Contributed By Cyril Amarchand Mangaldas
India follows the common law system, with a written constitution placed at the apex of that system. All laws and enactments must conform with the Constitution. India has a bicameral parliamentary system, with legislatures at both union and state levels. The legislature, coupled with the executive and the judiciary, together make up the three pillars of the Indian legal system.
India being a union of 29 states and seven union territories, the Indian Constitution comprises a mix of both federal and unitary features. In fact, the Indian legal system has often been referred to as "a federal structure with a strong bias towards the centre". As per the Indian Constitution, the power to legislate is conferred both to the parliament and to the state legislatures. The legislative powers have been divided between the centre and the individual states under the following three lists, as per the Constitution:
The power to legislate on residual matters not provided for in the above three lists is vested with the centre.
Sources of Law
While the Indian Constitution is considered to be the supreme law of the land, the Indian legal system also draws from other sources. Statutes and enactments of the parliament and state legislatures form an important part of the legal ecosystem. Even the executive has the power of delegated legislation in certain matters, allowing it to exercise law-making powers in the form of ordinances, rules and regulations. Judicial decisions, especially of the higher courts, are an essential source of law due to their precedential value. Customary and religious laws drawn from long-standing practices and religious ideas have also been incorporated into Indian law in certain cases.
The common law, custom and general principles of justice, equity and good conscience are drawn upon by the courts and provide the basis and the environment in which statutes are enacted. The common law and principles of justice, equity and good conscience are not altered by statute law except to the extent of repugnancy (inconsistency) between the two.
Separation of Powers
The doctrine of the separation of the powers of its three branches forms an essential part of the Indian legal system. While there are overlaps in their functioning (particularly that of executive and legislature), the separation of powers has frequently been recognised as a basic feature of the Indian constitution.
One example of the separation of the powers of the three organs of the Indian legal system is seen in judicial review. This tool offers the judiciary wide powers to review any action, law or directive of the executive or the legislature and declare it ultra vires of the Indian Constitution, thereby striking it down. Judicial review thus acts as a robust mechanism of checks and balances, ensuring that the other two branches stay within their constitutional limits. Security of tenure of judges enshrined in the constitution, and the collegium system of appointment, are some of the other mechanisms that ensure the separation and independence of judiciary.
The basic framework for the court system has been laid out in the Constitution (and in some other central and state legislation). The Indian judiciary has been established as a hierarchy with the Supreme Court being the apex court of the country, deciding important issues of law. The High Courts in the states sit next in the hierarchy, followed by the Sessions and District Courts. Apart from these, Gram Panchayats and Lok Adalats have been established at the village level with the aim of swift resolution of matters through alternate dispute resolution techniques. In certain cases, various courts have been set up to deal with specific subjects, the Family Courts, Commercial Courts, etc.
The Indian Judicial system also comprises quasi-judicial authorities at national, state and district levels, including commissions and tribunals such as Administrative Tribunals, Human Rights Commissions, Consumer Dispute Forums, Income Tax Appellate Tribunals, National Company Law Tribunals, etc. As in other common law countries, the orders and judgments of the Supreme Court and High Courts serve as precedents that the lower courts and tribunals are bound to follow.
Foreign investment in India is regulated by the Department for Promotion of Industry and Internal Trade (DPIIT) (erstwhile Department of Industrial Policy and Promotion). In this regard, the DPIIT puts in place a consolidated policy framework for foreign direct investment (FDI) which is currently the FDI Policy, dated 28 August 2017 (FDI Policy). The FDI Policy is amended by way of press notes or press releases and is consolidated on an annual basis. Whilst the DPIIT has provided the framework for FDI in India, the foreign investments and remittances are regulated by the Reserve Bank of India (RBI), in consultation with the central government, in terms of the recently notified non-debt instrument rules (NDI Rules) issued under the Foreign Exchange Management Act, 1999 (FEMA). The notification of NDI Rules has been done in supersession of the erstwhile FEMA regulations, which did not stipulate the requirement of central government consultation.
Under the FDI Policy, there exist broadly two routes for FDI: the automatic route (where no prior approval is required and the investment is only subject to post facto filings) and the government approval route (where prior approval of the relevant ministry is required). Foreign investment in some sectors, such as the pharmaceuticals sector, is permitted up to a certain threshold under the automatic route, and beyond such threshold under the approval route.
The approval route is restricted to sectors that are sensitive in nature, either from a state security perspective or from the perspective of macro-economic stability. The responsibility of granting or rejecting an FDI proposal under the approval route has been entrusted to the relevant administrative ministry/department (competent authority).
Under the FDI Policy, all sectors/activities broadly fall into one of the following three categories:
Other FDI Regulation
The government has recently also made prior government approval mandatory for foreign investments from neighbouring countries sharing borders with India.
In recent years, the government has undertaken a number of FDI Policy reforms by way of opening new sectors for FDI, increasing sectoral limits for existing sectors and simplifying other conditions specified under the FDI Policy to facilitate ease of doing business and accelerate the pace of foreign investment in the country.
All FDI proposals in restricted sectors are considered by the competent authority identified by the Government, with the DPPIT acting as the nodal authority. The DPIIT has issued a Standard Operating Procedure (SOP), in 2017, for the processing and grant of approvals by the relevant ministries, in terms of which, the proposal is required to be disposed of within eight to ten weeks (with an additional two weeks given to DPIIT for consideration of proposals that are proposed for rejection or where additional conditions are proposed to be imposed).
