N.N.Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.
– 2023 (4) KLT SN 40 (C.No.30) SC = 2023 KLT OnLine 1429 (SC)
and Ground Realities of Indian Situation in Arbitration Process

 (By Saji Koduvath, Advocate, Kottayam) 

Contents in a Nutshell

•     The 5-Judge Bench of our Apex Court, in N.N.Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.(2023 (4) KLT SN 40 (C.No.30) SC = 2023 KLT OnLine 1429 (SC) by majority (3:2), held that existence of a valid arbitration agreement (with sufficient stamp) was necessary for ‘reference to arbitrator’, under Section 8 of the Arbitration and Conciliation Act, 1996.

•     After 2015 Amendment on Arbitration and Conciliation Act, for ‘referring’  parties to arbitration (under Section 8) the courts should have “FOUND”, ‘PRIMA FACIE’ –

      •  (i)  the EXISTENCE of the arbitration agreement and

      •  (ii) the VALIDITY thereof.

•     Secion 8(1), as amended, reads as under:

•     “A judicial authority….shall…refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

•     The scope of judicial review and jurisdiction of the court under Section 8 (for reference to arbitrator) and Section 11 (for appointing arbitrator) of the Arbitration Act are identical.

PART I

N.N.Global Mercantile v. Indo Unique Flame Ltd. – Contentions, in Substance

The legal disputes in N.N.Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. ((2023 (4) KLT SN 40 (C.No.30) SC = 2023 KLTOnLine 1429 (SC), was placed before the Apex Court, treading following course:

•     A suit was filed by the appellant, to enforce a contract.

•     The defendant applied for reference under Section 8 of the Arbitration and Con-ciliation Act, the contract having contained an arbitration clause.

•     Trial Court rejected the application.

•     A Writ Petition was filed by the defendant challenging the Order. It was contended that the Arbitration Agreement was unenforceable as the (main) contract was
     unstamped.

•     The High Court allowed the Writ Petition. (Hence the plaintiff became the appellant before the Supreme Court).

It was argued before the Apex Court that the Arbitration Agreement in the contract was enforceable and could have been acted upon, even if the contract was unstamped and unenforceable under the Indian Stamp Act. The 2-Judge Bench of the Supreme Court, referred the matter to 3-Judge Bench.

The 3-Judge Bench of the Supreme Court, referred the case to 5-Judge Bench, pointing out that an arbitration clause would stand as a distinct, separate and independent from the substantive contract.  This is based on the doctrine of severability or separability. That is, when the parties enter into such a contract, there are two separate agreements,

•     (i) the substantive contract and

•     (ii) the arbitration agreement.

In this premise, the 3-Judge Bench opined as under: 

•     Even if the main contract was bad for it was unstamped or insufficiently stamped, the arbitration clause could be enforced.

•     The defect on insufficiency of stamp could be cured as provided in the Stamp Act, and therefore, it could not be said that an unstamped or insufficiently stamped instrument did not exist in the eye of the law.

•     The failure to stamp a document, did not affect the validity or unenforceability of the document, but it merely rendered the document inadmissible in evidence.

Before the 5-Judge Bench of the Supreme Court, it was argued –

•     by the respondents/defendants, on the basis of the relevant provisions of the Arbitration Act (especially Section 16), that an arbitration clause would stand as a distinct, separate and independent from the substantive contract and that an arbitration reference can be made by the court even if the arbitration agreement was insufficiently stamped; and

•     by the appellant/plaintiff, in view of the provisions in the Indian Stamp Act (especiallySection 33 and 35),that the arbitration reference could not be made by the court on the basis of an insufficiently stamped agreement. It was pointed out that unstamped or insufficiently stamped documents cannot be used as evidence for any purpose, as provided in the Stamp Act; and that for reference under Section 8 of the Arbitration Act the court has to specifically find that prima facie a “valid arbitration agreement exists”.

N.N.Global held – If Arb. Agreement Unstamped, No ‘Valid Arb. Agreement Exists’

It is held, by majority (3:2), in N.N.Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. ((2023 (4) KLT SN 40 (C.No.30) SC = 2023 KLT OnLine 1429 (SC)),that an arbitration reference cannot be made by the court under Section 8 of the Arb. Act, on the basis of an unstamped or insufficiently stamped agreement.

The Majority affirmed the findings in this regard, in the two earlier 3-Judge Bench decisions.

•     (i) Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg.Ltd. (2019 (2) KLT OnLine 3125 (SC)  (it was held that an arbitration reference cannot be made on the basis of an unstamped or insufficiently stamped agreement).

•     (ii) Vidya Drolia v. Durga Trading Corporation (2020 (6) KLT OnLine 1025 (SC) (it was held that landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations).

The majority judgment Paras.110 and 111 of N.N.Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.((2023 (4) KLT SN 40 (C.No.30) SC = 2023 KLT OnLine 1429 (SC)) reads as under:

•     “110. An instrument, which is eligible to stamp duty, may contain an Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enfor-ceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act. An unstampedinstrument, when it is required to be stamped, being not a contract and not enforceablein law, cannot, therefore, exist in law. Therefore, we approve of paragraphs 22 and 29 of Garware (supra). To this extent, we also approve of Vidya Drolia (supra), insofar as the reasoning in paragraphs 22 and 29 of Garware (supra) is approved.

•     111. The true intention behind the insertion of Section 11(6A) in the Act was to confine the Court, acting under Section 11,to examine and ascertain about the existence of an Arbitration Agreement.”

PART II - Relevant Provisions of Law

Arbitration and Conciliation Act on ‘Arbitrability’

Section 8(1), Section 11(6A) and Section 16 of the Arbitration Conciliation Act requires con-sideration in this regard.

There is a major change in the concept of ‘separability’ of the arbitration clause in a con-tract, after 2015 Amendment. The Amendment directed that the existence or validity of an arbitration agreement has to be ‘found’ by the Court, before referring the parties to arbitration, and appointing arbitrator, under the Arbitration and Conciliation Act.

Section 8(1) of the Arbitration and Conciliation Act reads (after 2015 Amendment) as under:

•     “8. Power to refer parties to arbitration where there is an arbitration agreement – (1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

Section 11(6A) of the Arbitration Act (inserted by 2015 Amendment) reads as under:

•     “11. Appointment of arbitrators – (1) … (2) … (3) … (4) … (5) …

•     (6A). The Supreme Court or, as the case may be, the High Court, while considering
any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the exa-mination of the existence of an arbitration agreement.”

Section 16, Arbitration and Conciliation Act reads as under:

•     “16. Competence of Arbitral Tribunal to rule on its jurisdiction – (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose –

•     (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

• (b) a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

Section 33 and 35 of the Indian Stamp Act, 1899

Section 33 of the Indian Stamp Act, 1899 reads as under:

•     33. Examination and impounding of instruments – (1) Every person having by law or consent of parties, authority to receive evidence, and every person in charge
of a public office, except an officer of police, before whom any instrument, chargeable,in his opinion, with duty, is produced or comes in the performance of his functions, shall, if it appears to him that such instrument is not duly stamped, impound the same.

•     (2) … (3) …

Section 35 of the Indian Stamp Act, 1899 reads as under:

•     35. Instruments not duly stamped inadmissible in evidence, etc. – No instrument
chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped:

•     Provided that – (a) any such instrument shall, be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion;

(b) …. (c) ….. (d) …. (e) …..

PART III - Decisive Earlier Decisions

SBP and Co. v. Patel Engg. Ltd.

Our Apex Court had occasion to consider the apparent inconsistency between Section 16and Section 11 of the Arbitration Act, inSBP and Co. v. Patel Engg.Ltd. (2005 (4)
KLT OnLine 1111 (SC).

•     Section 16 enjoins the Arbitral Tribunal ‘to rule on its own jurisdiction’, including ruling on any objections with respect to the ‘existence or validity’ of the arbitration agreement and it is made clear that the arbitration clause shall be treated as an agreement independent of the other terms of the contract.

•     Section 11(7) conferred finality to the decision of the Chief Justice, as regards the ‘reference’ to arbitration.

The explanation placed by the learned Senior Counsel, Mr.K.K.Venugopal, was pointed out by the Court.  He argued that Section 16 had ‘full play’ only when an Arbitral Tribunal was constituted without intervention under Section 11.

In SBP and Co. our Apex Court held as under:

•     “Prima facie, it would be difficult to say that in spite of the finality conferred by sub-section (7) of Section 11 of the Act, to such a decision of the Chief Justice, the Arbitral Tribunal can still go behind that decision and rule on its own jurisdiction or on the existence of an arbitration clause.”

In Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg.Ltd.(2019 (2) KLT OnLine 3125 (SC) it was observed as under:

•     “It is settled bySBP & Co. that Section 16 of the 1996 Act has full play only after the Arbitral Tribunal is constituted, without intervention of the Court under Section 11.”

Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd.

As regards the enforceability of an unstamped agreement and the bifurcation of an arbitration clause, it is held in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd.(2019 (2) KLT OnLine 3125 (SC), as under:

• “... A close look at Section 11(6A) would show that when the Supreme Court or the High Court considers an application under Sections 11(4) to 11(6), and comes across an arbitration clause in an agreement or conveyance which is unstamped, it is enjoined by the provisions of the Stamp Act to first impound the agreement or conveyance and see that stamp duty and penalty (if any) is paid before the agreement, as a whole, can be acted upon. It is important to remember that the Stamp Act applies to the agreement or conveyance as a whole. Therefore,it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence, as has been contended for by the respondent. The independent existence that could be given for certain limited purposes, on a harmonious reading of the Registration Act, 1908 ... “

• “22. When an arbitration Clause is contained “in a contract”, it is significant that the agreement only becomes a contract if it is enforceableby law.We have seen how,under the Indian Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. Therefore, even a plain reading of
Section 11(6A), when read with Section 7(2) of the 1996 Act and Section 2(h) of the Contract Act, would make it clear that an arbitration Clause in an agreement would not existwhen it is not enforceable by law. This is also an indicator that SMS Tea Estates has, in no manner, been touched by the amendment of Section 11(6A).”

“29. This judgment in Hyundai Engg.case is important in that what was specifically under consideration was an arbitration Clause which would get activated only if an insurer admits or accepts liability. Since on facts it was found that the insurer repudiated the claim, though an arbitration Clause did “exist”, so to speak, in the policy, it would not exist in law, as was held in that judgment, when one important fact is introduced, namely, that the insurer has not admitted or accepted liability. Likewise, in the facts of the present case, it is clear that the arbitration Clause that is contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped, as has been held by us above. The argument that Section 11(6A) deals with “existence”, as opposed to Section 8, Section 16,
and Section 45, which deal with “validity” of an arbitration agreement is answered by this Court’s understanding of the expression “existence” in Hyundai Engg.Case as followed by us.”

Vidya Drolia v. Durga Trading Corporation

Vidya Drolia v. Durga Trading Corporation(2020 (6) KLT OnLine 1025 (SC) made it clear-

•     For appointing an arbitrator, Courts shall make a prima facie ‘finding’ under Section 11(6A) as to “Non­-arbitrability of disputes”; and 

•     the prima facie examination is to make a “check”and to protect parties from being forced to arbitrate when the matter is demonstrably “non-­arbitrable”.

It is held in Vidya Drolia v. Durga Trading Corporation (2020 (6) KLT OnLine 1025 (SC) = as under:

• “133. Prima faciecase in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the Arbitral Tribunal. It is restricted to the subject-matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide.

• 134. Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the court is certain that no valid arbitration agreement exists or the disputes/subject-matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial… …

• 139. … Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain cases where the prima facieexamination may require a deeper consideration. The court’s challenge is to find the right amount of and the context when it would examine the prima facie case or exercise restraint. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable.”

The Apex Court further observed as under:

• “146. We now proceed to examine the question, whether the word “existence” in Section 11 merely refers to contract formation (whether there is an arbitration agreement) and excludes the question of enforcement (validity) and therefore the latter falls outside the jurisdiction of the court at the referral stage. On jurisprudentially and textualism it is possible to differentiate between existence of an arbitration agreement and validity of an arbitration agreement. Such interpretation can draw support from the plain meaning of the word “existence”. However, it is equally possible, jurisprudentially and on contextualism, to hold that an agreement has no existence if it is not enforceable and not binding. Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences. A reasonable and just interpretation of “existence” requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal.A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.

• 147. We would proceed to elaborate and give further reasons:

• 147.1. In Garware Wall Ropes Ltd. (Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. (2019 (2) KLT OnLine 3125 (SC) this Court had examined the question of stamp duty in an underlying contract with an arbitration clause and in the context had drawn a distinction between the first and second part of Section 7(2) of the Arbitration Act, albeit the observations made and quoted above with reference to “existence” and “validity” of the arbitration agreement being apposite and extremely important, we would repeat the same by reproducing para 29 thereof (2018 (3) KLT OnLine 3066 (SC).

• “29. This judgment in Hyundai Engg. case (United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd. (2018 (3) KLT OnLine 3066 (SC) is important in that what was specifically under consideration was an arbitration clause which would get activated only if an insurer admits or accepts liability. Since on facts it was found that the insurer repudiated the claim, though an arbitration clause did “exist”, so to speak, in the policy, it would not exist in law, as was held in that judgment, when one important fact is introduced, namely, that the insurer has not admitted or accepted liability. Likewise, in the facts of the present case, it is clear that the arbitration clause that is contained in the sub-contract would not “exist” as a matter of law until the sub-contract is duly stamped, as has been held by us above. The argument that Section 11(6-A) deals with “existence”, as opposed to Section 8, Section 16 and Section 45, which deal with “validity” of an arbitration agreement is answered by this Court’s understanding of the expression “existence” in Hyundai Engg.case (United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co.Ltd.
(2018 (3) KLT OnLine 3066 (SC) as followed by us.”

•  Existence and validity are intertwined, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement.”

• “153. Accordingly, we hold that the expression ‘existence of an arbitration agreement’ in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the Arbitral Tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.”

•  154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted.

• 154.4. Rarely as a demurrer the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. ”

The afore stated passages from Vidya Drolia v. Durga Trading Corporation (2020 (6) KLT OnLine 1025 (SC), is quoted and followed in NTPC Ltd. v. SPML Infra Ltd. (2023 KLT OnLine 1428 (SC)).

BSNL and Anr. v. Nortel Networks India (P) Ltd.

In BSNL & Anr. v. Nortel Networks India (P) Ltd. (2021 (2) KLT SN 37 (C.No. 34) SC =  2021 (2) KLT OnLine 1008 (SC)),it is held held as under:

• “45.1 …While exercising jurisdiction under Section 11 as the judicial forum, the court may exercise the prima facie test to screen and knockdown ex faciemeritless, frivolous, and dishonest litigation. Limited jurisdiction of the courts would ensure expeditious and efficient disposal at the referral stage. At the referral stage, the Court can interfere “only” when it is “manifest” that the claims are ex facie time-barred and dead, or there is no subsisting dispute…” (quoted and followed in NTPC Ltd. v. SPML Infra Ltd. (2023 KLT OnLine 1428 (SC)).

NTPC Ltd. v. SPML Infra Ltd.

NTPC Ltd. v. SPML Infra Ltd. (2023 KLT OnLine 1428 (SC)), without changing the foun-dations laid down by the Apex Court in earlier decisions, Dr.D.Y.Chandrachud, C.J.I., made clear the position of law with clarity and emphasis. It is observed as under:

• “24. Following the general rule and the principle laid down in Vidya Drolia (supra), this Court has consistently been holding that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. In Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engg. Pvt. Ltd. (2021 (2) KLT SN 30 (C.No.28) SC =2021 (2) KLT OnLine 1007 (SC)), Sanjiv Prakash v. Seema Kukreja (2021 (2) KLT OnLine 1040 (SC) and Indian Oil Corporation Ltd. v. NCC Ltd. (2022 (4) KLT OnLine 1084 (SC), the parties were referred to arbitration, as the prima facie review in each of these cases on the objection of non-arbitrability was found to be inconclusive. Following the exception to the general principle that the court may not refer parties to arbitration when it is clear that the case is manifestly and ex facie non-arbitrable, in BSNL and Anr. v. Nortel Networks India (P) Ltd. (2021 (2) KLT SN 37 (C.No. 34) SC = 2021 (2) KLT OnLine 1008 (SC)  and Secunderabad Cantonment Board v. B. Ramachandraiah (2021 (2) KLT OnLine 1116 (SC)), arbitration was refused as the claims of the parties were demonstrably time-barred.

• 25. Eye of the Needle: The above-referred precedents crystallise the position of law that the pre-referral jurisdiction of the courts under Section 11(6) of the Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement. These are matters which require a thorough examination by the referral court. The secondary inquiry that may arise at the reference stage itself is with respect to the non-arbitrability of the dispute.

