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National Pharmaceutical Pricing Authority: Analysis and Suggestions

To bring about a greater degree of transparency and objectivity to the pharmaceutical industry, the Government of India in 1997 constituted an advisory body – National Pharmaceutical Pricing Authority (NPPA), entrusted with the power to fix prices of bulk drugs and formulations. Most people in India buy healthcare from the private sector, a compulsion that accounts for a high proportion of healthcare-related expenditure. The lack of access to essential medicines to the poor masses along with out-of-pocket spending on medicines is impoverishing people across the country.  Over the years, NPPA has tightened the rope on many multinational pharmaceutical companies violating the rule laid down by it.   

Functions of National Pharmaceutical Pricing Authority:
a) To implement and enforce the provisions of the Drugs (Prices Control) Order in accordance with the powers delegated to it
b) To monitor the availability of drugs, identify shortages, if any, and to take remedial steps
c) To collect/ maintain data on production, exports, and imports, the market share of individual companies, the profitability of companies etc, for bulk drugs and formulations
d) Assistance to the Central Government in the parliamentary matters relating to the drug pricing

As a matter of practice, apart from keeping the drug prices at par, NPPA also undertakes matters which involve:

a) Complaints received from individuals, NGOs, and institutes related to  pricing/marketing at prices higher than the price fixed by NPPA
b) Legal matters arising out of the decisions of the Authority
c) Inter-sectoral coordination including coordination between organizations and institutes under the Central and State Governments, in areas related to the subjects entrusted to the Department
d) Medical Devices – Industry issues relating to promotion, production, and manufacture

Earlier, the prices of bulk drugs and the formulations included in the Scheduled categories were regulated by the Government of India as per the Drugs (Prices Control) Order (DPCO), 1995, issued from time to time under the provisions of section 3 of the Essential Commodities Act, 1955. DPCO, 2013 substituted the DPCO, 1995, which, unlike the previous order, which had only 74 medicines under its ambit, regulated prices of 348 essential drugs and laid down the framework for the drug policy and mechanism for regulating prices.

The current Drugs (Prices Control) Order, 2013 has three primary aims:
a) Expanding the National List of Essential Medicines (NLEM)
b) Authorizing the National Pharmaceutical Pricing Authority to regulate prices of India’s NLEM
c) Authorizing the NPPA to regulate price increases of non-essential medicines

The first NLEM was prepared and released in 1996. NLEM was subsequently revised by the National Pharmaceutical Pricing Authority (NPPA).

The Hon’ble Supreme Court of India in its order dated 10.03.2003 in SLP no. 3668/2003 (Union of India Vs. K.S Gopinath and Others) has also emphasized the need to “… Consider and formulate appropriate criteria for ensuring essential and life-saving drugs not fall out of price control…”

Thereafter, a series of price control regimes were carried out from time to time by the NPPA, keeping a fine balance between varying requirements of the pharmaceutical industry to grow and at the same time ensuring affordable and reasonably priced medicine to the consumers, especially poor masses.

The list of essential medicines to be included in the NLEM is based on regional epidemiology – patterns, causes, and effects of health and disease condition. As of now, the NLEM includes 348 medicines belonging to 27 therapeutic categories such as anti-cancer, anti-infective, cardiovascular, ophthalmological preparations, diuretics and anti-allergic etc.

Method of price fixing:
The drug prices in India are controlled using Drug (Price Control) Order (DPCO), which uses market-based mechanisms to set a price ceiling. Under the provisions of DPCO, the prices of only those medicines are fixed which are on the National List of Essential Medicines (NLEM), which in value terms constitutes approximately 17% of the total pharmaceuticals market.  

According to the official website of NPPA, if there are many drugs in the same category, the price cap is calculated based on the average price of the available drugs which collectively have at least 1% market share in the category and if the drug is the only drug available in the product category, then the price cap for that drug is the fixed percent and these fixed percent calculations are based on the price reduction done in similar drug categories, of the current drug price.

This way of calculating the drug price has come under severe criticism from various Non-governmental organizations (NGOs), who want the government to adopt the Cost Based Pricing (CBP) instead of Market Based Pricing (MBP).

(Source: Jan Swasthaya Abhiyaan)

According to a press release by one such NGO, Jan Swasthaya Abhiyaan, the Supreme Court had suggested that the Cost Based Pricing (CBP) formula, as specified in the Drug Price Control Order (DPCO) 1995, should be followed. The GOM (Group of Ministers), formed in 2005, had reserved its decision in spite of directives by the Court to expedite its decision. The delay allowed the pharmaceutical industry to continue to charge exorbitant prices, thus exploiting millions of hapless patients.

The NPPA currently has no mechanism to officially penalize an offending manufacturer. As per the NPPA guidelines, medicines not listed on the NLEM are allowed only a 10% annual hike on other drugs not listed under NLEM. If companies intend to hike the price of the medicines beyond 10%, then they will be required to seek permission from the NPPA. For all NLEM-listed treatments, yearly price increases must be in line with or below the wholesale price index.  

Recent reforms in the functioning of NPPA:

Coronary stent price regulation:
Coronary Atherosclerotic Heart Disease (CAD) is a common form of cardiovascular disease in India, which afflicts around 32 million people with a mortality of around 1.6 million per annum. In May, 2014, NPPA issued a new price control order on 108 non-scheduled medicines, dealing with heart, diabetes, TB and cancer, to which the major medical device manufacturers argued that those 108 drugs are not in there in the National List of Essential medicine and there is no shortage, therefore, NPPA has no authority to regulate the prices.

The Ministry of Health and Family Welfare, Government of India has notified coronary stents as “Drugs‟ under Section 3 (b) (iv) of the Drugs and Cosmetics Act, 1940.