As per the SOP, in order to obtain approval, the applicant must submit the proposal in a prescribed format on the website of the Foreign Investment Facilitation Portal, along with the documents that may be required, including, inter alia:
Any violation of FDI Policy with regard to the NDI Rules is covered by the penal provisions of FEMA, responsibility for the enforcement of which lies with the Directorate of Enforcement under the Ministry of Finance. Such a violation may attract a penalty up to three times the sum involved in the contravention (where that amount is quantifiable), or up to INR200,000 where the amount is not quantifiable. Further, where the contravention is a continuing one, an additional penalty of INR5,000 can also be levied for every day the contravention continues. Moreover, the authority adjudicating the violation may direct that any money or property in respect of which the contravention has taken place shall be confiscated by the government.
The competent authority granting the FDI approval may grant the approval subject to certain commitments being fulfilled by the foreign investor. For most sectors, these conditions or commitments are laid down in the FDI Policy itself. For instance, in the pharmaceutical sector, the investor and the investee companies are required to submit an undertaking that there is no non-compete clause in any form in any of the agreements entered into between them. Similarly, in the banking sector, the aggregate foreign investment in a private bank from all sources is allowed up to a maximum of 74% of the paid-up capital of the bank. At all times, at least 26% of the paid-up capital is to be held by residents, except in the case of a wholly owned subsidiary of a foreign bank.
In most cases, the investor is given an opportunity to rectify any defects/omissions in its application and to re-submit to the competent authority. However, there is no specific legal provision in FEMA or the FDI Policy for appeal if an FDI proposal is rejected by the competent authority.
The most common types of corporate vehicle used by foreign investors to establish a business presence in India are companies and limited liability partnerships (LLPs).
A company may be incorporated either as a private company or a public company. Companies may have unlimited liability of members, or liability of members limited to either the uncalled share capital amount or a guaranteed amount. A private company should have a minimum of two and a maximum of 200 members (excluding the past and present employees), can have share transfer restrictions in its articles of association, and is prohibited from raising capital from the public. A private company usually raises capital by way of allotting securities (ie, shares, debentures, etc) through private placement and as debt from shareholders or commercial banks.
A public company is a company which is not a private company and includes a private company which is a public company’s subsidiary. While a minimum of seven members are required to form a public company, there is no prescribed maximum number of members. Public companies are allowed to raise capital from the public by inviting them to subscribe to their securities. They also have an option to list their shares on any recognised stock exchange through an initial public offering. Listed companies are required to have a minimum public shareholding of 25%. Furthermore, certain classes of public companies are required to have at least two independent directors and one female director. Generally, all listed companies are required to have at least one female director and a board that is at least 50% composed of non-executive members.
While the Companies Act, 2013 (as amended) does not prescribe minimum capitalisation requirements for a company, certain minimum capitalisation norms issued by industry-specific regulators will need to be complied with, such as for banking and non-banking financial companies.
LLPs are a relatively new form of hybrid corporate entity with certain characteristics of both limited liability companies and partnerships. An LLP is a legal entity separate from its partners and has perpetual succession. The minimum number of partners required for an LLP is two and there is no limit on the maximum number of partners. LLPs are required to have two designated partners (DPs) who are individuals, at least one of whom should be resident in India. Furthermore, if the partners are bodies corporate, then their nominees who are individuals will act as DPs.
Partners are required to mandatorily enter into an LLP agreement to govern their mutual rights and obligations with respect to the LLP.
A non-resident entity may have limited operations in India through the establishment of:
Establishment of such offices, in most cases, requires prior approval of a bank that is an Authorised Category I Dealer, as established by FEMA. In the defence, telecoms, private security and information and broadcasting sectors, the prior approval of the RBI is typically required.
Indian companies and LLPs are incorporated by registration with the appropriate Registrar of Companies (RoC) of the state in which the registered office of the company/LLP will be located. The first step in the incorporation process is to obtain RoC approval of the reservation of name of the company/LLP.
Upon approval of incorporation-related filings, a certificate of incorporation (CoI) is issued by the RoC. Subsequently, companies having share capital (incorporated after 2 November 2018) are required to file, with the RoC, (i) a director’s declaration confirming that all the subscribers to the memorandum of association have fully paid up the value of their shares, and (ii) a verification (in the prescribed form) by the company of its registered office address, prior to commencing its business or exercising its borrowing powers.
In order to incorporate an LLP, the partners need to file the incorporation document. Pursuant to the filing of this document a CoI is issued by the RoC, which is conclusive evidence of the LLP’s incorporation. Within 30 days of incorporation, the LLP agreement entered into by the partners should be filed with the RoC.
Incorporation of both a company and an LLP takes approximately 20 working days. However, a company requires additional time for commencement of business as post-incorporation filings are required to be made to the RoC for business commencement.
Companies are required to make various filings with the RoC and with other relevant authorities (eg, the RBI and the Securities and Exchange Board of India (SEBI)). These filings include annual returns, audited accounts, board/shareholder resolutions in relation to management changes, amendments to charter documents, approval of financial statements and disclosures pertaining to significant beneficial ownership of shares. Listed companies are required to comply with additional continuous disclosure obligations (eg, annual reports, shareholding pattern, etc) and event-based disclosure obligations (eg, material events/information).
While LLPs are subject to less rigorous disclosure obligations than companies, they are required to file statements of accounts and solvency, annual returns, any changes in the LLP agreement, etc.
The incorporation-related filings, and most annual filings made by companies and LLPs with the RoC, are available for public access on payment of prescribed fees. However, the LLP agreement, or any amendments thereto, remain confidential. Filings made with the RBI are generally not publicly accessible, while certain periodic filings made to stock exchanges/SEBI are accessible to the public.