27. The standard of scrutiny to examine the non-arbitrability of a claim is only prima facie. Referral courts must not undertake a full review of the contested facts; they must only be confined to a primary first review and let facts speak for themselves. This also requires the courts to examine whether the assertion on arbitrability is bona fide or not. The prima facie scrutiny of the facts must lead to a clear conclusion that there is not even a vestige of doubt that the claim is non-arbitrable. On the other hand, even if there is the slightest doubt, the rule is to refer the dispute to arbitration.

28. The limited scrutiny, through the eye of the needle, is necessary and compelling. It is intertwined with the duty of the referral court to protect the parties from being forced to arbitrate when the matter is demonstrably non-arbitrable. It has been termed as a legitimate interference by courts to refuse reference in order to prevent wastage of public and private resources. Further, as noted in Vidya Drolia (supra), if this duty within the limited compass is not exercised, and the Court becomes too reluctant to intervene, it may undermine the effectiveness of both, arbitration and the Court. Therefore, this Court or a High Court, as the case may be, while exercising jurisdiction under Section 11(6) of the Act, is not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator, as explained in DLF Home Developers Limited v. Rajapura Homes Pvt. Ltd. (2021 (5) KLT OnLine 1139 (SC).″

PART III - Conclusion

In N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.  taking note of the divergence in the debated points, among Judges, it is observed by Hrishikesh Roy, J., one of the (two) Judges who dissented from the view of the majority, laid down the following-

 “… Let our minority opinion (self and Learned Brother Justice Ajay Rastogi, who has written a separate opinion), appeal to the brooding spirit of the future as also the powers of the legislature to examine the interplay between the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899; and to emphatically resolve the imbroglio to avoid any confusion in the minds of the stakeholders in the field of arbitration.”

Let the pointers be that as it may.

In any event, the legislatures (and the courts also) – as they are duty bound to ponder the welfare of the ‘downtrodden which is the majority’ – will have to consider whether the following are ground realities-

•     1. The majority of Execution Petitions that come before the Execution (civil) Courts are for realisation of amounts below Rupees 10 Lakh ; and the lion’s share of it is
filed by the persons who are engaged, directly or indirectly, in Money Lending activity, or initiated by similar “Service Providers”; and the opposite parties thereof belong (comparatively) to lower strata.  

•     2. A large number of Execution Petitions that come before the Execution (civil) Courtsare that from the uncontested Arbitration Awards from “Outside-States”.

 •    3.There is no effective “legal frame” (rules) for fixing remuneration of the Arbitrators.

RETENTION OF TALENT IS MORE IMPORTANT THAN SELECTION

Good Employee is an Asset

Although hiring good employees is a nightmare but it is more difficult to retain the employees. Talent management is the key area in every company worth its HR department and the CEO are more worried about intellectual capital than working capital.

By Advocate H.L. Kumar

Few years ago If you’d have asked the senior executives what their company’s most valuable assets were, chances are they would have talked about the brand, goodwill, plant and machinery and so on. But ask them this question today, and ‘people’ will most likely figure in the ensure. An organisation is made up of competencies which we can loosely call ‘capital’. Its key components are ‘customer capital’, ‘structural capital’. and ‘human capital’.

In this era of globalisation and modernization, organisations are becoming increasingly competitive, dynamic, innovative and productive. Globalisation has certainly thrown new challenges before HR persons as they have to prepare employees to meet the challenges of knowledge-based economy and to respond to the dynamics of the work environment with technological skill and a high level of thinking. They too, in fact, assure the role of business development managers and evolve themselves as service providers to their internal and external customers.

Just as it is vital for every establishment to attract the right talent, it is equally important for them to retain that talent. Today’s situation is such that companies are constantly vying with each other to offer better perks to their employees. While the nature of these perks may differ across levels, there is a need to offer something beyond just the pay packages. Stock options, exposure to other markets, substantial incentives on meeting targets foreign trips - these are all initiatives that have gained a lot of acceptance in the last few years. And this does go a long way in retaining people. It is important for one to keep in mind that it is not healthy for organizations to face attrition on a reasonably regular basis.

The challenges before all kinds of companies are the same today retaining talent by taking the workplace a consistently challenging and motivating arena, providing opportunities for growth through training, travel nurturing the entrepreneurial streak, and above all, proving that you are an employer who cares about every aspect of their lives.  The industry is changing every day and if you don’t keep up, you are left behind.  Insecurity levels are very high, which is why people want to work with organisations that allow them to train and learn the latest.  Indian or MNC, the primary factor to force an employee to get up every morning and come back to the same workplace for years is a challenging and motivating environment.

The unbridled growth of the new economy, the emergence of the knowledge worker and the high demand for talent in the domestic and global markets have rewritten the rules of the game.  Though hiring good employees is a nightmare, it is more difficult to retaining good employees.  Talent management is the key area in every company worth its HR department and CEOs are more worried about intellectual capital than working capital.  To add to the problems are the huge packages being doled out at all levels.

The accent today is more and more on the individual employee.  Companies that nurture its employees and provide them with continuous opportunities for self-development and tap their entrepreneurial streak have a tangible edge over their competitors.

Very recently, Piramal Group has introduced a comprehensive retention plan aimed at bolstering employee engagement and retaining top talent.  Under the new scheme, 280 mid and senior executives will get long term incentives compared to 70 of the top brass earlier. The company’s initiative reflects the growing demand for experienced senior professionals in financial and pharmaceutical sector.

“From around 70 top leaders, mostly reporting to CXOs and business heads we are now offering long-term incentives to around 280 mid to senior level executives.  This marks a four-fold increase in the number of employees benefiting from this program across our three businesses,” Vikram Bector, chief human resources officer, Piramal Group said in an interview.

Long-term incentives (LTI) are typically designed to retain and attract talent and spans three-plus years, Consultants said LTI and stock options are key components of compensation in established business.

“LTIs provide wealth-creation opportunity and helps a company woo good talent from other sectors like IT product firms, where stocks and incentive programmes are offered to even junior executives”, said Jang Bahadur Singh, director of human capital solutions at consulting firm Aon in India.

“Young talent coming in from early-stage organizations, look at equity plans, and LTIs work well,” he added.

Other business houses are also offering stocks options for the senior brass for their new ventures.

Aditya Birla Group venture TMRW has rolled out equity options for its new top brass, while rival Tata Digitial, the e-commerce unit of the $103-billion Tata group, is courting senior execs with long-term incentives to secure the loyalty of it most valuable resources and woo new talent.

The Sabina Conundrum – Judicial Restraint on the Kerala

Conservation of Paddy Land and Wetland Act, 2008

(By B.Premnath, Advocate, High Court of Kerala)

The Judgment of the Full Bench of the High Court of Kerala in Sabeena v. District Collector and connected cases¹, which imposes additional restrictions on the use of paddy land, is wrong, and is an encroachment into the territory of the legislature.

The Full Bench in Sabina¹ held that: “the purchaser of a bit of paddy land, subsequent to the introduction of the Kerala Conservation of Paddy Land and Wetland Act, 2008, is not entitled to get the benefit of Section 5(3) read with Section 9 of the Act, 2008  and“the owner of the paddy land who is entitled to seek conversion or reclamation in contemplation of the provisions of Act, 2008 is the owner of the paddy land on the date of coming into force of the Act, 2008, i.e., 12.08.2008”. By declaring so, the Courthas gone beyond the purpose and intent of the Kerala Conservation of Paddy Land and Wetland Act, 2008.

It is discernible from the Statement of Objects and Reasons, that Act 2008 is enacted to restrict the unbridled reclamation and conversion of the paddy land from 12.8.2008.
Section 3 of the Act 2008 does not prohibit purchase of paddy land after 2008, and also does not prohibit construction of a residence in the said paddy land. Section 3 of the Act 2008 declares that: “on and from the date of commencement of this Act, the owner, occupier or the person in custody of any paddy land shall not undertake any activity for the conversion or reclamation of such paddy land except in accordance with the provisions of this Act”. In plain language, it only means that any conversion or reclamation in a paddy land after 2008 shall be only as per the provisions of the Act 2008. It only has a prospective application.

