One Person Company: Everything you need to know



An OPC (One Person Company) as the name suggests is a company formed by a single person i.e. a company which has only one person as a member[1]. The concept was introduced in the Companies Act of 2013[2]. The objective behind introducing the concept of OPC was to provide a legal regime to small business owners, sole proprietor etcetera and provide them with the opportunity to own a limited liability business which in turn will help in the growth of the economy and be a step towards bringing Indian business laws at par with that of other developed economies such as UK, US and China etcetera[3]. As on 1 April 2014, a single person can incorporate a company in India[4].

An OPC gives a single person (known as the ‘promoter’) full control over a company while at the same time providing him/her with the advantage of limited liability. As per the Companies Act, 1956 the easiest company to be incorporated was a private company which required a minimum of two persons but with the enforcement of Companies Act, 2013, forming a company has become even more simpler with even a single person being eligible to establish a company.

Benefits of OPC:

There are several advantages of an OPC in comparison to other companies, some of which have been enlisted below:

  • An OPC requires minimum paper work as compared with other companies, for example, an OPC is not required to file audited statement of accounts with the MCA (Ministry of Corporate Affairs)
  • Only one member is required to start the company.
  • OPC has perpetual existence i.e. the company will continue to exist even after the death of the promoter (or member). This is because the OPC has a separate legal identity from that of its promoter.
  • Limited liability is another important feature of an OPC i.e. the liability of the owner is limited to the investment made in the business and cannot extend to personal assets of the promoter. It entails lower risk for business as compared to what would have been faced as a sole proprietorship.
  • Only one director is required and the sole shareholder can be the sole director.
  • It requires minimum compliance in comparison with private or public company[5], e.g. there is no need to hold annual general meeting, it poses lower risk for business as would have been faced as a sole proprietorship[6], only one director is sufficient[7], and there is relaxation in filing and signing of financial statements[8].
  • Any OPC falling under priority sector lending[9] can get loans faster and at better rates[10], leading to faster growth for the company[11].
  • As a registered legal entity start-up, OPC’s can easily get funding from financial institutions e.g. venture capitalists[12]
  • It is the most favorable form of business available for start-ups.
  • An OPC also grants the possibility to the promoter to convert in other types of companies as the OPC develops and grows.

Types of OPC:

Even though the Companies Act of 2013 provides for two forms of company -limited and unlimited company[13] but for obvious reasons an OPC can only be a limited company, which can be of two types –

  1. Limited by shares[14]-It is a company in which the liability of the members (or in this case shareholders) of the company is limited to the amount due for their shares. This is limited in the Memorandum of Association of the company[15]. But being a limited company doesn’t mean that the liability of the company is liability, it just means the liability of its members is limited and that of company is unlimited
  2. Limited by guarantee[16]-In this type of company the liability of its members is         limited to the amount each member has undertaken to contribute to the aspects of company in event of it being wound up and this is limited by the Memorandum of Association[17].

Who is Eligible to Incorporate an OPC[18]

An OPC can be incorporated by any individual who fulfills the following conditions:

  • The person incorporating the OPC, must be a natural person and thus by implication it cannot be formed by a juristic person.
  • The person must be an Indian citizen and a resident of India
  • Residency requirement- The person has to stay in India for not less than 182 days during the period immediately preceding the relevant financial year.
  • The person must not have opened another OPC or be a nominee in more than one OPC[19].
  • Thus the following kinds of persons cannot incorporate an OPC –
  1. Minor
  2. Foreign citizen
  3. Non-resident Indian
  4. Person incapacitated to contract[20]
  5. Artificial person e.g., any type of company incorporated under Companies Act,2013

Other Important Points that need to be borne in mind for forming an OPC:

They are:

  • Only an eligible person can open an OPC.
  • An OPC can be registered as a private company only[21].
  • It must have a minimum authorized share capital[22] of Rs. 1,00,000/- (Rupees One lakh).
  • There has to be restriction on transfer of shares.
  • An OPC is not allowed to give invitation to public for subscription of securities of the company[23].