Companies in India are governed by a single board. While the day-to-day operations are undertaken by the board, approval of the shareholders is required for certain matters (eg, amendment of articles, related-party transactions, share capital reductions, etc). The minimum number of directors is two for a private company, and three for a public company. The maximum number of directors allowed for any company is 15 (unless a special resolution is passed to eliminate this ceiling). Although at least one director is required to be a resident of India, there is no bar on companies having foreign directors.
LLPs are governed by their partners, as per the terms of the LLP agreement. The DPs are responsible for statutory compliance.
Liability of directors depends upon the roles they perform. The Companies Act recognises the concept of an "officer who is in default", which includes, inter alia, managing directors, full-time directors and key managerial personnel who would be vicariously held liable (ie, would have civil and/or criminal liability) for acts of commission/omission by the company. Certain other statutes also attach vicarious liability to directors.
Independent directors and non-executive directors (who are not promoters or key managerial personnel) have been granted limited liability under the Companies Act. Their liability only arises if it can be established that the given acts of omission/commission by the company occurred with their knowledge; can be attributable through board process; and were carried out with the consent or contribution, or without due diligence, of the director in carrying out his or her duties.
Although the liability of shareholders in a company limited by shares is limited to the unpaid amount on the shares held by them, in an unlimited company the shareholders’ liability is unlimited.
If, during the corporate insolvency resolution process or a liquidation process, it is found that any business of a company/LLP has been carried on with intent to defraud creditors or for any fraudulent purpose, then any persons who were knowingly parties to such fraud may be personally liable to make contributions to the assets of the company/LLP.
Generally, the "corporate veil" is respected in India. However, based on judicial precedents, we understand that courts are likely to disregard the corporate veil and hold the promoters, directors or shareholders personally liable where a statute prescribes lifting the corporate veil, or on grounds of public interest protection, or where a company has been formed for evasion of law.
Social justice is a fundamental objective of state policy under the Constitution of India and forms the bedrock of labour statutes in India. While there are particular lists of subjects on which the central and state legislatures can each legislate to the exclusion of the other, certain items on a Concurrent List may be legislated on by both the central and state legislatures (see 1.1 Legal System and Judicial Order). Labour matters fall under the concurrent list.
Labour Law Reform
With approximately 45 central legislatures and a range of state legislatures, the complexity of labour statutes cannot be understated. However, the labour law regime is currently being revamped to ease the compliance burden and the complications that exist in the current regime. The Ministry of Labour and Employment has come out with four different codes in this regard:
Out of the above mentioned four codes, only the Wages Code has received presidential assent and is awaiting notification in the official gazette to come into effect. The other codes are yet to gain impetus. It will be interesting to note how the codes will impact employers and employees in the future.
Current Labour Law
Currently, applicability of labour statutes in India depends upon several factors including type of industry/organisation, the location from which the employees render services, the work they perform and their salary. The types of industry can be broadly categorised into:
On the basis of work performed, employees in India can be divided into:
Workmen are afforded greater protection under Indian labour statutes.
The judiciary too has played a key role in explaining the scope and extent of labour statutes and, on some occasions, has spurred the legislation on important issues such as the Sexual Harassment of Women in the Workplace (Prevention, Prohibition and Redressal) Act, 2013 (the POSH Act).
Employers should ensure that they execute written contracts with their employees. This will help both parties to understand with clarity the terms that govern their relationship.
Typically, the employment contract covers the roles and responsibilities of the employee, duration of their employment, their remuneration and benefits (including maternity-related benefits), their obligation to abide by the policies framed by the employer, location of work, and provisions dealing with termination of employment. It is common for employers to supplement the terms of the employment contract by issuing policies that would also govern the employment relationship and which form an intrinsic part of the contract that binds both the parties. The policies typically cover various subjects ranging from code of conduct including post-employment covenants (such as non-compete, non-solicit and non-disclosure obligations), leave and holidays, working hours, grievance redressal mechanisms, anti-sexual harassment measures and the mode of investigating such complaints, to principles governing equal opportunity and inclusive development.
Some S&E Acts do provide for standard form employment contract/appointment letters that have to be entered into between employers and employees. Even the Industrial Employment (Standing Orders) Act, 1946 requires the terms and conditions of employment to be in writing and should be in line with certain statutorily prescribed requirements.
Working hours and overtime in establishments are governed by the Factories Act and local S&E Act, depending on the nature of the establishment. In most of the states, regular working hours are limited to 48 hours in a week. The laws prescribe a limit on both the daily and weekly hours of work. Work done beyond the prescribed limits would entitle employees to overtime wages, which is generally twice the ordinary rate of payment. The laws also prescribe limits on the number of overtime hours that may be worked.
Employees are also required to be given a weekly day off and leave on certain statutorily recognised holidays/festivals. Some states may require employers to provide compensatory off if an employee is made to work on a weekly day off and/or wages to be paid at twice the ordinary rate of wages if an employee is required to work on a recognised holiday/festival and on a day of rest.
In some states, the employment of female workers at night is either prohibited or regulated and requires the prior approval of the labour authorities and/or the female employees. In such cases, the employers are expected to put safety measures in place to protect those female employees and are also required to, inter alia, provide pick up and drop off facilities.
The laws make it a duty of employers to record the hours of work of each employee, including any overtime hours that may have been put in by the employees. However, this poses a challenge when employees work from home, as the laws have not evolved with the changing nature of work arrangements.