Section 5(3) is the repository of the power for the local level monitoring committee to recommend reclamation of paddy land for construction of residential building for the owner of the paddy land, in Panchayath area and Municipality/Corporation area, as the case may be. It is qualified by other conditions prescribed. Section 9 authorizes the district level monitoring committee to grant permission for filling up the paddy land for construction of residential building subject to the other provisions, especially Section 9(8) which imposes stringent conditions for considering the applications for reclamation. Section 9(8) reads as follows:- “Notwithstanding anything contained in sub-section (1), no application shall be considered by the District Level Authorised Committee, unless the Local Level Monitoring Committee has recommended that,- (i) such reclamation shall not adversely affect the ecological condition and the cultivation in the adjoining paddy land; (ii) the owner of the paddy land or his family do not own a suitable land for this purpose in that District; (iii) the building to be constructed is for his own purpose; and (iv) such paddy land is not surrounded by other paddy lands.”

The impact of the judgement of the Full Bench is that, the purchaser of a paddy land after 12.8.2008, a farmer or to be a farmer or not a farmer, cannot construct a residential building of his own in the said land, even if he is homeless and satisfies the conditions under Sections 5(3) and 9 of the Act 2008. If there is no restriction for the purchase of paddy land after the Act 2008 as the Full Bench rightly held, it is wrong in prohibiting the construction that is permitted by the Act 2008 through the provisions under Sections 5(3) and 9 and limiting the conversion or reclamation of the paddy land only to the owner of the said land on the date of coming into force of the Act 2008.

The judgement of the Full Bench in Sabina¹ is not merely a declaration of law, but legislation. Hon’ble Supreme Court in P.Ramachandra Rao v. State of Karnataka² held that: “Legislation is that source of law which consists in the declaration of legal rule by a competent authority. When Judges by judicial decisions lay down a new principle of general application of the nature specifically resolved for the legislature, they may said to have legislated, and not merely declared the law.”

Sabina¹ even amounts to excessive legislation. On the limits of Judges legislating, Justice Oliver Wendell Holmes remarked: “Without hesitation that Judges do and must legislate, but they can do so only interstitially; they are confined from molar to molecular motions”.

The Full Bench has drawn support from the judgments of the Supreme Court in Ambika Prasad Mishra v. State of U.P.³ and Sonia Bhatia v. State of U.P. ⁴. Ambika Prasad Mishra’and Sonia Bhatia’ dealt with the interpretation of the Uttar Pradesh Imposition of Ceiling on Land Holdings Act, 1960, which was enacted to provide for more equitable distribution of land by making the same available to the extent possible to landless agricultural labourers and to provide for cultivation, up reserve stock of food grains against lean years, by imposing a ceiling on large land holdings.

The relevant provision in the U.P. Act, Section 5(6), make any transfer of any surplus land which would have been declared so, as invalid after 24.01.1971, but at the same time exempts transfer in favour of any person (including Government) referred to in Section 5(2) and a transferproved to the satisfaction of the prescribed authority to be in good faith and for adequate consideration and under an irrevocable instrument not being a benami  transaction or for immediate or deferred benefit of the tenure-holder or other members of the family.

Ambika Prasad Mishra³repelled the challenge to the U.P. Act, given its laudable object. Sonia Bhatia⁴ excluded a gift on the facts of that case, from the purview of the proviso to Section 5(6) which contained the exceptions from the applicability to Section 5(6).

The object of the U.P. Act, 1960, is to preserve land for the landless agricultural labourers, declaring any transfer of land invalid, after 24.1.1971, but provided exceptions to genuine land transactions. There is no total bar on alienation of land. The exceptions in the U.P. Act 1960 and the restriction in the conversion/reclamation/construction in the Act 2008, are to be construed strictly. Beyond that, the restriction of transfer of land after 24.1.1971 in the U.P. Act, 1960 cannot be imported into the Paddy Land Act 2008 to hold that there cannot be any construction in a paddy land purchased after 12.8.2008. That is a far cry from the scope and object of the Act 2008.  

As quoted by the Full Bench from Ambika Prasad Mishra³, it is perfectly open to the legislature, as ancillary to its main policy to prevent activities which defeat the statutory purpose, to provide for invalidation for the actions. Act 2008 only impose a ceiling on the extent of land in which construction is permitted, subject to further restrictions in the form of S.5(3) and S.9(8). True, the emphasis is on the farmer/tiller of the paddy land, to promote cultivation. And if he has no house/residence in the Panchayath or Municipal/Corporation area, he is permitted to reclaim a limited extent of the paddy land, to construct a residential building. This in turn allows him to carry on paddy cultivation in his existing paddy land or in a paddy land which was purchased after 12.8.2008.

The Full Bench held that “the intention was to protect and maintain the existing paddy lands already included in the Data Bank and which remained as such when the Act came into force”. It is true that the language of Section 27A is to prohibit construction/reclamation/conversion of paddy land. But then it can be read only along with Sections 3, 5(3) and 9 of the Act 2008 which permits construction of residential building for the owner of the paddy land.

The example cited in the judgment that if the owner of one acre of paddy land sells it to 10 purchasers and if they are permitted to make an application seeking reclamation of the land in contemplation of Section 5(3) read with Section 9 of the Act 2008, the prohibition in Section 3 of the Act 2008, can be easily flouted, is a fallacy. If there are purchasers for 10 cents each or plots of different extents, they can construct residence/house in the said lands only subject to the restrictions in the Act 2008, especially under Section 9(8). All such tracts of land cannot get over the restrictions prescribed under Section 9(8).

A situation may arise when a farmer/to be farmer who do not have a house of his own, intends to settle down in his home town, purchases a paddy land after 12.08.2008, to which there is no restriction. He has a genuine intention to carry on farming. He wants to promote farming. He purchases 1 acre of paddy land. He is permitted under the Act 2008 to construct a house of his own in the paddy land after going through the rigours, after complying with the provisions under the Act 2008. But now he cannot, because he is restrained by a judicial fiat. The Full Bench failed to remind itself that the only mischief the Act 2008 intended to remedy was the indiscriminate filling up of paddy land and to promote the cultivation, and permit the owner of the paddy land to construct a house therein, if he has none in the same locality.

The Full Bench judgement in Sabina¹has gone beyond what the Honourable Supreme Court said in Union of India v. Elphinstone Spinning and Weaving Co. Ltd. & Others⁵:-
“Courts are not entitled to usurp legislative function under the guise of interpretation and they must avoid the danger of determining the meaning of a provision based on their own pre-conceived notions of ideological structure or scheme into which the provisions to be interpreted is somehow fitted. Caution is all the more necessary in dealing with a legislation enacted to give effect to policies that are subject to bitter public and parliamentary controversy for in controversial matters there is room for differences of opinion as to what is expedient, what is just and what is morally justifiable; it is Parliament’s opinion in those matters, that is paramount”.

The term “owner”, “occupier” or “person in custody of a paddy land” are not defined under the Act, 2008. “Holder of a paddy land” is defined under Section 2(viii) of the Act 2008, as “person holding any paddy land whether as owner or under a legal right”. It is an expansive definition. The legislature envisaged a situation where the paddy land would be leased, licensed, sold or another person would hold it as an agent on behalf of the owner. The term “holder of a paddy land”, is extensively used in Section 16 which contains provisions to cultivate the fallow paddy land.

A survey of the provisions of the Act 2008 reveals that detailed procedures are contemplated in Sections 5, 8 and 9 for filling up of paddy land for constructing of residential building. Sufficient care has been taken by the legislature to promote the objectives of the Act 2008. There are reporting officers in the form of agricultural officers to point out any violation of the provisions of the Act, 2008. Omission to report is also made an offence under Section 23.  Section 12 permits the authorized officer under the Act, 2008, to take measures to prevent the commission of any offences under the Act. Section 13 ordains the District Collector with the power to restore the reclaimed paddy land. The local authority cannot grant license/permit to carry out any activity/construction in a paddy land to convert or reclaim in contravention of the provisions of the Act 2008. Section 15 required the local level monitoring committee to direct the owner to cultivate the paddy land which is left uncultivated and fallow. Section 16 describes the manner in which the fallow paddy land to be cultivated. Section 17 contain provisions to activate the cultivation of a paddy land. Section 18 authorizes the District Collector to initiate proceedings for compliance of the provisions of the Act, 2008.

Sections 19 and 20 deals with the power of entry and seizure and confiscations of vessel, vehicle, which is used in committing acts in violation of the provisions of the Act 2008. Sections 22, 23, 24 deals in punishments and Section 26 bars the resort to Civil Courts for the acts done/purporting to be done by the Government or its officers under the Act, 2008. Section 27 declared that sums recoverable under the Act 2008, as arrears of land revenue. Section 27D moots creating an “Agricultural Promotion Fund”.

