Friday, 3 June 2016

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Sunday, 27 March 2016





The Real Estate (Regulation and Development) Bill:





The Government plans to have, by year 2022,affordable housing for all citizens.Till date especially in Mumbai, Pune,Bangalore, Delhi and countless other metropolis and developing urban areas, the developers took undue advantage of the buyers even when real estate was already pricey and profitable, information about the builders was not dependable, and there was no way for the consumer to have technical knowledge of construction.

The consumers in the growing real estate market face an acute problem of information asymmetry. They don’t have adequate information about the land itself, its ownership and other caveats. They have no way of knowing whether the developer has all the necessary permissions in place and they have always been cheated about the completion dates even when they end up paying on a timely basis of “slabs”, which makes up for almost 90% of the cost of the flat/real estate. However, banking on this information asymmetry, the developers divert these funds to buy other projects and continue with the same procedure and proceed for a 3rd project and so on and so forth. By this time, the consumers of the 1st project are now in aggression over the delay so some funds find their way back to completing this estate.The developer, even though undertaking massive projects in this capital intensive sector, never takes a loan or is never in need of financial assistance because he uses the consumer’s money for rolling which is more than sufficient for him.

On the other hand, if the buyer vets the agreement, it is likely that he will infer that all clauses are in favor of the builder and loaded against him. For instance, a delay in payment empowers the developer to charge you 18%p.a, while there is absolutely no mention whatsoever of any liability on the developer to deliver the estate on time. Forget delivery, even the completion dates are subject to numerous conditions and caveats which nullify any legal backing to the promise of a delivery, even though it is mentioned in the agreement. Project brochures are made by advertingprofessionals, which portray a totally different scene from what is actually being developed. Amenities are overstated, maintenance costs are conveniently ignored and the consumers are misled to believe that surrounding estates will also be as pleasant as depicted in the advertisements. Sample flats shown by the developer have class graded amenities but in reality the ones provided on completion are cheap knock-offs.

The Developer always finds avenues to delay handing over the estate to the society (read: housing society), primary reason being:
i. He can charge more maintenance
ii. If,FSI is increased, the developer can benefit by developing the same estate further with a higher market price.

The Real Estate bill tries to curb these activities and help overcome the hardship faced by buyers. The core objective of the bill is to protect the interest of the buyers and promote fair play in real estate market.


The highlights of the Real Estate (Regulatory and Development) Bill are:-


1)   There has been no solid framework for any regulation to set in in this sector and this bill will successfully formulate a uniform regulatory environment for Real Estate.

2)   The Government is set to establish,first and foremost, the Real Estate Regulatory Authority (RERA). This body will be created for the registration of Real Estate agents and their subsequent projects. Appellate Tribunal of Real Estate will also be devised so that the decisions of RERA could be appealed. This will result in less pressure on the judiciary and thereby result in faster dispute resolution through these forums.

3)   The Bill outlines the duties of developers, buyers and agents in the Residential Real Estate sector.


4)   Developers will be barred from booking or offering any Real Estate projects of Residential(housing,condominium,town homes) Commercial (offices, warehouses) and industrial (factories, workshops) nature for sale without registering them in RERA. The information of the promoter would be uploaded with the details of above mentioned point in the website of RERA.

5)   To prevent diversion of funds  from the project, the bill envisages that 70% of the money paid by the buyer should be maintained in a separate escrow bank account for the construction of the project to cover the cost of construction, including but not limited to, the cost of the land. The developer will be allowed to withdraw the amount,subject to terms and conditions set in the legislation.

6)   Standard model agreement will have written clauses with respect to completion certificate and payments.

7)   All measurements will be disclosed in terms of carpet area only. This brings about uniformity. Carpet area is the area which includes usable spaces like kitchen and toilets, and it would be clearly defined to impart clarity, which was not the case prior to his bill. Misleading terms like super-built up will be barred or will not have any legal backing.