Termination of service of employees (not workmen) would be governed by their employment contract and, if they are employed in commercial establishments/shops, by the local S&E Acts. Most states provide for a month’s notice or pay in lieu thereof (Termination Notice). In some states, employers have a duty to show reasonable cause before they can terminate the employment. For workmen, the provisions of the Industrial Disputes Act, 1947 (IDA), S&E Act and their employment contracts would govern the termination of their service. In addition to the Termination Notice, they are also entitled to retrenchment compensation at the rate of 15 days’ average pay for every completed year of employment or six months thereof. The government authorities also have to be notified of such terminations.
For factories, mines and plantations employing workmen beyond a prescribed threshold (which may vary from 100–300), the notice period stands extended to three months. Prior permission of the labour authority also has to be obtained to retrench such workmen.
Management employees are not covered under the IDA. Some local S&E Acts also exempt management employees from its applicability. In such cases, termination of service of management employees will be governed solely by their employment agreements.
It is notable that the above requirements can be dispensed with if the employee is being terminated for a cause such as misconduct. However, such dismissals should be preceded by a domestic enquiry consonant with principles of natural justice.
Further, certain protected categories of employees (such as those on maternity leave or in receipt of statutory sickness benefits, or those who are office bearers of a trade union or are workmen against whom certain proceedings are pending under the IDA) are afforded protection against unilateral termination.
Indian laws recognise employee representation under certain limited circumstances.
Under the IDA (and in some equivalent legislation applying in certain states) certain establishments are required to constitute a works committee or a joint management council in which employee participation is a must. The primary aim of such a committee/council is to foster good relations in the organisation. Even the grievance redressal committees set up under the IDA require employee representation.
Other than the limited roles these bodies typically play, employees do not have a right to be consulted on any matter that touches upon how the employer intends to run its business, including restructuring measures it intends to implement.
Employee representation at the management/board level in the private sector is not statutorily recognised. Unionisation, especially in labour intensive sectors, therefore plays an important role as it provides the employees an avenue to ensure employers are required to consult them on important matters that could potentially affect their rights, such as any changes made to salaries, working hours, leave, etc.
Employees are liable to pay taxes on salary earned in India (including perquisites, allowances, etc). Individuals are taxed on their total income at progressive rates, the highest of which is 30% (plus applicable surcharge and cess) on taxable income beyond INR1 million.
Employers are required to withhold taxes from salaries paid to employees at the applicable rates. A foreign company sending its employees to India may also need to undertake tax withholding in some cases.
Professional tax is levied, in certain states, on persons engaged in any profession, trade, calling or employment within those states. This tax is generally charged on the income of individuals, profits on business or gains from vocation, and is levied in terms of the applicable state-specific professional tax legislation. The rates for the levy of this tax vary from state to state.
Goods and Services Tax (GST)
GST is levied on gifts by an employer to an employee where the value of gifts to an employee exceeds INR50,000 in a financial year.
Resident companies (whose place of incorporation or "place of effective management" is India) are taxed on worldwide income, while non-resident companies are taxed only on income received, accrued, arising or deemed to have arisen in India.
Indian companies are generally taxed at the rate of 30% (plus applicable surcharge and cess). A lower corporate tax rate of 15% (plus applicable surcharge and cess) or 22% (plus applicable surcharge and cess) may also be available to Indian companies, subject to certain conditions. A foreign company is subject to Indian income tax on its ‘business income’ at the rate of 40% (plus applicable surcharge and cess) if it has a permanent establishment or business presence in India.
Dividends distributed by Indian companies are taxable in the hands of shareholders at the rates applicable to them. Non-resident shareholders would be eligible to benefit from lower tax rates under an applicable tax treaty, if any applies. Where no treaty benefit is available, the dividends paid to non-residents will be subject to withholding at the rate of 20%.
In certain cases, where the tax liability of the company is less than a prescribed limit, the company would be required to pay tax at the rate of 15% (plus applicable surcharge and cess) of its book profit (computed in a specified manner). This is called Minimum Alternate Tax, which is available to be credited against actual tax liability over 15 years when tax payable is more than 15%.
At present, GST and customs duty are the primary indirect taxes levied under Indian law.
India adopted a dual GST model with effect from 1 July 2017. In terms of the GST legislation, intra-state supplies of goods and/or services are subject to the simultaneous levy of central GST and state/union Territory GST. Inter-state supply of goods and/or services including imports are eligible to Integrated GST. The GST rates notified for the supply of goods or services are categorised under broad rate slabs of 5%, 12%, 18% and 28%.
The GST legislation covers all goods and services under its ambit, except crude petroleum, high-speed diesel, motor spirit, natural gas, aviation turbine fuel and alcoholic liquor for human consumption.
Customs duty is imposed on the import of goods into and export of goods from India, and is levied in terms of the Customs Act, 1962 and Customs Tariff Act, 1975. Currently, the effective median rate of customs duty on import of most non-agricultural products in India is approximately 31% (inclusive of Integrated GST).
Excise duty is imposed on the manufacture of specified goods, such as petroleum and tobacco products, alcoholic liquor, etc. The power to levy excise duty on petroleum and tobacco products remains with the central government and the power to levy excise duty on alcoholic products has been conferred upon state governments.
Sales tax is levied on the sale of specified goods which are outside the ambit of GST. It is levied at the federal as well as the state level in the form of value added tax (VAT) and central sales tax (CST). VAT is levied by states on the intra-state sale of goods. Every state has enacted its own VAT legislation to levy tax on such sales. VAT rates vary from state to state. CST is levied on inter-state sales. The power to levy CST under the CST Act, 1956 is conferred on the central government. The rate of CST is 2%, against issuance of Form C.