Thus Act 2008 contain safeguards to prevent indiscriminate filling up/conversion/reclamation/construction in the paddy land. Legislature knows the Will of the people. A law is presumed to be constitutional. What the Full Bench has done, is to read and write into the Act 2008 the provisions which are not there.

The Supreme Court in Elphinstone⁵ case, reminds: “While examining a particular statute for finding out the legislative intent it is the attitude of Judges in arriving at a solution by striking a balance between the letter and spirit of the statute without acknowledging that they have in any way supplemented the statute would be the proper criterion. The duty of Judge is to expand and not to legislate. There is no doubt a marginal area in which the Courts mould or creatively, interpret legislation and they are thus finishers, refiners and polishers of legislations which comes to them in a state requiring various degrees of further processing. But a Judge is not entitled to add something more than what is there in the statute by way of a supposed intention of the legislature.It is therefore, a Cardinal Principle of interpretation of statutes that the true or legal meaning of an enactment is derived by considering the meaning of the words used in the enactment in the light of any discernible purpose or object which comprehends the mischief and its remedy to which the enactment is directed”.

Benjamin Cardozo⁶ cautions : “In countless litigations, the law is so clear that Judges have no discretion. They have the right to legislate within gaps, but often there are no gaps. We shall have a false view of the landscape if we look at the waste spaces only, and refuse to see the acres already sown and fruitful. I think the difficulty has its origin in the failure to distinguish between right and power, between the command embodied in a judgement and the jural principle to which the obedience of the Judge is due. Judges have of course, the power, though not the right, to ignore the mandate of a statute, and render judgement despite of it.”

Let the final sentinel step into correct the Full Bench. 

REFERENCES

1.2022 (2) KLT 551 (F.B.).

2.2002 (2) KLT 189 (SC) = (2002) 4 SCC 578.

3.1980 KLT OnLine 1024 (SC) = (1980) 3 SCC 719.

4.1981 KLT OnLine 1020 (SC) = (1981) 2 SCC 585.

5.2001 (1) KLT OnLine 1004 (SC) = (2001) 4 SCC 139.

6. Nature of Judicial Process.

Where to File Cheque Bounce Cases (Jurisdiction of Court

– To File NI Act Complaint)? 

After 2015 Amendment, it is (only) the place where the Payee-Bank

(Bank in which the Payee Presents the Cheque for ‘Collection’) is situated

(By Saji Koduvath, Advocate, Kottayam)

1. Key Takeaways

•    1. Before the Negotiable Instruments (Amendment) Act, 2015 (Act 26 of 2015), there was no specific legislative commandment in the NI Act, as to territorial jurisdiction of courts for filing a complaint. Therefore, it was taken as the court (or courts) within whose territorial jurisdiction the offence was committed.

•    2. The Supreme Court held inDashrath Rupsingh Rathod v. State of Maharashtra, (2014 (3) KLT 605 (SC) = AIR 2014 SC 3519), that the jurisdiction for filing of complaints was ‘restricted to the location where the cheque was dishonoured, i.e., cheque was returned unpaid by the bank on which it was drawn (or, drawee bank – the Bank that is directed, by the drawer, to pay).

•    3. By the amendment of 2015, the dictum in Dashrath Rupsingh Rathod v. State of Maharashtra, (2014 (3) KLT 605 (SC) = AIR 2014 SC 3519), was overturned – Section 142 has been re-numbered as sub-section (1) and sub-section (2) has been inserted (which specified the territorial jurisdiction of the court).

•    The dictum of the Supreme Court in Dashrath Rupsingh Rathod case has been “legislatively overruled”*^*by an amendment to the Negotiable Instruments Act, in 2015

        • **(as observed in P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021 (2) KLT SN 39 (C.No.35) SC = 2021 (2) KLT OnLine 1019 (SC) = (2021) 6 SCC 325) – R.F. Nariman, J.)

•    4. After the 2015 amendment (after inserting sub-section (2) the territorial jurisdiction is limited to the Payee-Bank

•    The amendment stands as under:

•    “(2) The offence under Section 138 shall be inquired into and tried only by a court within whose local jurisdiction –

•    (a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or

•    (b) if the cheque is presented for payment by the payee or holder in due course otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

•    5. Section 142(2)(b) Simplified

•    The words ‘otherwise through an account’ requires explanation.

•    It can be simplified as under:

      •   if the cheque is presented by the payee or holder in due course (directly), in the bank of the drawer, (the proper court is that within whose local jurisdiction) the branch of the drawee bank where the drawer maintains the account, is situated.

•    6. The decision in Dashrath Rupsingh Rathod v. State of Maharashtra, (2014 (3) KLT 605 (SC) =AIR 2014 SC 3519)^#, was “legislatively overruled” by the amendment of 2015.^{# *} It is done within the ‘shortest’ (?) time for ensuring “a fair trial”.

•     #(rendered “keeping in perspective the hardship that … will continue to bear on alleged accused/respondents who may have to travel long distances in conducting their defence”)

•     #*(with the object of addressing “the difficulties faced by the payee or the lender of the money in filing the case under Section 138 of the said Act”, and “it is expected that the proposed amendments to the Negotiable Instruments Act, 1881 would help in ensuring that  a fair trial of cases under Section 138 of the said Act is conducted ….”)

2. Section 142 of the N I Act, after 2015 Amendment, reads as under:.

•    “142. Cognizance of offences.—(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974),—

•     no court shall take cognizance of any offence punishable under Section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque;

•     (b) such complaint is made within one month of the date on which the cause of action arises under clause (c) of the proviso to Section 138:

•     Provided that the cognizance of a complaint may be taken by the court after the prescribed period, if the complainant satisfies the court that he had sufficient cause for not making a complaint within such period.

•     (c) no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under Section 138.

•     “(2) The offence under Section 138 shall be inquired into and tried only by a court within whose local jurisdiction,—

•    (a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due course, as the case may be, maintains the account, is situated; or

•     (b) if the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch of the drawee bank where the drawer maintains the account, is situated.

•     Explanation — For the purposes of clause (a), where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.”

3.   Dashrath Rupsingh Rathod v. State of Maharashtra (2014 (3) KLT 605 (SC) = AIR 2014 SC 3519)

The Supreme Court, in Dashrath Rupsingh Rathod v. State of Maharashtra, (2014 (3) KLT 605 (SC) = AIR 2014 SC 3519), (T.S.Thakur, Vikramajit Sen, C.Nagappan, JJ.) held that the jurisdiction of the court in matters where the cheque is returned unpaid was ‘restricted to the location where the cheque was dishonoured, i.e., cheque was returned unpaid by the bank on which it was drawn’. It observed further as under:-

•    “20. We are quite alive to the magnitude of the impact that the present decision shall have to possibly lakhs of cases pending in various Courts spanning across the country. One approach could be to declare that this judgment will have only prospective pertinence, i.e. applicability to complaints that may be filed after this pronouncement. However, keeping in perspective the hardship that this will continue to bear on alleged accused/respondents who may have to travel long distances in conducting their defence, and also mindful of the legal implications of proceedings being permitted to continue in a Court devoid of jurisdiction, this recourse in entirety does not commend itself to us. Consequent on considerable consideration we think it expedient to direct that only those cases where, post the summoning and appearance of the alleged accused, the recording of evidence has commenced as envisaged in Section 145(2) of the Negotiable Instruments Act, 1881, will proceeding continue at that place. To clarify, regardless of whether evidence has been led before the Magistrate at the pre-summoning stage, either by affidavit or by oral statement, the complaint will be maintainable only at the place where the cheque stands dishonoured. To obviate and eradicate any legal complications, the category of complaint cases where proceedings have gone to the stage of Section 145(2) or beyond shall be deemed to have been transferred by us from the Court ordinarily possessing territorial jurisdiction, as now clarified, to the Court where it is those where the accused/respondent has not been properly served) shall be returned to the complainant for filing in the proper Court, in consonance with our exposition of the law. If such complaints are filed/refiled within thirty days of their return, they shall be deemed to have been filed within the time prescribed by law, unless the initial or prior filing was itself time barred.”