Steps to Incorporate an OPC:

  1. DSC and DIN: Before starting the process of incorporation of the company it is advisable that a Digital Signature Certificate[24] (DSC) and Director Identification Number[25] (DIN) are obtained. This helps because these two can be used while filing the necessary forms of MCA and for payment of requisite fee on behalf of the company.
  2. Name: A suitable name for the One Person Company must be decided and Form INC-1[26] must be filed with the ROC for availability and registration of name. Some of the things to be kept in mind when choosing a name are :
    1. Last word in the name must be “Limited”[27]; or
    2. The term “OPC” or “one person company” has to present in the name e.g. ABC Private Limited (OPC) is a valid name for a one person company[28];
    3. Name cannot be similar to or same as the name of an existing company[29];
    4. The name should not be against the law[30]; or
    5. Either the Central Government or the ROC (Registrar of Company) must not deem the name undesirable, but this usually happens after an application is filed with ROC and is consequently rejected on grounds of being undesirable[31]; or
    6. The name should not give an indication that the company is in any manner connected or affiliated with the Central Government, State Government or any local authority[32].

An important thing to be remembered while choosing the name of a company is that name and brand name of a company can and are mostly different and if there is a separate brand name then it will also have to be trademarked[33].

  1. Filing of forms: Within 60 days of filing for and getting approval of availability of name, the person forming the OPC is required to file Form INC-2[34] with the ROC within whose jurisdiction the registered office of the company will be situated. Along with the form the following documents should be attached :-
    1. Memorandum of Association (or MOA)[35]
    2. Articles of Association(AOA)[36]
    3. Proof of identity of the member and nominee.
    4. Residential proof of the member and nominee.
    5. Copy of PAN Card of the member and nominee.
    6. Consent of Nominee in Form INC 3[37].
    7. Affidavit from the subscriber and first Director to the memorandum in Form INC-9[38].
  2. Fees: Payment of fee has to be according to the Companies Rule[39]. Furthermore the company is also required to pay stamp duty as per the laws of the State in which the registered office of the company is located[40].
  3. Approval: After scrutiny if all the requirements are met then the ROC will issue a Certificate of Incorporation/ and thereafter the company can commence business.


The Nominee[41]:

Under the Companies Act of 2013, a member incorporating a company is required by law to nominate another person who in the event of subscriber’s (i.e. the person who incorporated OPC) death or his incapacity to contract will become the member/owner of the OPC. The person has to give his consent for the same (which he can later withdraw) which is also filed with ROC. At the time of becoming a member this nominee will also have to comply with all rules and regulations related to eligibility of becoming a member of OPC.

Drawbacks of an OPC:

Although an OPC can pride itself of guaranteeing several advantages to anyone willing to incorporate the same, it would not be wrong to contend that it too suffers from a fair share of drawbacks. Some of the drawbacks of an OPC are as follows:

  • One person is not allowed to be a member or nominee of more than one OPC.
  • An OPC is not allowed to be in the form of an unlimited company[42].
  • An OPC is taxed at flat rate of 30 %[43] as compared to tax slab for individuals.
  • OPC cannot be incorporated under Section 8[44] of Companies Act 2013. OPC is not even allowed to convert to such a company[45].
  • An OPC is not allowed to carry out Non-Banking Financial Investment activities. This includes investing in securities of any body corporate[46].
  • An OPC cannot convert into any kind of company unless the following conditions are met[47]
  1. The OPC must have been in existence for a minimum of two years; or
  2. It must have a paid up share capital which has increased beyond Rs. 50,00,000/- (rupees fifty lakh); or
  3. Its average turnover must have exceeded Rs. 2,00,00,000/- (rupees two crore).



The concept of OPC is novel and previously has been unheard of concept in India. Even now two years after its introduction  it is an unfamiliar concept for Indian entrepreneurs. Enacted with the aim of providing easier business formation norms and lesser paper work for businesses; OPC’s help in providing a safe and secure platform for budding businesses especially weavers, traders, artisans, small to mid-level entrepreneurs[48]. It gives them the security of limited liability and the opportunity to secure lending from venture capitalists, foreign investors, banks etc. Thus, it is a unique concept which will help in providing legal protection to the unorganized Indian businesses. With the new ‘Make in India’ and ‘Ease of Business’ policies of the new government the future seems promising, but what remains to be seen is the government regulations and clarifications in this regard.