A PIL was filed by Shri Birender Sangwan, through Ministry of Health & Family Welfare, and National Pharmaceutical Pricing Authority, New Delhi, (case of w.p. (c) 1772/2015), seeking directions of the court for the inclusion of “Coronary Stents” in the National List of Essential Medicines (NLEM).

In 2016, the government revoked the paragraph 19 of the Drug (price control) order, 2013, notifying the inclusion of stents in the National List of Essential Medicines (NLEM), citing unethical profiteering and exploitative pricing by the manufacturers. Following the path, National Pharmaceutical Pricing Authority (NPPA) slashed the price of the stent, a small mesh device used to pop open the blocked arteries, from Rs 1.21 lakh to Rs 27,890.

As a result of price control, Abbots Healthcare pulled the plug on two of its coronary stents, citing commercial unsustainability in India. Boston Scientific, a multinational company also withdrew two of its high-quality stents from India. An expert committee set up to review the request of setting a higher ceiling price for the brands if the product was proven to be clinically superior, rejected the plea, keeping in mind the exorbitant prices these multinational pharmaceutical companies were charging.

Orthopedic implants:
As per a report by World Health Organization (WHO), with over 70,000 hip and knee replacements performed every year, the growth rate of the orthopedic implants due to Musculoskeletal disease is estimated to be more than 25 percent per annum for the next five to six years. In 2017, widely used cobalt chromium knee implants, priced at up to 250,000 rupees at Indian hospitals, were capped at 54,720 rupees. Major international pharmaceutical companies protested against India’s price controls on drugs and medical devices, arguing this will curb innovation and would hurt future investment plans.

Furosemide drug:
The National Pharmaceutical Pricing Authority also regulated the price of a medicine prescribed to babies with heart ailments – Furosemide, sold under the brand name Lasix. The regulatory authority cut its price from Rs 100 to Rs 10. However, in 2018, the apex drug regulator increased the price of the medicine by almost eight times following reports of the drug going off the shelves after the prices were reduced by over 90 percent.

Bayer Corporation vs. Union of India
Cancer medicines are included in Section 8 of the First Schedule to the Drugs (Price Control) Order, 2013. In a one-of-its-kind case, a first compulsory license (CL) was granted to the Hyderabad-based Natco Pharma Limited, a generic drug maker, to produce and market Nexavar, an already patented cancer drug invented by Bayer Pharma, paving way for a reduction in the prices of costly life-saving drugs. Natco attained the license to manufacture and sell in India the patented drug under its brand name at a price of less than Rs.10, 000/- per month as against the price of Rs.2,80,428/- per month charged by the Bayer Corporation. It was the first step towards fixing the price of life-saving drugs as Bayer failed to fulfill the reasonable requirement of the public with regard to the aforementioned drug.

In 2017, the biggest crackdown by NPPA happened when, after analysis of market data and associated reports of December 2016 submitted by AIOCD-AWACS, it found out that 634 drugs which were under the ambit of the National List of Essential Medicines, were priced higher than the price fixed for them. This crackdown took on the companies like Sun Pharma, Cipla, Lupin, GlaxoSmithKline etc.

Suggested way forward:
More than 60% of deaths, about 6.1 million, in 2016 were due to Non-communicable diseases (NCDs), up from about 38% in 1990. Emerging lifestyle diseases in the last few decades have resulted in an immense increase in the availability of medicines in the marketplace, though accessibility is still an issue that needs to be resolved. Life-threatening diseases are on the rise and so is the profit-making by the pharmaceutical industry. A huge amount of research and development goes into discovery, development and clinical trials, before the commencement of the production. Every newly launched drug is thus very expensive, to begin with. Our country with its one-third population living below the poverty line, contracting a disease comes with a huge cost.

Hence, to address the issue of increasing drug prices affecting millions of people across the country, the Indian government may look to other larger areas of the pharmaceutical market to introduce new and increased regulation to make medicines more affordable. The ways that can be adopted are:

⇀ The government should replicate the drug price regulating model adopted by the state of Tamil Nadu and Kerala. Under these state schemes, drugs outside NLEM is also procured and sold at reasonable rates. According to a report by Kerala Medical Services Corporation and Odisha’s State Drug Management published on the World Health Organization’s (WHO) website, the Medical Services Corporation does central tendering and purchasing of the essential drugs for the entire state that is delivered to the district warehouses by the supplier in stipulated quantities. From here the drugs are distributed to the facilities based on a value-based passbook system. The system is claimed to be efficient with minimal delays.

⇀ We should have a cost-based system, keeping in mind that the market-based system not only worsens the condition of poor people but also monopolizes the market.

⇀ It is also important that the drug companies reduce the profit margin to serve the need of the people in want of the life-saving medicine.

⇀ People should be made aware of the Pradhan Mantri Bhartiya Jan Aushadi Scheme, a novel project launched by the Government of India in 2008. Under this scheme, medicines are provided to the public at a reasonable price.

The present predicament, of poor access to affordable health care amidst plenty of overpriced medicine, should not be allowed to continue to imperil the lives and health of Indians across the country.




 

Serious Fraud Investigation Office (SFIO): Analysis & Suggestions

The Indian Government set up a committee on corporate governance under the chairmanship of Naresh Chandra, former Cabinet secretary. Based on the recommendations of the committee, the Central Government issued a resolution on 2 July 2003 constituting the Serious Fraud Investigation Office (“SFIO”), which works under the MCA.

SFIO was set up as a multi-disciplinary organization with experts in the field of accountancy, forensic audit, law, investigation, company law, capital markets and taxation for detecting and prosecuting or recommending for prosecution while collar crimes and frauds. It is statutorily recognized under section 211 and its powers are defined under section 212 of the Companies Act 2013 (“Act”).