4. Legislative Overruling

In P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd. (2021 (2) KLT SN 39 (C.No.35) SC =2021 (2) KLT OnLine 1019 (SC) = (2021) 6 SCC 325) (Rohinton Fali Nariman, B.R. Gavai, JJ.)
it is held as under:

•    “49. In Dashrath Rupsingh Rathod v. State of Maharashtra, (2014 (3) KLT 605 (SC)  = (2014) 9 SCC 129), a three-Judge Bench of this Court answered the question as to whether the territorial jurisdiction for filing of cheque dishonour complaints is restricted to the court within whose territorial jurisdiction the offence is committed, which is the location where the cheque is dishonoured, i.e., returned unpaid by the bank on which it is drawn. This judgment has been legislatively overruledby Section 142(2) of the Negotiable Instruments Act set out hereinabove.”

End Note:

The Prefatory Note of the Bill which lead to Act 26 of 2015 reads as under:

•     “Statement of Objects and Reasons – The Negotiable Instruments Act, 1881 was enacted to define and amend the law relating to Promissory Notes, Bills of Exchange and Cheques. The Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988 inserted in the Negotiable Instruments Act, 1881 (hereinafter called the said Act), a new Chapter XVII, comprising Sections 138
to 142 with effect from 1st April, 1989. Section 138 of the said Act provides for penalties in case of dishonour of cheques due to insufficiency of funds in the account of the drawer of the cheque.

•     2. As Sections 138 to 142 of the said Act were found deficient in dealing with dishonour of cheques, the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, inter alia, amended Sections 138, 141 and 142 and inserted new Sections 143 to 147 in the said Act aimed at speedy disposal of cases relating to dishonour of cheque through their summary trial as well as making them compoundable. Punishment provided under Section 138 too was enhanced from one year to two years. These legislative reforms are aimed at encouraging the usage of cheque and enhancing the credibility of the instrument so that the normal business transactions and settlement of liabilities could be ensured.

•     3. The Supreme Court, in its judgment dated 1st August, 2014, in the case of Dashrath Rupsingh Rathod v. State of Maharashtra ((2014 (3) KLT 605 (SC) = (2014) 9 SCC 129), held that the territorial jurisdiction for dishonour of cheques is restricted tothe court within whose local jurisdiction the offence was committed, which in the present context is where the cheque is dishonoured by the bank on which it is drawn. The Supreme Court has directed that only those cases where, post the summoning and appearance of the alleged accused, the recording of evidence has commenced as envisaged in Section 145(2) of the Negotiable Instruments Act, 1881, will proceeding continue at that place. All other complaints (including those where the accused/respondent has not been properly served) shall be returned to the complainant for filing in the proper court, in consonance with exposition of the law, as determined by the Supreme Court.

•    4. Pursuant to the judgment of the Supreme Court, representations have been made to the Government by various stakeholders, including industry associations and financial institutions, expressing concerns about the wide impact this judgment would have on the business interests as it will offer undue protection to defaulters at the expense of the aggrieved complainant; will give a complete go-by to the practice/concept of ‘Payable at Par cheques’ and would ignore the current realities of cheque clearing with the introduction of CTS (Cheque Truncation System) where cheque clearance happens only through scanned image in electronic form and cheques are not physically required to be presented to the issuing branch (drawee bank branch) but are settled between the service branches of the drawee and payee banks; will give rise to multiplicity of cases covering several cheques drawn on bank(s) at different places; and adhering to it is impracticable for a single window agency with customers spread all over India.

•    5. To address the difficulties faced by the payee or the lender of the money in filing the case under Section 138 of the said Act, because of which, large number of cases are stuck, the jurisdiction for offence under Section 138 has been clearly defined. The Negotiable Instruments (Amendment) Bill, 2015 provides for the following, namely-

•    (i) filing of cases only by a court within whose local jurisdiction the bank branch of the payee, where the payee presents the cheque for payment, is situated;

•     (ii) stipulating that where a complaint has been filed against the drawer of a cheque in the court having jurisdiction under the new scheme of jurisdiction, all subsequent complaints arising out of Section 138 of the said Act against the same drawer shall be filed before the same court, irrespective of whether those cheques were presented for payment within the territorial jurisdiction of that court;

•     (iii) stipulating that if more than one prosecution is filed against the same drawer of cheques before different courts, upon the said fact having been brought to the notice of the court, the court shall transfer the case to the court having jurisdiction as per the new scheme of jurisdiction; and

•     (iv) amending Explanation I under Section 6 of the said Act relating to the meaning of expression “a cheque in the electronic form”, as the said meaning is found to be deficient because it presumes drawing of a physical cheque, which is not the objective in preparing “a cheque in the electronic form” and inserting a new Explanation III in the said section giving reference of the expressions contained in the Information Technology Act, 2000.

•     6. It is expected that the proposed amendments to the Negotiable Instruments Act, 1881 would help in ensuring that a fair trial of cases under Section 138 of the said Act is conducted keeping in view the interests of the complainant by clarifying the territorial jurisdiction for trying the cases for dishonour of cheques.

•     7. The Bill seeks to achieve the above objects.”

From Cryptocurrency to CBDC ––The Saga of Electronic Cash:
An Analysis in the Indian Context

(By Dr. Raju Narayana Swamy, IAS)

Introduction

Cryptocurrency is an internet-based store of value, which is used and created for much the same purpose as physical currency, yet cryptocurrency has no physical representation in reality – it is created, stored and transacted electronically. It is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units and verify the transfer of assets. Unlike traditional currency and financial instruments, it is not issued by a central bank. Rather anyone can attempt to “mine” it by using computers programmed to guess answers to a computational puzzle. It is thus neither a commodity currency (backed by gold or some other commodity) nor a fiat currency (used by convention as a result of a legal edict). It is fundamentally designed to bypass the established financial system. The objective for circumventing banks’ intermediation finds basis in

(i)   lack of bank’s trustworthiness

(ii)  costs charged by banks and

(iii)  tracking of transactions.

The key characteristics of cryptocurrency are decentralization, anonymity and borderlessness. What makes it remarkable is that it settles the most controversial issue – who owns wealth – without the need for a law enforcement apparatus.

The Financial Action Task Force (FATF) defined a cryptocurrency as “a math based decentralized convertible virtual currency protected by cryptography by relying on public and private keys to transfer value from one person to another and signed cryptographically each time it is transferred.”

Cryptocurrencies work with blockchain technology which ensures its security. Hash rate determines the degree of security of cryptocurrencies – the higher the hash rate, the lesser chance of security breach. With the highest hash rate of any network, bitcoin is considered the most secure cryptocurrency. A user of cryptocurrency chooses a private key, which is kept secret with him and generates a corresponding public key which is shared with the world. Any payments made by the user are made using the private key, but any payment to be received is sent to the public key, known to the world.

The concept of cryptocurrency was first proposed by David Chaum, an American cryptographer, in 1983, as a way of creating electronic cash. Cryptocurrency transfers are instantaneous and borderless and many have been designed so that users can transact in relative anonymity.

The Satoshi Nakamoto Paper

On October 31, 2008 , a person or group going by the name Satoshi Nakamoto posted online a short paper titled “Bitcoin: A Peer -to- Peer Electronic Cash System.” It addressed a straightforward question: Why do online payments have to involve banks, credit card companies and other financial intermediaries ? Why can’t they be like cash payments in the physical world? As bitcoin transactions happened, Nakamoto proposed, they would all be recorded in a ledger that logged exactly which bitcoins were spent and the pseudonymous identity of both the buyer and seller as verified by their signatures.
A universal, easily consultable ledger was essential for the bitcoin system in order to deal with the “double spend problem”. This problem arises because bitcoins are purely pieces of information, yet it is essential that they do not all follow the free, perfect and instant economics of information goods. If bitcoins could be freely, perfectly and instantly copied, forgery would be rampant. Needless to say, a trusted universally accessible online ledger would solve the double spend problem by enabling merchants to verify that a prospective buyer actually has the bitcoins they say they do and that they haven’t been already spent anywhere else.

But the billion dollar question that arose is: Who should be responsible for creating, maintaining and ensuring the integrity of this ledger? It cannot be a bank or credit card company because the whole point of the proposed system is that it could not rely on existing financial institutions or on governments. In fact, it had to operate in a completely decentralized way. By an ingenious combination of mathematics and programming, Nakamoto proposed an online system that would works as follows:-

1.    As each transaction between buyers and sellers happens, it is broadcast throughoutthe system.

2.    Specialized computers called “nodes” periodically collect all the transactions and verify that they are legitimate. The set of good transactions over a period of time is called a “block”.

3.    The nodes are also involved in a competition with each other consisting of trying to find a short numeric summary called a “hash” of the current block.

4.    The winning node broadcasts its just finished block throughout the system. As its reward it is allowed to create and keep for itself a predetermined number of bitcoins.