8)   Structural Defects: It is suggested that builders will be liable for structural defects with imprisonment of five years which is more than the earlier prescribed punishment of two years. “In such cases, the jail term is that of one year or five per cent of the apartment cost or both. Other pro-developer measures include single window clearance and digitization of land records.”  Defect liability period for quality of construction is now 5 years.

9)   The bill also brings about an increasingly regulated broker environment.Brokers are also required to register with the Regulatory authority.

10)    At least 2/3rd of the buyers consent will be needed if the developer wants to alter the plans,structural designs and specifications of the building.No changes in the project plan at a later stage.

11)  No Discrimination: There will be no discrimination based on caste, religion, creed, or gender. The government may bring a non-discriminatory clause to allow anyone to buy a property in the complex, even a transgender.

12)  Resident Welfare Association: “Formation of resident welfare association has been made compulsory within 3 months of the allotment of the majority of the units in the project so that buyers get to utilize facilities such as common hall, club house, reading room”.





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Tuesday, 15 March 2016





    COLLECTIVE FAILURE OF SYSTEM
 


The culture of ‘Self –enriching’, growing rich at the cost of others, is fast catching up in India, courtesy the politicians and the failure of systems to penalize them,thereby failing the ‘Doctrine of unjust enrichment’.

Mr Vijay Mallaya left the country, not set to return in the near future, similar to Mr. Lalit Modi and the notorious Dawood Ibrahmin.


The systematic failure of the Banks and the Regulatory system, in tandem with the blatant irresponsible use of the Kingfisher conglomerate funds as the promoters personal money bank all culminated into this massive blow up.

BANKS
a) The total amount that KFA owes to all banks is approximately Rs. 9,000 Crores, broadly divided between the banks as,SBI Rs. 1,600/- Crores, IDBIRs. 800/-Crores,PNB Rs. 800 Crores,BOI Rs. 650 Crores,BOB Rs. 550 Crores.

b) Consortium of 17 lenders led by SBI had from time to time extended loans on favorable terms to KFA. Was Due diligence properly conducted? Was credit appraisal properly done? With individual risk of each bank being stretched by individual loans, a consortium loan would further weaken the banks security and stretch the company’s asset cover to its limits.

c) Every bank has a credit committee.Their role in sanctioning huge amounts? As mentioned before, the banks had individual credits extended to the company along with the consortium loan. This fact in itself should have raised red flags within the banking system as it goes well beyond the banks systematic risk.

d) Were they convinced to finance an aircraft which they had never done in their life? Nor having knowledge of financing aircrafts? A capital intensive industry in a competitive market built on cash flows and working capital is massive risk in itself which requires strenuous planning and sound crisis mitigation systems in place. 

e)In the year 2009-10,the consortium restructured their debt, even when KFA had negative net worth and was technically categorized as an NPA. As a stakeholder, the banks should have raised concerns and filed for creditors liquidation given the bad shape of the company’s debts. However, restructuring the same debt was bound to fail, and the banks had a moral duty to end the company then and there. Ignoring the moral duty, they converted the loan into equity, that too at a premium. Rs. 1,355 Crores of debt was converted into equity at 61.6% premium of market price. In lay man’s terms, a loan was converted into capital. Who benefited from this? Certainly not any of the stakeholders!

f) A common element in all of the lending’s was the reliance on the Kingfisher brand value and its (assumed) ability to generate cash. How far can one take the reliance on ‘brand value’? How reliable is the valuation itself. Given the bad shape of the debt in the company and the conglomerate as a whole, shouldn’t the brand be revalued from time to time to reflect its true value?

h) Inspite of all the aforementioned problems the company was facing, Vijay Mallya drew a salary of almost Rs. 34 Crores. Was there no shareholder activism or moral obligation on the any of the lenders and Financial Institutional Investors to oppose this practice?

i) The auditors, of the Banks as well as KFA, must have notices this bubble of loan bloating up for quite a while. In a situation which escalated to non-payable debt of Rs. 9,000 Crores, none of the auditors of any organizations which were a part of this transaction had qualified any of the audit reports. Isn’t this a breach of the auditor’s fiduciary duty?

