Tuesday, 26 August 2014

STOP: Mirror Mirror on the wall, who's the fairest of them all!?

A father who is struggling financially is saddened to have a dark skinned daughter instead of a son. The depressed girl upon using the fairness cream gets a job as a flight attendant and has changed the tide for her father. The Ministry of Information pulled down this ad as it promoted discrimination on the basis of colour.

This aim of the ministry has been codified by the Advertising Standards Council of India by through the 'Advertising for Skin Lightening or Fairness Improvement Products Guidelines, 2014'. These guidelines emphasize that advertisements should not deride race, caste, colour, creed or nationality.

The guidelines state that no advertisement of a fairness product shall reinforce negative social stereotyping on the basis of skin colour. Specifically, advertising should not directly or implicitly show people with darker skin, in a way which is widely seen as, unattractive, unhappy, depressed or concerned. These ads should not portray people with darker skin, in a way which is widely seen as, at a disadvantage of any kind, or inferior, or unsuccessful in any aspect of life particularly in relation to being attractive to the opposite sex, matrimony, job placement, promotions and other prospects. It also provides that the ad mustn't associate darker or lighter colour skin with any particular socio-economic strata, caste, community, religion, profession or ethnicity. Further the ad should not perpetuate gender based discrimination because of skin colour.

PC: www.respectwomen.co.in


These guidelines not only promote equality but attempt to uproot racism which runs deep in India's history. 

Monday, 25 August 2014

Fixing Indian Arbitration

The Law Commission of India’s Troubleshooter Report

It is no secret that for all the international jurisprudence establishing arbitration as an effective, cost efficient, prompt and necessarily independent system of resolving a wide range of disputes, the Indian experience has been rather different. Even after the Supreme Court’s decision in BALCO, India remains a jurisdiction where the Courts routinely read down the sacrosanct bar on judicial intervention, parties almost without exception challenge awards with significant success, high arbitrator fees and courts stifle arbitration and fairly non-committal towards institutional arbitration.  In its 246th Report the LawCommission of India has recommended amendments to the Arbitration and Conciliation Act 1996 (‘Act’) to address some of the concerns plaguing the law governing arbitration in India. In this post we discuss some of the salient suggestions. In the interest of brevity we have dispensed with a comprehensive section-by-section analysis.

I.                   Boost for Institutional Arbitration
In an attempt to boost institutional arbitration the Commission has recommended addition of Explanation 2 to Section 11(6A) to lay down a general mandate for Courts should encourage the adjudication of disputes by reference to institutionalized arbitration. In view of certain institutional rules such as those contained in Rule 26 and Schedule I the SIAC Rules 2013, the Commission has recommended widening of the definition of ‘arbitral tribunal’ to also include emergency arbitrator.

II.                Section 2
In another suggestion the Commission ,in complete endorsement of the decision in Chloro Controls (I) P. Ltd[1] in addition to its proposed amendment to Section 8, has recommended that all reference to ‘party ’ in the Act also includes persons who derives his interest from such party. Several other changes have been recommended to Section 2 in order to capture the import of the judgement in  BALCO.[2] Further, in what is set to be a point of great debate the Law Commission on page 39 of its report recommends:

“Also insert the following proviso [after subsection 2(2)] “Provided that, subject to an express agreement to the contrary, the provisions of sections 9, 27, 37 (1)(a) and 37 (3) shall also apply to international commercial arbitration even if the seat of arbitration is outside India, if an award made, or that which might be made, in such place would be enforceable and recognized under Part II of this Act.”

Article 1(2) of the UNCITRAL Model Law which provides that “The provisions of this Law, except articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of this State." It would be over optimistic to expect that this will indeed clarify the law. With interim measures of foreign seated arbitrations back in the domain of the Indian Courts, albeit non-exclusively, the core issue of judicial overreach is likely to remain.

Interim Orders by a Foreign Court supervising Arbitration
The Commission could have tried to resolve the problem which exists insofar as there is no clarity as to the exact mode of enforcement of interim orders passed by a foreign court having supervisory jurisdiction over arbitration. Since an interim order is by nature not final and conclusive, lawyers have for long struggled to find a method of enforcing an interim measure issued by a foreign court in relation to an arbitration initiated under its jurisdiction. Any attempt to enforce such an interim order will fall foul of Section 44A of the CPC since the order will not qualify as a ‘judgement’ or ‘decree’. The other roundabout method for a party is to initiate contempt proceedings in the foreign court on the ground of non adherence to the initial interim order and subsequently attempt to enforce the judgement (not the underlying order but  the subsequent judgement holding contempt) under Section 13 and Section 44 of the CPC. Clearly, both these avenues are ineffective. While the Commission recognizes this problem, a clear remedy seems to have been left out. The Commission might have benefited by giving the issue more attention.

