Restriction on Sharing of Information

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(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

MCA revisits the existing cap of materiality of related party transactions u/s 188

/2 Comments/in , , /by

Munmi Phukon | Vinod Kothari & Company

corplaw@vinodkothari.com

 

Ministry of Corporate Affairs (MCA) has recently come out with a Notification dated 18th November, 2019 amending the Companies (Meetings and Powers of Board) Rules, 2014. The same will be effective from the date of publication in the Official Gazette. This amendment, has the impact of removing the monetary thresholds for the various transactions listed in section 188 and keeping only the proportional thresholds related to turnover and net worth of the company. Notably, the rules under section 188 as originally framed in 2014 had put absolute thresholds, such as Rs 100/ 50 crores of transaction value etc. In case of companies of large size, these limits were obviously quite small and were very easily hit.

It is important to note that the question of shareholders’ approval under sec 188 (2) arises only in cases where the transaction does not adhere either of the two conditions – arms’ length, and ordinary course of business. While the cases of shareholders’ approval under sec. 188 are not very common, nevertheless the amendment will lead to easing out the provisions for RPT approvals.

It is also important to note that SEBI’s RPT approval requirements in terms of Regulation 23 of the Listing Regulations is even more liberal – it relates to 10% of the consolidated turnover of the entity.

Despite the amendment as above, gaps still remain between the requirements applicable to listed entities in terms of Regulation 23, and the requirements applicable under the Act u/s 188. The differences are wide-spread – from the meaning of “related party”, to the scope of “transactions”, to approval from shareholders, as also the clause disabling related parties from voting. Therefore, even with the amendments, RPT provisions remain enigmatic.

Here is a quick comparison-

Respective clause of Rule 15(3)(a) Existing Text Revised Text Remarks
(i) sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188; sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188; Apart from the nature of transaction as provided in clause (ii) i.e. transaction pertaining to selling and disposing/ buying of property, the threshold for all other transactions shall be based on the turnover of the company. The threshold for clause (ii) shall be based on the net worth of the company.

 

Further to note, the revised limits are still different from the limits provided under SEBI Listing Regulations which is based on the consolidated turnover of the company.
(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188; selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;
(iii) leasing of property of any kind amounting to ten per cent. or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (c) of sub-section (1) of section 188; leasing of property of any kind amounting to ten per cent. or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, [amounting to ten percent or more of the turnover of the company] as mentioned in clause (c) of sub-section (1) of section 188;
(iv) availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent. or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188: availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent. or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:

 

See our other corporate law updates https://vinodkothari.com/resources/

Articles on similar topic – https://vinodkothari.com/2020/03/rpts-and-related-exemptions-in-the-context-of-government-companies/

Presentation on Related Party Transaction(RPTs)- An Overview

Proposed Changes in RPTs: A Presentation

FAQs on Fraud Reporting

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Team Corplaw & Finserv | corplaw@vinodkothari.com, finserv@vinodkothari.com

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Reporting of Fraud – Resource Centre

SEBI tightens its norm on resignation of auditors

/1 Comment/in /by

– Priya Udita

resolution@vinodkothari.com

OVERVIEW

Observing that a lot of statutory auditors of the companies are abruptly resigning before completing their tenure either due to lack of cooperation or lack of information provided by the company, SEBI has taken the matter in its hand to strengthen the norms. Consequently, SEBI issued a Consultation Paper[1] on policy proposals with respect to resignation of statutory auditors from listed entities (‘Paper’) dated July 18, 2019. The Paper discussed the policy proposal with the twin objective of strengthening disclosures to the investors and clarifying the role of the Audit Committee. Our analysis of the Paper can be assessed here.

Based on the policy proposal and public comments, SEBI issued circular on Resignation of statutory auditors from listed entities and their material subsidiaries (‘Circular’)[2] dated October 18, 2019 defining compliance to be followed by the listed entity and its material subsidiary while appointing or reappointing the auditors.

KEY AMENDMENTS

  1. Applicability:

The Circular is applicable on listed entities and its material subsidiaries. The material subsidiaries can be a listed or an unlisted entity. However, it is interesting to comprehend the applicability of the Circular on the debt listed companies (analysed below in our comment section).