Let us not forget that every company here had to file its compliances regularly to regulators from every spectrum of the economic industry. Which brings us to the next point.

REGULATORY AUTHORITIES
The Enforcement Directorate, RBI, Directorate of Aviation, the quasi-judicial body of DRT, the Registrar of Companies, the Income tax authorities and ultimately the Stock Exchange and SEBI. All of these regulatory bodies had received some form of literature pertaining to KFA’s predicament, and yet, no suo moto action was taken. Some of the issues which these bodies should have picked can reiterated, such as:

-          Conversion of 20%loan in to equity when net worth was flattening.
-          Was prudential credit exposure limits followed by banks?
-          The borrower’s inadequate credit ratings and the Company’s eligibility. KFA’saviation license was cancelled in the year 2012 and had not flown since then. How such a company which fails the basic test of ‘going concern’ allowed to raise debt on a continuous basis.
-          The Labour commissioner did not take any action in spite of salaries not paid on time.

CBI issued Look out Circular(LOC)against Mallaya in October and changed it back in November. Why weren’t any reports raised to question this action which was obviously on the right track? SFIO tightened their grip on defaulting companies and the irresponsible lenders but only when it was too late. Stakeholders expect a more pro-active intimidation from regulatory authorities. Similarly, DRT has given adjournments a multitude of times, which can be viewed as a failure of the judicial system. Did all the aforementioned investigating agencies act with rectitude in the KFA case?

KFA
KFA was incorporated as a birthday present to the son of Vijay Mallya, Siddharth Mallya, on his 18th birthday, listing him as one of the Directors. At the inception, the airline functioned in able hands actively killing the competition by setting up benchmark of affordable luxury travel. However, it started going downhill soon after. It started being used as the Mallya’s personal charter airline, which primarily came into focus when he flew in pop star Enrique Iglesias for his 60th Birthday, and started directing personal attacks on other airline by tweeting about their poor service. Furthermore, the Basic principles of corporate governance were not followed while running the company, let alone ethical standards.

He is drawing salary as Rajya Sabha Member(tax payers money) and he ran away from India on Diplomat  passport.  

This is not a one –off story.Such stories get repeated with alarming regularity and yet every time the regulators swoop in when the worst has passed. Jindal Steel & Power,Jai Prakash Associates whose ratings have been downgraded by 2 notches in a single action, indicate that they need to be monitored more closely.







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Friday, 15 January 2016



Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015.

On 23 October 2015, the President of India promulgated the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance, 2015.

The Ordinance provides for the constitution of Commercial Courts, and the establishment of Commercial Divisions and Commercial Appellate Divisions within High Courts to adjudicate ‘Commercial Disputes’.

The Ordinance amends certain provisions of the Civil Procedure Code, 1908, to the extent applicable to ‘Commercial Disputes’ and also prescribes timelines to streamline the conduct of such ‘Commercial Disputes’.

 "Commercial Court" means the Commercial Court constituted under sub-sec (1) of section 3,

 "Commercial Appellate Division" means the Commercial Appellate Division in a High Court constituted under sub-section (3) of section 3;

"Commercial dispute" means a dispute arising out of—

(i)                 Ordinary transactions of merchants, bankers, financiers and traders such as those relating to mercantile documents, including enforcement and interpretation of such documents;

(ii)               Export or import of merchandise or services;

(iii)             Issues relating to admiralty and maritime law;

(iv)              Transactions relating to aircraft, aircraft engines, aircraft equipment and helicopters, including sales, leasing and financing of the same;

(v)                Carriage of goods;

(vi)              Construction and infrastructure contracts, including tenders;

(vii)            Agreements relating to immovable property used exclusively in trade or commerce;

