay Rs. 100 and all other sums which shall become due to him, the instrument is not a promissory note. h. Payment must be in legal money of the country. Thus, a promise to pay Rs. 500 and deliver 10 quintals of rice is not a promissory note. i. It must be properly stamped in accordance with the provisions of the Indian Stamp Act. Each stamp must be duly cancelled by maker’s signature or initials. j. It must contain the name of place, number and the date on which it is made. However, their omission will not render the instrument invalid, e.g. if it is undated, it is deemed to be dated on the date of delivery. Note : A promissory note cannot be made payable or issued to bearer, no matter whether it is payable on demand or after a certain time (Section 31 of the RBI Act). CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 150

(ii) Bills of Exchange A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain person or to the bearer of the instrument. (Section 5) The definition of a bill of exchange is very similar to that of a promissory note and for most of the cases the rules which apply to promissory notes are in general applicable to bills. There are however, certain important points of distinction between the two. Parties to Bills of Exchange The following are parties to a bill of exchange: a. The Drawer: The person who draws the bill. b. The Drawee: The person on whom the bill is drawn. c. The Acceptor: One who accepts the bill. Generally, the drawee is the acceptor but a stranger may accept it on behalf of the drawee. d. The Payee: One to whom the sum stated in the bill is payable, either the drawer or any other person maybe the payee. e. The Holder: He is either the original payee or any other person to whom; the payee has endorsed the bill. In case of a bearer bill, the bearer is the holder. f. The Endorser: When the holder endorses the bill to any one else he becomes the endorser. g. The Endorsee: Is the person to whom the bill is endorsed. h. Drawee in case of Need: Besides the above parties, another person called the “drawee in case of need” may be introduced at the option of the drawer. The name of such a person may be inserted either by the drawer or by any endorser in order that resort may be had to him in case of need, i.e., when the bill is dishonoured by either non-acceptance or non-payment. i. Acceptor for Honour: Further, any person may voluntarily become a party to a bill as acceptor. A person, who on the refusal by the original drawee to accept the bill or to furnish better security, when demanded by the notary, accept the bill supra protest in order to safeguard the honour of the drawer or any endorser, is called the acceptor for honour. Essentials of a Bill of Exchange: 1. It must be in writing. 2. It must contain an unconditional order to pay money only and not merely a request. 3. It must be signed by the drawer. 4. The parties must be certain. 5. The sum payable must also be certain. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 151

6. It must comply with other formalities e.g. stamps, date, etc (iii) Cheque The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 and The Negotiable Instruments (Amendment) Act, 2015 have broadened, the definition of cheque to include the electronic image of a truncated cheque and a cheque in the electronic form. Section 6 of the Act provides that a ‘cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Parties to a Cheque The following are the parties to a cheque: a. The drawer: The person who draws the cheque. b. The drawee: The banker of the drawer on whom the cheque is drawn. Essentials of a Cheque 1. It is always drawn on a banker. 2. It is always payable on demand. 3. It does not require acceptance. There is, however, a custom among banks to mark cheques as good for purposes of clearance. 4. A cheque can be drawn on bank where the drawer has an account. 5. Cheques may be payable to the drawer himself. It may be made payable to bearer on demand unlike abill or a note. 6. The banker is liable only to the drawer. A holder has no remedy against the banker if a cheque is dishonoured. 7. A cheque is usually valid for fix months. However, it is not invalid if it is post dated or ante- dated. 8. No Stamp is required to be affixed on cheques. A promissory note, bill of exchange or cheque is dishonored by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. The holder of the instrument must give notice of such dishonor to some party it seeks to make liable, or to all parties to make them severally liable thereto. The Act maintains that if any cheque is returned unpaid by a drawer bank due to insufficient funds maintained by the drawer of the cheque, provided that the cheque was presented within its validity period and the payment was towards any money owed to the payee towards a legally enforceable debt or other liability, deems the CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 152

drawer of the cheque to have committed a cognizable offence. (The Negotiable Instrument Act; Chapter XVII, Section 138; p.27). The payee shall be required to give a notice in writing of such non- payment of the cheque to the drawer within thirty days of the receipt of information from the bank towards such non-payment. The court of jurisdiction will take cognizance of such an offence on a written complaint filed by the payee within one month of the expiry of the fifteen days afforded to the drawer by way of a written notice to make good the payment. If the person committing such an offence is a company, every person in charge of, or responsible for, conduct of the business of the company at the time the offence, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. The offence if so adjudicated, shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both. The Forward Contracts (Regulation) Act, 1952 The Forward Contracts Regulation Act (FCRA) provides for the regulation of commodity futures markets in India. It proposed setting up of a commission, the Forward Markets Commission (FMC) for the purpose of exercising specific functions and discharging duties assigned under this Act. It was considered vital for the development of futures trade. The Act sought to benefit various stakeholders including the farmers to take advantage of the price discovery in the commodities and manage the risk associated with price fluctuations. Several amendments have been carried out in the FCRA in the 2000s which included facilitating the entry of institutional investors, introducing Options, and permitting trading in these commodity derivatives, i.e. contracts that derive their value from the prices or indices of prices of underlying goods or in respect of such goods, services, activities, rights, interests, etc. The Act proposed giving recognition to associations, being a body of individuals, whether incorporated or not, constituted for the purpose of regulating and controlling the business of the sale or purchase of any goods or classes of goods with respect to which forward contracts may be entered into between members of such association or through any such member. As per the Act, forward contract means a contract for the delivery of goods and which is not a ready delivery contract, i.e. a contract which provides for the delivery of goods and the payment of a price there for, either immediately or within such period not exceeding eleven days after the date of the contract. (FCRA: chapter I, section 2c; p.3). The goods mean every kind of movable property other than actionable claims, money and securities, and the option in goods means an agreement for the purchase or sale of a right to buy or sell, or a right to buy and sell, goods in future, and includes a call or a put and call in goods. Under the Act, the Central Government retained the power to declare, by notification, all forward contracts for the sale or purchase of any goods or class of goods as illegal for such time as specified in CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 153