As a matter of practice, it takes up cases involving Rs. 500 crore or more. It also undertakes matters which involve:

  1. a) Complexity and having inter- departmental and multi-disciplinary ramifications.
  2. b) Substantial involvement of public interest in terms of monetary misappropriation or in terms of the number of persons affected and
  3. c) The possibility of investigations leading to or contributing towards a clear improvement in systems, the law of procedure.

Functioning of SFIO

  • The SFIO is to be headed by a director who should not be below the rank of a Joint Secretary to the Government of India having expertise in dealing with the matters relating to company frauds.
  • Central Government has the power to appoint other experts as members from those who have experience in the field of Corporate  Affairs, Banking, Taxation,  Capital Market, Forensic audit, law, and Information Technology amongst other fields as required. 

Corporate frauds in India come under the ambit of Companies Act. The Act empowers the Central Government with the right to investigate the affairs of the company, especially in cases of an alleged fraud or even in the oppression of the minority shareholders.

As per section 212 of the Act, the Central Government may refer any matter for investigation to SFIO, if:

  1. a) on receipt of a report of the Registrar or inspector under section 208 where a further   investigation into the affairs of the company is necessary;
  2. b) on intimation of a  special resolution passed by a  company that  its affairs  are required  to be investigated;
  3. c) in the public interest; or
  4. d) on request from any Department of the Central Government or a State Government

When a case has already been assigned to the SFIO no other agency of the government has the authority to proceed to investigate an offense which is committed under this Act and the same is to be transferred to the SFIO. The company and its officers and employees, who are or have been in the employment of the company, shall be responsible to provide all information, explanation, documents, and assistance to the investigating officer as he may require for the conduct of the investigation.

Primary limitation of SFIO:

Too much dependence on central government for accountability; insufficient manpower compared to notified requirement; discrepancies inadequate prosecution; shoddy enforcement of penalties; and MCA’s lackings:

As per data available on its website, SFIO has investigated 312 cases in total up to 2016-17, since its inception in 2003. It claims to have filed 1,237 prosecution cases in various designated courts and forums as on 15 March 2017. Regretfully there is no data on the website to indicate the number of prosecutions that resulted in convictions or even otherwise. Notably, as per the information provided by the Ministry of Corporate Affairs to a Parliamentary Panel, till march 2015, merely 6 convictions have resulted out of 162 investigations.

The strike rate of SFIO, India for over a 12-year period, has been at 3.7%. In contrast, the conviction rate of UK’s SFO, on whose lines SFIO was modeled, was as high as 85% as per a progress report submitted on 23 June 2014.

Poor track record of SFIO has been on many instances attributed to MCA. In July 2018, the minister of state for law, justice, and corporate affairs highlighted in Lok Sabha that out of the sanctioned strength of 133 posts, only 59 were in place i.e. 44% of the required strength. The above information is quite concerning in light of the fact that Corporate frauds are rising at an alarming rate, not merely in number but also value.

To make up the shortage of staff, often, consultants are employed by SFIO. Local staff from the regional directorate of MCA is also engaged on a part-time basis. Officials are also deputed from the police department. This effectively leads to a lot of floating population but with little accountability and it severely jeopardizes the effective functioning of SFIO.

Additionally, the funding of SFIO is done through Government exchequer. The budget for SFIO has seen a jump of 400 in this year itself. Improper utilization of funds is evident from the lapses in making due and timely appointments and failures ineffective investigations and the same has not caused a decrease or even metastasis in taxpayer’s money allotment towards SFIO. Funding is provided to SFIO has been increasing with every year even though the office has less than half the requisite manpower.

Some major lapses: cases: –

  • Section 212(12) requires that on completion of an investigation, the SFIO must submit a report to the Central Government and Section 212(14) states that on the submission of the report, the Central Government, after taking the appropriate legal advice may direct the SFIO to initiate prosecution. This gives the Central Government ultimate discretion on initiating prosecution.  It is unclear whether SFIO can suo moto undertake an investigation with the assent of the Central Government. Furthermore, there is also no certainty as to under what precise circumstances, the Courts can direct SFIO t undertake an investigation as courts have usually taken an ad hoc approach in giving directions to SFIO.
  • Convictions by SFIO are not taken to their logical conclusion: In the high profile 2009 case of Satyam Computers, a Special CBI Court in 2015 sentenced several of Satyam’s top management members, two partners of PwC and its auditors, to seven years in jail besides imposing fines. The convicted individuals managed to get their sentences suspended in less than a month from the Sessions Court. The government is yet to challenge the order of the sessions court. 
  • A query filed under the Right to Information (RTI) Act revealed in the case of PricewaterhouseCoopers Pvt Ltd, PWC and 14 of its directors, including four past and present chairmen who were found guilty by Registrar of Companies (RoC) for violating various sections of the Companies Act 1956 and relevant Accounting Standards over  three years, were charged with compounding which varied from Rs1.26 lakh to just Rs30,000 for each director. The value of violative transactions exceeded Rs2,460 crore. Add to that, the directors were likely drawing a remuneration of 10-15 crores. These violations were flagrantly in violation of the Companies Act. Taking all this into account, the scant amount of compounding fee charged was nothing less than a joke.
  • Demonetization happened in the November 2016 and in the present date, the probe report into three companies based in Telangana and Andhra Pradesh out of 18 that deposited huge money during demonetization is yet to be submitted.
  • A Parliamentary Standing Committee, chaired by former Corporate Affairs Minister M. Veerappa Moily in its report submitted in April 2015, apart from heavily criticizing SFIO for taking a lackadaisical approach in fulfilling the sanctioned manpower, further criticized the agency with regard technical capability. While highlighting the limits of the agency’s technical capability,  the committee stated: “The Early Warning System (EWS), which was instituted mainly with the purpose of dealing with chit fund scams and Ponzi schemes has been dumped for want of encouraging results.” And that “The Computer Forensic Lab set up in Market Research and Analysis Unit (MRAU) of SFIO is yet to show tangible results, by way of timely identification and detection of high tech corporate frauds,”. Both the statements concerning inadequate manpower and technical capability raises serious concerns about the agency’s credentials.

