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Opinion – Contempt of Court: A Stark Contrast Between Prashant Bhushan and Justice CS Karnan

This article looks at two cases of Contempt of Court, adjudicated by the Supreme Court of India. The stark difference between the two cases, with no plausible explanation, is quite telling about the power dynamics of the country. 

By: Arnav Sharma, 2nd year, B.B.A. LL.B, Jindal Global Law School.

India loves the Contempt of Courts Act, archaic legislation first enacted in 1926 by the colonial rulers, the British. Having its origins in British law, it was amended in 1971 and has been like that ever since. Contempt of Court is the offence of being disobedient or disrespectful towards a court of law, in the form of behaviour that defies the authority, justice and dignity of the court. The UK did away with the Contempt of Court long ago. But in India, it seems like it is here to stay. 

The Supreme Court’s contempt of court ruling against Prashant Bhushan stirred India’s soul. Liberal anger poured, with several judges even openly speaking in his support. But not too long ago, many of them watched in silence when Justice CS Karnan was sent to jail for 6 months for calling out corrupt judges. That the outrage is selective is so obvious. Saying that this is because of the difference of caste would do it injustice; Prashant Bhushan is a Brahmin, the highest caste, while Justice Karnan is a Dalit, the lowest.

But, Prashant Bhushan is a product of Delhi’s power elite, he is ‘one of them’ only. Justice Karnan is an outsider to this cosy circle. 

But contempt notices or proceedings won’t make Bhushan lose sleep; he has faced similar charges in 2001 and 2009. Every single time, his main argument has been Freedom of Speech. The gutsy and veteran advocate has never missed an opportunity to hammer the judges on corruption. He has rarely put forth any evidence in the public domain but still made huge allegations. He was fined Rs.1. 

On the other hand is Justice Karnan. As long as he shot off letters to Chief Justices of High Courts, to the CJI and occasionally to the Prime Minister, and his unpleasant accusations and theatrics as a self-proclaimed crusader were confined to the High Courts, the Supreme Court was hardly perturbed. But when Karnan defied the Supreme Court, the SC set up a seven-judge bench led by the CJI, and unanimously sentenced a sitting HC judge to prison, without even initiating the proceedings for his impeachment. 

On the bench were Justice Jasti Chelameswaram and Madan B Lokur, both of whom have now endorsed the resolution expressing solidarity with Bhushan and condemning the SC verdict holding him in contempt.

They termed his criticism of judges and the SC as the right to free speech and demanded the withdrawal of contempt proceedings. 

This raises the question: Why didn’t both these judges adopt the same evaluation process while deciding the case against Karnan? Why didn’t they dissent with the majority and gave Karnan a clean chit for exercising freedom of speech alleging corruption amongst judges? If Bhushan is exercising his ‘freedom’ while alleging that judges of the Supreme Court are corrupt, biased, and tilted towards a political party, or ideology, why is it that the same ‘freedom’ is not afforded to Justice Karnan, who was also alleged corruption in the judiciary. If they are right on Bhushan, then they are wrong on Karnan. 

The silence on the Karnan case is shocking. Justice Karnan did not make any public allegations against any judge. He had sent his complaint to the Prime Minister’s Office in a sealed envelope. He had asked for independent investigations into the claims made by him and offered to provide evidence backing his claims. Contrast this to Bhushan, who loud-mouthed on social media, singling out specific and selective judges and thus, in the public domain. 

So how does one understand the absolute silence in the Karnan case, but widespread outrage and support in Bhushan’s case? The simplest way to look at this is as I mentioned above; Justice Karnan is a Dalit outsider, not a part of the system, the media acted with bias and failed to present his case in totality.

The SC itself wished the same, that nobody ever really knows Justice Karnan’s side of the story, by explicitly stating in the Karnan judgement that ‘the media cannot publish or broadcast any statements made by Justice Karnan’, an unbelievable act by the Constitutional Court of a free, democratic republic.