the notification. The Act defined “non-transferable specific delivery contract” to mean a specific delivery contract, the rights or liabilities under which or under any delivery order, railway receipt, bill of lading, warehouse receipt or any other document of title relating thereto are not transferable. (FCRA: chapter I, section 2f; p.3). The provision of the Act would not apply to such category of goods and services. Also, no person shall organize, or assist in organizing, or be a member of any association in any area which provides facilities for the performance of any non-transferable specific delivery contract. The Central Government however retained the power under the Act to regulate such class or classes of non-transferable specific delivery contracts, if it is of opinion that in the interest of the trade or in the public interest it is expedient to regulate and control such area, and may also specify the manner and extent of applications of the provisions of the Act. (FCRA: chapter IV, section 18; p.14). The Indian Contract Act, 1872 Definition of Contract Salmon defines contact as “An agreement creating and defining obligation between the parties “ Sir Federick Pollock defines it as “Every agreement and promise enforceable at law is a contract.” Section 2(h) of the Act defines the term contract as “an agreement enforceable by law is a contract”. The definition resolves that a contract is fundamentally an agreement that binds the parties legally, thus, Contract = Agreement + Enforceability Agreement An agreement occurs when two minds meet upon a common purpose, i.e. they mean the same thing in the same sense at the same time. The meeting of the minds is called consensus-ad-idem, i.e., consent to the matter. Section 2(e) defines the term ‘agreement’ as “Every promise and every set of promise, forming the consideration for each other” In other words, an agreement consist of an offer by one party and its acceptance by the other party whom the offer was made Thus, Agreement = Offer + Acceptance CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 154

Offer Section 2 (a) defines proposal (offer) as “When one person signifies to another his willingness to do or to abstain from doing something with a view to obtain the assent of that other to such act or abstinence, he is said to make a proposal.” Promise Section 2 (b) defines “a proposal (offer) when accepted becomes a promise.” Thus an accepted offer is a promise. Acceptance Section 2(b) “when the person to whom the offer is made signifies his assent there to, the proposal is said to be accepted.” Enforceability Enforceability means creation of some legal obligations. An agreement is said to be enforceable only after complying all the requirements under section 10 of Indian contract act and only those agreements called contracts which have enforceability. However, there may be certain agreements which do not converts into contracts as there may be absence of one or more essentials as prescribed under section 10. Such agreement neither creates any contractual rights nor obligations on the parties. It is said that all agreements are not contract but on the other hand all contracts are agreement because every contract contains agreement as well as all essentials as required by the Indian contract Act. Agreement is the basis for every contract as Section 2(h) revels that “a contract is an agreement enforceable by law.” Therefore every contract is an agreement too but every agreement need not be contract necessarily, as there may be lack of any essential and due to absence of essential it remains an agreement. For example agreement between the family members, are only agreement as there is no legal intention., similarly agreement by incompetent person cannot be converted into contract because the agreement by incompetent person are void under The Indian Contract Act. A contract in many jurisdictions is a legally enforceable agreement made between two or more parties towards providing of a product or service, or towards performance of an act. The offer being made and accepted are critical elements of a contract, as well as the consideration involved in the contract. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 155

As per the Indian Contract Act, a person who makes a proposal to another signifying his/her willingness to do or to abstain from doing anything, with a view to obtain the assent of that other person is called a promiser; and if such proposal is accepted by that other person, the subject matter becomes a promise and the accepter, a promisee. The acceptance must be absolute and unqualified for a proposal to be converted into a promise. Such act of doing is called a consideration for the promise. Every promise or a set of promises, forming the consideration for each other, is an agreement. Promises which form the consideration or part of the consideration for each other are called reciprocal promises. An agreement enforceable by law is a contract, and otherwise is said to be void. An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. (Indian Contract Act; preamble, interpretation clause; p.9). If the proposal prescribes a manner in which it is to be accepted, the proposer may enforce the same for its acceptance, but if not insisted he/she is deemed to have accepted the acceptance. Likewise, the deemed acceptance may also be construed by the performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise. An express promise is conveyed by way of words in the proposal or its acceptance, otherwise it is said to be an implied promise, e.g. inference drawn from circumstances. A contract shall necessarily be an agreement made with free consent of the parties who are competent to contract, is for lawful consideration and lawful object, and is not expressly declared to be void. A person competent to contract shall have attained the age of majority, shall not have been disqualified from contracting by any law, and shall be of sound mind, i.e. he/she should be capable of understanding the subject matter of the contract and forming a rational judgment when he/she enters into the contract. A contract consisting of reciprocal promises to be performed simultaneously should begin only after the promise is ready and willing to perform his/her reciprocal promise, and those reciprocal promises shall have to be so performed in the order in which they are expressly provided for in the contract, or in the order commanded by the very nature of the transaction. In such a case, if one party to the contract is prevented by the other from performing his/her promise, the contract becomes voidable at the option of the party so prevented, with entitlement to compensation for any loss due arising there from. The Act defines a contingent contract as a contract to do something, only in case of happening of a collateral event. Such contracts cannot have legal enforceability unless and until that event has happened, and in case of the event becoming impossible, such contracts become void. (Indian Contract Act; chapter III, section 31; p.18). In case a contract is altered, rescinded or substituted by a new contract with agreement from the parties to the original contract, the promises thereof need not be performed. (Indian Contract Act; chapter IV, section 62; p.23). If a contract is rescinded by a party who CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 156

