Restriction on Sharing of Information

(Personal, Sensitive and Biometric Information)

Legal Division (legal@vinodkothari.com)

Introduction:

Information surround us and is generally captured in virtually everything we do. While some of the information are shared voluntarily; some are disseminated without an express consent, i.e. every time we do a google search, while we try to book a flight, or even when we scroll through shopping portals. Of the several ways in which data is collected, the most prominent one seems to be that collected by various companies and technological platforms while providing goods and services. Another easy access to data is the data available with the bankers, generally received during the KYC process, whereby an individual provides various information such as name, birth, address, Aadhaar number etc.

With globalisation and rapid digitalization, large quantum of data is either collected or shared or generated every micro second. Data has become the new currency in today’s time. While there is no doubt that such information are immensely valuable and several companies are willing to pay for its access, however, it is difficult to determine the exact potential contained by data in its form, and therefore, the likely exploitation. Several multinational organisations are paying huge sum of money to access this data and make business strategies to cater to the needs of the customers. This position is further complicated by government and regulators demanding and seeking access to data from the citizens and corporate. Thus, a need to protect the data from being misused or disclosed for fraudulent purposes becomes necessary.

Considering the risk involved during information sharing process, one may often whether information provided by an individual to a service provider can be disclosed to a third party who is not privy to such information? If yes, are the recipients subject to any restrictions on information sharing? In India, there are a host of laws and judicial pronouncements addressing the issue. By way of this write-up, we intend to delve on the same.

Banker’s Secrecy Obligations:

The general view prevailing till 1924 was that the banker would not make himself liable in any case where he gives bona fide answers to inquiries made by persons really interested, provided he confined his answers to the facts within his knowledge. However, this view was modified by the decision in Tourneir v. National Provincial and Union Bank of England [1].

In the case of Shankarlal Agarwalla v. State Bank of India AIR 1987 Cal 29[2], the Hon’ble Calcutta High Court referred to Halsbury’s Laws of England, Vol 1, 2nd edition, which stipulates that:

“It is an implied term of the contract between a banker and his customer that the banker will not divulge to third persons, without the consent of the customer, express or implied, either the state of the customer’s account, or any of his transactions with the bank or any information relating to the customer acquired through the keeping of his account, unless the banker is compelled to do so by order of a Court, or the circumstances give rise to a public duty of disclosure or the protection of the banker’s own interests requires it.”

 Referring to Paget’s Law of Banking (9th Edition, page 166), the court observed that among the duties of the banker towards the customer may be reckoned the duty of secrecy. Such duty is a legal one arising out of the contract and is not merely a moral one. Breach of it, therefore, gives a claim for nominal damages or for substantial damages if inquiry is resulted from the breach. It is, however, not an absolute duty, but is a qualified one subject to certain reasonable, if not essential, exceptions. One such instance is the duty to obey an order under the Banker’s Book Evidence Act.

Further, in the case of Kattabomman Transport Corporation Ltd. v. State Bank of India AIR 1992 Ker 351[3], it was held that among the duties of the banker towards the customer is the duty of secrecy. Such duty is a legal one arising out of the contract and is not merely a moral one.

Restrictions on Sharing of Customer’s Personal and Account based Information and the Relevant RBI Notifications

1.    Master Direction- Know Your Customer (KYC) Direction, 2016 (Updated as on August 09, 2019)[4] (“KYC Directions”)

While the bankers collect and store various information and documents received from their customers during the KYC process, Paragraph 56 of the Directions stipulate that banks will maintain complete secrecy regarding the customer information which arises out of the contractual relationship between the banker and customer. It further states that “Information collected from customers for the purpose of opening of account shall be treated as confidential and details thereof shall not be divulged for the purpose of cross selling, or for any other purpose without the express permission of the customer.

However, just like every rule is subject to certain exceptions, the KYC Directions also lay down certain exceptions to the aforementioned rule. The same is enlisted herein below:

(a) where disclosure is under compulsion of law;

(b) where there is a duty to the public to disclose;

(c) the interest of bank requires disclosure; and

(d) where the disclosure is made with the express or implied consent of the customer.

2.    Master Circular on Customer Service- UCBs[5]

Paragraph 25.10.3 of the Circular provides that the banks are required to take appropriate measures to protect the confidential information such as customer name, signature, account number etc. and ensure that these information are not misused by banks or their vendors. Further, due care and secure handling is also required to be exercised during the movement of cheques from the time they are tendered over the counters or dropped in the collection boxes by customers.

3.    Master Circular on Credit Card, Debit Card and Rupee Denominated Co-branded Pre-paid Card Operations of Banks and Credit Card issuing NBFCs[6]

Giving due recognition to customer’s rights, the Master Circular stipulates that the card issuing bank/NBFC should not reveal any information relating to customers obtained at the time of opening the account or issuing the credit card to any other person or organization without obtaining their specific consent, as regards the purpose for which the information will be used and the organizations with whom the information will be shared (akin to paragraph 16, which provides for similar restriction on sharing of data obtained at the time of issuing debit cards). In this regard, the circular also specifies that the application form should contain the consent.

In case where the customers gives his consent for the bank sharing the information with other agencies, banks should state and explain clearly to the customer the full meaning/ implications of the disclosure clause. Further, the information being sought from customers should not be of such nature as will violate the provisions of the laws relating to secrecy in the transactions.

In addition, banks/NBFCs are made solely responsible for the correctness of the data provided as above.

Further, the Circular prohibits any co-branding non-banking entity to access any details of customer’s accounts that may violate bank’s secrecy obligations.

Sharing of Customer’s Credit Information

Credit related information pertaining to an individual or a body corporate are definitely relevant for financial institutions, and while the bankers are allowed to publish information of default to CIBIL, the disclosure is definitely not free from restrictions.

We often find people complaining about marketing calls for card cards, etc. Sometimes the customer himself seeks credit referrals from their regular banks, for the purpose of availing loans, etc, and in such case, the entity providing credit undertakes a check from the entity having access to customer’s regular transaction details. Section 17 of the Credit Information Companies (Regulation) Act, 2005[7] lays down the procedure to be followed by the credit information company or credit institutions for furnishing credit information, which comprises of information with respect to nature of loans, credit worthiness of an individual and such like. Sub- section 3 of the said section states that every credit information company can provide credit information to its specified user, only on receipt of request from him, in accordance with the provisions of the said Act, and directions issued thereunder by the Reserve Bank of India from time to time in this behalf. Here, the term specified user means a credit institution, a credit information company and such person or institution as may be specified by the RBI.

Further, Section 22 of the CIC Act protects the credit information from an unauthorised access. It provides as follows:

“22(1) No person shall have access to credit information in the possession or control of a credit information company or a credit institution or a specified user unless the access is authorised by this act or any other law for the time being in force or directed to do so by any court or tribunal and any such access to credit information without such authorisation or direction shall be considered as an unauthorised access to credit information.”

To read more on sharing of credit information to Fintech companies, one may refer to our article here.

Restriction on Collection, Sharing and Storage of Biometric and Demographic Information:

The debate relating to the data privacy has reached new heights after the Apex Court judgment in Justice K.S. Puttaswamy and Ors. v. Union of India AIR 2017 (SC) 4161[8] (more commonly known as Aadhaar judgment), wherein it was held that “right to privacy” is a fundamental right guaranteed by Part III of the Constitution of India, and discussing the issue whether the Aadhaar Act violates right to privacy, the Hon’ble Supreme Court observed that “After detailed discussion, it is held that all matters pertaining to an individual do not qualify as being an inherent part of right to privacy. Only those matters over which there would be a reasonable expectation of privacy are protected by Article 21.”

The aforementioned decision had far reaching ramifications on the laws and regulations present in India. The court held that identity of a person is a great significance in individual’s life. The place of birth, parentage and the demographic particulars becomes an important attribute of one’s personality. When all this information is available in one place, in the form of Aadhaar card, it not only becomes unique, it would also qualify as a document of empowerment. Added with this feature, when an individual knows that no other person can clone her, it assumes greater significance. Consequently, it becomes necessary to protect this information. Further, the court discussed informational privacy being one of the essential aspects of fundamental right to privacy. The informational privacy deals with person’s mind i.e. it protects a person by giving the control over the dissemination of material that is personal to him/her and disallowing unauthorised use of such information by the State.