III.              Delay in the Arbitral Process
In its report the Commission seems to be generally concerned in Court based delays in arbitration matters, while particularly disturbed with the effect the decision by the Tribunal in White Industries[3] which exposed the far reaching consequences of inordinate delays in a jurisdiction with over 70 BITs most of which impose obligations of some variant of access to effective and prompt judicial process for investors. The Commission has therefore recommended some novel changes. In its opinion, restricting relevant ‘Court’ in case of international commercial arbitration involving foreign parties would be desirable owing to the expectation that commercially oriented judges would hear the matter expeditiously.  This would reduce what has been christened the “Investment Treaty risk.” While the concern is properly guided, there is no clarity as to how a change in the Court of supervision would directly reduce timelines in the backdrop of reports where where High Courts routinely perform below expectation due to a large number of pending cases. Policy measures such as training of judges to act with a heightened level of commercial orientation would perhaps be more effective. The Commission has however recognized that this suggested change cannot be a standalone remedy to counter the seemingly inherent malaise of delay so inherent in the current judicial process relating to arbitration. It has recommended that there is an urgent need to increase the threshold for judicial at both the pre and post award stage.

    A. Pre Judicial Intervention
In a concise manner the Commission expresses its disappointment that while the Supreme Court had the opportunity to clearly answer the question as to the scope and nature of permissible pre-arbitral judicial intervention, keeping in mind the bar under Section 5 of the Act, it framed the question in rather ineffective and infructuous manner focusing rather on the orthodox distinction between ‘judicial’ and ‘administrative’ power under Section 11 referring to a series of judgement culminating in SBP v. Patel Engineering[4] and the consequent clarification in  National Insurance Co. LTd v. Boghara Polyfab Pvt Ltd.[5] which divided this controversial matrix of precedent and laid down that the law in three distinct buckets, if you may. First, the category of issues which the CJI is obligated to decide. Under this category enquiry must be conducted as to whether the appropriate High Courts has been approached, whether there is an arbitration agreement and whether the party approaching the Court under Section 11 is party to such an agreement.  The second category includes issues such as whether the claim is a live claim and whether the parties concluded the transaction by satisfaction of rights and obligations. These issues in the second category are those over which the CJI/ designate may decide. The third category are those which must necessarily be left for the Tribunal to decide. These include questions of whether a claim is covered by an arbitration clause, and the merit of such claims.

The Commission simplistically refers to the desirability of extending these tests to Section 8 and Section 45 instead of restricting it only to Section 11. The Commission deserves merit to have pointed out that there exists no logical rationale to suggest that the scope and nature of judicial intervention on pre award stage should change on the fact that a party, which may intend to defeat the arbitration agreement refuses to appoint an arbitrator in terms of the agreement (covered by Section) or moves a proceeding before a judicial authority in spite of existence of such an arbitration agreement. (typically such cases in appear in relation to Section ). For a party intending to defeat the arbitration agreement, both the refusal to appoint arbitrator or initiation proceedings in Court serve the same purpose and therefore should not be subject to varying levels of judicial intervention. Therefore the Commission has recommended that Section 8 and Section 11

Section 8 and Section 11
The bar against bifurcation of claims under arbitration agreements so widely encompassed in  Sukanya Holdings[6] and so artfully skirted in Chloro Control is a valid subject of concern for the commission. To narrow down the effect of Sukanya Holding which stated that where all parties to a dispute are not parties to arbitration, the reference to the arbitration must be rejected. The Commission suggests adding of proviso to Section 8 stating that reference in such cases may only be rejected where all the parties are “necessary parties” to the action.  The term “necessary parties” has however not been defined.

The Commission also addresses the core question as to the depth of permissible judicial enquiry into the validity of the arbitration agreement. It recommends that if the authority is of the opinion that there is a prima facie arbitration agreement then it should refer the matter to the Tribunal and if the authority concludes that a valid agreement does not exist, such determination would be final and not prima facie. Similar amendments are proposed in Section 11 as well.  