deems the contract as voidable, the other party thereto need not perform any promise, and if the party rescinding voidable contract received any benefit there under from another party to the contract, he/she should restore such benefit to the party from whom it was received. The similar restoration of benefit to the parties to a contract be made if an agreement is discovered to be void, or when a contract becomes void. If a contract is broken, the sum stipulated in the contract by way of penalty towards such breach, whether or not actual damage or loss is proved to have been caused thereby, is receivable from the party breaking the contract. The contract of indemnity is defined where a promiser in a contract promises to save the other from loss to be incurred in the performance of the contract. (Indian Contract Act; chapter VIII, section 124; p.28).A contract of guarantee however is to perform the promise or discharge the liability of a third party in case of the promiser’s default. The promiser is called the surety, the promisee is called the creditor. The liability of the surety is co-extensive with that of the third party, unless otherwise provided in the contract. The surety has the right to revoke a continuing guarantee in respect of future transactions by due notice to the creditor. The Act defines contract of bailment as the delivery of goods by the delivering person, called bail or, to the person who is delivered, called bailee, in the course of a defined purpose which once accomplished, mandates that the goods be returned to bailor or otherwise disposed of according to the bailor’s direction. (Indian Contract Act; chapter IX, section 148; p.32). The bailment of goods as security for payment of a debt or performance of a promise is called pledge. The Act defines agent to be a person who is competent to contract and is employed to do any act for another or to represent another, called principal, in dealings with third party. (Indian Contract Act; chapter X, section 182; p.37). The relationship of agency may or may not have a consideration. The authority of an agent may be expressed or implied, but confers on him/her to carry on a business and to do every lawful thing necessary for the purpose of conducting such business, while being responsible to his/her principal according to the provisions in that behalf, or according to the custom which prevails in doing such kind of business. Contracts entered into through an agent and the acts undertaken thereto would have the same obligations and legal enforceability as if the contracts had been entered into and the acts done by the principal in person. An agent, however, cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. The principal shall indemnify an agent against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him/her. Any untruthful representation as an authorized agent of another and dealing in that garb with a third party, shall make such agent liable to make compensation of any loss or damage which the alleged principal has incurred by his/her such dealing. An agent cannot further delegate generally, except if the nature of the business or the agency so require to appoint such sub-agent. The agent would be responsible to the principal for the acts of the sub-agent. A sub-agent would act under the control of the original agent, but would not be responsible CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 157

to the principal except in cases of fraud perpetrated by the sub-agent. However, where a sub-agent is properly appointed, the principal is bound by and be responsible for his/her acts to third party as if he/she were an agent originally appointed by the principal. The Indian Partnership Act, 1932 Partnership is the contractual relationship among persons who agree to share the profits of a business. They are individually referred to as partners, and collectively a firm. The partnership does not arise out of a status, e.g. family business, or holding of a joint or common interest in a certain property or assets. The partnership determines whether a person is actually a partner in a firm, or the group of individuals is actually a firm. Owing to this, the consideration received by an outgoing partner due to sale of his/her own share or goodwill, does not render him/her a partner. By the same logic, the receiver/s of annuity out of business proceeds by the dependent/s of a deceased partner does not render them partner/s with the persons carrying on the business. The same premise is extended to a minor and a transferee. However, a transferee has entitlement to the share of the assets of the firm to which the transferring partner is entitled when the firm is dissolved. The property of a firm may be all property, acquired initially and in the course of business, and includes all rights and interests in the property as well as goodwill acquired or created by the business. The property of a firm shall be exclusively held and used for the purpose of carry on the business to the greatest common advantage. The contract determines the mutual rights and duties of the partners of a firm, but would at the foremost include: to be just and faithful to each other; and to render true accounts and full information of all things affecting the firm. The partners have rights to take part in the conduct of the business and have access to the books of the firm. The implied authority of any partner can be extended or restricted by the contract. All partners’ consent is required before any change in the nature of business is made. The partners are entitled to share equally the profits of the firm after deduction of any interest on capital subscribed. Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he/she is a partner. A firm is liable to the loss/injury caused to any third party, or to any penalty incurred, to the same extent as the partner, if a wrongful act or omission is done by the partner acting in the ordinary course of the business, either solely or with the authority all the partners. A partner may not be expelled from a firm by any majority of the partners, except in extraordinary case prescribed in the contract itself. An insolvent partner ceases to be a partner on the date of the order of adjudication, irrespective of the firm’s dissolution. The estate of a deceased partner is not liable for any act of the firm done after his/her death. The estate of a deceased partner is entitled to the share of the profits made by the firm if it is not dissolved pursuant to the death of the partner and the surviving partners carry on the business of the firm. A firm may be dissolved with the consent of all the partners CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 158

or in accordance with a contract. Notwithstanding such dissolution, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before the dissolution notice. After dissolution, every partner may restrain from carrying on a similar business in the firm name or from using any of the firm’s property, if the contract does not provide or unless the goodwill is bought, until the affairs of the firm have been completely wound up. The Limited Liability Partnership Act, 2008 A limited liability partnership (LLP) is a body corporate formed for carrying on a lawful business with a view to profit, and incorporated in the Act as a legal entity separate from that of its partners. It shall have perpetual succession in that any change in its partners shall not affect its existence, rights or liabilities. The LLP shall have at least two partners, who can be individuals or body corporate. The contribution of a partner may consist of tangible (movable or immovable) or intangible property or other benefit including money, capital, or agreement to contribute the same, and contracts for services performed or to be performed. Each partner’s monetary value of contribution shall be accounted for and disclosed in the accounts. The nominee of a body corporate shall be the designated partner, who is responsible for the doing of all acts, matters, things, etc. in respect of compliance of filing of any document, return, statement, etc. At least one of the designated partners of an LLP shall be a resident in India. An incorporated LLP shall, by its name, be capable of suing and being sued and do all acts in respect of acquiring, owning, holding, developing and disposing of tangible (movable or immovable) or intangible property. Every limited liability partnership shall conclude its name by such words or the acronym LLP. Every partner of a LLP for the purpose of its business is the agent of that LLP, but not of other partners. If the number of partners of a LLP is reduced below two, and the only partner carries on business, he/she/it shall be liable for the obligations and all liabilities of the LLP beyond a period of six months. The LLP is liable in the same way as its any partner for any wrongful act or omission on his/her part of the partner in the course of its business or with its authority. The liabilities of the LLP shall be met out of its property. An obligation of the LLP whether arising in contract or otherwise, shall be solely the obligation of the LLP. A partner is not personally liable, directly or indirectly for an obligation solely by reason of being a partner of the LLP. This however shall not affect the personal liability of a partner for his/her own wrongful act or omission, but a partner shall not be personally liable for the wrongful act or omission of any other partner of the LLP. The LLP shall maintain proper books of account in the prescribed manner relating to its affairs for each year, and within a period of six months from the end of each financial year, prepare a Statement of Account and Solvency, duly signed by its designated partners for the said financial year. Such statements duly audited shall be filed with the Registrar every year. There is provision to be converted CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 159

to a LLP by a firm, an unlisted public company, or a private company by applying to the Registrar. All tangible (movable or immovable) and intangible property vested in the firm or the company and all assets, interests, rights, privileges, liabilities, obligations relating thereto, and its entire undertaking shall be dissolved of its erstwhile status and transferred to and shall vest in the LLP without further assurance, act or deed. A Foreign Limited Liability Partnership can also be registered in India being an LLP formed, incorporated or registered outside India and which establishes a place of business within India with applicable provisions. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 160