Prior to the Aadhaar judgment, banks and NBFCs were compulsorily collecting their customer’s Aadhaar number for KYC verification, however, the Supreme Court struck off various provisions of the Act as unconstitutional. The court disallowed private entities from using Aadhaar numbers for the purpose of authentication, on the basis of a contract with the concerned individual, since the court was of the view that the same would lead to commercial exploitation of an individual’s biometric and demographic information by private entities, and consequently, be a breach of privacy.

The existing provisions of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016[9] also lay down various restrictions as regards information sharing. The relevant provisions are discussed below:

  1. Section 29(1) of the Act specifically prohibits sharing of core biometric information, such as finger print, Iris scan, or such other biological attribute of an individual as specified in the regulations, to any person or entity.
  2. Section 29(3) of the Act states that no identity information (including an individual’s Aadhaar number, his biometric information and his demographic information) available with a requesting entity will be used for any purpose other than specified to the individual at the time of submitting any identity information for authentication. It further states that such information will not be disclosed further except with the prior consent of the individual to whom such information relates.

Again, speaking of sharing of information, it is also pertinent to refer to the provisions of Aadhaar (Sharing of Information) Regulations, 2016[10]. The relevant provisions are as follows:

  • Regulation 3 deals with sharing of identity information by the authority. It states as follows:

“(1) Core biometric information collected by the Authority under the Act shall not be shared with anyone for any reason whatsoever.

 (2) The demographic information and photograph of an individual collected by the Authority under the Act may be shared by the Authority with a requesting entity in response to an authentication request for e-KYC data pertaining to such individual, upon the requesting entity obtaining consent from the Aadhaar number holder for the authentication process, in accordance with the provisions of the Act and the Aadhaar (Authentication) Regulations, 2016”.

  • Regulation 4 places restrictions on the requesting entities on storing of core biometric information. It further prohibits the requesting entities from sharing the identity information available to them for any purpose other than that specified to the Aadhaar number holder at the time of submitting such information for authentication, and without prior consent of the Aadhaar holder.
  • Regulation 5 mandates that the requesting entity should take the consent of the Aadhaar card holder for collection, storage and usage of his Aadhaar number. In addition to it, the requesting entities must inform the Aadhaar number holder the purpose for which such information is required and give alternatives to submission of Aadhaar number, if any.
  • Regulation 6 put restrictions on sharing, circulating or publishing of the Aadhaar number. Clause 1 of said regulation states that the Aadhaar number of an individual will not be published, displayed or posted publicly by any person or entity or agency. Further, Clause 3 states that no entity including a requesting entity will make public any database or record containing the Aadhaar numbers of individuals unless the Aadhaar numbers have been blacked out through appropriate means both in print and electronic form.

Some Common Exceptions to Secrecy Obligations

Having discussed the restrictions on usage and shareability of various information, it is relevant to understand the circumstances wherein disclosure can be made. Below we provide a few instances wherein disclosure of information will be deemed to be in accordance with law.

1.    Reasonable and Proper Occasions for Disclosure:

The question that may arise is what is regarded as a reasonable and a proper occasion? One such instance of proper occasion for disclosure is where disclosure is warranted under law.

2.    Common Courtesy:

Bankers have, of course, always acted honourably upon the principle of treating their customers’ affairs in confidence and only disclosing them in exceptional and justifiable circumstances. All the same there is a well- recognised practice among bankers themselves, generally described as “a common courtesy” whereby a bank, desiring information enquires of another bank. Information given in response to such enquiries is given confidentially and is worded with scrupulous care, so as to disclose no more than the general position of the customer. Such cases are, it is presumed, supported as permissible by reason of the implied consent of the customer, derived from evidence of a well- known practice among bankers and the circumstances giving rise to the enquiry[11].

However, in this case, one has to see the reasonability of the disclosure and the banker should limit the information (to be read as: nature or type of information) disclosed.

3.    Disclosure with Express Consent of Customer:

After analysing the rules and regulations governing the disclosure of information, it is understood that bankers are allowed to share customer information with third parties only after taking the express consent from the information provider. Considering the various RBI notifications, as discussed above, the consent of the information provider is mandatory for the disclosing or sharing of personal information such as account number, financial information etc. The Aadhaar judgment also specifies that any identity information, consisting of Aadhaar number, as well as demographic and biometric information, collected by an entity cannot be shared unless an express approval is taken by the Aadhaar card holder.

Conclusion

As we understand from the above, the basic principle is that an individual’s data is his private property, and that he may waive off his right to privacy by voluntarily agreeing to share data, however, the following points should be kept in mind:

  • Customer has given his consent by applying his mind, by understanding the choices that he has and the consequences of sharing or not sharing the data. The bankers sometime entice the customer into data sharing by providing certain add- on services, in such case also, it is the customer’s discretion, based on the comparative analysis- (i) What does he gain/lose by agreeing; (ii) What does he gain/lose by not agreeing.
  • Free consent has a meaning only if the customer is made aware that he has a right not to agree. The consent should not be buried in a heap of words, and it is advisable the consent is specifically obtained.
  • Consent should not be obtained by trickery or by not providing the customer the option to withhold consent.

A banker and his subordinates are, in this respect, in the same position as any other member of the community. In addition to the liability to the customer on account of unjustifiable disclosure of his account, the banker may make himself liable to the party to whom the information is given, to compensate him for the loss which the latter may suffer on account of having relied upon the information; provided it is proved that the banker gave the information knowing it to be false, or without having justifiable reason to believe it to be true[12]. Therefore, the following points are also of relevance in case the banker decides to give information regarding the state of his customer’s account:

  • The banker should ensure that he adheres to facts only, and as disclosed by the account, so as to avoid any liability as to any claim for fraudulent misrepresentation;
  • Information should only be given to a fellow banker, or to a person authorised by the customer to receive such information, in confidence and without prejudice; and
  • Information should be shared only on need to know basis.

 

[1] (1924) 1 KB 461

[2] https://indiankanoon.org/doc/1300997/

[3] https://indiankanoon.org/doc/908914/

[4] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11566&Mode=0

[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9863&Mode=0

[6] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9838&Mode=0

[7] http://legislative.gov.in/sites/default/files/A2005-30.pdf

[8] https://indiankanoon.org/doc/127517806/

[9]https://uidai.gov.in/images/targeted_delivery_of_financial_and_other_subsidies_benefits_and_services_13072016.pdf

[10]https://uidai.gov.in/images/resource/Compendium_of_Regulations_Circulars_Guidelines_for_AUA_KUA_ASA_05102017.pdf

[11] Tannan’s Banking Law and Practice in India, by Vinod Kothari, 26th Edition, 2017, pages 355- 356

[12] Ibid

Moving towards digital India: Are e-agreements valid?

     –Anita Baid and Richa Saraf (legal@vinodkothari.com)

Introduction

With the evolution of technology, the way of executing documents have also evolved. With the increasing demand for modern, convenient methods for entering into binding transactions, electronic agreements and electronic signature have gained a lot of momentum in recent years. Technological developments have not only changed the ways in which these transactions are entered into but the execution process has also revolutionised significantly.

Speaking about e- agreements, while there has been various case laws, wherein email between parties has also been accepted as a binding contract, the validity and enforceability of click- wrap agreements still continues to be a cause of concern. The recent report of the Steering Committee on Fintech Issues[1] has also discussed about re-engineering of legal processes for the digital world. The Committee suggests that insistence on wet signatures on physical loan agreements be replaced by paperless legal alternatives, as these can enable cutting costs and time in access to finance, repayment, recovery, etc., for businesses and financial service companies. To achieve the goal of paperless economy also the requirement of physical loan agreements are unwanted. The Committee has, therefore, recommended that the Department of Legal Affairs should review all such legal processes that have a bearing on financial services and consider amendments permitting digital alternatives in cases such as power-of-attorney, trust deeds, wills, negotiable instrument, other than a cheque, any other testamentary disposition, any contract for the sale or conveyance of immovable property or any interest in such property, etc., (where IT Act is not applicable), compatible with electronic service delivery by financial service providers.