On the other hand is Prashant Bhushan who belongs to the Upper Caste and the ruling elite. His father was Shanti Bhushan, the Law Minister in the Moraji Desai Cabinet, and the father-son duo was the 75th Most Powerful Indians, according to The Indian Express in 2009. 

Another reason for the same is that Justice Karnan was not just challenging the HC and SC, but he had put the whole power structure under scrutiny. The ‘Dalit gaze’ on the upper caste dominated judiciary, was unnerving for the Lutyens’s elite. Justice Karnan put into spotlight the caste domination, hegemonic structure and the opaque and non-transparent/ non-accountable judiciary of India. This is almost blasphemy for the Lutyens’s elite. The same was held by the Kariya Munda Committee of the Indian Parliament (2000-2001), which had found that despite there being suitable, eligible and well qualified SC/ST candidates (judges in District and High Courts), none of them were in the judgeship of the Supreme Court. 

Bhushan finds many new friends among the elites after the Supreme Court verdict. Not only because he is one of them, but because he is a man of the system. Justice Karnan is an outsider and, naturally, he found no friends among the elites and opinion-makers.

In my opinion, the Supreme Court’s judgement on Justice CS Karnan is another ADM Jabalpur; a blunder for which the court, and those who stayed silent on it; Justice Karnan’s pleas of mercy, pardon and review were ignored by the Parliament, the Supreme Court and by the President of India, will repent; it is a blunder of such high order, that it will come to haunt the court in the future, and they’ll have to apologize, just as Justice P.N. Bhagvati had to in 2011, 40 years after his troubled judgement in the ADM Jabalpur case.

Column

Crisis in the International Criminal Court

This article looks at the deep crisis in the International Criminal Court. From a rocky start, after just existence of 18 years, the cracks in the ICC are increasing day by day, with its legitimacy and authority being questioned and challenged by some of the most powerful states in the world.

By: Arnav Sharma, 2nd year, B.B.A. LL.B, Jindal Global Law School.

Based on the Rome Statute of 1998, the International Criminal Court (ICC) is a permanent ‘International Tribunal/ Court’ that seeks to prosecute individuals for the crimes of Genocide, War Crimes, Crimes against Humanity and Aggression. Having started its operations in 2002, and with 123 member states, the ICC has recently been going through a crisis; the criticism against it has never been this stronger, nor has it faced so many accusations of bias, and being called irrelevant, which brings into question: is the ICC required. After analyzing the data, statutes, laws and the views of practitioners and academia, I recommend making changes to the ICC to make it more inclusive, accountable, transparent and less biased. 

This paper looks at (I) brief history of the ICC (II) Beginning of the crisis and Criticisms of the ICC (III) Concluding remarks. 

(I)

Historically, many mass atrocities and grave crimes have been conducted by men with impunity. Be it Chengis Khan, Timur the Lame, Vlad the Impaler or Ivan the Terrible, numerous such men killed, raped, maimed, and tortured millions of people throughout the world.

After the Industrial Revolution, with the advent of technological advancements, and the Enlightenment period, with freedom, liberty and equality being the buzzword, and with the end of feudalism and monarchy, and the subsequent rise of Capitalism and the Democratic Republic states around the world, it was thought that maybe such atrocities were a thing of the past. World War I shook this reality.

The calls to establish an international forum where political leaders accused of committing grave crimes could be tried and punished first arose in the Paris Peace Conference of 1919. The Second World War, the deadliest conflict in human history, saw the setting up of two ad hoc tribunals to prosecute Axis leaders for war crimes. The International Military Tribunal in Nuremberg, and the International Military Tribunal for the Far East in Tokyo. The General Assembly of the United Nations requested the International Law Commission to draft statutes that could establish a similar permanent court, and the ILC came up with two statutes, but they were shelved as the entire world was facing the rampant rise of the Cold War. After the Yugoslavian wars, and the Rwandan Genocide, the International Criminal Tribunal for the former Yugoslavia was formed, to prosecute the large-scale atrocities, ethnic and racial cleansing by the armed forces during the wars. Similarly, the International Criminal Tribunal for Rwanda was set up following the Rwandan Genocide. The creation of these tribunals strengthened the calls for a permanent solution to this issue. 