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[1] Section 2(62) Companies Act 2013

[2] Section 3(1) (c) Companies Act 2013



[5] A complete list of exemptions for OPC is available at-

[6] Section 98, S 100 to 111 Companies Act, 2013

[7] Section  149 Companies Act 2013

[8] Section 134  Companies Act 2013

[9] Priority Sector Lending is a special program of Reserve Bank of India as per which banks are directed to provide lending to certain sectors which have been identified as special sectors and need special focus. See –

[10]One such sector which will benefit majorly from establishing an OPC is small and medium entreprises (SMEs).this is because being a legal entity helps reduce the paperwork and also reduces risks thereby  making the loan process easier and  thus banks are more inclined to give loans to such businesses instead of business which are sole proprietorship or partnership.

[11]Master Circular – Priority Sector Lending , RBI/2013-14/107  RPCD.CO.Plan.BC 9 /04.09.01/2013-14

[12] Venture capitalists unlike banks are more open to fund startups and also provide them with invaluable guidance during the startup’s expansion. See:

[13] Section 3(2) Companies Act 2013

[14] Section 3(2) (a) Companies Act 2013


[16] Section 3(2) (b) Companies Act 2013


[18] Rule 3 of Companies (Incorporation) Rules,2014

[19] Rule 3(2) of Companies (Incorporation) Rules,2014

[20] Section 10 and 11 of The Indian Contract Act, 1872


[22]Authorized share capital of a company is the maximum amount of share capital that a company is authorized to issue as per amount given in its MOA and AOA

[23] Sec 2 (68) (iii) of Companies Act 2013

[24]The DSC is an instrument issued by certifying authorities (TCS and n-Code are two of them) by which you can sign electronic documents

[25]Director Identification Number (DIN) is a unique identification number for an existing director or a person intending to become one.


[27] Section 4 (1) (a) Companies Act 2013


[29] To ensure that such conflict doesn’t arise the Ministry of Corporate Affairs provide services for checking availability of name, available at –

[30] Section 4(2) Companies Act 2013

[31] A list of words which will be constitute as undesirable name has been provided in Rule 8 of Companies (Incorporation) Rules,2014

[32] Section 4 (3)Companies Act 2013

[33] Availability of brand name can be checked at-


[35] The MOA of a company provides basic details of the company, its object for incorporation and the division of shares among its members. The format for MOA of different companies has been given in Schedule 1, Table A-E of the Companies Act 2013. In case of an OPC the MOA contains the name of the nominee also.

[36] AOA of a company contains the rules and regulation for management of the company and format for the same is given in Schedule 1, Table F-J of the Companies Act 2013



[39]Companies (Registration Offices and Fees) Rules, 2014 and also see


[41] Rule 4 of Companies (Incorporation) Rules,2014



[44]Section 8 – Formation of companies with charitable objects,etc.

[45] Rule 3(5) of Companies (Incorporation) Rules,2014

[46] Rule 3(6) of Companies (Incorporation) Rules,2014

[47] Rule 3(7) of Companies (Incorporation) Rules,2014


Reference Guide for opening new Commercial Establishments


Introduction to Idea of Shops, Establishments and the Licenses Required

This blog post aims to serve as a one-time reference guide with regard to opening new shops and commercial establishments in India. It deals with various licenses and registrations that one has to compulsorily acquire in order to set up a business. Every state in India has the jurisdiction to enact its own Shops Act to regulate every business that exists within their territories. It is one of the most powerful tools to ensure that all legal businesses are recorded with the respective state governments. Only after successful compliance with the shops registration act, the existence of the business is confirmed.

This blog post deals specifically with the license requirement for opening shops and commercial establishments in Mumbai. There is no specific reason for choosing Mumbai as a model city except that it requires one of the maximum numbers of permits from different departments of the Municipal Corporation. Giving an account of the licenses required in Mumbai would almost definitely cover the licenses required in other states in India.