In this article, we have discussed the legal validity of electronic agreements and electronic signatures.

Validity of E- Agreement as per the Contract Act, 1872[2]

Section 10 of the Contract Act lays down as to what agreements are contracts. It states:

All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.”

Contracts executed electronically are also governed by the basic principles provided in the Contract Act, which mandates that a valid contract should have been entered with a free consent and for a lawful consideration between two majors. The intent of the parties is, therefore, relevant.

In case of click wrap agreements also, if the terms and conditions are provided to the user (offer) and he confirms to the same by ticking on “I Agree” (acceptance), then he shall be held liable to honour the obligations under the contract.

Recognition of E- Agreement and Digital Signature under the Information Technology Act, 2000[3]

Section 10A of the IT Act expressly provides for validity of contracts formed through electronic means and states that-

“Where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose.”

An e-agreement subsequent to its execution is stored/recorded with the executing parties in electronic form, and is considered as an electronic record under the IT Act. In this regard, it is relevant to refer to Section 2(1)(t) of the IT Act, which defines an electronic record as “data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche”.

The terms electronic signature and digital signature have been defined under the IT Act.

In fact, the IT Act quite comprehensively covers the legalities of digital signature certificates (DSCs). Section 5 of the IT Act gives electronic signatures their legal character.

“5. Legal recognition of electronic signatures: Where any law provides that information or any other matter shall be authenticated by affixing the signature or any document shall be signed or bear the signature of any person, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied, if such information or matter is authenticated by means of electronic signature affixed in such manner as may be prescribed by the Central Government. “

Considering that the IT Act has recognised e-signatures as legal and binding, the same may also form a strong basis for initiating litigation before a court of law.

Recognition of E- Agreement and E- Signature under Stamp Acts

While a majority of state stamp laws do not specifically include electronic records within their ambit, some state stamp duty laws do recognise “electronic records” within the purview of “instrument”. For instance, Section 2(l) of the Maharashtra Stamp Act, 1958[4] specifically refers to electronic records in the definition of the term “instrument” as under:

instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded, but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt;

Explanation. – The term “document” also includes any electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000.

The Maharashtra E-Registration and E-Filing Rules, 2013[5] also make appending of electronic signature or biometric thumb print mandatory, thereby further giving recognition and legal validity to e-contract and e- signature. The Indian Penal Code, the Banker’s Book of Evidence Act 1891 and the Reserve Bank of India Act, 1934 also contain provisions in relation to such electronic contracts which contain digital signature.

Admissibility of E- agreements as evidence?

Under the Evidence Act, 1872[6], an e-agreement has the same legal effect as a paper based agreement. The definition of “evidence” as provided under Section 3 of the Evidence Act includes “all documents including electronic records produced for the inspection of the court.” Section 65B(1) of the Evidence Act provides that any information contained in an electronic record which is printed on a paper, stored, recorded or copied in optical or magnetic media produced by a computer shall be deemed to be also a document and shall be admissible in any proceedings, without further proof or production of the original, as evidence of any contents of the original or of any fact stated therein of which direct evidence would be admissible”.

Further, Section 47A of the Evidence Act stipulates that when the Court has to form an opinion as to the electronic signature of any person, the opinion of the Certifying Authority which has issued the electronic Signature Certificate is a relevant fact, and Section 85B of the Evidence Act stipulates that unless the contrary is proved, the Court shall presume that-

  • the secure electronic record has not been altered since the specific point of time to which the secure status relates;
  • the secure digital signature is affixed by subscriber with the intention of signing or approving the electronic record.

Global Laws

UNCITRAL Model Law on Electronic Signatures[7]

In 1996, the United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Electronic Commerce to bring uniformity in the law in different countries. Based on which, India enacted the Information Technology Act, 2000. Subsequently, in 2001, as an addition to the existing Model Law, a Model Law on Electronic Signatures was adopted by the General Assembly of UNICTRAL.

Article 2 (a) of the Model Law defines electronic signatures as below:

“Electronic signature” means data in electronic form in, affixed to or logically associated with, a data message, which may be used to identify the signatory in relation to the data message and to indicate the signatory’s approval of the information contained in the data message;”

The Model Law has further examined various electronic signature techniques being used, and has broadly recognised two categories of electronic signatures-

  • Digital Signatures relying on public-key cryptography; and
  • Electronic Signatures relying on techniques other than public-key cryptography.

UK Law Commission- Consultation Paper on Making a Will[8]

The Law Commission has considered various forms of e- signatures such as typed names and digital images of handwritten signatures, passwords and PINs, biometrics, and digital signatures. The following are the key discussions in the Consultation Paper with respect to alternative modes of signature:

  • A rudimentary electronic signature may consist of a typed name in an electronic document, or a digital image of a handwritten signature. Such digital images may be produced by a scan or a photograph of the signature. However, there is a high risk of fraud in these forms of e- signature, as any person can copy the signature of any other person.
  • A biometric signature is a type of electronic signature that measures a unique physical attribute of the signatory in order to authenticate a document. For instance, fingerprints, retina scan, voice recognition, facial recognition. A biodynamic manuscript signature is also a type of biometric signature that is increasingly being used, where the unique way by which a person signs is recorded by way of various parameters including speed, pressure, and even the angle of the stylus, however, the reliability of biodynamic signatures varies on the systems used to record and analyse them.

Conclusion

On a combined reading of the national and international laws, it can be said that e-agreements are valid and enforceable in the courts, however, since the risk associated with e-signatures are high, for high stake transactions, parties still insist on wet signatures on physical agreements. For fintech entities, who have been vigorously using e- mode of documentation and execution, in order to avoid fraud or forgery, e- signatures can be used with an additional layer of security, for instance, by verifying the electronic signature via sending an OTP at the registered mobile number, or by using geo location, to capture the IP address, or such other mechanism to track the detail of the electronic device from where the e-signature has been affixed. Such two-tier verification process shall also ensure authenticity of the signatory.

 

[1] https://dea.gov.in/sites/default/files/Report%20of%20the%20Steering%20Committee%20on%20Fintech_2.pdf

[2] https://indiacode.nic.in/bitstream/123456789/2187/3/a1872___9pdf.pdf

[3] https://indiacode.nic.in/bitstream/123456789/1999/3/A2000-21.pdf

[4]https://indiacode.nic.in/bitstream/123456789/6916/1/maharashtra_stamp_act_%28lx_of_1958%29_%28modified_upto_05.12.2018%29.pdf

[5] http://igrmaharashtra.gov.in/writedata/PDF/e-Registration%20and%20e-Filing%20Rules%202013.pdf

[6] http://legislative.gov.in/sites/default/files/A1872-01.pdf

[7] https://www.uncitral.org/pdf/english/texts/electcom/ml-elecsig-e.pdf

[8] https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2017/07/Making-a-will-consultation.pdf

 

Our other write-ups on e-agreements and fintech lending can be referred here:

  • http://vinodkothari.com/wp-content/uploads/2019/03/Single-point-collection-of-stamp-duty.pdf
  • http://vinodkothari.com/articles-fintech-startups/

 

An analysis of the Model Tenancy Act, 2019

1.      Introduction

In India, every state has its own law on tenancy matters. The matters, which are not covered by state legislations are governed by the Transfer of Property Act, 1882 (“TPA”), which is central legislation dealing with the matters between tenants and landlords. However, it covers transaction between tenant and landowner in the form of a lease. Codified legislation dealing exclusively on rent related matters in the real estate market has been long ignored in India. Lack of an exclusive legal framework hampered the growth of rental housing segment and resulted in low investments in the rental housing sector. The draft Model Tenancy Act, 2015 was an effort made earlier to codify the law on tenancy. but majority of states never implemented the same. In Union Budget 2019, it was proposed that in order to promote rental housing, new tenancy laws will be formulated to remove the archaic laws currently in use. In furtherance to the said proposition, Ministry of Housing and Urban Affairs (MHUA) released the draft Model Tenancy Act, 2019 (“MTA”) on July 10, 2019, which aims to regulate rental housing by a market-oriented approach while balancing interests of landowner and tenant at the same time. The article points out current problems of rental housing in India along with the issue that how MTA is going to compensate for these problems. It also presents an overview of MTA and loopholes present in it.