Indian tax laws confer two kinds of incentives: investment-linked and profit-linked incentives. These incentives are generally offered in the form of tax holidays or deductions of expenditure to a specified extent and are available for qualifying businesses. Taxes withheld on payments made to taxpayers are available as a credit against their Indian tax liability.
Input Tax Credit (ITC)
Under the GST legislation, the ITC of GST paid by a recipient on procurement of goods and/or services would be available to it for offset against its output GST liability, subject to fulfilment of conditions prescribed in this regard.
Incentives under the Indirect Tax
The Foreign Trade Policy, 2015-2020 (FTP) provides for a suite of export-promotion incentive schemes, such as advance authorisation, export promotion capital goods, export-oriented unit, etc. In addition, the availability of sector-specific incentives may be explored for various manufacturing and service sectors such as handicraft, agricultural, green technology, etc, under the FTP. The FTP, as well as the procedure thereunder, along with the validity of various licences, certificates, status, etc has been extended till 31 March 2021.
India has also signed free trade agreements with various countries, exempting various specified goods from import duty.
Developers and units in Special Economic Zones are entitled to various indirect tax benefits in relation to their authorised operations, such as customs duties exemption on imported goods and upfront exemption/refund of GST paid on the procurement of goods and/or services.
Indian law does not provide for tax consolidation of group entities.
In terms of thin capitalisation rules, Indian tax laws have a provision whereby deduction of interest payments made by an Indian company, or a permanent establishment of a foreign company, to its associated enterprises is restricted to 30% of its earnings before interest, taxes, depreciation and amortisation (EBITDA) or interest paid or payable to the associated enterprise, whichever is less. Such interest can be carried forward for a period of eight years and claimed as a deduction in the year in which the interest amount is within the 30% limit mentioned in 5.2 Taxes Applicable to Businesses.
Indian tax laws contain detailed transfer pricing provisions, which also include specified domestic transactions undertaken in certain circumstances. There is a requirement to maintain detailed documentation to substantiate that the companies’ related-party transactions are conducted at arm’s length. The recommendations of the OECD’s Action Plan 13, in relation to country-by-country reporting and maintenance of master and local files for transfer pricing documentation, have also been incorporated into Indian law. Companies may benefit from safe harbour rules applicable to specific transactions and also choose to enter into advance pricing agreements with the tax department.
General anti-avoidance rules are applicable to all transactions undertaken from 1 April 2017. These rules require that all arrangements must have genuine commercial substance and should not be undertaken with the main objective of avoiding taxes. Failing to satisfy the tax authorities regarding the commercial substance of the transaction may result in denial of tax treaty benefits, re-characterisation of debt into equity and vice versa, etc.
Additionally, there are certain fair market value requirements wherein tax is levied on the recipient of specified property (including shares) when such property is received at less than its fair market value, computed in accordance with the specified rules. Similar fair market value requirements are also applicable at the time of transfer of unlisted shares where the transferor is subject to capital gains tax based on the fair market value of such shares if actual consideration received is lower than such fair market value. Tax is also levied on share premium received by companies from Indian residents in respect of unlisted shares to the extent that the premium is not justified by the valuation of shares.
The Indian merger regulation under the Competition Act, 2002 (as amended) (Competition Act) became effective on 1 June 2011. The Competition Act aims to regulate combinations which cause or are likely to cause an appreciable adverse effect on competition (AAEC) in India.
The Indian merger control regime is mandatory and suspensory. Notifiable transactions cannot be consummated (entirely or in part) prior to the Competition Commission of India’s (CCI) approval.
Transactions are notifiable if thresholds prescribed under Section 5 of the Competition Act are met and if certain exemptions are unavailable. Section 5 of the Competition Act comprises three categories of combinations:
Aiming to exempt small transactions, the government of India, by way of a notification dated 27 March 2017, introduced an exemption for all combinations where the target’s asset value in India is less than INR3.5 billion (approximately USD48 million) or its turnover value in India is less than INR10 billion (approximately USD138 million) (Small Target Exemption). Where the Small Target Exemption is inapplicable, the threshold analysis based on Section 5 of the Competition Act will determine the need to notify the transaction.
A given combination will be notifiable if the acquirer and the target jointly have:
A given combination will be notifiable if the acquirer group and the target, after the combination, jointly have:
However, the Competition Act does not expressly cover joint ventures (JVs). JVs created as a result of transfer of assets by one or more enterprises (Brownfield JVs) may be notifiable provided the jurisdictional thresholds are met. JVs formed afresh by capital contributions from one or more enterprises (Greenfield JVs) are generally exempt from the requirement to notify the CCI prior to their formation.
Pursuant to a notification dated 29 June 2017, the government of India has done away with the requirement to notify a combination within 30 calendar days of the "trigger event", for a period of ten years. Parties are now free to approach the CCI for its approval at any time prior to the closing of the transaction.
Forms of Filing
Combining parties can either file a short Form I or a long Form II with the CCI. A third form of notification, a Form III, is prescribed for certain exempt transactions and is required to be filed after the completion of the exempt transaction. If the combining parties are competitors and hold a market share exceeding 15% or if parties are vertically integrated and hold an individual or combined market share exceeding 25%, a Form II filing is recommended. The filing fee for a Form I is INR2 million while the filing fee for a Form II is INR6.5 million.
Responsibility to Notify
In the case of acquisitions, the acquirer has the responsibility to notify the CCI of a particular transaction. In the case of a merger or amalgamation, a joint notice is required to be filed by the party/parties.