Chapter - 4: Consumer Grievances Redressal Learning Objectives  Understand consumer grievances redressal under various regulators  Distinguish nuances of comprehensive consumer empowerment in the digital era Topics  Redress in Banking – The Banking Ombudsman Scheme 2006  Investor Grievance Redress Mechanism – SEBI Complaints Redress System (SCORES) platform  The Consumer Protection Act, 2019 Introduction A consumer is said to be a king in a free market economy. The earlier approach of caveat emptor, which means “Let the buyer beware”, has now been changed to caveat venditor(“Let the seller beware”). However, with growing competition and in an attempt to increase their sales and market share, manufacturers and service providers may be tempted to engage in unscrupulous, exploitative and unfair trade practices like defective and unsafe products, adulteration, false and misleading advertising, hoarding, black-marketing etc. This means that a consumer might be exposed to risks due to unsafe products, might suffer from bad health due to adulterated food products, might be cheated because of misleading advertisements or sale of spurious products, might have to pay a higher price when sellers engage in overpricing, hoarding or black marketing etc. Thus, there is a need for providing adequate protection to consumers against such practices of the sellers. The consumer protection is at the core of all regulation-making. Financial products and services are typical and to a great extent intangible in the sense that the outcome is difficult to distinguish from a desirable one, and is usually after a fair length in time or in the long-term. A vast majority of consumers are not trained in finance, hence it is difficult for them to discern the outcome in a financial transaction from what is desirable in their individual best interest. The outcome in certain financial products and services cannot be defined at the time of transaction. In other cases, it can be camouflaged in a financial terminology which serves the minimum regulatory requirement and can be the screen to disallow consumer grievances, if they arise at a later stage. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 161

It is a challenge for regulatory agencies, arbitrators and courts to establish mechanisms which should resolve consumer grievance cases in principle-based manner, keeping the consumers’ interest uppermost. It is to be kept in the perspective that the consumers are not organized which comes in the way of a structured stance developing and being considered in regulation-making. Although, consumers affect all economic decisions, they being the agents for two-thirds of all spending in the economy, it is ironic that consumers get affected the most by those same economic policies which they directly or indirectly help evolve. Regulators make analogies about consumer interest and afford protection within considered parameters at a point in time. This protection available to consumers in the regulations has to be reviewed constantly and updated in a progressive exercise. The effective regulations of entities in the market should coexist with an easily accessible and credible mechanism to resolve disputes timely between consumers and the regulated entities. This is essential for promoting consumer confidence which is the pedestal of financial stability in the markets. Many jurisdictions try to ensure that consumers have recourse to a dependable mechanism to redress grievances. Such systems have to be time bound, easily accessible, independent and fair and should involve least financial burden. Towards accomplishing this objective, the banking and insurance sector regulators in India have well-structured ombudsman schemes which help resolve consumer grievances. There are other online mechanism of registering and monitoring of complaints and grievances. Additionally, a comprehensive law, being the Consumer Protection Act can also be utilized to settle financial grievances. Redress in Banking – The Banking Ombudsman Scheme Origin: Banking Ombudsman Scheme 2006 The RBI first introduced the Banking Ombudsman Scheme in 1995 u/s 35A of the Banking Regulation Act, 1949 and it was revised in 2002 to over regional and rural banks and last being in July 2017. Then again there was a revision in the year 2006 which is known as “Banking Ombudsman Scheme 2006” to cover complaints for ATM transactions, debit and credit cards, deduction of service charges etc. It was last amended in February 2009, to cover problems due to internet banking. This RBI Banking Ombudsman scheme covers all banks- PSU Banks, Rural and Co-operative Banks. The Ombudsman Banking has been defined under clause 4 of the Banking Ombudsman Scheme, 2006. The scheme covers scheduled commercial banks, urban co-operative banks, regional rural banks, apart from small finance banks and Payment banks. RBI administers twenty-one offices of banking ombudsman across India and bears the entire cost of running the scheme. A total of 163,590 complaints in the year 2017-18 were received which were 25% more than the previous year. The disposal rate of 96.5% was maintained. Nearly two-thirds of maintainable complaints were resolved by agreement i.e., through mediation. The major grounds of complaints received during the year were CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 162

non-observance of fair practices code, ATM, debit and credit card issues, failure to meet commitments, and mobile and electronic banking. The total cost during the year 2017-18 incurred towards handling complaints was Rs. 572 million. The awareness campaigns, events and advertisements were organized by the offices of banking ombudsman in their respective rural and semi-urban areas. RBI also implemented in April, 2019 the ombudsman scheme for deposit taking Non-Banking Financial Companies (NBFCs) and those non- deposit taking NBFCs having customer interface, with assets size of Rs. 1 billion or above. Public grievances and complaints which are not covered by the Ombudsmen Schemes are managed by the Consumer Education and Protection Department (CEPD) of RBI and by such cells in its regional offices. CEPD focuses on reducing the information asymmetry while expanding disclosures and meting out fair treatment to the financial consumers. Moreover, the Charter of Customer Rights [RBI; December 2014] lays down broad guidelines and principles for banks towards protecting consumers from unfair treatment and conduct. The internal ombudsman mechanism implemented in 2015 in all public sector banks, select private sector and foreign banks serves as the first level to resolve customer complaints, before they could be escalated to the banking ombudsman. RBI has also implemented a technology enabled Complaint Management System (CMS) which will integrate the entire mechanism of Ombudsmen for banking and NBFCs, its nodal department CEPD and regional cells. Investor Grievance Redress Mechanism – SEBI Complaints Redress System (SCORES) platform SEBI notified ombudsman regulations in August 2003 which contained guidelines for appointing ombudsman. In March 2007 the proposal to introduce an ombudsman for capital markets was scrapped. SEBI reckoned that the then prevailing system of addressing investor grievances by stock exchanges was working. The bourses in their self-regulatory capacity were regarded as the first level of regulators for the corporate, and only unresolved complaints were escalated. SEBI issued a circular on December 18, 2014 regarding redressal of investor grievances through SEBI Complaints Redress System (SCORES) platform. SCORES is a web based centralized system to capture investor complaints against listed companies and registered intermediaries and is available 24×7. It was introduced on June 8, 2011 and has been facilitating redressal of investor grievances in a speedy manner. SEBI encourages investors to lodge complaints through electronic mode in SCORES. However, complaints received from investors in physical form are also digitized by SEBI and uploaded in SCORES. Thereafter, follow-up actions of the complaint are done in electronic form only i.e. through SCORES. Investors can easily access, retrieve and preserve the complaints lodged by them in electronic mode. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 163