2.      Need for rental housing

Housing is one of the basic necessities of life. The rapid pace of urbanization in India has resulted in severe shortage of housing. People go for rental housing because  low-income or people are not ready to build their own house.In spite of government’s prime consideration to affordable housing, many poor households live in congested conditions, which indicates that housing is unaffordable for a large section of population, be it ownership or rental.

The Draft National Urban Rental Housing Policy, 2015 (“the Policy”) pointed out that there is a huge housing shortage in urban areas and on the other hand, there are massive stocks of vacant houses.[1]Possible reasons ascertained for vacant houses could be  low rental yield, fear of repossession, lack of incentives etc. The Policy defines rental housing as a property occupied by someone other than the owner, for which the tenant pays a periodic mutually agreed rent to the owner.[2] The policy suggested that if these vacant houses are made available for rental housing, then some, if not most of the urban housing shortage, could be addressed.[3] Hence, the need for rental housing can be understoodunder the following heads-

  1. An alternative to eliminate the problem of housing shortage in view of ever-increasing population of India.
  2. Prevention of future growth of slums by providing affordable housing to all.
  3. Rental housing could be turned as a steady source of income for the landlords, making investment in rental market attractive.

3.      Current problems of rental housing in India

Rental housing is a subject on which States have exclusive right to legislate. It is a state subject as mentioned under item 18 in List II of Seventh Schedule of the Constitution of India. Although, Central Government can guide the states as we have a quasi-federal structure in India, therefore, Central Government has power to make model law on rent control or tenancy.

At present, nearly every state has its own law governing matters relating to rental housing in their jurisdiction in the name of Rent Control Laws. However, these rent control laws are not adequate to satisfy the need for rental housing in true sense. Because, issues, such as lack of affordable housing, lack of investment in rental housing etc., are still present in the country.

The problems of rental housing in India, as present under different existing rent control laws, can be encapsulated as follow:

  1. Fixation of standard rent:

Existing rent control laws provide for standard rent or fair rent, which is calculated on the basis of cost of construction involved, when the premise was built and does not include present market value of the premise as a consideration to determine standard rent. This proves to be major disincentive for landlords and investors, who want to invest in rental market as it will give very low rate of return.

  1. Overstaying problem of tenants:

Existing rent control laws do not provide for any remedy for when tenants do not vacant the rent premises even after termination of the tenancy period. Therefore, landlords often fear that they might lose control on their premises and had to go long litigation process for recovering their premises.

  1. Reduced liquidity for landlords:

Freeze of availability of rental housing is evident in light of the long litigation proceedings relating to recovery of rental premises by the landlord or proceedings relating to eviction of tenants. When the proceedings are undergoing, it is difficult to rent out the premises which are lis pendens in court of law and thereby it reduces liquidity for landlords in the market.

  1. Security deposit:

From the point of view of tenants, it is unfair to give limitless amount to the landlords in the name of security deposit or pugree. Existing rent control laws do not provide for any upper cap as far as security deposit is concerned and tenants have to suffer in the hands of landlords, who demand lump sum amount as much as they want at the beginning of tenancy period. Because of this practice, poor households choose to live in slum areas as they cannot afford to give arbitrary amount of security deposit, which leads to lack of affordable housing in the Country.

  1. Landlord’s right to evict the tenant on false grounds:

It has been seen in many cases that landlords file false cases to evict tenants on the ground of non-payment of rent because most of the existing rent control laws do no mandate receipt of rent to be given by the landlord.

  1. Lease under Transfer of Property Act, 1882:

Section 105 of the aforesaid Act defines lease as “a lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.” It is to be noted that in case of a lease agreement, terms of the same cannot be changed until the expiry of the lease period unlike tenancy agreement. In practice, landlords often opt for tenancy agreement under rent control laws where they can execute tenancy on a month-to-month basis and can alter its terms.. However, in areas with high vacancy rate of rental premises, landlords choose for lease agreement under Section 105 and thereby make the use of rent control laws fatal. In addition, TPA and rent control laws do not mandate a written agreement to be executed, which is another problem to enforce the rights of either party to the oral agreement and leads to never-ending litigation proceedings in case of disputes.

  1. Leave and License Contract:

Apart from rent control laws and lease under the TPA, people often use leave and license contract as given under the Indian Easements Act, 1882. Section 52 of the said Act defines license as- “where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a license.” Hence, the licensor gives the license to the licensee to use the property, which includes usage same as applicable to rental market without transferring a specific interest in the immovable property. Thus, to execute a landlord-tenant relationship, there exist different contracts under the different names and different procedures, the ambiguities of which can be used by the landlord or tenant to influence the law as per their needs.

4.      Overview of MTA

MTA has been drafted with a view to balance the interests of the landowner and tenant and to provide for speedy dispute redressal by establishing adjudicatory bodies under MTA. It also tries to create an accountable and transparent environment for renting the premises and promotes sustainable ecosystem to various segments of society including migrants, professionals, workers, students and urban poor. To understand what MTA proposes for tenants and landlords, a brief overview has been presented here under the following heads-

4.1       Institutional framework – regulatory and judicial bodies-

Rent Authority-

Section 29 of MTA provides for the appointment of Rent Authority to be an officer who is

not below the rank of Deputy Collector. Rent Authority exercises same power as vested in Rent Court in the following matters-

  1. Upload details of tenancy agreement on a digital platform in the local vernacular or state language in the form prescribed and provide a unique identification number to the parties[4];
  2. Fix or revise the rent on an application by the landowner or tenant[5];
  3. Investigate the case and pass an order in case of deposit of rent by the tenant with the rent authority, if the landowner does not accept the rent[6];
  4. Allow the tenant, if requested, to vacate the premises if it becomes uninhabitable in absence of repairs by the landlord.[7]
  5. Conduct an inquiry and allow compensation or levy penalty in case of an application made to it by the landlord or tenant if any person cuts-off or withholds any essential supply or service in the premises occupied by the tenant or the landowner.[8]

Rent Court and Rent Tribunal-

Section 32 and 33 provides for the constitution of Rent Court and Rent Tribunal respectively. Section 34 gives exclusive jurisdiction to Rent Court and Rent Authority to hear and decide the applications relating to disputes between landowner and tenant and matters connected with and ancillary thereto. For speedy disposal of cases, Rent Court or Rent Tribunal has to dispose the case within 60 days from the date of receipt of the application or appeal and shall record the reasons in writing in case of disposal of case exceeds 60 days period.[9]Appeal from the orders of the Rent Court lies to the Rent Tribunal.[10] In addition, order of Rent Court or Rent Tribunal shall be executable by as a decree of a civil court.[11]Following reliefs can be given by the Rent Court[12]:

  1. Delivery of possession of the premises to the party in whose favor the decision is made;
  2. Attachment of bank account of the losing party for the satisfaction of the amount to be paid;
  3. Appoint any advocate or any other competent person including officers of the Rent Court or local administration or local body for the execution of the order.

4.2       Scope of coverage-

MTA applies to any premises, which is, let separately for residence or commercial or educational use except industrial use.[13] However, MTA does not provide what constitutes residence/commercial/educational/industrial use. Besides, MTA does not apply to the following premises[14]

  1. Hotel, lodging house, dharamshala or inn etc.;[15]
  2. Premises owned or promoted by-
    1. The Central/ State/ UT Government, or
    2. Local Authority, or
    3. Government undertaking or enterprise, or
    4. Statutory body, or
    5. Cantonment board;
  3. Premises owned by a company, university or organization given on rent to its employees as part of service contract;
  4. Premises owned by owned by religious or charitable institutions as may be specified by notification;
  5. Premises owned by owned by any trust registered under the Public Trust Act of the State;
  6. Premises owned by owned by Wakfs registered under the Wakf Act, 1995;
  7. Any other building specifically exempted in public interest through notification.

However, if the owner of any of the premises mentioned under in (b) to (g) wishes a tenancy agreement to be regulated under MTA, then he can inform the same to the Rent Authority.