Section 9 and Section 17
Perhaps the vehicle of abuse in many contracts containing arbitration, Section 9 of the Act per the recommendation of the Commission must be amended to have a 60 day limit to initiate arbitration proceedings where a party has obtained an injunction over subject matter covered by the arbitration agreement. Evidently, this is a legislative counter to the tendency of parties to obtain a Section 9 injunction and continue to take benefit of the same perpetually, without taking any steps taken to proceed with arbitration. However, the Commission is rather vague insofar as it recommends that the following clause be included

“(2) Where, before the arbitral proceedings, a Court grants any interim measure of protection under sub-section (1), the arbitral proceedings shall be commenced within 60 days from the date of such grant or within such shorter or further time as indicated by the Court, failing which the interim measure of protection shall cease to operate.

The provision dilutes the efficacy of what could have been a strict legislative deadline for commencement of proceedings and retains judicial discretion, which if routinely exercised in the proper manner in the first place would have not given rise to the problem in the first place.

The Commission has also recognized in relation to Section 17, that in India interim orders of the Tribunal are routinely rendered ineffective. The proposed amendment would give the tribunal the same powers as a civil court in relation to the interim measures.  Read with the amendment in Section 9, parties would be left with no option but to approach only the tribunal once the tribunal is constituted. The proposed amendment would also grant the tribunal the authority to grant interim relief even after the award has been rendered.

  B. Post Award Judicial Intervention

Section 34 (Setting aside of an award)
The Commission recommends to resolve the seemingly age-old problem of the interpretation of the grounds stated in Section34 for the setting aside of an award.  It recommends amendments to counter the widening of the words “morality or justice” used in the otherwise clear judgement in Renusagar by replacing it with a higher threshold of  the award being in “in conflict with the most basic notions of morality or justice” In an additional explanation suggested the commission seeks to bar erroneous application of law and re-appreciation of evidence as grounds for setting aside of awards. These were the grounds used in Saw Pipes[7]  to successfully set aside an award


Section 36 (Enforcement of Award)
The Commission took a cue for the Apex Courts observations in National Aluminium Company Ltd v. Pressteel & Fabrications (P) Ltd and Anr[8] where the Court stated that amendments to Section 36 was necessary to ensure that parties intending to defeat the arbitration do not get an automatic stay on enforcement by the mere filing an application of Section 36.   

Section 37
There exists a bar on second appeal from orders appealed under Section 37. However, inconsistencies in relation to parties succeeding in filing letters patent appeal where the Letters Patent Act of various high courts have not been suitably amended to conform with the provision in Section 37. The Commission has therefore recommended that Section 37 be amended to also bar letters patent appeals in addition to ordinary second appeals.

IV.              Other Salient Recommendation of the Law Commission
The Law commission has recommended a variety of other changes some of which are as follows:

  1. Amendment to Section 16 in order to counter the effect of the Apex Court’s decision in N Radhakrishnan v. Maestro Engineers[9]  which restricted the authority of the tribunal to rule on questions of fraud, corruption etc.
  2.  Amendment to Section 20 to provide for parties to agree to the seat and venue of arbitration instead of the ambiguous “place of arbitration” The amendment would recognize the distinction between the legal seat of arbitration and the venue of arbitration.
  3. Amendment to  Section 23, by addition of  an Explanation which clarifies that the defence may set up a counter claim and such will be heard by the arbitral tribunal even if exceeds the terms of reference to the Tribunal as long as the claim is covered within the scope of the arbitration agreement.  The rationale for such a suggestion is self evident.
  4. Amendment in Section 24 requiring that hearings and presentation of evidence be done on continuous days to avoid parties seeking unnecessary adjournments which drive up the cost of arbitration.


A significant and perhaps underestimated change suggested by the Commission is the addition of Section 6A which would lay down a regime for costs with a higher than expected adherence to the ‘costs follow the event’ regime. The effect of this clause is most likely to invisible since the purport of this amendment would lie in its significant effect on legal strategy by parties, many of whom have until now benefited without consequence from tactics which inflate the costs of arbitration.  If the amendment is actually made, a significant decline in the filing of frivolous claims may also be expected.

Having delved into the recommendations of the Commission, one can only hope that at the least, the significant suggestions be adopted by means of relevant amendment to the Act.