(viii)          Franchising agreements;

(ix)              distribution and licensing agreements;

(x)                management and consultancy agreements;

(xi)              joint venture agreements;

(xii)            shareholders agreements;

(xiii)          subscription and investment agreements pertaining to the services industry including outsourcing services and financial services;

(xiv)          mercantile agency and mercantile usage;

(xv)            partnership agreements;

(xvi)          technology development agreements;

(xvii)        intellectual property rights relating to registered and unregistered trademarks, copyright, patent, design, domain names, geographical indications and semiconductor integrated circuits;

(xviii)      agreements for sale of goods or provision of services;

(xix)          exploitation of oil and gas reserves or other natural resources including electromagnetic spectrum;

(xx)            insurance and re-insurance;

(xxi)          contracts of agency relating to any of the above, or relating to such other commercial disputes as may be prescribed; and

(xxii)        Such other commercial disputes as may be prescribed.

 Wide meaning of 'Commercial Dispute': The term ‘Commercial Dispute’ has been very broadly defined in the Ordinance, to encompass almost every kind of transaction that gives rise to a commercial relationship. The subject matter of such disputes could be as wide ranging as commercial contracts relating to exploitation of natural resources, intellectual property rights, insurance, construction and infrastructure contracts, government contracts, immovable property, etc. Such commercial disputes will now be adjudicated by Specialized Commercial Courts which will comprise of judges specially trained to deal with Commercial Disputes.

 Specialized Commercial Courts at various levels: These will be categorised as follows:
(a)   Commercial Courts will be constituted in every district in all states and union territories where the High Court of that state or union territory does not have/exercise ordinary original civil jurisdiction. At present, only five High Courts exercise ordinary original civil jurisdiction – the High Courts of Delhi, Bombay, Madras, Calcutta and Himachal Pradesh. Therefore, in all other states and union territories, Commercial Courts will now adjudicate upon Commercial Disputes.

(b)   Commercial Divisions will be set up within High Courts which do exercise ordinary original civil jurisdiction. A Commercial Division in such states and union territories will exercise jurisdiction over all cases and applications relating to Commercial Disputes.

(c)    Commercial Appellate Divisions will be set up in every High Court to hear appeals against (i) orders of Commercial Division of High Court; and (ii) orders of Commercial Courts. Interestingly, the Ordinance does not provide for a statutory right to appeal to the Supreme Court from an order of the Commercial Appellate Division. Accordingly, the Ordinance limits the number of appeals allowed in Commercial Disputes to only one.

At present, although there are no specialized designated commercial courts which hear Commercial Disputes, certain judges at the district court level predominantly hear Commercial Disputes. Similarly, in the five High Courts which exercise ordinary original civil jurisdiction in India, there are designated judges who hear Commercial Disputes. Such designated judges at the district court level and the High Court level, however, do not hear commercial matters exclusively. The Ordinance proposes to constitute and establish Specialized Commercial Courts to hear only Commercial Disputes.

Commercial Dispute value threshold: Under the Ordinance, only those Commercial Disputes where the value of the subject matter in respect of the said Commercial Dispute is more than Rs 1,00,00,000 (defined as Specified Value in the Ordinance), will be adjudicated by the Specialized Commercial Courts. Further, the Ordinance has also prescribed the manner in which the Specified Value of a commercial dispute is to be determined.

Given that the objective of the Ordinance is to fast track the resolution of Commercial Disputes, the threshold of Rs. 1,00,00,000 can be considered to be low. As a result, larger Commercial Disputes may not receive the focus that may have been intended through the Ordinance.

Existing Commercial Disputes to be transferred: Under the Ordinance, all suits and/or applications relating to a Commercial Dispute of a Specified Value pending before any civil court where a Commercial Court has been constituted will be transferred to such Commercial Court. Similarly, where a Commercial Division has been constituted (in the five High Courts exercising ordinary original civil jurisdiction), such pending suits and applications will be transferred to the new Commercial Divisions of such High Courts.