4.3       Protection of landlord-

As stated above the prime object of the MTA is to eliminate the fear among landlords regarding repossession of their premises and increase the growth of investment in rental sector of the market. Keeping this view, MTA proposes to give protection to landlord in following manner-

  1. Subletting of rented premises cannot be effected without prior consent of landlord in
  2. writing along with disclosure of all details of sub-letting to landlord by the tenant. .[16]
  3. Landlord is allowed to make deduction from security deposit amount for any liability of the tenant.[17]
  4. Landlord is allowed to deduct the amount from the security deposit or can ask the amount payable from the tenant, in case the tenant refuses to carry out scheduled or agreed repairs in the premises.[18]
  5. Landlord can file an application to the Rent Authority against the tenant in case of cut-off or withhold of any essential supply or service in the premises by the tenant.[19]
  6. Landlord can evict the tenant on an application made to the Rent Court on any of the grounds mentioned under Section 21. These grounds are-
  7. Failure of agreement on rent payable;
  8. Failure of tenant to pay the arrears of rent in full and other charges payable unless the payment of the same within 1 month of notice being served on the tenant;
  9. Tenant has parted with the possession of whole or any part of the premises without obtaining the written consent of the landlord;
  10. Tenant has continued misuse of the premises even after receipt of notice from the landowner to stop such misuse;
  11. The premises are required by the landlord for carrying out any repairs, additions, alterations etc., which cannot be carried out without the premises being vacated unless re-entry of tenant has been pre-agreed between the parties;
  12. The premises or any part thereof are required by the landlord for carrying out any repairs, additions, alterations etc. for change of its use as a consequence of change of land use by the competent authority;
  13. Tenant has given written notice to vacate the premises and in consequence of that notice, the landlord has contracted to sell the accommodation or has taken any other step, as a result of which his interests would seriously suffer if he is not put in possession of that accommodation.
  14. In case of overstay of the tenant beyond tenancy period, the landlord is entitled to get compensation of double of the monthly rent for 2 months and 4 times of the monthly rent.[20]
  15. Landlord can make any construction or improvement to the rented premises after permission of the Rent Court obtained in this behalf.[21]
  16. Landlord is allowed to fix or revise the rent payable by the tenant, provided the same should be agreed by the tenant in the tenancy agreement.[22]

4.4       Protection of tenant-

MTA has not only given protection to landlords but balances the interests of the tenants as well. With this view, MTA proposes to give protection to landlord in the following manner-

  1. In the event of death of the tenant, his/her successors will have the same rights and obligations as agreed in tenancy agreement for the remaining period of the tenancy.[23]
  2. Rent cannot be increased during the tenancy period, unless the amount of increase or method for increase is expressly set out in the Tenancy Agreement.[24]
  3. Tenant is entitled to get refund of the security deposit amount at the time of vacating the premises after deduction of amount of liability, if any.[25]
  4. Tenant is entitled to get a written acknowledgment rent receipt by the landlord.[26]
  5. Where the landlord refuses to accept the rent, tenant may deposit it with the Rent Authority.[27]
  6. Tenant is allowed to deduct the amount from periodic rent, in case the landlord refuses to carry out the scheduled or agreed repairs in the premises.[28]
  7. Where the premises becomes uninhabitable and landlord refuses for repairs, thenthetenant has the right to vacate the premises after giving 15 days notice in writing to the landlord or with the permission of the Rent Authority, in case the.[29]
  8. Tenant can file an application to the Rent Authority against the landlord in case of cut-off or withhold of any essential supply or service in the premises by the landlord.[30]
  9. Tenant is entitled to get refund of such an advance amount and interest, in case of default, after deduction of rent and other charges in case of eviction proceedings initiated by the landlord under Section 21.[31]
  10. Tenant may give up possession of the premises on giving a one-month prior notice or notice as required under the tenancy agreement to the landlord.[32]

5.      How will the MTA help rental housing issue?

MTA recommends eradicating the existing rental housing problems by incorporating needful provisions. MTA has recognized the problems in existing rent control laws in its preamble as lack of growth of rental housing segment and lack of the landlords renting out their vacant premises. For better understanding of these needful provisions in MTA, a comparison of key provisions of existing rent control laws and MTA has been produced in Annexure A. In conclusion, the table suggests that MTA provides for market-oriented approach by leaving the fixation of rent amount on parties[33], who may fix or revise it considering current market value of the premises and thereby increasing the possibilities of high rate of return to the investors in the rental housing market. On the other hand, to remove the fear of the landlords of losing possession of the premises has been taken care by MTA by giving a remedy in form of compensation to the landlord[34].

6.      What do the state governments have to do?

As mentioned above, housing is a state subject and States have exclusive right to legislate upon it. MTA proposes only a model on how the issues relating to rental housing as existed under current laws relating to tenancy can be eliminated. It is completely on the states to adopt or not adopt MTA in their state. For better functioning of the rental housing in the state and to resolve the issues as point out above, state should adopt MTA. Moreover, States are free to make amendments in the proposed provisions in MTA while incorporating the same in their states.[35]

7.      What incentives will the state governments have for enacting the MTA?

MTA only proposes a model and States are under no obligation to enact MTA in their respective jurisdictions. Therefore, what the states will get for enacting MTA is equally an important question to consider. Section 46 of MTA provides that if any difficulty arises in giving effect to the provisions MTA, the State/UT Government may, by order, not inconsistent with the provisions MTA, remove the difficulty. Hence, any State enacting MTA is empowered to remove difficulty or amend the provision in their jurisdiction, if there arises any difficulty in implementation of the MTA.

Moreover, housing is one of the basic needs of life and raising the standard of living of its people is one of the primary duties of State as enshrined under the Article 47 of the Constitution of India. Therefore, States shall make every endeavor to resolve the issue of affordable housing in the best manner possible and MTA serves this objective well.

8.      Drawbacks of the MTA

Despite all the good attempts made in the provisions of MTA to remove the current problems relating to rental housing, MTA shortfalls on following grounds:

  1. Moreover, the term ‘Landlord’ covers ‘Lessor’ and the term ‘Tenant’ covers ‘Lessee’ in its definitions, but the MTA nowhere provides that it will override the provisions relating to Lease under the Transfer of Property Act, 1882. Therefore, usage of the term lessor/lessee would create conflict in practice since application of the Transfer of Property Act, 1882 is not clarified under the MTA .
  2. Lodging house and hotels are kept outside the scope of MTA. Therefore, application of the MTA to premises providing paying guest facilities is not clear.
  3. MTA provides for prospective application and gives no redress to tenancies, which are already in existence, prior to the commencement of MTA. Hence, position regarding existing tenancies is left untouched.
  4. Successor-in-interest has not been included in the definition of the term ‘tenant’ under Section 2 (m) of the MTA. However, Section 6 provides for successors of the tenant to come into the shoes of tenant in case of his/her death. This provision creates anomaly that after death of tenant, his/her successor-in-interest may deny acceptance of tenancy agreement on the ground that he/she is not covered within the definition of the term ‘tenant’.
  5. The term ‘rent’ is not defined under the Act, because of which, the form of rent payable is not clear, i.e. whether it has to be necessarily in cash or kind or crops or services rendered.
  6. The MTA does not address the situation in case of failure to execute tenancy agreement, failure to obtain consent of landowner for subletting, failure to refund security deposit at the time of taking over vacant possession of the premises by the landlord, failure to observe obligations imposed on parties. Although specific establishment of adjudicatory bodies has been provided under the MTA but the same results in increase of litigation matters before judicial bodies established under the MTA.
  7. MTA is open to be adopted by the States and does not necessarily impose application of its provisions to State.
  8. MTAdoes not talk about weak bargaining power of tenants and allows parties to agree on rent amount, which may cause prejudice to weaker sections of the society.
  9. MTA does not talk about over-riding effect of MTA on existing laws on tenancy, lease under the TPA, license under the Indian Easements Act, 1882 to uphold the objectives of the MTA.

9.      Conclusion

MTA is a welcoming step in rental matters relating to any premises. Establishment of the adjudicating authorities is going to lessen the burden on lower courts in the country in the matters relating to tenancy. However, application of the MTA would be interesting to see as to how many states actually implement MTA because it is only a model and not mandatory for states to adopt it.