The ILC presented a final draft statute in 1994, and a special conference of the General Assembly was held in June 1998, to negotiate and finalize the treaty that would serve as the court’s statute. The Rome Statute of the International Criminal Court was adopted by a vote of 120 to 7, with 21 abstentions. 

After 60 countries ratified the Rome Statute, the ICC began its operation on 1st July 2002, with its headquarters in The Hague, the Netherlands. It has 123 member nations and does not enjoy a universal jurisdiction, but the only jurisdiction over member countries. 

(II)

It is not that the opposition against the ICC is new but has been since it’s very inception. Only 123 countries are members of the ICC. Almost 70 countries, including the superpower United States, Russia, India, China, Israel, and the Philippines with many more nations have attempted to or have left the ICC. The ICC has been repeatedly called out for its hypocrisy, anti-Semitic, anti-African bias. An overwhelming majority of investigations and convictions by the ICC have been in the African continent, while many crimes have been committed with impunity around the world which the ICC claims to prosecute. The ICC is accused of having an anti-Semitic and anti-Israel stance since it’s very inception. The United States has repeatedly said that the ICC looks at the Israeli-Palestinian issue from a biased lens. Similarly, is what is alleged by African leaders and politicians, who have said that the ICC exists only to ‘harass small and weak nations’, while completely ignoring what the rich and powerful countries are doing.

The ICC has long been condemned for not taking any action against the United States for its actions in the Middle East, especially in the Iraqi invasions, where multiple US forces personnel and the Central Investigation Agency (CIA) have been accused of killing innocent people, raping women and destroying their properties.

Similarly, other European countries such as the UK, Germany and France’s, and Australia’s armed forces deployed abroad have been accused of committing war crimes, but the ICC has kept mum over such issues. This has further raised questions over its credibility and claims of impartiality. 

But the real crisis began in 2017, when an investigation by eight international media groups of the European Investigative Collaboration found bombshell evidence after analyzing 40,000+ confidential documents of the ICC, finding the open bias and political games in the ICC. Evidence showed that the former and First Prosecutor of the ICC, Luis Moreno Ocampo (2003-2012), along with the ICC tried to detain Cote d’Ivoire’s ex-President Laurent Gbagbo, without having an arrest warrant and before even preliminary investigation. French intelligence documents showed that the same was being done by the ICC and Ocampo in confluence with the new President of Cote d’Ivoire, who wanted political revenge and snatch the control from Gbagbo. Further documents proved that Ocampo and the ICC knew they had no judicial basis and lacked serious evidence to prove that Gbagbo had indeed committed, crimes against humanity, but they still did the same. 

Another explosive finding was of Libya. Ocampo had issued an arrest warrant in 2011 against Muammar Gaddafi, the longest-serving and brutal dictator of Libya, but could not follow through because he was killed later that year. After stepping down from the role of the Prosecutor of the ICC, he worked in a private American law firm, Justice First. One of Justice First’s client was Hassan Taranaki, a very wealthy and powerful Libyan business, once a close friend of Gaddafi, and now an ally of General Haftar Khalifa, the most powerful man and de-facto ruler of Libya. When Ocampo found out that his successor, the new ICC Prosecutor, Fatou Bensouda, planned on prosecuting General Khalifa, he not only worked to protect General Khalifa but also helped the ICC prosecutor to indict Khalifa’s enemies. For this, he received more than $7 Million from a foreign donor, suspected to be living in Qatar. 

EIC’s investigations also show how, after indicting Kenyan President Uhuru Kenyetta, for crimes against humanity in 2010, the ICC and its Prosecutor took a complete U-turn without any plausible explanation.