The deterrence that SFIO was envisioned to create has clearly not materialized. There are many instances wherein, in high-state corporate crimes, fines of merely 2-3 lakhs have been imposed by SFIO.

Suggested way forward:

  • Penalties and compounding fees should be enhanced drastically. Besides acting as a strong deterrent, it will ensure that sufficient funds are available for SFIO initiatives without burdening the taxpayers.
  • Steps must be taken to ensure that convictions by SFIO are taken to their logical conclusion in a time bound fashion to send a strong message to the violators. Apart from working on increasing the rightful conviction rate, it must also ensure that convictions attain their logical conclusion to bring about the desired effect i.e. deterrence. Instances such as the above-discussed case of Satyam Computers must be avoided at all costs.
  • Steps to ensure that the heavy reliance on the Central Government, for funds, manpower and sanction is reduced. Further, the overlapping mandate that it has with SEBI, Central Economic Intelligence Bureau, the Reserve Bank of India and the Central Bureau of Investigation can also be streamlined so that the agency has more autonomy and promptness in its undertakings.
  • Measures must be taken to ensure objective evaluation of the performance of SFIO and further erring officials should be held accountable.
  • Website UK SFO can be taken as a model example to increase transparency and accountability of the body. Like UK SFO, SFIO as well could start with posting the details of the cases: pending and closed on its website. The increased transparency will lead to more accountability of the Government body and will likely help all stakeholders.
  • MCA in alliance with the Government must ensure that SFIO is provided with adequate resources, skilled manpower, and state of the art technology support.

Is Section 34(5) Of The Arbitration Act Mandatory Or Directory: Supreme Court Interpretation

BACKGROUND
This instant appeal arose out of an arbitral award passed on 06.01.2016. The award debtor in the instant case, (“Appellant”) challenged the said award by filing an application under Section 34 of the Arbitration and Conciliation Act, 2015 (“Act”) before Patna High Court. The Court issued a notice to the opposite party on 18.07.2016.

The said Application became vexed between the parties on account of coming into force of Section 34(5) of the Act. Section 34(5) and related 34(6 )of the Act states as follows:

Section 34 – Application for setting aside the arbitral award. –

 (5) An application under this Section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

(6) An application under this Section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in Sub-section (5) is served upon the other party.

In the instant case, neither prior notice was issued by the Appellant to the other party in terms of the aforementioned Section, nor was the application accompanied by an affidavit that was a requirement under subsection 34(6).

While taking the non-compliance with the relevant clauses of section 34 into account, the Single Judge Bench of Patna High Court, vide judgment dated 06.09.2016, held that the provision contained under Section 34(5) was the only directory and not mandatory. The judgment by Patna High Court was based on the decision of Supreme Court in Kailash v. Nanhku and Ors.

Aggrieved by the Judgement of the High Court, the Respondent preferred a Letters Patent Appeal (LPA) to the Division Bench of Patna High Court, which vides an order dated 28.10.2016, held:

‘……Upon adverting to the Law Commission Report which led to the 2015 amendment, that the mandatory language of Section 34(5), together with its object, made it clear that the sub-section was a condition precedent to the filing of a proper application under Section 34, and, on the analogy of a notice issued Under Section 80 of the Code of Civil Procedure, 1908, being a condition precedent to the filing of a suit against the Government…….’

‘……since this mandatory requirement had not been complied with, and as the period of 120 days had run out, the Section 34 application itself would have to be dismissed.’

Aggrieved by the decision of the Hon’ble Division Bench, the Appellant preferred the present appeal in Supreme Court.

ISSUE FOR CONSIDERATION BEFORE SUPREME COURT

Whether Section 34(5) of the Arbitration and Conciliation Act, 1996, inserted by Amending Act 3 of 2016 (w.e.f 23rd October 2015), is mandatory or directory?

OBSERVATION

The Supreme Court bench comprising of J. Rohinton Fali Nariman and J. Indu Malhotra made reference to the definitive objective of the provisions as per “The 246th Law Commission Report” and the same is as under:

“……the object of Section 34(5) and (6) is the requirement that an application under Section 34 is disposed of expeditiously within a period of one year from the date of service of the notice.”

The Court also referred to numerous case laws to arrive at a Just and irrefutable conclusion with respect to the issue in question.

The Honorable Bench referred to Topline Shoes v. Corporation Bank. In the instant case,  Section 13(2) (a) of the Consumer Protection Act, 1986, was dealt with. Section 13(2) permits the opposite party to file its reply “within a period of 30 days or such extended period not extending 15 days, as may be granted by the District Forum”.

“The Court read the same in conjunction with the Statement of Objects and Reasons of the Act which provides that the principles of natural justice have to be kept in mind and thus, held the provision to be the directory in nature.”

Further, a decision of the Apex Court in Kailash v. Nanhku and Ors has also referred wherein the Hon’ble Court dealt with the amendment of Order VIII Rule 1 of the CPC under the Amendment Act of 2002. Order VIII Rule 1 is circumscribed by the words “shall not be later than ninety days”.

The question of law in the instant case was “Whether, after the amendment of Order VIII Rule 1 of the Code of Civil Procedure by the Amendment Act of 2002, the said provision must be construed as being mandatory?