 

 

Annexure-A

Comparison of Existing Rent Control Laws and MTA:

The author has tried to analyze some of the major existing rent control laws[36]in comparison with the MTA. The same has reproduced in a table form below:

Point of difference Existing Laws MTA Comments
Purpose of the Act 1.      Control of rent and protection of tenant from payment of rent more than the standard rent, and

2.      Protection of tenants from eviction,

 

It provides not only for protection of tenants but also provides for protection of landowners. Most of the existing rent control laws are tenant-centric; whereas MTA balances the interests of landowner and tenant.
Exemption  Premises belonging to the Government are exempted but no specific provision is present regarding exemption of religious or charitable premises and premises owned by a university except Maharashtra Rent Control Act, 1999.[37] MTA exempts any premises owned by the Government, religious or charitable institutions, and premises owned by a company, university or organization given on rent to its employees as part of service contract.[38] MTA applies to all kind of government occupied premises and publicly used premises unlike existing rent control laws.

 

Definition of ‘Landlord’ If the premises were let to a tenant then landlord means a person who-

1.      is receiving, or is entitled to receive the rent of any premises, or

2.      trustee, guardian or receiver, who is receiving or is entitled to receive rent, on behalf of, or for the benefit of, any other person who cannot enter into a contract (such as minor, person with unsound mind etc.).

 

If the premises were let to a tenant then landlord (Landowner/Lessor) means a person who[39]

1.      is receiving, or is entitled to receivethe rent of any premises,and

2.      includes successor-in-interest,

3.      trustee, guardian or receiver, who is receiving or is entitled to receive rent, on behalf of, or for the benefit of, any other person who cannot enter into a contract (such as minor, person with unsound mind etc.).

MTA covers Lessor within the term ‘Landlord’ and includes successor-in-interest unlike existing rent control laws.

 

Definition of ‘Premises’ Premises mean any building or part of a building rented out, and includes-

1.      Gardens, garages or outhouses, any furnituresupplied by the landlord,

2.      any fittings affixedto such building.

However, premises do not include hotel, lodging house.

 

 

Premises mean any building or part of a itrented out for the purpose of residence or commercial or educational use, (except for industrial use) and includes[40]

1.      the garden, garage or closed parking area, grounds and out-houses, appertaining to such building or part of the building,

2.      any fitting to such building or part of the building for the more beneficial enjoyment thereof,

However, premises do not include hotel, lodging house, dharamshala or inn etc.[41]

State RCAs do not explicitly exclude industrial use, unlike MTA and do not specifically recognize a particular purpose of use of building to be cover within the term ‘premises’.
Definition of ‘Tenant’ Some of the rent control laws do not provide definition of term ‘tenant’. And others include tenant as a person-

1.      who is paying the rent, or

2.      deemed tenant, or

3.      sub-tenant,

4.      member of tenant’s family in case of death of tenant.

Tenant/Lesseemeans a person[42]

1.      by whom the rent is payable, or

2.      on whose behalf the rent is payable, and

3.      includes a sub-tenant,and

4.      any person continuing in possession after the termination of his tenancy whether before or after the commencement of this Act.

However, tenant does not include any person against whom any order or decree for eviction has made.

MTA does not include successor-in-interest within the definition of tenant.
Standard rent Standard rent means a rent fixed by the Controller under rent control laws. No provision is made. MTA does not provide for the definition of the term ‘rent’.
Tenancy agreement It was not necessary and tenancy can be affected even without entering into tenancy agreement. It means a written agreement executed by the landowner and the tenant.[43] Moreover, it is mandatorycondition for a tenancy to come into effect.[44] MTA making the tenancy agreement mandatory unlike existing rent control laws.
Sub-letting No provision regarding prior written consent of landlord for sub-letting by tenant. Prior written consent of the landowner is madecompulsory.[45] More stringent provision.
Fixation of rent Rent fixed (standard rent) based on the value of land andcost of construction when built. The rent is the amount agreed between the landowner and the tenant as per the terms of the tenancy agreement.[46] Standard rent or fair rent concept has removed in MTA.
Increase in rent It is unilateral by the landlord with the approval of the controller. Revision of rent between the landowner and the tenant shall be as per the terms set out in the Tenancy Agreementor on a prior 3 months notice to the tenant.[47] Mutually agreed increase in rent is provided under MTA unlike rent control laws.
Temporary recovery of possession The landlord is entitled to get possession of the building, if bona fide, it is required by him to carry out repairs, alterations or additions, which cannot be carried out without the building being vacated, after which the building will again be offered to the tenant.

 

Rent Court may on an application made to it, make the order that the landlord is entitled to get possession of the premises or any part thereof on account of any repairs or rebuilding or additions or alterations or demolition, which cannot be carried out without the premises being vacated, provided that such re-possession has to be mutually agreed to between the landowner and the tenant and the new tenancy agreement has to submitted with the Rent Authority.[48] More requirements that are stringent have been put on the parties under MTA.
Deposit of rent Many of state rent control lawsdo not provide for deposit of rent lawfully payable to the landlord in respect of the building, before the authority as may be prescribed. Explicit provision provided for deposit of rent with the Rent Authority where the landowner does not accept the rent or refuses to give a receipt or if landowner does not accept the rent.[49] Transparency and accountability enabled provision.
Overstay of tenant No deterrent provision, therefore landlords fear to give their houses on rent, which in turn reduces the supply of renting houses in the market. It provides for compensation i.e. four times the rent, to the landlord.[50] MTA provides Remedy in favour of landlord.
Rent Receipt on payment of rent No provision. Every tenant is entitled to get a written receiptfrom the landowner for the amount paid to him.[51] Tenant friendly provision to eliminate abuse against tenants.
Security deposits No explicit provision existed for security deposits/ pugree in addition to rent. MTA provides for 2 months’ rent in residential property, 1-month rent in non-residential property as security deposit.[52] MTA provides elimination of abuse against tenants.
Inheritance of tenancy Order of inheritance has provided in most of the state RCAs. No order of successors has given in MTA.[53] MTA introduces more wide import in case of inheritance of tenancy.
Structural alteration to the rent premises Rent control laws provide for structural alteration without consent of tenant and increase rent. MTA provides for structural alteration to rent premises only if the same is provided in the  agreementwith the tenant and increase the rent.[54] Tenant friendly provision to eliminate abuse against tenants.
Adjudicatory Authority Controller or Civil Courts Rent Authority, Rent Court, Rent Tribunal[55] Specific adjudicatory bodies introduced in MTA for speedy disposal of rent related matters.

 

 

 

[1]Draft National Urban Rental Housing Policy, 2015, p 10.

[2]Id. At p 5.

[3]Id.

[4] Section 4 (4), MTA, 2019.

[5] Section 10, MTA, 2019.

[6] Section 14 (2), MTA, 2019.

[7] Section 15 (5), MTA, 2019.

[8] Section 20, MTA, 2019.

[9] Section 35 (2), MTA, 2019.

[10] Section 37, MTA, 2019.

[11] Section 36 (7), MTA, 2019.

[12] Section 38 (1), MTA, 2019.

[13] Section 2 (e), MTA, 2019.

[14] Section 3, MTA, 2019.

[15]Id.

[16] Section 7, MTA, 2019.

[17] Section 11 (2), MTA, 2019.

[18] Section 15 (3), MTA, 2019.

[19] Section 20, MTA, 2019.

[20] Section 22, MTA, 2019.

[21] Section 25, MTA, 2019.

[22] Section 8 & 9, MTA, 2019.

[23] Section 6, MTA, 2019.

[24] Section 9 (4), MTA, 2019.

[25] Section 11 (2), MTA, 2019.

[26] Section 13 (2), MTA, 2019.

[27] Section 14, MTA, 2019.

[28] Section 15 (4), MTA, 2019.

[29] Section 15 (5), MTA, 2019.

[30] Section 20, MTA, 2019.

[31] Section 23, MTA, 2019.

[32] Section 28, MTA, 2019.

[33] Section 8, MTA, 2019.

[34] Section 22, MTA, 2019.

[35] Section 46, MTA, 2019.