5.    Other nodes double-check this block.

6.    Once nodes convince themselves that a block is correct and complete, they start putting together the next one and carrying out its proof of work and the entire block creation process starts all over again.

Many readers of Nakamoto’s paper came to believe that the system he described could actually be built and would be valuable.

In May 2010, Laszlo Hanyeez, a programmer living in Florida posted a request on a bitcoin forum to trade 10000 bitcoins in exchange for a couple of pizzas. Four days later, 18 year old Jeremy accepted the offer and purchased the food via the Papa John’s website. This was the first known trade of bitcoin for a physical product and gave the fledgling currency a value of about $.003 per bitcoin as Jeremy paid $ 30 for the pizza.

Skepticism of mainstream economists

Throughout this time, most mainstream economists were skeptical of bitcoin’s potential as a rival to the world’s established currencies. Two of the main functions of any money, they pointed out, were a means of exchange and a store of value. For both these functions, stability of the currency is critical. But the value of the bitcoin fluctuated wildly and this volatility made the digital currency unsuitable as a mainstream means of exchange Apprehension prevails that if one or more private currencies are allowed, that may lead to a parallel currency system in the economy, which may result in “dollarization.” If most people in a country start using cryptocurrencies, the central bank would lose the sole authority to print money – nay lose the significant power to control money supply and liquidity in the market. This in turn would hamper the ability of the bank to ensure macroeconomic stability of the country. Cryptocurrencies do not have an issuer, they are not an instrument of debt or commodities nor do they have any intrinsic value. Thus they can act as currency only in a private environment and not on a national scale.

Worries about cryptocurrencies range from issues of irreversibility and of investor protection to those of national security. On the investor protection front, there are concerns that speculative investments in cryptocurrencies could adversely affect innocent investors. Given the virtual, anonymous and decentralized nature of cryptocurrencies, it is feared that they may circumvent rules concerning Know Your Customer (KYC), Anti Money Laundering etc. As regards national security, there is a concern that cryptocurrency could be used for terror financing. This is because while the original purchase of the currency could be traced, any subsequent transaction is extremely difficult to detect. They have been linked to illicit cyber activity for some time and have become common bartering tools for illicit goods and services on dark marketplaces such as Silk Road, Alphabay and Valhalla. These platforms allow consumers to purchase items such as drugs, weapons, cybercrime-as-a-service, hacking tools, malware, stolen credit card details and compromised usernames and password combinations using bitcoins.

Cryptocurrencies, such as bitcoin and ethereum, are also involved in the facilitation of ransomware attacks, where users are prevented from using their systems until a ransom is paid. It is also worth mentioning here that advanced economies being mature markets may withstand disruptions by cryptocurrencies whereas India may not. However, the proven benefits of cryptocurrencies must also be acknowledged – low cost transactions, transparency, speed, security, cross-border nature, lack of the need for a middle man, investment profits and portfolio diversification.

To summarize, bitcoin shows the potential of completely decentralized communities. By combining cryptography, economics, code and networks, it creates something as fundamental and critical as money. Unlike modern currency which is a creature of law, bitcoin does not require faith in any public institution. The most remarkable thing about it is how it enables a global crowd of people and organizations all acting in their own interest to create something of immense shared value. Needless to say it sparked a wave of innovation and entrepreneurship. But despite ample worldwide enthusiasm, it did not meet with remarkable success. The failure occurred not because of intractable problems with mining or newly discovered vulnerabilities of the cryptocurrency, but for organizational reasons.

Legal nature of cryptocurrencies

The status of cryptocurrency has to be analyzed in the backdrop of the following Acts:

a)   FEMA 1999

b)    The Federal Reserve Bank of India Act 1934 (RBI Act)

c)    The Coinage Act, 1906

d)   Indian Contract Act, 1872

e)   The Payment and Settlement Systems Act, 2007

f)    The Securities Contracts (Regulation) Act, 1956

g)   The Sale of Goods Act, 1930

Moreover, cryptocurrencies may fall under the definition of “computer program” under the Indian Copyright Act of 1957. Needless to say, they can be classified as intangible goods under the Sale of Goods Act of 1930. Again, use and trading thereof needs compliance with principles required under protection of information, especially IT Act of 2000 read with IT (Reasonable Security Practices and Procedures and Sensitive Personal Data and Information) Regulation of 2011.

The legal nature of cryptocurrencies can be explored by comparing them with money and property. Cryptocurrencies possess the positive and normative features of property-being definable, identifiable and capable of being exclusively controlled and transferred. They also share the essential function of money owned by the holder of the private key.  Like bank accounts, the token provides access to some interests to which the owner has a legal entitlement. True, bitcoin has no value in itself as a chain of characters. But for those who recognize the value of cryptocurrencies, the alphanumeric character represents money. It can be used and transferred in exchange for goods, services, fiat currencies and other cryptocurrencies. It provides a claim to others who recognize the function and value of cryptocurrencies. But it is only a claim, an entry or ticket to the game. One must not forget that in Skatteverket v. Hedqvist, the CJEV recognized the use of bitcoin as a means of payment between individuals – as a currency which has no purpose other than a means of payment. Similarly the Court of Southern District of New York in US v. Murgio held that as bitcoin was used as a means of payment for goods and services, it constituted funds or monetary value in law. Needless to say, money and property have no fixed meaning and scope, but are a variable collection of interests established by social convention and State recognition. Money for instance is credit, a social relation, a convention recognized by the State, a two sided balance sheet operation. We should expect the scope of these terms to evolve over time as soon as new uses are discovered or new technologies are applied. Law would then have to adapt to such social realities. No wonder why El Salvador became the first country to recognize bitcoin as a tender.

Some of the cryptocurrency platforms are

1)   Bitcoin (formed in 2008. It is a peer-to-peer electronic cash system based on a PoW (Proof of Work) (which consists of a complex cryptographic math puzzle) consensus mechanism).

2)   Ethereum (launched in July 2015, it is promoted and supported by the Ethereum Foundation, a Swiss non-profit organization).

3)   Ripple (XRP).

4)   Bitcoin Cash (BCH) (Bitcoin developers wanted to raise the block size limit from 1 MB to 8 MB, to reduce transaction fees and improve confirmation times while others had different plans. Because the community could not reach a consensus, the new cryptocurrency Bitcoin Cash was created. Like Bitcoin, Bitcoin Cash makes use of the PoW mechanism, which means that it can be mined.  Anyone who held Bitcoin at the time Bitcoin Cash was created (ie) 1st August 2017 also became owner of the same amount of Bitcoin Cash).

5)    Litecoin (LTC) (Launched in October 2011.It is based on the Scrypt PoW algorithm. Litecoin is often described as the silver to Bitcoin’s gold. It is different from Bitcoin in two ways – first, Litecoin offers a much faster transaction speed than Bitcoin and second, the total supply limit of Litecoin is much higher)

6)   Stellar (XLM).

7)   Monero (XMR).

8)   Dash (based on XII PoW algorithm. What is specific to Dash and makes it different from most other coins is that it has a two -tier network).

9)   NEO.

10)  IOTA (launched in 2016. It is based on what is known as a directed acyclic graph).

Bitcoins have been used as means of exchange to buy online at some of the CD stores or even book tickets.  Many countries have identified cryptocurrencies as a growing threat but responses to this threat have ranged from taking steps to make cryptocurrencies, such as Bitcoin, illegal to taking a “wait and watch” stance. To date, few sustained efforts have been made to regulate Bitcoin or other cryptocurrencies.

However, Chinese banks are prohibited from developing relationships with those using bitcoins or running bitcoin-related businesses.  China has defined bitcoin as a “virtual commodity” that should not be considered or used as a currency. 

In fact, the legality of bitcoins in India was a major question in the year 2014. The Enforcement Directorate (ED) searched and raided a few bitcoin exchanges to see whether they were violating Indian laws or not. ED believed that bitcoins can be used for criminal activities including money laundering, hawala transactions and funding of terrorist activities. Indian Laxmicoin had even sought clarifications from regulatory authorities of India before its launch. Cyber attacks also targeted bitcoin users and bitcoin exchanges in the year 2014. According to some reports, bitcoin website Mt.Gox’s disappeared due to sophisticated cyber attacks and stealing of bitcoins. The Enforcement Directorate also searched Seven Digital Cash LLP offices and websites for selling and buying bitcoins in India.