Further, it enhances the turnaround time and speed of redressal of a complaint. The complaints against stock brokers, sub-brokers and Depository Participants continued to be routed through the platforms of the concerned Stock Exchange or Depository. The platform does not accept complaints against companies falling under the purview of other regulatory bodies viz. RBI, IRDAI, PFRDA, Competition Commission of India (CCI), etc., or under the purview of other ministries viz., MCA, etc. Such complaints may pertain to banks, NBFCs, Primary Dealers, insurance companies, insurance products and their intermediaries, pension products and their intermediaries, housing finance companies, unlisted companies, suspended companies, vanishing companies, sick companies, companies struck off from Registrar of Companies (RoC) or those under liquidation or insolvency proceedings. The platform enables online movement of complaints to the concerned listed company or intermediary and uploading of the Action Taken Reports (ATRs) by them, thus facilitating tracking of resolution status. SEBI retains the sole authority to close the complaints. The Board of Directors of the listed company or the registered intermediary, their proprietors or partners are made responsible for ensuring compliance including filing of ATR/reply. Any failure to file ATR within thirty days of date of receipt of the grievance is treated as failure to furnish information to SEBI and a deemed non-redressal of the grievance. Investors are required to register on the SCORES platform with necessary details like name, address, e-mail address, PAN and mobile number. They need to select the correct complaint category, provide entity name, the nature and full details of the complaint and upload supporting documents. In case the complaint has not already been filed with the concerned entity, it is first routed to the entity to elicit response/resolution within thirty days. The complainant has to indicate if the resolution by the entity is not satisfactory along with the reason, else the complaint is treated as closed. An appropriate supervising officer in SEBI is the next level of escalation. SEBI can act as a facilitator but cannot stand to judge, arbitrate in a matter or represent on behalf of investor or force the entity to resolve the complaint. The securities and other laws provide legal rights and remedies which investors can resort to in resolving grievances, i.e. by seeking intervention of consumer courts, the courts and arbitration, etc. SEBI has empowered stock exchanges to levy fine for non-redressal of investor complaints in respect of listed companies under the SEBI (Listing and Disclosure Requirements) Regulations, 2015. In case of default to redress, the exchanges can direct to freeze the entire shareholding as well as other securities held in the demat account of the promoter group. If non-compliance continues, the stock exchanges may refer such cases to SEBI for enforcement actions, if any. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 164

Insurance Ombudsman Scheme he Insurance Ombudsman scheme was created by the Government of India for individual policyholders to have their complaints settled out of the courts system in a cost-effective, efficient and impartial way. There are at present 17 Insurance Ombudsman in different locations and any person who has a grievance against an insurer, may himself or through his legal heirs, nominee or assignee, make a complaint in writing to the Insurance ombudsman within whose territorial jurisdiction the branch or office of the insurer complained against or the residential address or place of residence of the complainant is located. The Insurance Ombudsman was created in November, 1998 with the purpose of timely settlement of the insured’s grievances. An individual can approach ombudsman in the concerned jurisdiction for consideration of complaint/grievance against an insurer, the major grievances being a partial or total repudiation of claim, dispute with regard to premium paid in terms of the policy, misrepresentation of policy terms and conditions, dispute with regard to policy wordings of claims, delay in settlement of claims, non-issuance of any insurance document, etc. The powers of an ombudsman are restricted to insurance contracts of value not exceeding Rs. 3 million. The insurance companies are bound to honor the awards made by an ombudsman within three months. A complaint can be filed with an insurance ombudsman after a representation made to the concerned insurer is either not resolved or is not resolved satisfactorily within a month, but not beyond a year after the insurer had replied, provided that the same complaint on the subject is not be pending before any court, consumer forum or arbitrator. The ombudsman shall pass an award within a period of three months. A policyholder, not satisfied with the award of the ombudsman, can approach Consumer Forums and/or Courts of law. The Consumer Protection Act, 2019 The erstwhile Consumer Protection Act, 1986 sought to protect the interests of consumers by way of establishing consumer councils and other authorities for the settlement of consumer disputes. It provided for a three-tier system at the district, the state and the national levels along with detailed procedure for handling of complaints. It was felt in the 1980s that there was a drastic change in the perspective due to the industrial revolution and changed contours of commerce due to globalization. That resulted in a vast array of consumer goods and services including insurance, banking and finance. Hence, it became necessary to safeguard the interests of consumers and to protect them from exploitation and from adulterated and sub-standard goods and services. Similarly, the late 1990s and the following two decades have seen a sea change in the consumer goods industry and the nature of CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 165