[36]Maharashtra Rent Control Act, 1999; Delhi Rent Control Act, 1958; Andhra Pradesh Buildings (Lease, Rent and Eviction) Control (Amendment) Act, 1960; The West Bengal Premises Tenancy Act, 1997.

[37] Section 3, Maharashtra Rent Control Act, 1999.

[38] Section 3, MTA, 2019.

[39] Section 2(b), MTA, 2019.

[40] Section 2(e), MTA, 2019.

[41]Id.

[42] Section 2(m), MTA, 2019.

[43] Section 2(a), MTA, 2019.

[44] Section 4, MTA, 2019.

[45] Section 7 (1), MTA, 2019.

[46] Section 8, MTA, 2019.

[47] Section 9, MTA, 2019.

[48] Section 9 (6), MTA, 2019.

[49] Section 14 (1), MTA, 2019.

[50] Section 22, MTA, 2019.

[51] Section 13 (2), MTA, 2019.

[52] Section 11, MTA, 2019.

[53] Section 6, MTA, 2019.

[54] Section 9 (6), MTA, 2019.

[55] Chapter VI & VII, MTA, 2019.

Supreme Court’s status-quo on Essar Steel-How the tables could turn for ArcelorMittal!

– CS Megha Mittal

(mittal@vinodkothari.com)

[This article is intended for academic debate on the law around powers of the Committee of Creditors vis-à-vis the adjudicatory authorities, as it continues to evolve] Read more

ICSI Auditing standards -A guidance to the Members in Practice

By Kanakprabha Jethani | Executive

Kanak@vinodkothari.com

Background

ICSI has recently issued four Auditing Standards[1] (‘Standards’) for the members in practice namely:

  • CSAS-1 – Auditing Standard on Audit Engagement
  • CSAS-2 – Auditing Standard on Audit Process and Documentation
  • CSAS-3 – Auditing Standard on Forming of Opinion
  • CSAS-4 – Auditing Standard on Secretarial Audit

in order to enable them to carry out the audit engagements more effectively. The first three Standards will be applicable to all kind of audit engagements and the fourth one will specifically be applicable for the Secretarial Audit under Section 204 of the Companies Act, 2013. In terms of ICSI’s own language, the Standards shall be mandatorily effective from the audit engagements accepted on or after 1st April, 2020.

Objective of the Standards

Seemingly, ICSI is seeking to promote best auditing practices, uniformity and consistency in conduct of the audits by the members in practice. These are expected to strengthen the audit process and corporate governance practices. Since, varied audit practices are being carried over by different auditors, monitoring of audit process becomes cumbersome and troublesome at the same time. These Standards are expected to harmonise the audit practices among the auditors all over the country. The objective is to streamline and enable members to effectively undertake secretarial audit and ensure compliance. It is also expected that these Standards will enhance the quality of compliance.

Applicability of Standards

These Standards shall be effective and recommendatory to be accepted by the auditors on or after 1st July 2019. However, the same shall be mandatorily applicable to the audit assignments obtained on or after 1st April 2020.

Whether these Standards are statutorily required?

In order to be statutorily applicable and binding, legal backing to the provision is required. For example, for the Secretarial Standard-1 and secretarial Standard-2 have a backing of legal provision i.e. Section 118 of the Companies Act 2013. Section 118(10) provides that every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India. In compliance of aforesaid section, companies follow these two secretarial standards. The same is not the case for other secretarial standards issued by ICSI such as, Secretarial Standard -3 relating to Dividend or Secretarial Standard-4 relating to maintenance of registers and records and hence purely voluntary.

Likewise, the Auditing standards issued by ICSI also do not carry a legal backing as of now though the same is being brought in by ICSI with an intent to make it mandatory.

What are the various audits a PCS can undertake?

A Practising Company Secretary is authorised to undertake various audits as prescribed under the Companies Act 2013, SEBI regulations and other applicable laws, some of which are as under:

  • Secretarial Audit as per provisions of Section 204 of the Companies Act 2013;
  • Half-yearly certificate certifying that all share certificates were issued by Share transfer Agent/ Registrar and transfer Agent within 30 days of lodgement of transfer as provided under regulation 40(9) of SEBI(Listing Obligations and Disclosure Requirements) Regulations;
  • Annual Secretarial Compliance Report as per SEBI Listing Regulations;
  • Half-yearly certification of maintenance of 100% asset cover for non-convertible debt securities as per regulation 56(d) of SEBI(Listing Obligations and Disclosure Requirements) Regulations;
  • Certificate regarding compliance of conditions of corporate governance as per SEBI Listing Regulations;
  • Share Reconciliation Certificate as per SEBI (Depositories and Participants) Regulations, 2018 etc.

These Standards shall be applicable to all these audits along with any other audit required to be done by PCS. Thus, for the purposes of these Standards, ‘Auditor’ shall mean a Practising Company Secretary undertaking any of such audits.

The list of TO DO’s for auditors

CSAS-1 – AUDITING STANDARD ON AUDIT ENGAGEMENT

This deals with roles and responsibilities of Auditor undertaking audit engagement. They also elaborates procedures and principles for entering into agreement with appointing authority.

Eligibility to take audit engagement

  • Auditor shall not hold, singly or along with partners, spouse, parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person, more than 2% in the paid up share capital or shares of nominal value of Rs. 50,000, whichever is lower or more than 2% voting power in the Auditee, as the case may be.
  • Auditor shall not be indebted to the Auditee for an amount of five lakh rupees or more except if such indebtedness is arising out of ordinary course of business.
  • If an Auditor was in employment of the Auditee, its holding or subsidiary company and 2 (two) years must have lapsed from the date of cessation of employment.

Things to do pursuant to CSAS-1:

  • Ensure that appointment is made as per provisions of Companies Act 2013 and rules made thereunder.
  • Submit eligibility certificate to appointing authority.
  • Obtain audit engagement letter and copy of resolution passed by appointing authority and provide acceptance thereto.
  • Ensure audit engagement letter includes:
  1. The objective and scope of the audit; if the same has been established by law, reference to relevant provisions must be stated.
  2. The responsibilities of the Auditor and the Auditee;
  3. Written representations provided and/or to be provided by the Management to the Auditor, including particulars of the Predecessor or Previous Auditor;
  4. The period within which the audit report shall be submitted by the Auditor, along with milestones, if any;
  5. The commercial terms regarding audit fees and reimbursement of out of pocket expenses in connection with the audit;
  6. Limitations of audit, if any.
  • Intimate previous auditor about such engagement, in writing.
  • Ensure that such engagement is within the limits prescribed by ICSI from time to time.
  • Maintain confidentiality of information obtained during the course of audit unless there is a legal obligation to disclose such information. Also, ensure that employees, staff and other team members also be bound by duty of confidentiality.
  • Do not agree to change in terms of engagement unless there is reasonable justification for doing so.
  • If terms of appointment are changed resulting in lower level of assurance, it shall be accepted only after considering the appropriateness of the same.
  • Any changes in terms of engagement must be agreed by way of supplementary or revised engagement letter.

 

CSAS-2 AUDITING STANDARD ON AUDIT PROCESS AND DOCUMENTATION

This Standard deals with the roles and responsibilities of Auditor with respect to maintenance of proper audit records that provides-

  • sufficient and appropriate record to form the basis for the Auditor’s Report; and
  • evidence that the audit was planned and performed in accordance with the applicable Auditing Standards and statutory requirements.

Things to do pursuant to CSAS-2

  • Formulate an audit plan as per terms of audit engagement.
  • Ensure adherence to audit plan.
  • Conduct risk assessment of auditee considering business, environmental and organisational structure and compliance requirements.
  • Evaluate high-risk areas relating to internal control systems, transparency, prudence, probity, changes in compliance team etc.
  • Obtain sufficient information of the auditee for conduct of audit.
  • Make use of systematic and comprehensive checklists.
  • Obtain necessary evidence and evaluate the same so as to support the opinion. This shall be adequately documented in audit working papers.
  • Obtain third-party confirmations wherever required.
  • Document discussions with management of the auditee in significant matters.
  • Collate the documentation for records within 45 days of date of signing of auditor’s report.
  • Maintain documentation in physical or electronic form for a period of 8 years from date of signing of auditor’s report.