[1] Chloro Controls (I) P. Ltd.v. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641
[2] Bharat Aluminium Company and Ors. etc. v. Kaiser Aluminium Technical Service, Inc. and Ors. etc., (2012) 9 SCC 552]
[3] White Industries Australia Ltd v. Republic of India, UNCITRAL, Final Award (November 30,2011)
[4] (2005) 8 SCC 618
[5] (2009) 1 SCC 267
[6] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr., (2003) 5 SCC 531
[7] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705
[8] (2004) 1 SCC 540
[9] (2010) 1 SCC 72)

Friday, 25 July 2014

The Curious Case of Bitcoins - Part II

In our previous post, we have highlighted the negative attitude of the Reserve Bank of India towards the use of BITCOINS. However it is important to note that BITCOINS are not illegal per se. There is tremendous scope for these trading units to be legalized in India. In this post we seek to highlight the possible ways in which these units can be legalized.

CURRENCY
 'Currency' is defined as " currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.[1]" The definition gives the government wide powers to expand the scope of the definition. This power can be used to include BITCOINS as a currency. However as of now, a BITCOIN is not a currency as it does not satisfy the requirement mentioned in the definition.

SECURITY
The Securities Contracts (Regulation) Act, 1955 defines securities to include[2] -

"(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities;”

The law again gives the power to the government to include 'such other instruments' as securities. Therefore there is scope for bitcoins to be termed as securities. If the government does take this decision to qualify BITCOINS as a security, it would give birth to a plethora of regulations and guidelines issued by SEBI.
However currently BITCOINS doesn't qualify as a security as it doesn't fall under any of the permissible heads mentioned in the definition.

COMPUTER PROGRAMME

The Indian Copyright Act, 1957, defines the term "computer programme[3]" as "a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result." BITCOIN is a code which facilitates the transfer of bitcoin currency from one account to the other. Therefore BITCOINS can be regulated as a computer programme under the existing legal regime. As computer programmes are movable goods, therefore BITCOINS can also be categorized as a movable good.

Keeping in mind the growing popularity of BITCOINS across the globe, it will be interesting to see how the Government of India will regulate these virtual currencies in India.








[1] S 2(h) of the Foreign Exchange Management Act, 1999 
[2] S. 2(h) of the Securities Contracts (Regulation) Act, 1955
[3]S. 2(ffc) of Indian Copyright Act, 1957

Sunday, 22 June 2014

Crowdfunding

Crowdfunding is a method of raising funds from multiple investors over the web for a specific project, business venture or a social cause. The United States of America and the United Kingdom are seen as dominant players in this kind of funding. Crowdfunding has developed as an alternative means of raising funds, especially for start-ups and SMEs. Another reason for the popularity of this form of fund generation is the financial crisis in 2008 which resulted in restricted fund allocation by banks thereby giving rise to the need for an alternative method of funding.

Funding through this method has grown exponentially especially with innovative start-up companies. Max Gunawan’s startup managed to raise close to $600,000 in a span of 30 days through the process of crowdfunding. Julie Urman, a video game developer, raised close to $9 Million within a span of 30 days.

There are multiple types of crowdfunding:
  1. Donation crowdfunding: As the name suggests it involves generation of funds for charity and philanthropic purposes.
  2.  Reward crowdfunding: A form of funding which is dependent on a future of existing reward as consideration.
  3. Peer-to-Peer lending: Is an online platform where lenders and borrows are matched for unsecured loans and the interest rate is determined or set by this platform.
  4. Equity Crowdfunding: As the name suggests, funds are generated with equity of the funded company as consideration.

The United States and the United Kingdom have regulations on crowdfunding. India has seen the growth of this kind of funding, but it still stands unregulated. Recently SEBI released a consultation paper on crowdfunding which discusses the methods, risks and advantages of this form of funding. It provides a comprehensive note on the regulations in other countries and pinpoints the regulations which can affect crowdfunding in India. The provisions of the Companies Act, 2013 and various SEBI Regulations such as ICDR has been discussed.

Crowdfunding can be categorized as a form of private placement, therefore the provisions of the Companies Act, 2013 are attracted. Advertisements by companies raising money through private placements is prohibited and securities cannot be issued to more than 200 persons. However, QIBs and employees availing the employee stock option by companies are excluded. Further such offers can be made only to such persons whose names are recorded by the company prior to the invitation to subscribe.

However, as mentioned above, Companies Act, 2013 provides a window for making private placement offers to Qualified Institutional Buyers (QIBs) and the 'limit of 200' is not applicable to such QIBs. QIBs are the entities such as a MF, Foreign Portfolio Investor (FPI), AIF, Scheduled Commercial Bank, IRDA registered Insurance company etc. as defined in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This exception can therefore be exploited in order to generate funds under crowdfunding. 