“The provision is procedural in nature and that its object is to curb the mischief of unscrupulous defendants adopting dilatory tactics by delaying the disposal of cases. The language of the proviso to Order VIII Rule 1 is couched in negative form; it does not specify any penal consequences flowing from the non-compliance. The provision being in the domain of the procedural law was to be held directory and not mandatory.”

The identical ratio was adopted by Supreme Court in Surendra Trading Company while interpreting the time-bound proceedings, under IBC, at the end of Adjudicating authority i.e NCLT. The Apex Court held that the time period of 14 days to be directive and not mandatory.

The Hon’ble Apex Court further considered the matter of Salem Advocate Bar Association v. Union of India, wherein it was held that:

“The use of the word “shall” in Order 8 Rule 1 by itself is not conclusive to determine whether the provision is mandatory or directory. We have to ascertain the object which is required to be served by this provision and its design and context in which it is enacted. The use of the word “shall” is ordinarily indicative of mandatory nature of the provision but having regard to the context in which it is used or having regard to the intention of the legislation, the same can be construed as directory. The Rule in question has to advance the cause of justice and not to defeat it. The Rules of procedure are made to advance the cause of justice and not to defeat it. Construction of the Rule or procedure which promotes justice and prevents miscarriage has to be preferred. The Rules of procedure are the handmaid of justice and not its mistress. In the present context, the strict interpretation would defeat justice.”

The Apex Court also referred to the judgment in Bihari Chowdhary and Anr. v. State of Bihar and Ors. dealt with Section 80 of the Civil Procedure Code. The provision affords the government or public officers, an opportunity to analyze the claim being proposed to be filed against them, with the intent to avoid unnecessary litigation and saving public time and money by settling the claim without driving the individual who has issued the notice to file a suit. The patent object of the section is the advancement of justice and the securing public interest by avoidance unnecessary litigation. The Court hence observed that Section 80 of the CPC, even though a procedural provision, is mandatory in nature as it is conceived in public interest.

The Court held:

Section 80 CPC is to be contrasted with Section 34(5), also a procedural provision, the infraction of which leads to no consequence. To construe such a provision as being mandatory would defeat the advancement of justice, as it would provide the consequence of dismissing an application filed without adhering to the requirements of Section 34(5), thereby scuttling the process of justice.”

Further, In Global Aviation Services Private Limited v. Airport Authorities of India, the Bombay High Court held :

 “Section 34(5) of the Arbitration and Conciliation Act is directory because no consequence has been provided for breach of the limit specified.”

REFERRED  DECISIONS

The Hon’ble Court put reliance upon the following decisions in forming the view:

  1. Topline Shoes v. Corporation Bank – (2002) 6 SCC 33
  2. Kailash v. Nanhku and Ors – (2005) 4 SCC 480
  3. Salem Advocate Bar Association v. Union of India – (2005) 6 SCC 344
  4. New India Assurance Co. Ltd. v. Hill Multipurpose Cold Storage Pvt. Ltd. – (2015) 16 SCC 20.
  5. Bihari Chowdhary and Anr. v. State of Bihar and Ors – (1984) 2 SCC 627
  6. Global Aviation Services Private Limited v. Airport Authorities of India – Commercial Arbitration Petition No. 434 of 2017 [decided on 21.02.2018]

The Supreme Court further emphasized upon the instructive passage in Maxwell on Interpretation of Statutes, 10th Edition, to the effect that

“……considerations of convenience and justice are uppermost, and if general inconvenience or injustice results, without promoting the real aim and object of the enactment, the provision must be declared to be directory.”

In the light of the cases and jurisprudence discussed above, the Hon’ble Apex Court held as under:

“It will thus be seen that Section 34(5) does not deal with the power of the Court to condone the non-compliance thereof. It is imperative to note that the provision is procedural, the object behind which is to dispose of applications Under Section 34 expeditiously. One must remember the wise observation contained in Kailash, where the object of such a provision is only to expedite the hearing and not to scuttle the same. All Rules of procedure are the handmaids of justice and if, in advancing the cause of justice, it is made clear that such provision should be construed as directory, then so be it.” 

KEY TAKEAWAYS

  • The Supreme Court set aside a number of High Court judgments that have all taken the view that Section 34(5) is mandatory in nature.
  • The Court allowed the appeal by holding Section 34(5) to be directory and set aside the judgment of the Patna High Court.
  • The Court further directed that the Section 34 application will now be decided on the merits alone.

CONCLUDING  REMARKS

The Supreme Court in the captioned matter has been more inclined to see that on account of strict interpretation of the amended provisions, justice is not unduly defeated in a matter.

This reasoning by the Apex Court overtly signals that the judiciary wants a more flexible interpretation of the words written in the statute: an interpretation that is not bound within the airtight compartment of the lingo used in drafting the law but one which furthers the fundamental goal of rightful administration of justice.

Finally, it is further a common law that a provision in a statute which is procedural in nature, even if it has the word “shall” in it, may not be held to be mandatory, if consequently no prejudice is caused.

Dieselgate Scam: NGT Slaps Volkswagen With Rs 1 Bn For Flouting Emission Norms

NEW DELHI: Nearly four years after the Volkswagen’s emission-cheating scam came to the fore, a bench headed by National Green Tribunal (NGT) Chairperson Justice Adarsh Kumar Goel has asked the German car-making company’s India unit to deposit 1 billion rupees with the Central Pollution Control Board (CPCB) for not complying with the emission norms set by the country.

Acting on a petition filed by Saloni Ailawadi, a schoolteacher from the Capital region, the bench constituted a committee comprising of officials from the Ministry of Environment and Forest, Ministry of Heavy Industries, CPCB and Automotive Research Association of India (ARAI).