Further, the Circular has come into force with immediate effect from the date of its notification.

  1. Exception:

The provisions of this Circular  is inapplicable in case the auditor disqualified under section 141 of the Companies Act, 2013.

  1. Compliance for limited review or audit review while appointing or reappointing the auditors:
  2. Within 45 days from the end of quarter of a financial year- the auditor shall issue the limited review/ audit report for such quarter before resignation.

For Example: if the auditor resigns on May 28, 2019 then the auditor is required to submit limited review of quarter ending on June 30, 2019.

  1. Resignation after  45  days  from  the  end  of  a  quarter  of  a  financial year- then the auditor shall issue the limited review/ audit report for such quarter as well as the next quarter before resignation.

For Example: if the auditor resigns on August 25, 2019, then the auditor needs to issue limited review/audit report of quarter ending on September 30, 2019 as well as December 30, 2019.

  1. However, if the auditor has signed the limited review/ audit report for the first 3 quarters of a financial year- then the auditor shall issue the limited review/ audit report for the last quarter of such financial year as well as the audit report for such financial year before the resignation.
  2. Role of Audit Committee

Though the SEBI (Listing and Disclosure Obligations) Regulation, 2015 (‘SEBI LODR Regulations’) laid down the broad role of the audit committee inter alia the appointment, remuneration of the statutory auditors, but, there was not much for the audit committee to delve once the auditor resigns. Thus, with the intention to further enhance the role of audit committee, SEBI has laid down following procedures:

  1. For the auditors:
  2. In case of conflict with the management of the listed entity due to lack of cooperation or non-availability of information, the auditor can approach the chairman of the audit committee of the listed entity.
  3. Where the auditor proposes to resign, all concerns with respect to the proposed resignation, along with relevant documents should be given to the audit committee.
  4. Further where the proposed resignation is due to non-receipt of information/explanation from the company, the auditor will have to inform the audit committee of the details of information asked and not provided by the management.
  5. For the Audit Committee:
  6. In case of concern raised due to non-availability of information, audit committee must receive such concern directly and immediately without specifically waiting for the quarterly audit committee meetings.
  7. On receipt of information from the auditor relating to the proposal to resign, the audit committee/board of directors must deliberate on the matter as soon as possible but not later than the date of the next audit committee meeting and communicate its views to the management and the auditor.
  8. Disclaimer by the auditor:

Where the auditor does not receive the information demanded for the purpose of auditing, an appropriate disclaimer in the audit report must be provided in accordance with the Standards of Auditing as specified by ICAI/NFRA.

  1. Obligations of the listed entity/material subsidiary
  2. The listed entity/its material subsidiary are required to ensure that the new compliance is included in the terms of appointment at the time of appointment or reappointment of the auditors. In case of existing auditors, the appointment letter is needed to be modified to give such effect.
  3. The listed entity/its material subsidiary need to obtain the information about the auditor’s resignation in a format as specified in the Circular. Further, the listed entity has the obligation to ensure disclosure of the same under Sub-clause  (7A)  of  Clause  A  in Part  A  of Schedule  III under Regulation 30(2) of SEBI LODR Regulations.
  4. The listed entity/material subsidiary will provide all the relevant document or information as required by the auditor during the period from its proposal to resign and submission of the limited review/audit report.
  5. The listed entity will disclose the views of the audit committee to the stock exchange as soon as possible and not later than later than twenty four hours after the date of such audit committee meeting.

ANALYSIS

Firstly, we need to understand the current regulatory provisions governing the resignation of the auditors and the need felt by SEBI to issue this Circular.

Section 140(2) of the Companies Act, 2013 along with the Companies (Audit and Auditors) Rules, 2014 mandates the auditor to file a statement in a prescribed form to the company and to the Registrar citing reasons for resignation, within 30 days from the date of resignation. In addition to that, sub-clause (7A) of Clause A in Part A of Schedule III under Regulation 30(2) of the SEBI (LODR) Regulations prescribes that the listed entity shall disclose detailed reasons of the resignation to the stock exchange within 24 hours of such resignation. ICAI’s auditing standards (SA-705) enumerates that in a situation where the possible effects on the financial statements of undetected misstatements are both material and pervasive such that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor can resign. According to the Rule 5 of National Financial Reporting Authority Rules, 2018 (‘NFRA Rules’), every auditor of the entities covered by these rules are required to file an annual return in form NFRA 2 with the authority giving details with respect to the audit as well as resignations given in the past 3 years.

