Managerial Personnel appointment - A detailed analysis (Learning no. 5)

Keywords: Director, Managerial Personnel, Remuneration, CA 2013, remuneration, perquisite, MoA, AoA, Special Resolution, SEBI (LoDR) Reg, DIN, Inadequate profit.

Fugitive economic offenders : A serious threat to world nation

FUGITIVE ECONOMIC OFFENDERS: A SERIOUS THREAT TO THE WORLD NATION

INTRODUCTION

Corporate India witnessed various fraud and economic offences which have tampered the economy as well as banking sector. Some of prominent instances have been the Punjab National Bank scam (PNB Scam) having Mr. Nirav Modi & Choksi Group at the center of it, looted Rs. 12,636 crores and left India for quite a long in order to evade trail for criminal offences. There are other cases which probably the most reported one was tycoon of the erstwhile Kingfisher Airlines owner Mr. Vijay Vittal Mallya who is indebted about Rs.9,000 Crores to a group of banks.

Currently, there are various other statutes that can penalize economic offences which include:

·   The Prevention of Money-Laundering Act, 2002 (PMLA, 2002) primarily focused to prevent money-laundering and to provide for confiscation of property derived therefrom;

·   The Benami Properties Transactions Act, 1988 (BPT Act, 1988) which prohibits benami transactions;

·   The Companies Act, 2013 which prescribes penal measures for offences such as fraud and other unlawful corporate practices;

·   The Indian Penal Code, 1860 (IPC, 1860) and the Code of Criminal Procedure, 1973 (CrPC, 1973) also cover penal measures for economic offences, such as forgery and cheating.

·   The Secularization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002) and The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RoDBFI Act, 1993) are also live now for recovery of financial assets by banks and financial institutions.

However these laws have proved to be time consuming. But, none of these statutes give specific provisions to deal with high value white collar criminals who have left India to evade from all criminal cases.Considering these offenders are serious threats to the world nation, India raised concerns and action against such offenders at BRICS nation’s foreign ministers meeting held on July 26, 2019.

In an attempt to deter and bring fugitive economic offenders back to India to face legal proceeding under court of law and also authorizes the government to confiscate the properties in India or abroad of such offenders, Houses of Parliament (Lokha Sabha and Rajya Sabha had approved on July 19, 2018 and July 25, 2018) had enacted The Fugitive Economic Offenders Act, 2018 (‘The FEO Act, 2018’) followed by assent of President on July 31, 2018. It shall be deemed to have come into force w.e.f. April 21, 2018. This statute also provides regulatory authorities to prevent such accused person from leaving the jurisdiction, or escaping from the legal bounds of the Indian government. Recently, Westminster Magistrate's Court of United Kingdom (UK) had issued extradition order of Mr. Vijay Mallya on December 10, 2018 which gave huge relief to the government and banking Industry in India from Non Performing Assets (NPA). However he had challenged the aggrieved order in higher court in UK.The UK order which has been followed by the special PMLA court in Mumbai declared Mr. Vijay Mallya as a 'fugitive economic offender (FEO)' under the FEO Act, 2018.

Reserve Bank of India (RBI)has released the list of India’s willful defaulters on November 20, 2019 after 4 years of Supreme Court’s direction to disclose. Over last few years, RBI reluctant to share these information on the ground that it would be against the interest of public and bankers. Having said that, there were about 3 companies belonging to Mehul Choksi group, amongst 30 major willful defaulters which banking Industry is currently struggling with.According to CRILC (Central Repository of Information on Large Credits) database, over 11,000 companies had willfully defaulted loan amount worth of over Rs 1.61 lakh crore as of December, 2018. Borrowers were categorizing as a ‘Wilful Defaulter’ if the company has not met repayment obligations even if it has capacity to do so. This article examines the concept of “Fugitive Economic Offender (FEO)”in detail and its implication.

REGULATORY FRAMEWORK

The preamble of the FEO Act, 2018 provide for measures to deter FEO from evading the process of law in India by staying outside the jurisdiction of Indian courts, to preserve the sanctity of the rule of law in India and for matters connected therewith.The Act inter-alia has various provisions which includes declaration of any individual as a “FEO”, attachment of the property of such person, power to disallow civil claims, bar on jurisdiction of Civil Court in respect of matter which the Special Court is empowered under the Act and the overriding effect of the Act.