After leaving office as the Prosecutor, Ocampo began talking about offering Kenyetta ‘an honorable way out’. He then contacted his successor, Bensouda, and they both decided to ‘honourably acquit Kenyetta’. It is mind-blogging to think that the same man who convicted Kenyetta, just a few years ago, would want to let him off after leaving office. It was widely believed that the same was done to appease the United States, which saw Kenyetta as a key ally in the African region, and its fight against Al Shabab in Somalia. 

The EIC findings shredded whatever credibility the ICC had left. The US had never cooperated very much with the ICC, with President George Bush staunchly against it. The Obama administration saw some cooperation on some issues. In 2019, the Pre-Trial Chamber of the ICC refused to authorize an investigation into the alleged war crimes that have been committed by all the parties in Afghanistan since 2003. The Prosecutor had submitted a 20,000 plus page request, in 2017, however, the PTC held that the requested investigation ‘would not serve the interests of justice’. This decision had led to huge dismay and uproar around the world. While the United States, Israel and its allies celebrated this decision, many around the world understood that the ICC had succumbed to the intense pressure and bullying of Washington. However, when the ICC in 2020 did authorize an investigation, the United States began a belligerent, brutal and relentless attack on the ICC. Former NSA John Bolton used inflammatory rhetoric and called the ICC ‘illegitimate’, and President Donald Trump via an EO threatened to arrest ICC officials if ICC brought criminal charges against its personnel, and revoked the Visa of all ICC officials, including the Prosecutors. This has only deepened the credibility crisis the ICC is going through. The ICC is also plagued with cumbersome, lengthy and very slow trials and weak management. Many accused are still at large, including Sudan’s President Omar al-Bashir, and billions of dollars have been spent for just 3 convictions for core international cases. Also, Bashir and Cote d’Ivoire’s former President Laurent Gbagbo got acquitted upon appeal. This made ICC the subject of scorn and ridicule around the world. It also raised questions over the Prosecution’s ability to get convictions in high-profile cases. 

(III)

The challenges the ICC face are numerous and tough, but the ICC is here to stay.

The ICC is not solely to be blamed for that; the member states have not been very supportive of the ICC, and the resources have been limited.

With major powers of the world refusing to join and fund the ICC, and threats of more leaving, how these issues are solved, and the ICC regains its credibility, transparency and the closes in the gap between the unique vision captured in the Rome Statute, to what it is today, is to be seen. 

Column

Freedom of Exploration and Use of Outer Space

Humans are driven towards exploring space and discovering new worlds. This article elucidates the meaning of outer space, the right to explore outer space and the limit up to which this right could be enjoyed.

By: Suhaiba Geelani

Introduction

“The Earth is the cradle of humanity, but mankind cannot stay in the cradle forever.” Considering the lineage of Earth, Earth is a descendant of the Universe. It is a small town with many neighbours in the big Universe. Back in old days, the Sovereign States had the rights of their land going up forever and ever in perpetuity. But then scientists explored outer Space and things got complicated.

What is Outer Space?

Outer space is that expanse of gigantic Universe that exists beyond Earth’s atmosphere. It includes all the space above the lowest perigee achieved by any satellite put into orbit. Space encompasses that aerial arena which cannot be claimed by any Sovereign State.

The relations between the States as well as their relations with international organizations in the sphere of outer space is regulated by International Space Law, developed by The Committee on the Peaceful Uses of Outer Space.

Whilst the Committee has concluded five international treaties and five sets of principles on space-related activities, the Outer Space Treaty of 1967, forms the base of International Space Law. All the five treaties deal with issues such as the non-appropriation of outer space by any one country, arms control, the freedom of exploration, liability for damage caused by space objects, the safety and rescue of spacecraft and astronauts, the prevention of harmful interference with space activities, and the environment, the notification, and registration of space activities, scientific investigation, and the exploitation of natural resources in outer space and the settlement of disputes. The freedom of exploration, and use of Outer Space, enshrining the idea that outer space is Res-Communis i.e. common heritage of mankind, is one of the key provisions of international outer space law. Mere a swift glance at this vital concept begs numerous questions. Who can explore outer space? What does exploration involve? What is the limitation of this freedom?