Transactions are notified to the CCI upon the occurrence of one of the following trigger events:
Given that the merger control regime in India is suspensory in nature, the Competition Act provides that notifiable transactions cannot be consummated until CCI’s approval has been obtained, or until a period of 210 calendar days has passed from the day on which the notice has been filed with the CCI, whichever is earlier.
Green Channel Approval
In line with the government's policy to improve ease of doing business in India, the CCI, by way of a notification published on 13 August 2019, has introduced the concept of a Green Channel' approval (Green Channel). This route will allow parties to file a simplified version of Form I and receive deemed approval of the transaction immediately upon notifying the CCI. However, the Green Channel will apply to only those transactions where the acquirer (and the acquirer group) has no existing interests in companies:
Cartels are covered under Section 3(3) of the Competition Act. The CCI assesses anti-competitive agreements by the standard of whether the agreements have caused an AAEC in a given market. The Competition Act provides for a presumption that all cartels cause AAEC in India. The standard of proof for cartel cases is that of a preponderance or balance of probability.
The JV Exemption
JVs between actual or potential competitors are exempt from Section 3, if they result in increased efficiencies in the production, supply, distribution, storage, acquisition or control of goods and services. Section 3(3) does not grant a blanket immunity to JVs, although it does raise a presumption in their favour.
Monetary penalties are imposed on enterprises, including individuals, involved in a cartel. The penalties on enterprises may be of up to whichever is the higher of three times the profit or 10% of the relevant turnover (ie, pertaining to products and services that have been affected by the contravention) for each year of the continuation of the cartel.
Section 48 of the Competition Act also allows the CCI to penalise individuals who are responsible for the conduct of the contravening enterprise. So far, the maximum penalty payable by individuals is 10% of the average income of the individual during the preceding three financial years.
The CCI also possesses extra-territorial powers under Section 32 of the Competition Act, which rests on whether any act outside India causes or is likely to cause AAEC in India.
Power to Temporarily Restrain Parties
Section 33 of the Competition Act allows the CCI to temporarily restrain an enterprise under inquiry from engaging in anti-competitive conduct (akin to an interim injunction), until the conclusion of the inquiry or further orders of the CCI.
The Leniency Regime
Under the Competition Commission of India (Lesser Penalty) Regulations, 2009, in conjunction with Section 3 (read with Section 46) of the Competition Act, the CCI is empowered to impose lesser penalties on persons (enterprises and individuals) who make a full, true and vital disclosure with respect to their involvement in a cartel if the leniency or lesser penalty applicant complies with certain other conditions.
Section 4 of the Competition Act prohibits an abuse of dominant position by any enterprise or "group". A dominant position is defined in the Competition Act to mean a position of strength, enjoyed by an enterprise in the relevant market in India, which enables it to operate independently of the competitive forces prevailing in the relevant market or affect its competitors or consumers or the relevant market in its favour.
Establishing abuse of dominance of an enterprise or a group under the provisions of the Competition Act is a three stage-process comprising:
Defining the Relevant Market
Dominance of an enterprise can only be established in a defined relevant market. The purpose of defining the relevant market is to define the appropriate boundaries within which an enterprise’s dominance can be assessed, considering both, the "relevant product market" and "relevant geographic market".
Assessment of Dominance
Dominance refers to the ability of an enterprise to operate independently of market forces and exploit its position of strength to affect competitors or consumers or the relevant market in its favour.
Assessment of Abuse of Dominance
Section 4(2) of the Competition Act enumerates that an abuse of dominant position would be constituted by:
In cases of an abuse of dominance violation, the CCI has a wide variety of powers to:
India is a member of the Paris Convention and Trips Agreement and has one of the world's most modern intellectual property regimes, as all its laws are compliant and in harmony with the international conventions and treaties. The IP statutes are complemented by a pro-IP judiciary, which appreciates the necessity of such protection and its importance to the nation’s economy while balancing the interests of the larger Indian community.
Definition under Patents Act, 1970
A patent may be granted for an invention that is a new product or process, involving an inventive step and capable of industrial application. The Act does not list the subject matter that is patentable and instead specifically stipulates subject matter that is not patentable.
Application is filed with provisional or complete specification and an abstract providing information on the invention. Thereafter, it is published in the Journal, which renders the application open for pre-grant opposition. Upon publication, the applicant files formal request for examination. A first examination report is issued with substantive/procedural objections and requirements. Upon successful removal of all objections, the application proceeds to grant.
Term of Protection
The term of protection is 20 years from date of filing.
Enforcement and Remedies
Registration entitles a patent holder to prevent others from making, using, offering for sale, selling or importing the patented product; or from using the patented process, offering for sale, selling or importing products obtained directly by that process in India. Where the patent is violated, the patentee has recourse to administrative remedies (stopping entry of infringing goods through Custom authorities), civil remedies (ie, obtaining injunctions, damages or account of profits) and relief of delivery up.
Definition under Trade Marks Act, 1999
A trade mark means a mark that is capable of being represented graphically and of distinguishing the goods or services of one person from those of others, and which is used or proposed to be used in relation to goods or services for the purpose of indicating connection in the course of trade between the goods or services and the person having the right, whether as a proprietor or a permitted user, to use the mark.
Application can be filed in respect of single or multiple classes of goods and services as per the current edition of the Nice Classification. Upon filing, the application is numbered and the filing date is issued. The application is examined and, if objections are raised, the applicant is required to submit a response within the prescribed timeline. Once the application passes the examination stage, the Registrar accepts the mark and publishes it in the Journal. Any party may oppose within four months from date of publication. If the mark sails through the opposition period, it proceeds to registration and a certificate is issued.
Term of Protection
Ten years, renewable indefinitely every ten years.