The FEO Act, 2018 defines'fugitive economic offender' (FEO) (under Sec 2(f)) as any individual against whom a warrant for arrest in relation to a Scheduled Offence has been issued by any Court in India, who

(i)   has left India so as to avoid criminal prosecution, or

(ii)  being abroad, refuses to return to India to face criminal prosecution.

The Act also defines the term“Scheduled Offence” (under Sec 2(m)) as used in the aforesaid definition refers to an offence specified in the Schedule, if the total value involved in such offence or offences is Rs. 100 crore or more;

The Act clarifies the economic offence as specified in the Schedule to the FEO Act, 2018 to include:

·   The Indian Penal Code vide Sec 255, 257, 258, 259, 260,417, 418, 420, 421, 422, 423, 424, 467, 471, 472, 473, 475,476, 481, 482, 483, 484, 485, 486, 487, 488, 489 A &489 B.

·   Sec 138 of the Negotiable Instruments Act, 1881.

·   Sec 58B of the Reserve Bank of India Act, 1934.

·   Sec 9 of the Central Excise Act, 1944.

·   Sec 135 of the Customs Act, 1962.

·   Sec 3 of the Prohibition of Benami Property Transaction Act, 1988.

·   The Prevention of Corruption Act, 1988 vide Sec 7, 8, 9, 10 and 13.

·   Sec 12A and 24 of the Securities and Exchange Board of India Act, 1992.

·   Sec 3 and 4 of the PMLA, 2002.

·   Sec 30 (2) of the Limited Liability Partnership Act, 2008.

·   Sections 34 and 35 of the Foreign Contribution (Regulation)Act, 2010.

·   Section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

·   Section 69 of the Insolvency and Bankruptcy Code, 2016.

·   Sec 132 (5) of the Central Goods and Services Tax Act, 2017.

The term “Proceeds of crime” (under Sec 2(k)) refers to any property derived or obtained, directly or indirectly, by any person from any criminal activity relating to a scheduled offence or the value of such property or where such property is outside the country, then the property equivalent in value held within the country.       

On blind reading, it appears that the FEO Act, 2018 has been drafted in the similar line to the provisions of the PMLA, 2002 and provide for the same definition and provisions, i.e. attachment of the property of a person accused of committing the offences prescribed therein, by the director with the permission of the Special Court.Section 2(n) of the Act provides that a 'Special Court' means a Court of Session designated as a Special Court under Section 43(1) of the PMLA, 2002.

IMPORTANT PROVISIONS UNDER THE FEO ACT, 2018

·   Applicability (Sec 3): The FEO Act, 2018 shall apply to any individual who is, or becomes, a FEO on or after April 21, 2018.

·   Who can apply(Sec 4 (1)): A director or any other officer not below the rank of deputy director authorised by the director (hereinafter referred as “prescribed authority”), has reason to believe on the basis of material in his possession, shall file an application to a special court.

·   Contents of application (Sec 4 (2)): Such application shall contain:

a)  Reason for the belief that an individual is FEO.

b)  Any information on whereabouts of such person.

c)  Value of properties made from proceeds of crime and confiscation sought for.

d)  List of related persons who may have interest in such properties as mentioned above.

·   Attachment of property (Sec 5): Prescribed authority as mentioned above may, with the permission of the Special Court, attach any property mentioned in the application by the order in writing.Such person may by a written order, at any time prior to the filing of application under Sec 4, attach any property if the director has reason to believe that the property will become unavailable for confiscation in future.

However,such prescribed authority has to file an application within 30 days of provisional attachment.The attachment of any property shall continue for a period of 180 days from the date of such order or such other period as may be extended by the Special Court.

·   Powers of Director and other officers (Sec 6): Such prescribed authority shall have same power as vested in a civil court under the Code of Civil Procedure, 1908.

·   Issue of notice (Sec 10): On receipt of application under Sec 4, the special court shall issue a notice to such individual and to any other person who has any interest in such property as provided in application. The notice shall also provide for specified date and time not less than 6 weeks from date of issue of notice and that in case of failure to appear, the individual shall be declared as FEO.

·   Hearing of application & declaration (Sec 11 & 12): After hearing the application, if the court concludes that the individual concerned is a FEO, reasons for the same are to be recorded in writing. On such declaration, the court shall order for confiscation of the properties.

·   Appeal before higher court (Sec 17): If any person who is aggrieved by order of the special court, may file an appeal before High Court within a period of 30 days from the judgment date.