The Indian Context

RBI issued a circular on 6th April 2018 stating that ‘it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs (virtual currencies) or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of VCs.’ The ban was immediate and gave virtually no time to users and companies to organize their affairs.

Though the circular did not ban cryptocurrencies per se, the effect of the circular was to cut off the use of cryptocurrencies from the normal banking channels. This created a bottleneck for bitcoin companies like Zebpay and Unocoin (which had set up its first ATM in 2018 to enable Indians to buy and sell bitcoins). With the closure of banking channels, these companies resorted to intermediaries. People who hold bitcoins can choose to retain them, but will not be able to convert it into rupees or trade in Indian currency. In the 2018-19 Budget Speech, the Union Finance Minister has said that the Government does not consider cryptocurrencies legal tender.

Internet and Mobile Association of India v. R.B.I.

The circular was challenged before the Supreme Court by way of Writ Petitions. Two main questions were considered by the Court in Internet and Mobile Association of India v.R.B.I.(2020 (2) KLT OnLine 1155 (SC) = 2020 SCC Online SC 275):

1)   Whether the R.B.I. had the power to regulate cryptocurrencies at all?

2)   If RBI indeed had the power, had that power been rightly used so as to ban cryptocurrencies?

As regards the first question, the Court was required to undertake a two-fold exercise: first, the Court was required to examine the extent and nature of RBI’s powers and second, the Court was called upon to determine what the true nature of cryptocurrencies was. As regards the former, an extensive historical review of central banks was undertaken -from considering the establishment of the Bank of England under a royal charter in 1694 to the establishment of the Indian Central Bank by the Imperial Bank of India Act, 1921. After considering the history, the Court examined the functions that RBI was required to perform in modern times and came to the conclusion that one fundamental role was the supervision of monetary policy. As per the preamble of the Reserve Bank of India Act, 1934 (as amended in 2016) the primary objective of monetary policy was to maintain price stability while keeping in mind the objective of growth. The Court also considered other statutory enactments to conclude that RBI had extremely wide powers to operate the currency and credit system of the country, including the sole right to issue bank notes that would constitute legal tender. In fact RBI had a special place in the economic system of the country which even enabled it to exercise functions that were essentially legislative in nature.

As regards the latter – and in particular the petitioners’ contention that they were not ‘money’ as  understood in the legal or social sense – the Court undertook an exhaustive analysis of how various other countries and regulators across the world had treated virtual currencies. The judgement contained a table, showing the different definitions of the term ‘virtual currency’ adopted by regulators around the world. It also considered the definitions of the term adopted in legislation and other statutory instruments in almost thirty jurisdictions.  As a result of the intensive exercise, the Court reached the conclusion that there is unanimity of opinion among all the regulators and the Governments of various countries that though virtual currencies have not acquired the status of a legal tender, they constitute digital representations of value and that they are capable of functioning as a medium of exchange and/or a unit of account and/or a store of value. Hence the Court ruled that it was not possible to accept the contention of the petitioners that virtual currencies are just goods/commodities and can never be regarded as real money.

Thus the Court ruled that RBI did in fact have the power to regulate cryptocurrencies. RBI was not only to be a mute spectator and only determine interest rates. Since by their very nature, virtual currencies had the potential to interfere with those matters that RBI had been tasked to monitor, the Court rejected the first contention of the petitioners that the impugned decision is ultra vires.

But the petitioners had another argument up their sleeve. They argued that the circular was violative of the right to free trade and business guaranteed under Article 19(1)(g) of the Constitution. Access to the banking system was imperative for any business and hence, the petitioners urged, a complete ban on accessing these services imposed an unreasonable restriction on their right to carry on their trade. To decide whether this contention had any merit, the Court relied on the doctrine of proportionality. The Court thus had to examine whether the ban was the best method to deal with the public interest argument raised by RBI or whether regulation without a ban would have been possible or desirable. In doing so, the judgement again referred to how other countries had dealt with the issues raised by virtual currencies. The Court held that “when the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft Bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.” The circular was thus held to be unconstitutional and struck down.

The result of the judgement was to open up the cryptocurrency markets once again. The RBI Governor made statements warning of the dangers of cryptocurrencies. The effect of these statements was that banks kept on dissociating themselves from the crypto markets. Thus even though the ban had been struck down, not much has changed.

Rumours floated that the Cryptocurrency and Regulation of Official Digital Currency Bill 2021 (which sought the probation of all private cryptocurrencies) would be introduced in the Lok Sabha. However the bill was never introduced. Rather than banning the use of cryptocurrency, the Union Budget of 2022 introduced a tax of 30% on the profits earned through the trading of such currencies – a  tacit admission of the legality thereof.

The dangers of speculative investments in cryptocurrencies are as real as they were when the circular was passed. A ban may not be the best option, but failure to regulate is an abdication of responsibility.

The International Scenario

The International Monetary Fund (IMF) recognises that effective policy co-ordination for cryptocurrencies will be required at national and international levels due to their cross-border reach, which increases the potential risks and creates opportunities for regulatory arbitrage. They argue that the initial focus of regulation should focus on the most pressing concerns related to cryptocurrencies - financial integrity, consumer/investor protection, and tax evasion - whilst leaving less immediate risks - financial stability and monetary policy - to later stages. Needless to say, for a regulatory framework tailored to bitcoin and other cryptocurrencies to function effectively, it must be global. This is because it is conceivable that anyone, in any country, could utilise bitcoin for illicit purposes. For example, an Australian individual could purchase bitcoins online and use them to pay an American hacker to carry out a ransomware attack on a third individual, who resides in Russia. If the relevant regulatory framework does not encompass all three jurisdictions and is not consistently implemented within said jurisdictions, the likelihood of successfully punishing those responsible diminishes significantly. Moreover, those misusing bitcoin will simply migrate to regulation-free jurisdictions to acquire and use them unimpeded.

Conclusion

Needless to say, banning cryptocurrencies will sound like banning the internet. Hence the need of the hour is strengthening the Digital Rupee – India’s very own CBDC (Central Bank Digital Currency). There is a fundamental distinction between CBDC and a non- public cryptographic money other than government backing. CBDC will be upheld through permissioned blockchain innovation than permissionless blockchain innovation that is generally utilized through different individual cryptographic forms of money like bitcoin. CBDC holds the promise to become “programmable money” (ie) it could be designed to act in a particular manner in predetermined criteria. This could herald in a new age for public services delivery which at present suffers from systemic issues – inefficiency and corruption, to name a few. When combined with Jan Dhan – Aadhar – Mobile trinity, CBDC can increase financial inclusion and stands to reduce the cost of printing, storage and distribution of money. However, challenges for CBDCs are galore – data breach, counterfeiting and quantum computing being the major ones. The road ahead is that of a sovereign – backed CBDC with high credit standing and stability backed by an infrastructure that is secure from cybersecurity threats especially in the light of emerging technologies including quantum computing. This should be accompanied by a G20 initiative on a global framework for regulating and overseeing cryptocurrencies.

References

1)    Legal status of Cryptocurrency in India: A critical review, Afzalur Rahman M.K, International Journal of Engineering and Technology, 2018.

2)    Internet and Mobile Association of India v. Reserve Bank of India, 2020 (2) KLT OnLine 1155 (SC) = Writ Petition (Civil) No 528 of 2018.

3)    Cryptocurrencies – An Assessment, Keynote address of Deputy Governor, RBI at Indian Banks Association 17th Annual Banking Technology Conference available at https://rbi.org.in/Scripts/BS-Speeches/View.aspx?Id=1196.

4)   Bitcoin for smart trading in smart grid, M.T. Alam, H. Li and A. Patidar, 21st IEEE International Workshop on Local and Metropolitan Area Networks, 2015

5)   The Legal Status of Online Currencies: Are Bitcoins the Future?” R.B.Ollen, Journal of Banking and Finance Law and Practice, 2013

6)   “No, Ripple Isn’t the Next Bitcoin”, M.O.Rcutt, 2018, https://www.technology review.com/s/609958/no-ripple-isnt-the-next-bitcoin/

7)   Bitcoin, its Legal Classification and its Regulatory Framework, T.M.Andjee, J.Bus and Sec L, 2016 http://digitalcommons.law.msu.edu/jbsl

8)   Cryptocurrencies and Blockchain, Legal context and implication for financial crimes, money laundering and tax evasion, Robby Houben, Alexander Snyers, https://www.europarl.europa.eu/crusdata/150761/TAX 3% 20 study % 20 on % 20 cryptocurrencies %20 and % 20 blockchain.pdf