Enforcement and Remedies
Registration confers an exclusive right to the use of the registered mark and the right to institute infringement proceedings. Indian IP law confers protection to well-known trademarks and has provisions against disparagement and unfair advertising that is contrary to honest commercial practices. India also follows common law and affords protection to goodwill and reputation under passing off. Indian courts recognise the worldwide goodwill and cross-border reputation of overseas traders, and there are several judicial precedents wherein well-known trade marks have been protected even in the absence of the proprietors’ direct business presence in India. Protection also extends to unauthorised use in relation to trade names or domain names. Remedies include injunction, damages or account for profits, and delivery-up of infringing labels and marks for destruction and erasure. A proprietor may choose to file a criminal complaint and obtain a search and seizure order from the court or may directly approach the police.
Definition under Designs Act, 2000
Industrial designs are features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article in two or three-dimensional form, or both, by any industrial process or means – whether manual, mechanical or chemical, separate or combined – which, in the finished article, appeals to and is judged solely by the eye. This definition specifically excludes mode or principle of construction, anything which is in substance a mere mechanical device, any trade mark, any property mark and any artistic work.
Upon filing an application with the Patents Office, date and serial number are allotted. Examination is conducted to determine whether the application and documents satisfy procedural and formal requirements and whether the design is registrable under the Act. An examination report is issued listing the objections/requisitions which can be procedural or substantive. Once the application passes the examination stage, the design is registered. Upon registration, a registration certificate is issued and the design is published in the Journal.
Term of Protection
An initial term of ten years, extendible by five.
Enforcement and Remedies
A registered proprietor can file an action for piracy (ie, infringement of copyright) against, inter alia, fraudulent or obvious imitation of any article (in any class of articles in which the design is registered) for the purpose of sale, import for sale or publication/exposure for sale. The Act provides monetary relief up to INR25,000 (recoverable as a contract debt) or up to INR50,000 in respect of one design, if the registered proprietor files a suit for recovery of damages and injunction.
Definition under Copyright Act, 1957
Copyright is a statutory bundle of rights conferred upon creators of original literary, dramatic, musical and artistic works and on producers of cinematograph films and sound recordings. These rights include exclusively reproducing, communicating to the public, adapting and translating such work.
Copyright comes into existence as soon as a work is created and registration is not mandatory. Upon filing an application with the Registrar, a diary number is issued and the application is open for third party objections for a period of 30 days. Upon successful completion of this period, application is examined and a discrepancy letter is issued to the applicant, who has to respond to the objections and correct the identified deficiencies. If the Registrar is satisfied with the response, the application proceeds to registration and extracts from the Register of Copyright are issued.
Term of Protection
For original literary, dramatic, musical and artistic works, the term of protection is the lifetime of the author, plus 60 years.
For cinematograph films, sound recordings, photographs, posthumous publications, anonymous and pseudonymous publications, works of government and works of international organisations, the term of protection is 60 years from the date of publication.
Enforcement and Remedies
Works of foreign authors who are citizens of signatories to the Berne Convention, Universal Copyright Convention and WTO are accorded the same protection as if their works were first published in India. The owner of copyright is entitled to protect his or her work against unauthorised use and may obtain relief from the court including injunction, damages and accounts of profits. The Act also provides for criminal remedies.
India has a robust intellectual property regime with legislation in place to protect various forms of statutory intellectual property, including geographical indications and semiconductor topographies. India is also a party to the Madrid Protocol for International Trademark registration and Patent Cooperation Treaty.
Protecting Software and Computer Databases
Computer programs, tables and compilations including computer databases are protected as literary works under the Copyright Act. Both object and source codes can be protected as literary works and their terms of protection extend to life of the author plus 60 years. Patent law also offers protection to computer-implemented inventions although programs per se are not patentable. Graphic user interfaces are not protected under the Designs Act and may have protection as artistic work. Draft amendments to the Designs Rules, 2001, on 18 October 18 2019, seeking to, inter alia, follow the current edition (12th Edition) of the Locarno Classification, which would lead to the introduction of new Class 32 (graphic symbols and logos, surface patterns, ornamentation) in India is currently pending.
Protecting Trade Secrets
There is no specific legislation to protect trade secrets; however, the right to restrain breach of trust or confidence is specifically protected under Section 16 of Copyright Act. Confidential information may be protected contractually as well as at common law. However, it is always recommended that there are specific covenants included when defining a relationship (such as an employer-employee) to treat business information as confidential.
The legal framework for data protection in India is governed by the Information Technology Act, 2000 (IT Act) and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (SPDI Rules).
The SPDI Rules categorise personally identifiable information into "personal information" and "sensitive personal data or information" (SPDI). SPDI includes personal information about an individual relating to passwords; financial information such as details of bank accounts, credit cards, debit cards and other payment instruments; physical, physiological and mental health conditions; sexual orientation; medical records and history; and biometric information.
The SPDI Rules impose substantial obligations on bodies corporate that process SPDI including requirements to obtain consent, comply with broadly defined principles of purpose and storage limitation, appoint a grievance officer, and implement reasonable security practices (currently defined to include ISO/IEC/27001 (Information Technology – Security Techniques – Information Security Management System Requirements)).
Data subjects are empowered to review, update and correct information provided, and to withdraw their consent to processing of information.
Entities which are negligent in implementing or maintaining reasonable security practices and procedures resulting in wrongful loss or wrongful gain, are liable to pay damages by way of compensation to the person affected.