·   Management of properties confiscated (Sec 15): The Central Government may, by the order published in the Official Gazette, appoint officers (not below the rank of a joint secretary to the Government of India), to perform the functions of an Administrator such as to manage and deal with such properties. Such administrator shall be responsible for disposal of such properties and shall hear all claims in relation to such properties.

·   Power to disallow civil claims (Sec 14): One of the unique provisions under the FEO Act, 2018 is power to disallow any claims once an individual has been pronounced as FEO by special court under provisions of sec 12 of the Act.The section also disallows a limited liability partnership or a company from putting forward or defending the civil claim if its promoter or key managerial personnel or major shareholder or anyone who holds a controlling interest has been declared a FEO. 

INSIGHT INTO FEO ACT, 2018

Under PMLA, 2002, confiscation of properties actually take place after adjudication proceeding is over whereas, FEO Act, 2018 provides for the confiscation and disposal of properties which may be occurred before the declaration of individual as ‘FEO’ subject to certain conditions.

FEO Act, 2018 provides that no civil claims shall be laid before court of law related to confiscation of FEO property whereas PMLA, 2002 was silent on the same.It may be looked on the other way that disallowing the civil claims of FEO may violate Article 21 of Constitution of India ie., the right to life.

Even though FEO Act, 2018 specifies confiscation of foreign properties and such properties are in contracting states, the Special Court may issue a letter of request to a Court or authority in the contracting state for execution of such order. In fact, there are lots of pending cases with such authorities of contract state for execution.The term “contracting State” (Sec 2(c)) means any country or place outside India in respect of which arrangements have been made by the Central Government with the Government of such country through a treaty or otherwise.

CONCLUSION

Considering above cons and pros, the FEO Act, 2018 is a strong and effectual law to identify the economic offenders who are indulging in scams and absconding from home country to avoid criminal proceedings. Even though FEOs are serious threat to the world nation, the statute gives provisions to extradite such offenders from foreign countries.Mr. Vijay Mallaya, Liquor baron was the first person to declare as FEO under the FEO Act, 2018 and this helps government to confiscate his properties. In the coming days, more offenders will come into the picture.

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Convergence from FII to FPI: a Novel Sunrise for Professionals

Foriegn Investment into India

Foreign Investment in India can be made either in form of FDI and FPI. Under FDI, Non Resident (NR) can make investment in Indian Corporates to make it as Subsidiaries or Joint Venture after complying with FEMA, 1999 together with RBI circulars, rules and other regulations. For eg: Indian Oil Skytanking Limited, Joint Venture of Skytanking GmbH, Germany and IOT Infrastructure & Energy Services Ltd. Their Areas of operation is maintaining aviation fuel facility project, designing, construction. As a result of said investment, foreign investors can participate in the policy decisions/ control the investee Company in its operations. No Secondary Market investments, investment in Mutual Fund or Government Securities are allowed under FDI scheme.

On the other part, FPIs are allowed to make investment in stock market by adhering to the FPI Regulations and RBI rules & Regulations. Person who is making investment doesn’t have any control/ policy decisions in Investee Company’s management. For eg: Foreign Pension Fund Scheme making investment in India. Now let us understand the concept of FPI.

Foeign Institutional Investors (FII), Sub accounts and Qualified Foreign Investors (QFI)

FII means Institutional Investors incorporated abroad who proposed to invest in India has to register with SEBI after satisfying condition prescribed under Regulations. such registration procedure is cumbersome. So, small  retail foreign investors can't afford to such compliance including registration procedure. They have been given an alternative to open "sub account" with FII.

QFI allowed to invest in stock exchange without prior registration with SEBI. it was introduced in finance Act, 2008

In order to streamline the deficiencies, functioning and to pluck out money laundering in the area of Foreign Investment by Institutional Investors abroad, Securities and Exchange Board of India (‘SEBI’) has come up with new regulation being SEBI (Foreign Portfolio Investors) Regulations, 2019 (‘FPI Regulations’) w.e.f. September 23, 2019 by revoking erstwhile SEBI (Foreign Institutional Investors) Regulations, 1995 (‘FII Regulations’) and SEBI (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations, 2014”). With effect from this regulation, Indian Capital Market has got new class of investors namely Foreign Portfolio Investors (‘FPI’) and that the Foreign Institutional Investors (‘FII’), its Sub-Accounts & Qualified Foreign Investors (‘QFI’) had conglomerated with FPI.