services offered to consumers. The digitization has been one single largest game changer. The ease and access to goods and services, the mechanisms to acquire/avail them, to pay for them and the accompanying perception of service has created its own challenges. The e-commerce has blurred geographical boundaries and with them the liability aspect of goods and services. The securities have been almost entirely dematerialized. There is information overload especially in digital mode, scientific processing of huge databases, algorithmic trading, etc. The fintech has its role in almost every sphere with machine learning, internet of things, etc. The revised Consumer Protection Act, 2019 enacted on August 9, 2019 seeks to address this aspect along with improvement in processes and the mechanisms of enforcement. The revised Act provides for a Central Consumer Protection Council (Central Council) with its objective to render advice on promotion and protection of the consumers' rights under the Act. The Minister-in- charge of the Department of Consumer Affairs in the Central Government shall be the Chairperson of the Central Council which shall meet at least once every year. Every State Government shall establish a State Consumer Protection Council (State Council) which shall have the objective to render advice on promotion and protection of consumer rights under the Act within that State. It shall meet at least twice in a year under the chairmanship of Minister-in-charge of the Department of Consumer Affairs of the State. The State Government shall establish for every District a District Consumer Protection Council (District Council), which shall meet as often as possible but at least twice in a year. The objects of every District Council shall be to render advice on promotion and protection of consumer rights under the Act within the district. There is provision in the Act of the establishment of the Central Consumer Protection Authority (Central Authority), a regulatory authority having enforcement powers to take suomoto actions, cancel licenses, recall products, order reimbursement of the price of goods/services, file class action suits, etc. The Central Authority shall regulate matters relating to violation of rights of consumers, unfair trade practices and false or misleading advertisements which are prejudicial to the interests of public and consumers and to promote, protect and enforce the rights of consumers as a class. A Director General will spearhead the Authority’s investigation wing, which may conduct inquiry or investigation into consumer law violations. The Director General shall also exercise the powers of search and seizure. The State Government shall establish at least one District Consumer Disputes Redressal Commission (District Commission) in each district of the State. The District Commission shall have jurisdiction to entertain complaints where the value of the goods or services paid as consideration does not exceed Rs. 10 million. A consumer may file complaint in a District Commission if she works/resides in that district, or the cause of action, wholly or in part, arises in that district, or the opposite party ordinarily resides or carries on business or has a branch office in that district at the time of the institution of the complaint. Every complaint shall be disposed of as expeditiously as possible but within a period of three months from the date of receipt of the notice by the opposite party. Any person aggrieved by an CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 166

order made by the District Commission may prefer an appeal against such order to the State Consumer Disputes Redressal Commission (State Commission) on the grounds of facts or law within a period of forty-five days from the date of the order. The State Commission shall have jurisdiction to entertain complaints where the value of the goods or services paid as consideration, exceeds Rs. 10 million but does not exceed Rs. 100 million. The State Commission will ordinarily dispose of the cases within a period of three months. A person aggrieved by an order made by the State Commission may prefer an appeal against such order to the National Consumer Disputes Redressal Commission (National Commission) within a period of thirty days from the date of the order. An appeal shall lie to the National Commission from any order passed in appeal by any State Commission, if the National Commission is satisfied that the case involves a substantial question of law, and the memorandum of appeal shall precisely state the substantial question of law. Such appeals will be normally disposed of within ninety days. The District Commission, or the State Commission, or the National Commission shall have the power to review any of the order passed by it if there is an error apparent on the face of the record, either of its own motion or on an application made by any of the parties within thirty days of such order. An appeal shall lie, both on facts and on law, from the order made by the National Commission to the Supreme Court of India within thirty days of such order. Every order made by a District Commission/State Commission/National Commission shall be enforced by it in the same manner as if it were a decree made by a Court in a suit before it. Whoever fails to comply with any order made by any of the Commission shall be punishable with imprisonment for a term which shall not be less than one month, but which may extend to three years, or with fine, which shall not be less than Rs. 25,000, but which may extend to Rs. 100,000, or with both. The Act maintains that a product seller includes a person who is involved in placing the product for a commercial purpose and includes e-commerce platforms and aggregators. The product liability covers within its scope, the product manufacturer, product service provider and product seller for any claim for compensation. The product manufacturers have an increased liability risks especially where the express warranty of a product is made. The Unfair Trade Practices also include sharing of personal information given by the consumer in confidence, unless such disclosure is made in accordance with the provisions of any other law. The celebrities who endorse products in advertisements as well as the brand ambassadors have increased liability under Unfair Trade Practices. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 167

Chapter 5: Other Acts, Statutes and Regulations Relevant to Financial Consumers Learning Objectives  Understand other Acts, Statutes and Regulations impacting financial consumers Topics  Right to Information Act, 2005 (RTI)  SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP) Introduction The financial consumer has recourse to certain statues and regulations which affirm protection to its interests. The information is power and the right information and practices go a long way in building confidence in the institutions, the manufacturers and dispensers of financial products and services, and in the public authorities as well, who are vested with powers to make rules and regulate industries. The right to information act or RTI is one game changer statute which empowers the general public to have access to the rightful information from authorities and institutions in the Central and State Governments. One positive offshoot of RTI is that it instills accountability in the public institutions. Also, the compliance requirement and its time bound nature reinforces discipline of elaborate cataloguing and sequencing of records and data and their genuineness. Right to Information Act, 2005 (RTI) India is a democratic Republic. The democracy requires transparency of information which is vital to its functioning, notwithstanding the fact that the revealing of certain information may actually conflict with its very confidentiality and sensitiveness apart from other public interests and efficient operations of the governments. It is essential to manage these conflicting interests. RTI provides a mechanism for citizens to access certain information under the control of public authorities with the central purpose to infuse a degree of accountability in their functioning. The right to Information Act 2005 which came fully into effecton12th October 2005 is one of the most significant legislation enacted by the Parliament in India. It is a major step towards more accountable CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 168

and transparent government. RTI has been enacted to provide for setting out the practical regime of right to information for citizens to secure access to information under the control of public authorities in order to promote transparency and accountability. The Act will certainly lead to end the culture of governmental secrecy and fulfill its potential as a truly great democracy. Objective of the Act 1. To promote transparency accountability in the functioning of the government. 2. To set up a practical regime for giving citizens access to Information that is under the control of public authorities. 3. To empower the citizens as the law will promote the participation of the citizens in official decisions that directly affect their lives. 4. The effective implementation of RTI Act will build public trust in the government functioning. 5. It will lead to effective and efficient records management technique that is needed to facilitate the provision of information in response to public interest. Right to Information means the right to information accessible under this Act which is held by or under the control of any public authority and includes the right to: -  Inspection of work, documents, records.  Taking notes, extracts, or certified copies of documents or records.  Taking certified samples of material.  Obtaining information in the form of diskettes, floppies, tapes, video cassettes or in any other electronic mode or through printouts where such information is shared in a computer or in any other device. Every public authority is required to maintain all its records systematically in order to facilitate the access to such records in a timely manner, and designate Public Information Officers in all administrative units to dispense information to persons seeking the same. A person who seeks information is not required to give any reason or details other than the contact details where the required information needs to be delivered. A request for information shall not be rejected unless there is reason to believe that the act of providing information would disproportionately divert the public resources or would be detrimental to the safety or preservation of the record demanded. In case a request for the information sought is rejected, the concerned Public Information Officer shall communicate the reason for such rejection, the period within which the appeal can be made against such rejection, along with details of the appellate authority. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 169