Depending on the type of business one is in, the licenses vary. For example, someone who wishes to venture into the food industry, by opening a restaurant requires permits from the Food and Drug Inspector, the Fire Department, the Police Commissioner and the local municipal authorities; for a normal grocery shop, one needs approvals from the fire department, municipality and health department. This blog will cover the general requirements for opening a shop or any commercial establishment under the meaning of the Bombay Shops and Establishments Act, 1948.

Application Procedure

Any citizen who wishes to open a shop or a commercial establishment in Maharashtra must be registered under the Bombay Shops and Establishments Act, 1948. For the purposes of registration, every business owner must send the relevant application form along with the fees to the Inspector appointed under Section 48 of the Act. The default authority under the Act is “local authority” that can be the following entities as per Schedule 1A of the Act –

  1. Any corporation under the Bombay Municipal Corporation Act, 1888
  2. A Municipality under the Bombay Municipal Boroughs Act, 1925, Bombay District Municipal Act, 1901, the Central Provinces and Berar Municipalities Act, 1922 or the Hyderabad District Municipalities Act, 1956
  3. A local board constituted under the Local Boards Act, 1923

An application sent to the local authority along with the following mandatory documents and registration fees would complete the registration process.

  1. Address proof of the premises where the shop or commercial establishment shall be set up (electricity bill/sale deed/tax receipt are considered valid for this purpose);
  2. Identity proof of the owner (in case of a firm/trust, then that of the partners/trustees);
  3. Nature of business verification – this can be of the following types:
  1. If Bar and Restaurant, Wine Shop or Beer Shop, then State Excise License has to be attached;
  2. If Medical Stores, then Food and Drug Administration License needs to be attached;
  3. If Cyber Café, then NOC from the Police Department -, Police Commissioner License and Man Power Supplier copy of the Work Order of the Principal Employer has to be attached;
  4. If Entertainment, then copy of the Collector’s permission has to be attached;
  5. If Transportation/Tour and Travel Agency, then RTO Transport Permit needs to be attached;
  6. If Import/Export/Clear Forwarding/Shipping/Cargo Industry, then licenses from the concerned department to be attached;
  7. For a share brokering business, SEBI Enrolment Form to be attached;
  8. For Trading Business, copy of the financial transaction to be attached;
  9. For Fire Works Shops, Municipal Corporation NOC, Fire Brigade NOC, Collector’s NOC and Police Department NOC must be attached.

Once a shop is registered under the Shops and Establishments Act, there are some basic conditions relating to work and employment that the employer has to adhere to. The objective of the Bombay Shops and Establishment Act was to regulate the conditions of work and employment in shops, commercial establishments, hotels, restaurants, eating houses, theatres and other establishments. Opening and closing hours of shops/residential hotels/restaurants/theatres, their daily weekly work hours, interval for rest, holidays. It prohibits the working of children in establishment. General rules regarding leave, paid leaves and other benefits accorded to employees are also laid down. Health Safety and precautions in case of emergency also have to be observed. Penalty for not complying with any of the provisions of the Act attracts a maximum fine of Rs 5000.

These requirements are more on part of the employer to accord certain basic work conditions to his employees. The workers have been left completely out of the purview of this legislation. Rightly so, the author feels, since the requirements of the employee differs from case to case basis, and it is the employer who can best decide the qualification of his employees. It is important to understand the legislative intent behind the enactment of Shops Act; it is not to balance the rights of employers and employees, it is a clear pro-worker legislation aimed at regulating various details about the business like work hours, holiday’s list, overtime rule, joining and termination criteria etc. Therefore, it is a democratic jurisdictional act that is established by every state in India in order to guide their business segments.

License Requirements for opening a Small-Sized Restaurant in Mumbai

Just to give a perspective, it would be interesting to take a look at the licenses/permits/certificates to be obtained by a small-sized restaurant in Mumbai.

There are five major departments that need to be approached – Brihanmumbai Municipal Corporation (BMC), Police Department, State Government, Excise Department and Sales Department. The Central Government also needs to be approached for Food Safety and Standards Authority of India license and recorded musical performance licenses.