Who can explore outer space?

Article I of the Outer Space Treaty provides that outer space, including Moon and other celestial bodies, shall be free for exploration and use by all states without discrimination of any kind, on the basis of equality, and, in accordance with International law, and there shall free access to all areas of celestial bodies. It reiterates that outer space is not subject to national appropriation. It shall be the province of all mankind. No State can claim sovereignty over them by means of use or occupation or any other means. The language of the provision is extensive. It refers to “all” States, and for this reason, there can be little doubt concerning the intention of the drafters to include or exclude any specific State. Thereby, all the State, Parties, signatory, or Non Parties have the right to freely explore and use the outer space. The treaty does not specifically preclude other international entities like international governmental organizations, non-governmental organizations and individuals, etc. from the exercise of this freedom. However, the activities of non-governmental entities require the authorization and continuing supervision by the State concerned. In the exercise of this universal right, States are free to determine all aspects of their participation in the exploration, and use of outer space on an equitable and mutually acceptable basis as long as the contractual terms in such cooperative ventures are fair, reasonable and in full compliance with the legitimate rights and interests of the parties concerned. The states are obliged to respect, and not hamper one another’s interests in this sphere.

What does exploration and use involve?

The Exploration and use cover a wide range of human activities irrespective of whether such activities are carried out directly by man or indirectly through the use of his instruments. Outer Space Law does not specifically mention any list of activities that the countries are supposed to carry out in the outer space.

However, each of the treaties as well as declarations constituting International Space Law, stresses the notion, that the activities carried out in outer space and whatever benefits might be accrued from outer space should be devoted to enhancing the well-being of all countries and humankind. 

The benefits may be the actual or the potential benefit including material, political, psychological, propaganda, military and other benefits and interests. The activities of States in the exploration and use of outer space shall be carried on in accordance with international law, including the Charter of the United Nations, in the interest of maintaining international peace and security and promoting international co-operation and understanding. The “Benefits Declaration” declares that all States, particularly those with relevant space capabilities and with programmes for the exploration and use of outer space, should contribute to promoting and fostering international cooperation on an equitable and mutually acceptable basis. In this context, particular attention should be given to the benefit for and the interests of developing countries and countries with incipient space programmes stemming from such international cooperation conducted with countries with more advanced space capabilities. The General Assembly, after recognising the significance of nuclear power has even extended its limited usage in the outer space as well.

Limitations 

The ubiquitous right of freedom of exploration and use of outer space is not absolute. It is limited by a number of both general as well as
specific provisions. 

The  Outer Space Law explicitly acknowledged that the exploration and use must be carried on in accordance with the provisions of International Law and for the benefit of mankind.  Part II of Article IV of the Outer space treaty specifically limits the exploration and use of moon and other celestial bodies for peaceful purposes.

Though , the term peaceful has not been defined anywhere, it could be interpreted that peaceful simply means non aggressive or amiable . Space law prohibits installation of any nuclear weapons or weapons of mass destruction, establishment of military bases or any kind of military operations on celestial bodies or satellites or space stations. It forbids national appropriation and harmful contamination of outer space. 

Conclusion

International Space Law has appreciably maintained and regulated the conduct of the states in the sphere of Outer Space. But it contains certain scanty provisions, which are in dire need of updates. In addition to this, Space and its exploration a nd use have drastically changed over last few decades, so a robust space regime is of utmost importance.