Certain information is categorized where the authorities shall not be under obligation to disclose. Such areas generally are the categorical records related to the security, strategy, economy, science and technology, space and nuclear research, etc. This may also potentially include areas where the disclosed information and facts could prejudicially impact the sovereignty and integrity of the State or its relations with a foreign State, or the disclosure could lead to provocation in a certain community or in general could give rise to offence. Such forbidden information can be so specified by any court of law or tribunal; can be part of cabinet papers including records of deliberations of the Council of Ministers, Secretaries; can be a breach of privilege of Parliament or the State Legislature. Other areas where a request for information is denied are: information on intellectual property and trade secrets; information available to a person in his/her fiduciary relationship; personal information having no links with public service; information necessary to safeguard the life or physical safety of any person; information which if leaked could hamper an investigative process or prosecution; etc. However, even in these cases, part access may be provided to the record which does not contain any information which is exempt from disclosure. SEBI (Disclosure and Investor Protection) Guidelines, 2000 (DIP) The Disclosure and Investor Protection guidelines issued by SEBI in the year 2000 and amended from time to time are the most comprehensive compendium in respect of issuances to be made by companies and other corporate entities, the methodology to be adopted, the role and responsibility of various intermediaries such as merchant bankers and registrars, and most importantly the timely disclosures to be made at every stage for the benefit of investors and other financial consumers. Though it may seem that the guidelines in good part are applicable to the corporate and institutional entities in the ecosystem of securities market, the ultimate aim is to help discover the most appropriate market determined price that should be paid by the investor, who may have the entire channel to review and make an informed decision. The securities market regulator SEBI does not engage directly or indirectly in fixing the price of an issue or any formula to purport the same. However, the guidelines in this regard are elaborate which the issuer has to follow and come to a price band in consultation with merchant bankers. The full disclosure of parameters adopted and process followed in this regard is to be made. In the book building process, the issuer appoints a lead manager book runner who is responsible for preparing the draft red herring prospectus which is filed with SEBI, and which discloses a price band for the issue. The prospectus is sent to corporate investors and to the media to create awareness. The corporate investors and other syndicate members may act an interface between the issuer and the investors. The investors can access the entire chain of information and get their queries clarified with syndicate members. The risk factors from every foreseeable perspective are covered and explained for the benefit of investors, who in accordance with their risk appetite and risk capacity take calculated CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 170

bets towards investment. The due diligence certificates are mandated by SEBI at various stages of an issue from the issuer as well as all the intermediaries in the entire process to ascertain the validity of information value chain; the accounts and valuation records, the promoters’ contribution, the assets and liabilities, the profit and loss statements, etc. There are certain restrictions imposed on the companies which are in the interest of investors. If a company has issued either fully convertible debentures or partly convertible debentures, it is restricted from issuing any shares by way of bonus or rights unless they reserve appropriate proportion of such issues towards the benefit eligible to the holders of such debentures. In case, fully convertible debentures have been issued which bear interest at a rate less than the bank rate, the offer document shall contain explanation of that price, which would take into account the notional interest loss on the investment from the date of allotment of such debentures to the date of full conversion, in all stages, if relevant. And towards this activity investors can ascertain the price that would work the best in their favour, depending on their individual return expectation. In respect of rights issues, the issuer company may utilise funds collected only after satisfying the designated stock exchange that a minimum ninety percent subscription has been received. There are guidelines for the publication of research reports. The lead merchant banker shall ensure that the research report is prepared only on the basis of published information as contained in the offer document, and that no selective or additional information or information extraneous to the offer document shall be made available by the issuer or any member of the company management or syndicate to any particular section of the investors or to any research analyst in any manner whatsoever including at road shows, presentations, in research or sales reports or at bidding centres, etc. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 171

Chapter 6: Regulation of Market Intermediaries in Financial Products Learning Objectives  Compare regulations of market intermediaries in financial products Topics  SEBI (Intermediaries) Regulations, 2008  SEBI (Investment Advisers) Regulations, 2013  SEBI (Self-Regulatory Organizations) Regulations, 2004 Introduction The advisers and distributors in various financial sectors need to comply with the respective sector regulations and guidelines including obtaining requisite licenses to practice. There is no single professional accreditation which authorizes advisers to practice across the segments of insurance, investments, retirement, etc. Advisers have to register with respective regulatory agencies and follow their code of conduct and recommended professional practices. It is therefore necessary to have a broad understanding of regulations around financial intermediation in India. SEBI (Intermediaries) Regulations, 2008 The capital market intermediaries are vital link between investor, issuer and regulator. The objective of these intermediaries is to smoothen the process of investment and to establish a link between the investors and the users of funds. Corporations and Governments do not market their securities directly to the investors. Instead, they hire the services of the market intermediaries to represent them to the investors. Investors, particularly small investors, find it difficult to make direct investment. A small investor desiring to invest may be able to diversify across issuers to reduce risk. He may not be equipped to assess and monitor the credit risk of issuers. Market intermediaries help investors to select investments by providing investment consultancy, market analysis and credit rating of investment instruments. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 172