Given the high-level of risks associated with this new way of fund-raising activity, SEBI has proposed that only 'accredited investors' be allowed to participate in crowdfunding activities. Such investors would include institutional investors, companies, HNIs and financially-secure retail investors advised by investment advisors or portfolio managers. SEBI has clarified that no regulations are under construction and this consultation paper is merely a medium to understand and garner public opinion on crowdfunding. 

Thursday, 17 April 2014

Transgender, a New Gender: Recognizing the T in LGBT

On 15th April 2014 the Supreme Court of India gifted India with the recognition of a new gender – Transgender. By allowing the petition filed by National legal Services Authority, the Court held that trans-genders have the right to equality under Article 14 and the right to live with dignity under Article 21.

The Court defined Transgender to mean a person whose gender identity, gender expression or behavior does not conform to their biological sex. Transgender are persons who do not identify with their sex assigned at birth, which include Hijras/Eunuchs and they do not identify themselves as either male or female. Hijras are not men by virtue of anatomy appearance and psychologically, they are also not women, though they are like women with no female reproduction organ and no menstruation. Since Hijras do not have reproduction capacities as either men or women, they are neither men nor women and claim to be an institutional “third gender”. Among Hijras, there are emasculated (castrated, nirvana) men, non-emasculated men (not castrated/akva/akka) and inter-sexed persons (hermaphrodites). Transgenders also include persons who intend to undergo Sex Re-Assignment Surgery (SRS) or have undergone SRS to align their biological sex with their gender identity in order to become male or female. Further, there are persons who like to cross-dress in clothing of opposite gender, i.e transvestites.

Gender Identity and Sexual Orientation
The Court differentiated between gender identity and sexual orientation. Gender identity refers to each person’s deeply felt internal and individual experience of gender, which may or may not correspond with the sex assigned at birth, including the personal sense of the body which may involve a freely chosen, modification of bodily appearance or functions by medical, surgical or other means and other expressions of gender, including dress, speech and mannerisms. Gender identity, therefore, refers to an individual’s self-identification as a man, woman, transgender or other identified category. While sexual orientation refers to an individual’s enduring physical, romantic and/or emotional attraction to another person. It includes within its ambit transgender and gender-variant people with heavy sexual orientation and their sexual orientation may or may not change during or after gender transmission which also includes homosexuals etc.

By keeping in mind the above difference and identifying the need to adhere to international obligations under the UDHR, ICESCR, ICCPR and Yogakarta Principles the Supreme Court of India recognized the need to protect the rights of transgenders.  Due to the absence of suitable legislation protecting the rights of the members of the transgender community, they are facing discrimination in various areas and hence the necessity to follow the International Conventions to which India is a party and to give due respect to other non-binding International Conventions and principles. Constitution makers could not have envisaged that each and every human activity be guided, controlled, recognized or safeguarded by laws made by the legislature the Court relied on the following points while guaranteeing the much needed rights:

Article 14: Article 14 of the Constitution of India ensures equal protection and therefore imposes a positive obligation on the states to ensure the same. Article 14 does not restrict the word ‘person’ and its application only to male or female. Hijras/transgender persons who are neither male/female fall within the expression ‘person’ and, hence, entitled to legal protection of laws in all spheres of State activity, including employment, healthcare, education as well as equal civil and citizenship rights, as enjoyed by any other citizen of this country.

Article 15 & 16: prohibit discrimination against any citizen on certain enumerated grounds, including the ground of ‘sex’. In fact, both the Articles prohibit all forms of gender bias and gender based discrimination. Both gender and biological attributes constitute distinct components of sex. The discrimination on the ground of ‘sex’ under Articles 15 and 16, therefore, includes discrimination on the ground of gender identity. The expression ‘sex’ used in Articles 15 and 16 is not just limited to biological sex of male or female, but intended to include people who consider themselves to be neither male or female.

 Article 19: Provides that all persons have the freedom of speech and expression. Therefore no restriction can be put on the basis of appearance, dressing, words or any other form. However this is subject to Article 19(2). Gender identity lies at the core of one’s personal identity, gender expression and presentation and, therefore, it will have to be protected under Article 19(1)(a) of the Constitution of India.

Article 21: Article 21 protects the dignity of human life, one’s personal autonomy, one’s right to privacy, etc. Right to dignity has been recognized to be an essential part of the right to life and accrues to all persons on account of being humans. Recognition of gender forms the essence of human dignity. Legal recognition of gender identity is, therefore, part of right to dignity and freedom guaranteed under our Constitution.