The Volkswagen “dieselgate” scandal erupted in 2015 after the International Council on Clean Transportation (ICCT) found discrepancies between VW’s test results and real-world performance. Results showed that nitrogen oxide emission on road was 35% higher than the one conducted in the lab. United States Environment Protection Agency (EPA) investigated and found that the company had illegally installed an engine control unit (ECU) software, which allegedly helped them cheat on U.S pollution test.

According to a report by DownToEarth, the software is programmed to sense whether the vehicle is being tested in the laboratory, based on parameters such as the position of the steering wheel, vehicle speed, duration of engine operations and barometric pressure. It then switches the car into a clean-running mode, reduces NOx emissions and helps it pass the test. But once on the road, the software switches to run on a separate calibration, which reduces the effectiveness of the NOx control system, and the car begins to emit 10 to 40 times more NOx than the certified level, depending on the driving condition.

This resulted in a domino effect and regulators from all across the globe started investigating the possibility of the same happening in their country.  This resulted in a fall of stock prices immediately after the news broke out. Volkswagen Group CEO Martin Winterkorn resigned, and the head of brand development Heinz-Jakob Neusser, Audi research, and development head Ulrich Hackenberg, and Porsche research and development head Wolfgang Hatz were also suspended.

In January 2017, Volkswagen pleaded guilty to criminal charges and set out a statement explaining how engineers had developed the defeat devices because diesel models could not pass US emissions tests without them.

In India, VW came under scrutiny when ARAI carried out an independent research and found out that the car manufacturing company used a defeat device to manipulate the emission norms under BS stage IV. VW denied it outrightly, stating that it has not flouted any law. Maintaining the recall as ‘voluntary’, VW, which sells cars in India under multiple brands including  Skoda, and Audi announced a recall of over 323,000 vehicles in December 2015.

Volkswagen fraud brings out the loopholes in the monitoring system which requires stringent regulations. The United States of America is the first country to have drafted rules to prohibit defeat devices in vehicles way back in 1978. It also has the most elaborate system to make manufacturers accountable for their emissions performance on the road.

On the other hand, our country lags behind in stating the emissions standards and the intent to regulate the automobile industry, which is the major contributor to the global warming.

 

 

 

 

 

 

 

Six North Eastern States Agree To Implement RERA

Two years after the Real Estate (Regulation and Development) Act was enacted by the parliament, six North-Eastern states have agreed to implement RERA in their respective states.

This Act gives powers to all the states to notify their own rules for the real estate and appoint regulatory authorities. Arunachal Pradesh, Meghalaya, Manipur, Mizoram, Nagaland, and Sikkim were the only state left which had not notified their rules due to land issues. They have finally agreed to implement the law, paving way for protecting the interest of home-buyers in these states.

This came after a team of the Union Housing and Urban Affairs (HUA) Ministry, sent by the Central government, visited the northeastern states on October 26 and held a workshop with their representatives to resolve the issues pertaining to the implementation of the Act.

The Act is not applicable in Jammu and Kashmir. Instead of implementing RERA, West Bengal had notified its own real estate law — the Housing and Industrial Regulation Act, 2017 (HIRA).

RERA, enacted two years ago was welcomed with enthusiasm by every state, as the benefits of this Act were too big to ignore. This has given a sigh of relief to lakhs of stressed homebuyers. Earlier, the real estate was not scrutinized enough and there were a lot of ways to find a way around the loopholes in the existing laws.  With the enactment of RERA, the real estate has become more transparent and accountable.

As many as 32,923 real estate projects have been registered under this legislation across the country. Also, 25,247 real estate agents have been registered under it.

 

 

ED To Look Into FDI Violation by E-Commerce Websites

The Enforcement Directorate (ED) has started an inquiry into the alleged violation of Foreign Direct Investment (FDI) norms by two major players in the e-commerce arena, Flipkart and Amazon, under the Foreign Exchange Management Act (FEMA),1999.

This case is scheduled to be heard on 19 November.

On a PIL filed by Telecom Watchdog, an NGO, these two telecom companies along with the Union of India, who is also a respondent, received a notice from Delhi High Court bench on July 30th, 2018.

PIL alleged that the e-commerce websites sold popular products at a much cheaper rate through proxy ‘controlled sellers’ through companies such as Prione Business Services Pvt Ltd and Cloud Tail India Pvt Limited in case of Amazon and by Flipkart through Shreyash Retail Pvt Ltd, Tech-Connect Retail Pvt Ltd, Health & Happiness Pvt Ltd, Consulting Rooms Pvt Ltd, Savadika Retail Pvt Ltd.

Amazon and Flipkart, which have foreign funding, operate through a marketplace model, which makes them a mere facilitator between a seller and a consumer. These platforms have no ownership over the goods sold on such marketplace platforms and are not allowed to influence the prices of products sold on their website or hold inventory.

To find their way around the FDI norms, Amazon has created a company called Prione Business Services, a joint venture between Amazon group and Catarman Advisors LLP. This entity is the owner of Cloudtail, which sells products on Amazon.

Through these sellers, Amazon and Flipkart have complete control on influencing the price of goods sold on their platforms, a practice that violates the FDI norms of the country.

Now, the Enforcement Directorate (ED) has filed its reply to the court stating that the investigation against the two e-commerce players has been registered and the probe is underway.

The reply filed by ED stated that the investigation is underway and the department is trying to ascertain whether the respondent companies have been contravening any provisions of FEMA 1991 or contravening any Rule, Regulations, Notification, Direction or Order issued in exercise of the powers under FEMA 1999.