The term “FPI” has been defined as under:

a person who has been registered under Chapter II of these regulations and shall be deemed to be an intermediary in terms of the provisions of the Act;

Provided that any FII or QFI who holds a valid Registration Certificate shall be deemed to be a FPI till the expiry of the block of three years for which fees have been paid as per the FII Regulations.

ELIGIBILITY CRITERIA FOR FPI

As per Regulation 4 of FPI Regulations, the applicant should inter-alia satisfy following eligibility criteria to become FPI which is enumerated as below:

Ø  The applicant should not be resident India including NRI and Overseas Citizen of India.

Ø  The applicant is resident of a country whose

o   Securities Market Regulator is a signatory to the International Organisation of Securities Commission’s (IOSC) Multilateral Memorandum of Understanding (MoU) or is a signatory to Bilateral MoU with SEBI.

o   Central Bank is member of Bank for International Settlements.

o   Jurisdiction has not been identified in public statement of Financial Action Task Force with any deficiencies/ warnings.

Ø The Applicant is legally permitted to invest in Securities outside the Country of its incorporation or establishment or place of business.

Ø The applicant should be authorised by the Memorandum of Association and Articles of Association or equivalent document(s) or the agreement to invest on its own behalf or on behalf of its clients.

Ø The applicant should have sufficient experience, good track record, professionally competent, financially good, good reputation with fairness and integrity.

TYPES OF FPI

Category I FPI

(i)          Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled or at least 75% directly or indirectly owned by such Government and Government related investor(s); (ii)         Pension funds and university funds; (iii)        Appropriately regulated entities such as insurance or reinsurance entities, banks, asset management  companies,  investment  managers,  investment advisors, portfolio managers, broker dealers and swap dealers; (iv)       Entities from the Financial Action Task Force member countries which are– · appropriately regulated funds; · unregulated funds whose investment manager is appropriately regulated and registered as a Category I foreign portfolio investor: · university  related  endowments of  such universities  that  havebeen  in existence for more than five years; (v)         An  entity · whose  investment  manager  is  fromtheFinancial  Action  Task Force  member  countryand such  an investment  manager  is  registered  as  aCategory I foreign portfolio investor;or · which is at least 75% owned,  directly  or  indirectly  by  another entity,eligible  under  sub-clause (ii), (iii)and (iv) above  and such an eligible  entity is from a Financial Action Task Force member country:

Category II FPI

shall include all the investors not eligible under Category I foreign portfolio investors such as (i)          appropriately  regulated  funds  not  eligible  as  Category-I FPI; (ii)         endowments and foundations; (iii)        charitable organisations; (iv)       corporate bodies; (v)         family offices; (vi)       Individuals; (vii)      appropriately regulated  entities  investing  on  behalf  of their client,  as  per conditions specified by the Board from time to time; (viii)     Unregulated funds in the form of limited partnership and trusts;

FPI REGISTRATION

A Person shall not buy, sell or otherwise deal (‘trade’) in securities as FPI unless it has obtained a Certificate granted by Designated Depository Participant (DDP). FII or sub-account may continue to trade in securities until the expiry of registration or until it obtains a Registration Certificate as FPI whichever is earlier subject to payment of conversion fees. Also QFI may continue to trade in securities for a period of 1 year from the date of commencement of FPI regulations or until it obtains a registration Certificate as FPI, whichever is earlier.

The FPI registration is granted by DDP who fulfils the eligibility conditions and on submitting the application along with requisite fees. If all requisite documents are in line, DDP will grant the Registration Certificate at the earliest which shall not exceed 30 days from the receipt of application or further information/ documents called for by the DDP. The Registration granted shall be permanent unless it is suspended or cancelled by the SEBI or surrendered by the FPI.

Application may be rejected by DDP due to non satisfaction of requirements under FPI regulations after giving reasonable opportunity of being heard. The aggrieved party may approach the SEBI for reconsideration of DDP’s decision within 30 days of receipt of communication about rejection of the application.

CONCLUSION

SEBI can now concentrate on core areas of its activities as it has delegated some of its power to DDPs particularly FPI registration. Every FPIs and DDPs are required to appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications etc. issued by SEBI or Central Government. Compliance officer shall also immediately and independently report to SEBI regarding any non-compliance observed by him. We, the professionals have scope of employment in this area.