In order to operate in secondary market, the investors have to transact through share brokers. Registrars and Share Transfer Agents, Custodians and Depositories Participants are capital market intermediaries that provide important infrastructure services for both primary and secondary markets. According to SEBI (Intermediaries) Regulations, 2008, “intermediary” means a person mentioned in clauses (b)and (b a) of sub-section (2) of section 11 and sub-section (1) and (1A) of section 12 of the Act and includes an asset management company in relation to the SEBI (Mutual Funds) Regulations, 1996, a clearing member of a clearing corporation or clearing house and a trading member of a derivative segment or currency derivatives segment of a stock exchange but does not include foreign institutional investor, foreign venture capital investor, mutual fund, collective investment scheme and venture capital fund. The intermediaries regulations of SEBI includes under the broad definition of intermediaries: stock brokers and sub-brokers, trading members of derivatives segment of a stock exchange, merchant bankers and underwriters, bankers and registrars to an issue, share transfer agents, depository participants, clearing members, custodians of securities, trustees of trust deeds, portfolio managers, investment advisers, foreign institutional investors, foreign portfolio investors, credit rating agencies, asset management companies, and such other intermediaries who may be associated with securities markets in any manner. Associates of an intermediary are persons/entities who are under common control with intermediary, either controlling the intermediary or being controlled by it, directly or indirectly, and include any relative, or companies under the same management. To carry on the activities of one or more intermediary activities, separate certificates need to be obtained. An intermediary is required to provide to SEBI every year a certificate of compliance with all prescribed obligations and responsibilities as well as fulfillment of the continued eligibility criteria, and maintain accounts and records as specified in the relevant regulations. Merchant Bankers are the key intermediaries between the company and issue of capital. The activities of the Merchant Bankers in the Indian capital market are regulated by SEBI (Merchant Bankers)Regulation, 1992. Underwriting is compulsory for a public issue. It is necessary for a public company which invites public subscription for its securities to ensure that its issue is fully subscribed. Bankers to the issue, as the name suggests, carries out all the activities of ensuring that the funds are collected and transferred to the Escrow accounts. A stock broker plays a very important role in the secondary market helping both the seller and the buyer of the securities to enter into a transaction. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 173

A portfolio manager with professional experience and expertise in the field, studies the market and adjusts the investment mix for his client on a continuing basis to ensure safety of investment and reasonable returns there from. Custodian means any person who carries on or proposes to carry on the business of providing custodial services. Investment adviser means any person, who for consideration is engaged in the business of providing investment advice to clients or other group of persons and includes any person who holds out himself as an investment adviser, by whatever name called. A prescribed code of conduct needs to be abided by an intermediary and its directors, officers, employees and key management personnel, ensuring that sound good corporate policies and good corporate governance is in place. It shall redress investor grievances promptly (within forty-five days) and shall maintain records of all complaints received and redressed. It shall ensure that the recommendation made to a client is suitable, and that an investment advice issued in the publicly accessible media is with due disclosure of all interests. It shall refrain from engaging in price rigging, market manipulation, market distortion, fraudulent practices, self-dealing, front-running, and creating unfair competition or false market which may affect the smooth functioning of the market. It shall make adequate disclosures of all interests, resolve proactively any potential areas of conflict of duties on an ongoing basis. An intermediary shall be transparent, fair, objective and unbiased in rendering services. SEBI (Investment Advisers) Regulations, 2013 Definition: “Investment Adviser” means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called. Roles & Responsibilities:  Investment advisers are those, who guide one about his or her financial dealings and investments. Basically Investment adviser give advice and provide services related to the investment management process. The Investment adviser shall done the risk profiling for clients to assess their risks.  An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 174

 An investment adviser shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.  An investment adviser shall maintain an arms-length relationship between its activities as an investment adviser and other activities.  An investment adviser which is also engaged in activities other than investment advisory services shall ensure that its investment advisory services are clearly segregated from all its other activities, in the manner as prescribed hereunder.  An investment adviser shall ensure that in case of any conflict of interest of the investment advisory activities with other activities, such conflict of interest shall be disclosed to the client.  An investment adviser shall not divulge any confidential information about its client, which has come to its knowledge, without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force. SEBI adopted a consultative approach to construct Investment Advisers (IA) Regulations in January 2013. The investment advice as per these regulations is considered as advice towards all types of dealing in the securities or investment products, dispensed to a client either orally or in written form. The investment adviser engages with a client in a fiduciary capacity and seeks remuneration directly from the client advised, and not from any other sources. Financial Planning is considered to be investment advice as well. Intermediaries who are engaged exclusively dealing in insurance and pension products need not register as investment advisers, as also several other professionals who may dispense investment advice incidental to their main profession of tax, accounts, law and distribution of mutual fund products. In their subsequent consultation papers to amend the IA regulations, SEBI however proposed that such professionals offering advice for a consideration have to register as investment advisers as well. The proposals further recommended mutual fund distributors to choose between investment advice and distribution. The investment advisers as individuals cannot be on the execution side as well. The institutions and body corporate, which engage in both the activities of distribution and investment advice, are required to dispense investment advice through a separately identifiable department or division. In the subsequent consultation paper however, it was further proposed that such institutional entities would be required to provide investment advice through a subsidiary only. There are qualification and certification requirements from a registered investment adviser (RIA). They have certain obligations and responsibilities; like risk profiling of client, suitability norms which bind the advice being provided to the client’s analyzed risk profile, disclosure requirements on the services to be provided and the relevant fee structure, proactive disclosure of conflict of interest, and maintenance of records with respect to the advice provided. The RIA shall maintain an arms-length relationship between its other activities, if any, from the core investment advisory services. A CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 175

prescribed code of conduct requires an RIA to maintain fairness and diligence in all dealings including the fees charged, to uphold a certain level of capability, to being compliant with regulations/laws, etc. SEBI (Self-Regulatory Organizations) Regulations, 2004 A Self-Regulatory Organization (SRO) defined in the above regulations would mean an organization of intermediaries which is representing a particular segment of the securities market and which is duly recognized by SEBI under these regulations, but would exclude a stock exchange. Such an organization intending to be recognized as an SRO may apply to SEBI by forming a non-profit company with objective to promote a useful activity including commerce. Such a company shall have its main object as discharging the function of an SRO, shall have a net worth of at least INR 10 million, shall have adequate infrastructure for the purpose, professional capability and experience. SEBI would ensure that grant of SRO status to the applying organization is in the interest of financial consumers and the securities market, in general. SEBI has mandated that overall governance and management of an SRO shall vest in its Board of Directors, a majority of which shall be independent directors. After an SRO of specific segment of intermediaries is thus recognized, the registration and renewal of intermediaries who would be its members, shall be made only through the specified SRO. The SRO will treat all its members in a fair and transparent manner and in their respect, collect membership fees, organize awareness and training programs as well as screening tests/certifications, issue a code of conduct and monitor the same. It shall inform SEBI of any violations by its members of the provisions of the SEBI Act and rules and regulations, circulars and guidelines made there under, and shall take disciplinary action as directed. An SRO shall have approved governing norms to direct its various functions. CFP Level 1 - Module 3 – Regulatory Environment & Compliances - India Page 176