The Foreign Exchange Management Act consolidates and amends the law relating to foreign exchange with the
objective of facilitating external trade and payments and promotes the orderly development and maintenance of foreign exchange market in India.

 

Explained: Recent Spat Between RBI and The Government of India

The Reserve Bank of India, known for its restraint, has now tuned combative, showcasing its resentment against the government.

At least two speeches recently made by the top RBI officials underscore the extent of the friction between the Central Bank and the Central Government.

In a speech delivered on Friday, Reserve Bank of India Deputy Governor Viral Acharya warned about the risk of undermining the central bank’s independence and called it catastrophic. He also forewarned that the rash move could trigger a crisis of confidence in capital markets that are tapped by governments (and others in the economy) to run their finances. Showing his resentment, he said that the Government that does not respect central bank independence will sooner or later incur the wrath of financial markets, ignite an economic fire, and come to rue the day they undermined an important regulatory institution.

What is the provocation for the RBI’s public expression of discomfort with the government?
In the wake of the Nirav Modi’s Rs. 13,000-crore fraud at state-owned Punjab national bank, Finance Minister Arun Jaitley questioned the RBI’S role. On Tuesday, the Finance Minister went further saying the central bank looked the other way when banks gave loans indiscriminately between 2008 and 2014. It is this indiscriminate lending Jaitley has maintained that led to the huge pile-up Non-performing Assets (NPAs).
RBI Governor Urjit Patel had earlier responded strongly asserting that the RBI did not have the same regulatory powers over public sector bank, as it does over private banks. The Reserve Bank of  India cannot replace the management and board of a public sector bank or revoke its license.

According to the RBI governor,
“In the case of private sector banks, the real deterrence to fraud arises from the market and regulatory discipline. A private bank failing to meet banks solvency standards and under RBI’s Prompt and Corrective Action would find it hard to raise capital, whereby, it would need to put the house in or order so that it can raise funds from the market and get back to the growth path.  There are incentives to invest in governance, so as to limit frauds and regulators violations. In contrast, this market discipline mechanism for public sector banks is weaker. The government or the sovereign owns these banks, so there is implicitly a stronger perceived sovereign guarantee for all creditors. Perhaps, since the original idea behind bank nationalization was complete government control over credit allocation, in India, the RBI’s regulatory powers over public sector banks are weaker than those over private sector banks.”

The RBI’s Prompt and Corrective Action (PCA), which is a regulatory intensive care for banks with deep holes in their balance sheets, is another flashpoint. There are twenty Public Sector Banks, out of which eleven are operating under emergency measures. However, the government has asked for relaxation of these norms, saying it is impacting the lending ability and therefore, growth.

Viral Acharya, in his speech, says
“Sweeping bank loan losses under the rug by compromising supervisory and regulatory standards can create a facade of financial stability in the short run, but inevitably cause the fragile deck of cards to fall in a heap at some point in future, likely with a greater taxpayer bill and loss of potential output.”

Another point of contention has been – Who will regulate India’s payment ecosystem?
An inter-ministerial committee set up for the finalization of amendments to the Payment & Settlement Systems Act, 2007 was formed by the Government under the chairmanship of Secretary, Department of Economic Affairs, which will have oversight on payments done through e-payments.

The Reserve Bank of India sent a strong dissent note to the government questioning the need for the separate payment regulator. The Payments Regulatory Board must remain with the Reserve Bank and headed by the RBI governor, it said. It also notified that having the regulation and supervision over Payment and Settlement systems with the central bank will ensure holistic benefits.

Another issue has been the government choice of directors on the RBI board. The government recently appointed charted accountant S. Gurumurthy associated with RSS affiliate swadeshi Jagran Manch on the Reserve Bank of India Board.

There is also the tussle over resources. The government is of the view that the Reserve Bank of India is sitting on excess capital and must transfer some of it to meet the government’s fiscal targets. This debate, though, is not new and has been going on for at least two years.

The RBI has said having adequate resources is a part of the central bank’s independence. The RBI believes the use of such a transfer would erode whatever confidence that exists in the government’s intentions to practice fiscal prudence.

The government on Wednesday said the autonomy of the Reserve Bank of India is “essential”, but acknowledged that it holds consultations with the central bank on several matters of public interest.

The statement came hours after reports said that the Centre had initiated talks with the RBI to consider invoking a provision under the RBI Act which has never been used before, which could empower it to issue directions to the central bank on certain matters. This provision was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 global financial crisis.

What is section 7 under the RBI Act?
Section 7 of RBI Act states:

1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.

(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.

(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.

To soften the blow, Government has come out with a clarification on the purported spat with the Reserve Bank of India. The government has said that the central bank enjoys autonomy within the RBI Act and that both the government and the RBI engage in consultations guided by public interest and the requirements of the Indian economy.

While disagreements between the RBI and government are not new, many experts feel that the particular episode has blown out of proportion, suggesting that it will have a negative effect on financial market sentiments.

 

Explained: Infrastructure Leasing And Financial Services (IL&FS) Crisis

India’s financial market is reeling under high selling pressure, triggering concerns about risks in the country’s shadow banking sector. IL&FS Financial Services, a group company, defaulted in payment and failed to meet the commercial paper redemption obligations which were due on September 14. The company, on September 15, reported that it had received notices for delays and defaults in servicing some of the intercorporate deposits accepted by it. ICRA, an independent and professional investment information, and credit rating agency, downgraded the ratings of IL&FS from A1+ TO D-. IL&FS crisis has jeopardized hundreds of investors, banks and mutual funds and has sparked panic among equity investors.