Keeping in mind the above points the Supreme Court held that Hijras, Eunuchs, be treated as “third gender” for the purpose of safeguarding their rights under Part III of Constitution of India. The Court directed the Central and State Governments to recognize this new gender identity, treat them as socially and educationally backward classes of citizens and extend all kinds of reservation in cases of admission in educational institutions and for public appointments. Further steps must be taken operate separate HIV Sero-survellance Centres since Hijras/ Transgenders face several sexual health issues and steps must be taken to address the problems being faced by Hijras/Transgenders such as fear, shame, gender dysphoria, social pressure, depression, suicidal tendencies, social stigma, etc. and any insistence for SRS for declaring one’s gender is immoral and illegal. Lastly, the Court insisted on proper steps should be taken measures to provide medical care to Transgenders in the hospitals and also provide them separate public toilets and other facilities.


In our opinion this is a remarkable judgment and addresses the need of the hour – recognition of alternate genders. This judgement, understandably contains a disclaimer stating that the issue of constitutionality of Section 377 of IPC is finally settled in NAZ foundation and therefore reserves its opinion on the same. It is interesting to note that the Supreme Court in its judgement in NAZ relied on a binary understanding of the term ‘gender’ while categorizing homosexual intercourse as “against the order of nature”. This presumption of the existence of only two genders must affect the understanding of the Court as to the true meaning of the “order of nature”.

Wednesday, 2 April 2014

The Securities Laws (Amendment) Ordinance, 2014: Re - Promulgated

The President of India re - promulgated The Securities Law Ordinance 2014. SEBI has been given the power to rely on telephone records for the purposes of investigation and evidence collection. The following post will discuss the powers of SEBI under the ordinance.

The Securities and Exchange Board of India Act, 1992 was enacted to provide for the establishment of a board to protect the interests of investors in securities and to promote, develop and regulate the securities market[1]. Under the ordinance, SEBI is empowered to call for information, conduct investigations, inquiries and audits.[2] It can call for relevant information and records from any person including any bank and any other authority, board or corporation established or constituted by or under the Central or State Acts.[3]

The Board is empowered to investigate, if it has reasonable grounds to believe that the securities transaction is detrimental to investors or the securities market and if any person has violated the provisions of the Act.[4] The Investigating authority, appointed by the Board, is empowered to do the following:

 1. Require any intermediary or person to furnish such information, produce records, books, registers or other documents before it[5]. The Authority will be permitted to keep such records for a period of six months only[6].

2.  If the Investigating Authority has reason to believe that any person or enterprise to whom a notice has been issued or might be issued, (1) has omitted or failed to provide the information; (2) would not provide the information and not produce the required documents or, (3) would destroy, mutilate, alter, falsify or secrete the information or documents, then the Chairman may authorize the Investigating Authority to do any of the following[7]:
a.       Enter and search the building, place, vessel, vehicle or aircraft where the information is expected to be kept.
b.      Break open the lock of any door, box, locker, safe almariah where the keys are not available.
c.       Search any person.
d.      Require any person who is found to be in possession or control of any books of accounts or documents which are maintained in electronic form to provide the facility to investigate such books and documents.
e.       Seize any books and documents.
f.       Place identification marks and extract copies of books and documents.
g.      Record on oath the statement of any person in possession or in control of such books and documents.

    3. The Board must make regulations in relation to search and seizure. The regulations must provide the procedure to be followed by Authorized Officers for obtaining ingress into any building, place, vessel, vehicle or aircraft. It must also provide the procedure for ensuring safe custody of any books, documents or assets seized.[8] The books and documents seized under the Act must be returned after the conclusion of the investigation.[9]

      The re - promulgated ordinance is in almost all respects identical to the earlier issued ordinance. However it does contain some significant changes. One of the most significant of them compared to the earlier ordinance is the provision providing  SEBI with the power to supersede an order issued by an adjudicating officer where it considers ” that the order is erroneous to the extent that it is not in the interest of the securities market.” [New provision Section 15-I (3)] However the power of the SEBI extends only to increasing the quantum of penalty. This presents a difficult situation, where the adjudicating officer under the act being under an implied obligation to act fairly may be overruled on the point of amount of compensation by one of the parties appearing before the Officer. This, in addition to the fact that the Adjudicating Officer is appointed from the ranks of SEBI under Section 15-I is a matter of concern in assessing the independence of the adjudicating officer. Given that the already existing remedy to approach the SAT remains unscathed the overriding powers of the SEBI represents an additional adjudication stage. One must however note that the overriding powers of the SEBI are restricted to enhancement of the penalty and does not extend to overruling questions of whether or not a violation has occurred.