Column

Muslim Stand-Up Comic Jailed-For Jokes They Thought He Would Crack

To suppress free speech is a double wrong. It violates the rights of the hearer as well as those of the speaker

-Frederick Douglass

Written by: Rahul Krishna Sharma, 1st Year at Campus Law Centre, Delhi University

Introduction

On 1st January 2021 stand-up comedian, Munawar Faruqui and four of his associates were arrested by the Indore Police, following a complaint from Eklavya Singh Gaur, son of Indore BJP MLA Malini Gaur. In the complaint, Mr Gaur complained that the aforementioned allegedly insulted Hindu deities during a comedy show and profaned Home Minister Amit Shah.

This article intends to analyse the Munawar Faruqui case and seeks to answer a few unanswered questions that lay still in the political and legal spectrum of India.

Further, this article is divided into two parts. The first part attempts to analyse as to who exactly is Munawar Faruqui and why is it important to understand him in the context of the 21st century India. The second part of this article intends to scrutinize the case made against him and to provide a deep seethed understanding of the legal sections and precedents that are in play.

Munawar Faruqui: A Contextual Understanding

It would be highly erroneous and careless on my part if I leave this section of the article by just labelling Munawar Faruqui as a standup comedian or an entertainer because the truth is, he is much more than that.

Munawar Faruqui, a 28-years-old small towner Muslim comedian residing from Junagadh is today the poster boy of a modern young Muslim man who is unconventional to the bone, not only because of this career choice but also because of his (a Muslim man’s) choice to voice himself against the ruling party in a highly polarized Hindu India. He is aspirational in the sense that he made it in the most unconventional field and in the most unconventional way and sees himself beyond his religious identity which in today’s India is highly commendable. However, it’s not just this. Munawar essentially carries two burdens on him. First, the lack of financial capital which in crude terms is “poverty” and poverty, does not just deny the material benefits but as Amartya Sen explains, the exclusion of poor from participation and access to opportunities and activities is a major nonmaterial dimension of poverty that also needs to be recognized and this, in its entirety is the second burden that Munwar faces and that is of the social exclusion. However, this social exclusion doesn’t just arise from him being poor but also stems from his religious identity i.e. him being a Muslim man in an India that is submerged in the idea of Hindutva.

 What really happened?

The question “What really happened” is intrinsic and is not just a question for Munawar but also for the Indian masses who stand by the very soul of the Indian Constitution which swears to be secular and democratic.

On 1st January 2021, Faruqui was slated to perform at Indore’s Monroe Café when a mob led by Eklavya Singh Gaur, convenor of the Hind Rakshak Sanghatan entered the café and demanded the performance to be halted. Gaur further alleged that the show mocked Hindu deities by passing indecent comments and also reprimanded Faruqui for a previous video that was uploaded by the comedian on his Youtube page. The audience however retaliated with a different account and reported that the event had just started and went on for five minutes or so and nothing was said that could be construed as hurting religious feelings. The police do not have any video evidence of the event.

The Legal Proceedings

The Madhya Pradesh Police, after a preliminary probe, booked Faruqui under IPC section 295-A, 298(uttering words with deliberate intent to wound religious feelings) and 269(negligent act likely to cause spread of diseases)

Section 295A of the IPC

Section 295A of the IPC states that whosoever deliberately and maliciously intends to outrage feelings of any class by insulting its religion or religious beliefs in any manner will be punished.

However, it becomes essential to prove the mens rea i.e., guilty mind of the person accused. With no video evidence and the audience siding with Munawar this entire trial can always be judged as a political trial rather than a legal trial, in which case the issue entirely changes. The issue then is not whether any man is above the law.

It is whether any man is below the law and in this case, it is our very own Munawar whose identity became the very reason for him to be treated differently.

In a religious and sensitive country like India, anything can be interpreted to be an insult to someone’s religious beliefs.

However, criminal law cannot operate to curb free speech and liberty in order to protect the religiously sensitive kind.

The applicability of Section 295A came up before the Supreme Court in the 1957 Ramji Lal Modi Vs. The State of U.P [1957] INSC 31. 