Sr No Department License/NOC
1. BMC Shops and Establishment Certificate
2. BMC Health License (to serve food)
3. BMC Madira License (to serve Liquor)
4. BMC Grading Certificate, Sign Board License under License Department, Medical Certificate of Kitchen Staff, Water Connections, Drainage Inspection Certificate, Neon Sign certificate, Pollution Clearance Certificate, Weights and Measures Certificates etc.
5. BMC Permission to operate more than two gas cylinders at a time (fire department and health department), permission to operate heavy machinery (PWD)
6. State Government Professional Tax Certificate of employees and employers
7. Police Department Police Registration Certificate and under the Bombay Police Act, Noakarnama
8. Sales Tax Department Sales Tax Registration Certificate under Bombay Sales Tax Act
9. Income Tax Department PAN for Restaurant Business
10. Excise Department Dance Permits (if any), Accounts Register, Customer’s Drinking Permit etc.

Critique of the Application Procedure and Suggestions

Shops and Establishments Act has been one of the effective tools to protect the illegitimate and illegal acts in the employment segment of particular state jurisdiction. It is compulsory for all business houses to register under various authorities mentioned under the Act before starting their business. Waiver under the Act is not an option under the Indian Laws.

Most of the other states have their own Shops and Establishments Act that lay down the long list of authorities to be approached for opening a single shop. While each of these licenses are necessary keeping in mind the safety and regulatory aspect, the actual procedure of procuring a license from so many departments is very cumbersome.

India is counted among the fastest growing economies in the world today, and if we are to live up to our name, it is imperative that we incentivise the domestic production, manufacturing and service sectors. Opening a restaurant, or a hair-saloon or a simple grocery store would definitely contribute to the GDP of our country, albeit in a smaller scale. Therefore, the process of acquiring licenses by these small scale enterprises must be made easier and hassle-free. Some of solutions are suggested below.

  • A much needed reform in the system is to create a centralised nodal agency for procuring licenses, where all forms can be submitted together, and the approval would also be given from that nodal centre. This would ensure a one stop solution for the license seekers while at the same time not compromising with any of license requirements.
  • Another solution can be to create different sets of licenses, with each set pertaining to the licenses required by one particular entity, for example, all the licenses required to open a restaurant will be in Set-A, all licenses required to open a medical store in Set-B, for a cyber café Set-C and so on. This would help the license seekers get a clearer and cleaner understanding of all the regulations they are supposed to comply with. This would also aid the concerned government department to regulate the licensees according to their establishment-type.

More than the above mentioned solutions, it is the present system that needs to be strengthened; the extent of red-tapism existing in our bureaucratic framework is staggering. The culture of collecting files needs to be replaced with a positive culture of clearing files. Every department needs to be proficient in its working, so much so that prospective business houses should feel hopeful about their licenses getting approved at the earliest and believe that their government is supportive of their ventures. It is only with a change in attitude can we really expect a change for real.

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Revisiting Related Party Transaction laws in India


In layman’s language, a Related Party Transaction is nothing but businesses carried out among the relatives of different companies. On the other hand, legally speaking, there are many financial and commercial legal instruments which define and provide for such transactions.

Section 188 of the Companies Act, 2013 does not disallow or prohibit Related Party Transactions (for brevity, RPTs) but in fact, lays down how the contracts or arrangements involving related parties should be made keeping in mind the interests of the company, investors and other tax compliances. It is to be noted that the definitions of related parties have been given in not just The Companies Act, 2013 but also in Indian Accounting Standards-18 which is a tax compliance rule. Additionally, under the S. 41 of the Income Tax Act, 1961, while considering the taxable status of transactions, the following have been regarded as related parties:

assessee is an individual – any relative of the assessee; (ii) assessee is a company, firm, association of persons or HUF – any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession, (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person[1].

Therefore, it is always better to go through the section in the company’s annual report which details related party disclosures to get a fair idea of the operative mechanism of the company.Globally speaking, in countries like South Korea, RPTs act as a tool to transfer wealth from one generationof controllers to the next in avoidance of inheritance taxes.[2] In business adverse jurisdictions with stringent tax system, RPTs is a way of accruing private benefits.