The other significant change is the fact that a safeguard has been put in place vide an amendment in Section 11C (8) requiring written reasons for authorizing a search and seizure operation.

In addition to addressing the investigative powers of SEBI relating to offences under the SEBI Act the ordinance covers provisions for settlement of administrative and civil proceedings as well as establishment of special courts as amendments to the SEBI Act, 1992. The ordinance also contains amendments to the Securities Contract Regulation (Regulation) Act, 1956 and Depositories Act, 1996 which enable SEBI to exercise similar investigative powers offences prescribed the respective acts.




[1] Preamble, Securities and Exchange Board of India Act, 1992
[2] Section 11(2)(i), Securities and Exchange Board of India Act, 1992
[3] Section 11(2)(ia), The Securities (Amendment) Second Ordinance, 2013
[4] Section 11C, Securities and Exchange Board of India Act, 1992
[5] Section 11C(3), Securities and Exchange Board of India Act, 1992
[6] Section 11C(4), Securities and Exchange Board of India Act, 1992
[7] Section 11C(8), Inserted vide The Securities Laws (Amendment) Second Ordinance, 2013
[8] Section 11C(9), Inserted vide The Securities Laws (Amendment) Second Ordinance, 2013
[9] Regulation 11C(10), Securities and Exchange Board of India, 1992 (Refer: The Securities Laws (Amendment) Second Ordinance, 2013.

Sunday, 23 March 2014

Electronic Surveillance and Right to Privacy: Stuck between a Rock and a Hard Place.

Big brother surveillance techniques have sparked much debate on the conflict that exists between the right to privacy and the duty to protect security of state. The conflicting judgments of two US courts on the constitutionality of NSA’s bulk surveillance programme is interesting to note. This post highlights the conflict and also gives a brief overview of the Big brother surveillance techniques that exist in India.

On June 6, 2013 the plaintiffs brought the first of two related lawsuits challenging the constitutionality and statutory authorization of certain intelligence gathering practices relating to the wholesale collection of phone record metadata and internet activity of all US Citizens[1].

The Court found that it does not have the authority to evaluate the constitutional challenge on one of the lawsuits, one claiming that government has exceeded its statutory authority under the Foreign Intelligence Surveillance Act (“FISA”).  However the Court did find sufficient basis for jurisdiction and authority to evaluate the NSA’s conduct on constitutional challenges, notwithstanding the fact that it was done pursuant to orders issued by the Foreign Intelligence Surveillance Court (“FISC”).

The Court granted in part, the Motion for Preliminary injunction. In spite of granting this injunction, the judge himself stayed his order in view of the “significant national security interests at stake in this case and novelty of the constitutional issues” pending appeal.

In a significant statement the Court said

“Plaintiffs have a substantial likelihood of showing that their privacy interests outweigh the government’s interest in collecting and analysing bulk telephony metadata and therefore the NSA’s bulk collection program is indeed an unreasonable search under the fourth amendment.”

The almost-Orwellian technology that enables the government to store and analyze the phone metadata of every telephone user in the United States is unlike anything that could have been conceived in 1979.

The reference to the year is to distinguish a US Supreme Court Case called Smith v. Maryland[2] where the question before the Court was whether local police could collect phone records after the pen register was installed for the limited purpose of investigating a case of harassing phone calls. The US Supreme Court held that such surveillance is in compliance with the fourth amendment. The NSA relies heavily on this precedent to justify its bulk surveillance programme.

The judge in the instant case stated that the extension of the precedent in Smith would be “stuff of science fiction”.

The judge also remarked
“I cannot imagine a more "indiscriminate" and "arbitrary invasion" than this systematic and high- tech collection and retention of personal data on virtually every single citizen for purposes of querying and analyzing it without prior judicial approval. Surely, such a program infringes on "that degree of privacy" that the Founders enshrined in the Fourth Amendment. Indeed, I have little doubt that the author of our Constitution, James Madison, who cautioned us to beware "the abridgement of freedom of the people by gradual and silent encroachments by those in power," would be aghast."