In 2017 the Supreme Court of India delivered a landmark judgment in the case of Justice K.S. Puttaswamy (Retd) v Union of India & Ors, 2017 (10) SCALE 1, wherein it was held that the right to privacy is an intrinsic part of the fundamental right to life and personal liberty under Article 21 of the Constitution of India. The Court recognised "informational privacy" as an important aspect of the right to privacy that can be claimed against state actors, but this right is not an absolute right and may be subject to reasonable restrictions.
The Personal Data Protection Bill, 2019 (PDP Bill) has been introduced in the Lok Sabha in December 2019 and referred to a joint parliamentary committee (JPC), which is likely to present its report in the second week of the upcoming monsoon session of the Parliament. The PDP Bill, based in large part on a Draft Personal Data Protection Bill (Draft Bill) proposed by a committee of experts constituted under the chairmanship of Retd. Justice B. N. Srikrishna, if enacted, will result in far reaching changes in the manner in which personal data is processed in India.
The PDP Bill expands substantial data protection obligations to cover all forms of personal data. It provides for a consent-centric regime which, while broadly based on the EU GDPR, includes several key differences, including a fiduciary relationship between the data principal (subject) and data fiduciary (processor), irreversible standard of anonymisation, localisation of sensitive personal data and critical personal data, privacy by design policies, consent managers, a regulatory sandbox, and different approaches to data breach reporting, and the right to be forgotten.
Recently, challenges have been filed in courts (and some orders have been passed) on data collection and processing in the context of the COVID-19 pandemic. Around the same time, the government of India has issued a protocol on the treatment of data collected through its contact tracing application, which evidences some dilution from the above “irreversible” anonymisation standard under the PDP Bill.
While "reasonable purposes" would be specified by the Data Protection Authority (DPA) to be constituted under the PDP Bill, it may indicatively include prevention and detection of unlawful activity, whistleblowing, network security, processing of publicly available data, mergers and acquisitions, credit scoring, debt recovery and a much-needed exemption for operating search engines.
Enhanced obligations are applicable under the PDP Bill to significant data fiduciaries (determined based on volume, sensitivity of data processed, turnover, risk of harm, use of new technologies, etc), including conducting periodic data audits, appointment of data protection officers, data protection impact assessments and maintenance of records. Some restrictions are also applicable to the processing of personal data by guardian data fiduciaries, which process large volumes of children’s personal data or operate commercial websites/online services targeted at children. These entities are barred from profiling, tracking, monitoring or targeted advertising directed at children. The PDP Bill has specific provisions relating to social media intermediaries (including enabling voluntary verification of users) and consent managers.
The PDP Bill provides (or empowers the central government to provide) specific exemptions in relation to processing for research, archiving or statistical purposes and manual processing. It also provides for a regulatory sandbox for encouraging innovation and use of new technologies. It also empowers the central government to specifically exempt any agency from application of the PDP Bill.
The PDP Bill also provides necessary exemptions in relation to the processing of data without consent if necessary to respond to medical emergencies (involving a threat to life or serious threat to health) or to provide medical treatment or health services to individuals during epidemics, outbreaks of disease or other threats to public health. In such cases, data fiduciaries may be exempt from providing consent notices (if that notice is prejudicial to the purpose of processing), affording the right to data portability and restrictions applicable to transfer of critical personal data outside India. However, more clarity on exemptions is anticipated with the regulations and codes of practice evolved by the DPA.
A Draft e-Commerce Policy issued by the Department for Promotion of Industry and Internal Trade proposed restrictions on cross-border flows of data generated through internet of things-enabled devices, e-commerce platforms, social networks and search engines.
The government has also constituted a committee of experts to deliberate on a data governance framework for issues relating to non-personal data, including community data and other large-scale data. The committee is likely to hold public consultations on the same.
The SPDI Rules are applicable to personal information and SPDI collected within India, even requiring foreign companies collecting personal information in India to comply with the IT Act and SPDI Rules. The IT Act has jurisdiction that extends to offences and contraventions committed outside India if those offences or contraventions involve a computer, computer systems or computer network located in India.
The PDP Bill, similarly, is also applicable to the processing of data in India, by the State, Indian companies, other entities or citizens. Any data fiduciary not present in India is also required to comply with the PDP Bill if that fiduciary processes personal data in connection with any business in India, systematic activity of offering goods and services to data principals in India, or profiling of data principals in India. The central government is empowered to exempt processing of personal data of data principals not within India, pursuant to any contract entered into with persons outside India, by any data processor incorporated under Indian law.
The SPDI Rules and the PDP Bill provide for specific conditions for the transfer of SPDI/sensitive personal data and critical personal data outside India. Conditions under the SPDI Rules include transfer pursuant to lawful contract or consent of the data subject and ensuring the same level of data protection in the transferee entity/country, while the conditions under the PDP Bill are more nuanced including transfers pursuant to explicit consent in addition to approved intra-group schemes, contracts, transfers to countries, entities or classes thereof having adequate levels of protection and other grounds such as emergencies, provision of health services, etc.
The Ministry of Electronics and Information Technology (MEITY) is the nodal ministry enforcing the SPDI Rules. Sector-specific regulators – such as SEBI, the RBI, the Insurance Regulatory and Development Authority of India and the Medical Council of India – have prescribed specific regulations in relation to data, and may enforce the implementation thereof.
The PDP Bill proposes the establishment of a data protection authority (DPA) to oversee implementation of the PDP Bill. The functions of the DPA would extend to issuing regulations and codes of practice to monitor, implement and enforce the PDP Bill; taking prompt actions; classification of data fiduciaries; monitoring cross-border transfers; receiving complaints; etc. The proposed DPA is to have broad ranging powers to enable it to discharge these obligations.