Jurisdiction over arbitrations: In line with the terms of the arbitration ordinance, all matters pertaining to international commercial arbitrations have been brought within the purview of the High Court, whether or not such High Court exercises original jurisdiction [1], except matters relating to the appointment of arbitrators in international commercial arbitrations[2].
Applications and appeals arising out of domestic arbitrations involving purely local Indian parties, which would ordinarily lie before any principal civil court of original jurisdiction (not being a High Court), shall now lie before a Commercial Court (where constituted) exercising territorial jurisdiction over such arbitration.

Consequent amendments to CPC: The provisions of the Code of Civil Procedure, 1908 (CPC), to the extent of its application to any suit in respect of a Commercial Dispute of a specified value, has been amended by the Ordinance to streamline the conduct of Commercial Disputes. Key amendments to the CPC are as follows:
(a) The Ordinance has introduced a new provision in the CPC, which prescribes that a Commercial Court or a Commercial Division will hold a ‘case management hearing’ to frame issues and fix timelines, as noted below, to ensure that the case is concluded in an expeditious and efficient manner.
(b) The amended provisions of the CPC allow parties to apply for summary judgement where the court could arrive at a decision solely on the basis of written pleadings.
(c) The ordinance has also introduced comprehensive provisions in the CPC dealing with award of actual costs and interest. The amended provisions of the CPC also provide the issues that Specialized Commercial Courts may consider while imposing costs on parties. The earlier provisions under the CPC dealing with costs and interest, provided for imposition of only nominal costs [3] (which continue to apply to matters other than Commercial Disputes).

Fixed Timelines: The Ordinance, while amending the provisions of the CPC, has also introduced strict timelines to ensure prompt resolution of disputes, in the following manner:

a)      The maximum period for filing a written statement has been set at 120 days upon the expiry of which the defendant’s right to file a written statement shall stand forfeited.
b)      All appeals to the Commercial Appellate Division must be made within a period of 60 days from the date of the impugned judgement and the appellate division must endeavour to dispose of the same within 6 months from when it is filed.

c)      A plaintiff seeking to adduce additional documents must make an application for the same within 30 days of filing the suit.

d)      All applications seeking leave to deliver interrogatories must be decided within 7 days from the date on which they are filed.

e)      Interrogatories shall be answered by affidavit to be filed within 10 days, however such period is extendable by the court.

f)       All parties must complete inspection of all documents disclosed within 30 days of the filing of the written statement.

g)      Any directions sought by parties for inspection of documents must be disposed of within 30 days of filing an application for such directions.

h)      Inspection of documents must be completed within 5 days of the passing of an order allowing inspection.

i)        Parties must submit their statements of admission/denial of all disclosed documents within 15 days of completion of the inspection. The court however has the discretion to fix any other such time as it deems fit for submission of these statements.

j)        Any party served with a notice to produce documents may be given up to 15 days to submit the relevant documents.

k)      The first case management hearing is to be held within four weeks from the submission of admission/denial of documents by all parties to the suit.

l)        Arguments must be concluded within 6 months from the date of the first case management hearing

m)   Written arguments under distinct heads are to be submitted by the parties within 4 weeks of the commencement of oral arguments. Thereafter, the court may allow revised written arguments to be filed within one week after conclusion of oral arguments.

n)      The court must pronounce judgement within 90 days of conclusion of arguments.



The Commercial Court shall have jurisdiction to try all suits and applications relating to a commercial dispute of a Specified Value arising out of the entire territory of the State over which it has been vested territorial jurisdiction.

Notwithstanding anything contained in any other law for the time being in force, no civil revision application or petition shall be entertained against any interlocutory order of a Commercial Court, including an order on the issue of jurisdiction, and any such challenge, subject to the provisions of section 13, shall be raised only in an appeal against the decree of the Commercial Court.



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