In a span of about 10 days a similar question came up before American Civil Liberties Union Et. Al v.James Clapper et. al[3]  before the United States District Court Southern District of New York. In a similar set of facts, the Plaintiffs challenged the legality of NSA’s telephony metadata collection program. The Court denied the claims and allowed the Government’s motion to dismiss. It ruled that the state interest was reasonable and not violative of the fourth amendment right and security of state supersedes the right to privacy.

Big Brother Surveillance in India:
In the recent past, India has also introduced several bulk surveillance programmes which seek to closely monitor communications and movements of citizens. Such programmes are giving wings to various governmental departments to rely on databases which contain private information such as, tax details, PAN numbers, date of birth etc. the following paragraphs will throw some light on these technologies:


  1. CMS: The Central Monitoring System is an initiative by the Ministry of Telecommunications which will empower governmental departments such as intelligence agencies and tax authorities to intercept telephone messages, calls, emails and VoIP. It is stated that this project is in line with Section 5 of the Indian Telegraph Act, 1885 and is secure as it has a strong inbuilt mechanism to protect the privacy of information stored. We believe that this clearly impinges upon the right to privacy. The lack of public documentation which highlights the effects and manner of implementation of the project raises concerns. Secondly, the concept of necessity has been done away with as information will be monitored even when there is no threat to security of state. Thirdly, by including tax authorities in the list of authorised departments the Government has gone beyond the ruling of the Supreme Court which stated that economic emergency is not national emergency.
  2. NATGRID: is a project introduced after the gruesome 26/11 attacks and envisions networking 21 databases for purposes of crime investigation including tax, health, and travel information. The information will be accessible to 11 security agencies and law enforcement agencies. Supporters of the project claim that the project is merely a technical interface for intelligence agencies and is a security initiative, thereby forming a reasonable restriction to privacy. One of the biggest hurdles to is the protection of information and lack of adequate safety equipment. Establishment of such grids will pose a huge risk of data loss due to hacking and contamination. Further NATGRID will not help in preventing attacks like 26/11 because the nodal defense departments are not privy to the information. The Government has also failed to define the legal status of the project, which poses huge concerns for privacy.
  3. UAV: Unmanned Ariel Vehicles are being used by the police to monitor large crowds and traffic. The Mumbai police recently used UAV ‘Netra’ to monitor large crowds during the Raj Thackrey rally. The use of these vehicles for concerns other than combating terrorism is an infringement of privacy as restoration of public order does not qualify as public emergency. Further there is no clarity on how the information is collected, stored and accessed.
  4. CCTV: CCTV cameras have been installed by many metro cities in public places such as railway stations and metro stations. These have been installed under simple executive orders and no clear safeguards exist with regard to how this information is stored, processed, accessed and monitored. The recent Privacy Protection Bill, 2011 is the only parliamentary step which seeks to regulate information and footage collected through such cameras. However the Bill is still at its infancy and it will take a lot of time before this data protection legislation becomes the law of the land.

Big Brother Surveillance: Cross Border Remedy:
As India’s privacy law is modeled on the American jurisprudence, such conflicting decisions are bound to affect the law on bulk surveillance and privacy in the country. It is interesting to note that the NSA’s bulk surveillance programme also keeps tabs on communications that happen within India. This was challenged before the Hon’ble Supreme Court of India in S.N. Singh Patron Baanaana.com v Union of India. The Supreme Court dismissed a petition on the grounds that Article 32 can be invoked only against the state, hence other civil remedies must be resorted to.

Such lack of remedies poses a huge concern for the citizens of India, as there is no redressal for cross border surveillance which clearly impinges upon the privacy of an individual.

Conclusion:
It is our opinion that there is a need to strike a balance between the states duty to protect the right to privacy and ensure security of state. Article 21, while encompassing the right to be left alone also provides that the same can be abridged in accordance to reasonable procedure established by law. Taking a cue from this exception, several Supreme Court cases have held privacy to be subservient to security of state. The need for surveillance is justified as there is a duty on states to protect public order and state security under Article 38 of the Constitution of India. But this Directive Principle of State Policy must be read with Part III as both form an essential part of fundamental governance of state. Hence the big brother surveillance techniques are in direct conflict with the right to privacy. These programmes must get Parliamentary approval and can be regarded as reasonable exceptions only if strong steps are taken towards protecting the data collected.





[1] Klayman et al v. Obama Civil Action No. 13-0851 (RJL) Filed December 16, 2013
[2] 442 U.S. 735 (1979
[3]ACLU v Clapper 13 Civ. 3994 (WHP)