Features of audit plan

  • The audit shall be planned in a manner which ensures that qualitative audit is carried out in an efficient, effective and timely manner.
  • Audit planning shall ensure that appropriate attention is accorded to crucial areas of audit and significant issues are identified in a timely manner.
  • Audit plan should be based on professional scepticism, so that it is possible to exercise professional judgment in an objective manner.

CSAS-3 – Auditing Standard on Forming of Opinion

This Standard provides details about the manner of evaluation of conclusions derived out of audit evidence which leads to formation of Auditor’s opinion.

Things to do pursuant to CSAS-3

  • Consider materiality while forming opinion.
  • Consider all relevant audit evidence before issuing audit report.
  • Apply professional judgement and scepticism to ensure evidence is factually correct.
  • Prepare audit report within the agreed time-frame.
  • Verify accuracy of facts and responses from concerned persons.
  • Adhere to generally accepted principles and practices in relation to audit process.
  • Indicate if any third-party report or opinion is being relied on.
  • Indicate if third-party report is provided by the auditee and also consider important findings of third party.
  • Carry out a supplemental test to check veracity of third-party report.
  • Express unmodified opinion if satisfied that applicable laws have been duly complied with and relevant records are free from misstatement.
  • Express modified opinion in bold or italic letters. Modified opinion is to be issued if:
    • non-compliance of applicable laws is found,
    • relevant records aren’t free from misstatement,
    • sufficient and appropriate audit evidence to ensure the above is not available.

 

 

  • Ask auditee to remove any such limitation on scope of audit which is likely to make the Auditor give modified opinion or disclaimer.
  • Give unmodified opinion, if in case of absence of sufficient and appropriate evidence, Auditor can conclude that effects of unavailability of such evidence will be non-material. However, if the effects are likely to be material, the auditor shall express disclaimer of opinion.

Format of audit report

  • The report shall be addressed to appointing authority unless the terms of engagement provide otherwise.
  • Report must be detailed. Specific formats, if any, must be followed.
  • Provide annexures for detailing of certain aspects, wherever necessary.
  • Include a section named Auditor’s responsibility in the audit report.
  • This section shall state that the audit was conducted in accordance with applicable Standards.
  • The report shall state that due to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements or material non-compliances may not be detected, even though the audit is properly planned and performed.
  • Signature block shall mention name of auditor/firm, certificate of practice number/registration number and membership number of the auditor.
  • Mention clearly the date and place of signing audit report.

CSAS-4 – Auditing Standard on Secretarial Audit

This Standard lays down the manner of evaluation of statutory compliances and corporate conduct in the process of doing secretarial audit u/s 204 of the Companies Act, 2013. It gives a broad structure to the audit process.

Things to do pursuant to CSAS-4

  • Take note of laws applicable to the auditee. This includes specific laws as well as general laws.
  • Review Memorandum of Association, Articles of Association, statutory books, disclosure by the auditee etc.
  • Identify events and corporate actions that took place in the audit period by reviewing website of the auditee, disclosures made to stock exchanges, statutory records of the auditee etc.
  • Verify event based as well as calendar compliances of the auditee.
  • Verify composition of Board of directors is in compliance with applicable rules and regulations i.e. optimum combination and strength is maintained and directors are not disqualified.
  • Ensure formation of required committees and proper composition of such committees.
  • Ensure decisions by board of directors are taken in compliance with the law i.e. in properly constituted meeting or by circulation.
  • Ensure that systems of compliance are adequate and effective.
  • Analyse instances of receipt of show cause notices, prosecutions initiated, fee or penalty levied etc.
  • Collect further evidence and conduct in-depth checking if a fraud is suspected.
  • If there is a sufficient reason to believe that a fraud has been committed, the same shall be reported to Audit Committee/Board/Central Government as per the process laid down under the Companies Act, 2013. Also, the same shall be included in Secretarial Audit Report.
  • Verify the comments received on reporting fraud.
  • Include fraud detected by other auditor in the audit report.
  • Report all the events that affect auditee’s going concern or alters the charter or capital structure or management or business operation or control, etc.

Conclusion

These Standards provide a broad structure to the audit process and direction as to proceeding the audit. Having a direction to proceed will make the audit more systematic. To establish these structures and systems would initially require plenty of clerical nature work. However, this is a one-time labour to be put in for structuring all the future audits.

These Standards are issued with a motive to enhance the level and quality of compliance and at the same time harmonise the audit practices being followed by various auditors. Unity of procedures ensures clarity to the auditee which enables them to ensure systematic compliance. Application of these Standards is believed to be beneficial for the Auditors as well as the companies and regulators in the long run.

[1] https://www.icsi.edu/media/webmodules/ICSI_Auditing_Standards.pdf

SEBI proposed amendments in PIT Regulation to incentivize Informants…

By Dibisha Mishra (dibisha@vinodkothari.com)

corplaw@vinodkothari.com

Introduction

SEBI’s recent Discussion Paper[i] on amendment to the SEBI (PIT) Regulations, 2015 presses the fact that mere Regulator’s watch on the illegal transactions are not enough to practically eliminate trading on the basis of UPSI. Wherein insiders are finding new ways to get into such illegal transactions including transactions through proxy, difficulty in tracking and proving the same even if they are tracked remains a challenge for SEBI. Hence, to ensure better tracking and maintain the integrity of the securities market, the regulator is intending to bring in informants to the stage. The informants shall basically be the employees or any other person who observes actual or suspected cases on insider trading. Such mechanism shall have a dedicated reporting window and also provide for near absolute confidentiality to so that the informants are not deterred by the fear of retaliation or discrimination or disclosure of personal data.

Is this altogether a new concept?

Such Informant Mechanism, is not a new concept brought in to tackle the issue of insider trading altogether. Several other regulation though out the globe have been following the same practice. One such example being UK’s Market Abuse Regulation (596/2014) which provides similar kind of reporting mechanism. This concept is similar to ‘Whistle Blower Policy’ for frauds as provided under the Companies Act, 2013. However, SEBI’s Informant Mechanism enables reporting to the regulator directly rather than routing the same to the Company’s management itself. It also takes a step further to incentivize the informants to encourage pro-active reporting.

Features

The salient features of the proposed Informant Mechanism shall be as follows:

  1. Voluntary Information Disclosure Form where information can be reported.
  2. Disclosure on source of information: The information should be original and not sourced from any other person
  3. Office of Informant Protection(OIP): A dedicated department separate from investigation and inspection wings.
  4. Submission of Information: either by himself or through a practicing advocate where the informant decides to report unanimously.
  5. Confidentiality of Informant shall be maintained throughout the proceedings, if any, initiated by SEBI unless evidence of such informant is required such proceedings.
  6. Information reported shall be taken up further if the same is material. Such information may further be forwarded to the operational department for suitable actions only after slashing down the identity details of the informant.
  7. Reporting of the functioning of OIP on an annual basis to SEBI.
  8. A dedicated hotline to guide persons on how to file information.
  9. Grant of reward where information provided as as per informant policy and amount of disgorgement exceeds Rs. 5 crores. The reward shall be paid from IEPF account.
  10. Provision for amnesty.

Few downsides

  1. Smaller cases nor covered: While the proposed Informant Reward Policy is headed to incentivize the informant to promote pro-active reporting of insider trading transactions which were earlier left undetected, the department also proposes to put the minimum threshold for the amount of disgorgement. Only those information revealing insider trading transaction amounting to Rupees Five Crores or more shall be taken up for the purpose of rewarding. This clause itself slashes down majority of comparatively smaller but rather more frequent transactions from coming under its purview.
  2. Material cases: Proposed policy states that only those cases that are material shall be processed further. The official who shall be responsible to determine whether the information is material is nowhere mentioned.
  3. Tracking System: The policy mentions no such system of tracking by the informants regarding the status of information by them.

Conclusion

The discussion paper indicates SEBI’s intention to buckle up its systems for tracking down insider trading transactions and take appropriate action. However, the extent to which the proposed policy gets implemented along with modifications, if any, is yet to be seen.

[i] https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the-sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-informant-mechanism_43237.html