In this case, the constitutionality of section 295A was challenged. However, this case came up before the court, post the 1st Constitutional Amendment, which introduced reasonable restrictions in Article 19. Therefore, it was difficult for the court to strike down the law as unconstitutional.

However, the court clarified that—

“… s. 295A does not penalise any and every act of insult to or attempt to insult the religion or the religious beliefs of a class of citizens but it penalises only those acts of insults to or those varieties of attempts to insult the religion or the religious beliefs of a class of citizens, which are perpetrated with the deliberate and malicious intention of outraging the religious feelings of that class. Insults to religion offered unwittingly or carelessly or without any deliberate or malicious intention to outrage the religious feelings of that class do not come within the section. It only publishes the aggravated form of insult to religion when it is perpetrated with the deliberate and malicious intention of outraging the religious feelings of that class”

The Supreme Court in Shreya Singhal [AIR 2015 SC 1523] has argued that while Ramji Lal Modi did not strike down Section 295A, the impugned provision was read down to mean that aggravated forms of insults to religion must have a tendency to disrupt public order.

More recently, in the Mahendra Singh Dhoni Case [AIR 2017 SC 2392], the Supreme Court reiterated that in Ramji Lal Modi “emphasis has been laid on the calculated tendency of the said aggravated form of insult and also to disrupt the public order to invite the penalty.”

The established precedents clearly indicate the following. 

 Firstly, 295A does not penalise every act of insult.

Secondly, deliberate and malicious intention of outraging religious feelings must be proved.

Thirdly, only an aggravated form of insult to religion is punished.

Lastly, the aggravated form of insult must have a tendency to disrupt public order.

To argue from a perspective that Munawar Faruqui has desecrated section 295A is not only a death to free speech but also is against the wishes of the Prime Minister of the country who rightfully says

“I think we need more satire and humour. Humour brings happiness in our lives. Humour is the best healer.”

 Citations:

  1. Ramji Lal Modi Vs. The State of U.P [1957] INSC 31
  2. Shreya Singhal [AIR 2015 SC 1523]
  3. Mahendra Singh Dhoni Case [AIR 2017 SC 2392]
  4. Munawar Faruqui’s Case- Misuse Of Section 295A Of Penal Code And An Aggravated Insult On Free Speech (livelaw.in)

Column

FEMA regulations on cross border merger

RBI issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations) on 20 March 2018 to address various issues that may arise concerning cross border mergers from an exchange control perspective.

By: Riya Singh, 4th year, BBA LLB, KLE Society’s Law College, Bangalore.

Introduction

On 13th April 2017, the Ministry of Corporate Affairs (MCA) notified Section 234 of the Companies Act, 2013 and inserted a new Rule 25A (merger or amalgamation of a Foreign Company with an Indian company and vice-versa) in the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (Compromises Rules), paving way for merger and amalgamation of a Foreign Company with an Indian company and vice-versa. Since Rule 25A required prior approval of the Reserve Bank of India (RBI) for the cross-border merger, without corresponding procedural aspects in place, the cross-border merger could not take-off. Now, with the RBI notifying the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Regulations/Regulations) for mergers amalgamation and arrangement between Indian and foreign companies on 20th March 2018, this gap has been bridged.

Key definitions under the Regulations 

  • ‘Cross border merger’ means any merger, amalgamation, or arrangement between an Indian company and foreign company under the Act. 
  • ‘Foreign company’ means any company or body corporate incorporated outside India whether having a place of business in India or not. For outbound mergers, a foreign company should be incorporated in a specified jurisdiction. 
  • ‘Inbound merger’ means a cross border merger where the resultant company is an Indian company. 
  • ‘Indian company’ means a company incorporated under the Companies Act, 2013, or under any previous company law. 
  • ‘Outbound merger’ means a cross border merger where the resultant company is a foreign company. 
  • ‘Resultant Company’ means an Indian company or a foreign company, which takes over the assets and liabilities of the companies involved in the cross-border merger.
  • The Ministry of Corporate Affairs, Government of India notified Section 234 of the Companies Act, 2013 and Rule 25-A of the Companies Merger Rules, providing for a mandatory prior approval of the Reserve Bank of India, to transit mergers and amalgamations between Indian companies and companies incorporated in International/foreign jurisdiction (cross-border merger).