What is IL&FS?
IL&FS (infrastructure leasing and financial services) is over 30 years old. It is a shadow bank, a financial institution which doesn’t receive deposits like a traditional bank. Since it doesn’t take deposits, it largely escapes regulatory oversight. Its website mentions that it has financed projects worth $25 billion.

Who owns IL&FS?

A brainchild of the late MJ Pherwani, IL&FS was founded in 1987 with equity from Central Bank of India, Unit Trust of India and Housing Development Finance Co to fund infrastructure projects. IL&FS has institutional shareholders including SBI, LIC, ORIX Corporation of Japan and Abu Dhabi Investment Authority (ADIA). As on March 31, 2018, LIC and ORIX Corporation is the largest shareholders in IL&FS with their stakeholding at 25.34 percent and 23.54 percent, respectively. Other prominent shareholders include ADIA (12.56 percent), HDFC (9.02 percent), CBI (7.67 percent) and SBI (6.42 percent).

Crisis looming over IL&FS:
IL&FS has since August 27th been defaulting on payments. In order words, it is unable to meet its repayment obligations.
The group with at least 24 direct subsidiaries, 135 indirect subsidiaries, six joint ventures, and four associate companies is sitting on a debt of about Rs 91,000 crore. Of this, nearly Rs 60,000 crore of debt is at the project level, including road, power and water projects. A major reason behind troubles of IL&FS is complications in land acquisition. The 2013 land acquisition law made many of its projects unviable. Cost escalation also led to many incomplete projects. Lack of timely action exacerbated the problems.

Picture credits: Hindustan times

As per The Indian Express report,  disputes over contracts have locked about 90 billion rupees of payments due from the government. The company is also impacted by the increased in the interest rates in short-term borrowing.
IL&FS’ investors include banks, insurance companies, and mutual funds. Now, a leading infrastructure finance company like IL&FS defaulting results in loss of confidence and will, experts say, mean that investors will stay away from debt instruments of other Non-Banking Financial Companies and Housing Finance Companies. IL&FS has defaulted on commercial papers or CP, which are considered low-risk investments and so mutual funds are invested in it.

Hemindra Hazari, an independent market analyst, writing in The Wire, says, “With so many luminaries of the corporate world on the board, management oversight and accountability should have been all-pervasive and senior management emoluments should have tracked performance. But a look at the firm’s annual reports depicts a disturbing picture.”


Raghav Bahl argues in BloomberQuint

Finance Minister Arun Jaitley has said the government will take all measures to ensure that adequate liquidity is provided to non-banking financial companies or NBFCs, mutual fund houses, and small and medium enterprises or SMEs, after the stock and bond markets were rattled by the IL&FS crisis.

Last month, The National Law Company Tribunal (NCLT) allowed the Government to take control of IL&FS.  The last time the Government had moved to take control of a company was in the wake of the Satyam Scandal in 2009.

The government superseded the existing board of debt-laden Infrastructure Leasing & Financial Services (IL&FS) with six new board member, appointing Kotak Mahindra Bank MD Uday Kotak as Chairman of the board. The government also nominated technocrats who have had varied experience in their careers.

All eyes are on the newly constituted board of Infrastructure Leasing and Financial Services (IL&FS), which has been tasked to come up with a rescue plan for the company by tomorrow.

 

SC Asks Centre To Equip JJB With Video-Conferencing Facility

The Supreme Court on Monday asked the Centre to notify it on whether the Observation Homes and Juvenile Justice Boards are equipped with the video-conferencing facility.

Observation Home is an institution, where neglected and delinquent juveniles are kept for a few weeks during an inquiry or trial.

A bench of Justices Madan B Lokur and Deepak Gupta referring to the provisions of the Juvenile Justice (Care and Protection of Children) Act said: “The Act mandates that observation home should be there in every district. It is better to have a home which is properly maintained and have video conferencing facility.”

The bench also added that in the long run, it will be cheaper for the states and also comfortable for children and there will no need to take a child 200 kilometer just to attend the Juvenile Justice Board.

Justices Madan B Lokur and Deepak Gupta also directed all the trial courts across the country to consider the possibility of cutting a list of witnesses, in consultation with public prosecutor and defense counsel.

It said trial courts should also consider releasing poor under-trials on personal or bail bonds of a limited amount.

Directing to consider the application of section 309 of the Code of Criminal Procedure (CrPC), the bench told center to ensure that when a witness appears before the court, he or she should be examined.

The bench said that video-conferencing facility in JJBs and observation homes should be there. It contended that it would be cheaper for the states and also comfortable for the minors in a situation where a juvenile has to travel for five to six hours to be produced before the JJB.

The court passed these directions while hearing a matter related to deficiencies in jails as highlighted by two apex court judges (one of them has retired) during their visit to Faridabad jail and an observation home in June this year.

 

India, China Sign Internal Security Cooperation Agreement

New Delhi: Marking a new beginning in Indo-China relationship, Internal Security Cooperation Agreement was signed between the two countries on Monday.

A High-Level meeting co-chaired by Union Home Minister Rajnath Singh with State Councilor and Minister of Public Security of the People’s Republic of China, Zhao Kezhi, happened in Delhi.

Issues of mutual interest, including bilateral counter-terrorism cooperation, was discussed during the meeting.

An Agreement on security cooperation was also signed by the Ministry of Home Affairs of India and the Ministry of Public Security of China. This agreement is believed to strengthen and consolidate discussions and cooperation in the areas of counter-terrorism, organized crimes and drug control.

The proposed pact is also expected to cover areas of intelligence sharing, exchange programme, sharing of best practices, cooperation in disaster mitigation besides others.

This bilateral visit is from 21st October to 25th October.

The move comes just a year after a two-month-long border stand-off between the India Army and China’s People’s Liberation Army at Doklam on the India-Bhutan-China tri-junction.