Though the law provided these rules and regulation, the rising trend on abrupt resignations by the auditor citing reason as ‘pre-occupation’ were leaving the investors vulnerable to various threats. Due to resignation of the large audit firms, SEBI was forced to review its listing and disclosure obligations. In order to enhance accountability of auditors and protect the investors from the insecure environment due to abrupt resignation, SEBI felt the dire need to regulate such resignations and took the step in a right direction by issuing this Circular.

OUR COMMENT

The Circular was much needed as the rules governing the resignation of auditors across different forums were inadequate. The Circular, in addition to regulation of abrupt resignation, will give a helping hand to the auditors especially in case of lack of cooperation by the management, if any, faced by them. This will ultimately benefit SEBI to look into the matter for potential fraudulent or vulnerable transactions. Further the enhancing role of the audit committee is commendable.

However, the Circular has few gaps such as the applicability of Circular on debt listed entities. Now, there can be various scenarios. Suppose the listed entity ‘A’ has a material subsidiary ‘B’. The Circular will be applicable where ‘B’ is unlisted but a material subsidiary of ‘A’. The question arises where ‘B’ is a debt listed entity only, whether the Circular will be applicable? In our view, the Circular will be applicable in the instant case since B is a material subsidiary.

Further, it is important to note that the intimation requirements under the Circular are two-fold and both are parallel to each other serving different intents. In the first part, the listed entity has to inform the stock exchange within 24 hours of the resignation as per Sub-clause (7A) of Clause A in Part A of Schedule III under Regulation 30(2) of SEBI LODR Regulations, whereas in the second part the audit committee is required to inform the stock exchange as soon as possible from the date of resignation but not later than date of next audit meeting.  The intimation under the second part will carry the views of the audit committee on the concerns raised by the auditor before resignation whereas the intimation under Regulation 30 is an intimation of a material event. We shall be coming out with our set of FAQs on the Circular discussing the same at length from various perspectives.

[1] See the paper here.

[2] See the Circular here.

 

Schemes under Section 230 with a pinch of section 29A – Is it the final recipe?

/1 Comment/in , /by

-Sikha Bansal (resolution@vinodkothari.com)

Note: This article is in continuation of/an addition to our earlier article wherein the author discussed various aspects pertaining to schemes of arrangement in liquidation under section 230 of the Companies Act, 2013 read with various provisions of the Insolvency and Bankruptcy Code, 2016. The author has described various factors and principles which the judiciary may consider while sanctioning a scheme of arrangement for companies in liquidation, how a scheme is different from a resolution plan or a going concern sale, what constitutes ‘class’ in the context, whether the waterfall under section 53 will apply to such schemes, etc. The author also pointed out the lack of clarity as to applicability or inapplicability of section 29A on such schemes. However, very recently, NCLAT has clarified that persons ineligible under section 29A are not qualified to propose a scheme during liquidation. This Part discusses this ruling and ponders upon some questions which still remain open-ended/unanswered.

The conundrum as to whether section 29A of the Insolvency and Bankruptcy Code, 2016 (‘Code’) will apply to schemes under section 230 of the Companies Act, 2013 (‘Companies Act’) has been put to rest, at least for the time being, by a recent ruling of the National Company Law Appellate Tribunal (‘NCLAT’). In  Jindal Steel and Power Limited v. Arun Kumar Jagatramka & Gujarat NRE Coke Limited (Company Appeal (AT) No. 221 of 2018), vide order dated 24.10.2019, NCLAT held, while a scheme under section 230 is maintainable for companies in liquidation under the Code, the same is not maintainable at the instance of a person ineligible under section 29A of the Code. The NCLAT relied on the observation of the Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., WP No. 99 of 2018, that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation.

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