Cross-border merger: Procedural aspects

Inbound Mergers

When the Resultant Company is an Indian Company, the following procedure becomes applicable:

  • Issue/Transfer of securities:

The issue or transfer of any security and/or a foreign security, to a person resident outside India should be made under the pricing guidelines, entry routes, sectoral caps, attendant conditions, and reporting requirements for foreign investment as laid down in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (TISPRO). However, this is subject to the following conditions:

Where the Foreign Company is a joint venture (JV) or a wholly-owned subsidiary (WOS) of the Indian company, it shall comply with the conditions prescribed for transfer of shares of such JV/ WOS by the Indian party as laid down in Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 (TIFS); 

where the Inbound Merger of the JV/WOS results in the acquisition of the Step-down subsidiary of JV/ WOS of the Indian party by the Resultant Company, then such acquisition should comply with Regulation 6 and 7 of TIFS which provide for permission for direct investment in certain cases and investment by Indian party engaged in financial services sector respectively.

  • Borrowings:

Any borrowing of the Foreign Company from overseas sources that becomes the borrowing of the Resultant Company shall conform within two years, to Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 or Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.

Outbound Mergers

  • Any person resident in India may acquire or hold securities of the resultant company under ODI Regulations5 (or under LRS6 in case of a resident individual). 
  • Any office of the Indian company in India shall be deemed to be a branch office of the resultant company under the Branch/Liaison Office Regulations, 20167. 
  • The guarantees or outstanding borrowings shall be repaid as per the sanctioned Scheme. Ø Any liability not in conformity with the FEMA regulations shall not be acquired by the resultant company. Further, a no-objection certificate to this effect is to be obtained from the Indian lenders. 
  • The resultant company may acquire, hold, and transfer any asset in India which a foreign company is otherwise permitted to acquire. 
  • Where the asset or security is not permitted to be acquired or held, the resultant company shall sell/ dispose of such asset or security within two years from the date of sanction of Scheme and repatriate sale proceeds outside India through banking channels. Repayment of Indian liabilities from sale proceeds of Indian assets within two years permissible.

The legislation provides that any transaction undertaken concerning a cross-border merger under the FEMA Regulations shall be deemed to be approved by RBI under Rule 25-A.

While the FEMA Regulations intend to cover cross-border “merger, amalgamation, demerger or arrangement”, the jurisdiction of legislative provisions of the Companies Act and Merger Rules are delimited to only “mergers and amalgamations”, without any explicit mention of “arrangement or demergers”. This is likely to have a trickle-down impact on insolvency and bankruptcy proceedings as well since it will encourage foreign bidders to consider buying Indian assets. In an inbound merger, the new rules allow the resultant company to issue or transfer any security to a person resident outside India subject to pricing and sectoral foreign investment conditions and FEMA regulations. For an outbound merger, the new provision allows resident Indian entities to acquire or hold securities of the resultant company under FEMA regulations.

Conclusion

After the introduction of the provisions for cross border merger in the Act, the notification of these Regulations would now enable active evaluation of cross border merger. Any transaction on account of a cross border merger undertaken in compliance with these Regulations shall be considered to have deemed approval of the RBI subject to obtaining other applicable regulatory approvals as provided under the Act. Further, for all practical purposes of corporate planning – extant direct and indirect tax laws, statutes governing corporate-conduct, accounting norms, and other relevant compliance provisions of respective jurisdictions need to be evaluated in greater detail concerning cross border arrangement.

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