Impact of RPTs

The RPTs have a tendency to adversely affect the financial health of the corporates by the undesired influence or control or joint control on the policies of the administration and operation of companies. The corporate wealth can be misappropriated by reducing the profits to the outside investors and shareholders. Tax evasion is also accompanied with such actions by managers of the company-. The best corporate governance practices are thus challenged owing to poor monitoring and disclosure policies of the companies in case of RPTs. Recent corporate scandals have heightened the concern to understand the phenomenon. Accounting frauds in Enron, Tyco, Parmalat, and Satyam are glaring examples of the same.[3] There has always been an incessant effort made to highlight the significance of transactions done based on arm length principle (usually, the parties to the transactions act independently without showing any personal interest in the business).


Let’s look at the laws in place

RPTs under Indian Accounting Standards

Under AS 18, related party includes[4]:

Enterprises, directly or indirectly, controlled by one or more other enterprises;

Associates or Joint Ventures of an enterprise;

Individuals who own interest in the voting power of an enterprise and are in a position tosignificantly influence the enterprise;

Key Management Personnel and their relatives;

Enterprises which share common directors.Now comes the analysis part, if we compare the two definitions, we will come to know that AS­ 18 is wider in purview than the Companies Act. The Companies Act requires approval only when a director and his/her relatives are involved in the transactions. However, even if substantial interest is involved if the key management personnel (i.e -a director), is not involved in any transaction, the approvals are not required-. In this way, AS-18 takes a lead because it requires the approval from all key management personnel transacting with related parties.



Presence of parent or controlling company is to be revealed in the financial statements irrespective of the transaction between the two[5]. However, before the Ministry of Corporate Affairs gave a clarification through a circular issued in 2014, to exclude mergers and acquisitions transactions from the purview of related party transactions (RPT) provision in the new company law. Prior to this, there were much speculations u/s 188 since the provision was not clear.[6]

Under both CLA, 2013 and SEBI Code, approval of the shareholders through special resolution needs to be obtained in addition to the requirement that the related parties must abstain from voting on such resolutions. But, the problem with this might be the rising of doubts in the minds of minority shareholders who have every right to disapprove a non-abusive RPT without wholly examining the proposed transactions. Not only this, it is highly imperative on the part of independent directors on the board to effectively monitor and identify the RPTs. Until these things materialize, Indian capital markets will continue to suffer.



Further, Auditing and Assurance Standard 23­ Related Parties impose duty on auditor to identify and disclose the related party transaction in the financial statements of the company. This is in correspondence to the roles of auditors in a company.

Photo Courtesy:


[1] Definition of Related Party – A Comparative Analysis
CORPORATE LAW REPORTER last accessed 12/7/15
[2]Luca Enriques, Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal), HLS Forum
<>   last accessed 12/7/15
[3]Padmini Srinivasan, An Analysis of Related-Party Transactions in India, last accessed 12/7/15
[4]See Supra note 1
[5]IAS 24 — Related Party Disclosures, DELOITTE accessed 14/7/15
[6]K R Srivats, M&A deals, de-mergers not to attract related party provision in new company law, THE BUSINESS LINE

<> last accessed 13/7/15

Being a Sports Lawyer in India

As young budding lawyers, generally when asked about sports law, we have no clue about it. What is sports law? Is there any special Act dedicated to this field of law? If not, then which Acts are usually referred? Most of us would be as perplexed and confused as a non-law student would be.

Sports law in simple words is an umbrella term describing the legal issues related to sports. With regards to this specific area of law, a lot of questions may arise; the First, among those would be, is recognising and playing a sport for a reasonably long time enough to qualify as a sports lawyer? The answer to that is a NO! To become a sports lawyer, one should have keen interest in the administration and management of sporting activity. Moreover, it is required to substantiate such knowledge and to have great proficiency in law applicable to commercial activities. One should have expertise in law related to Contract, Media, Competition, Drafting and Negotiation. The study of the legislations controlling sporting activities and its structure of management in India would prepare one to take up sports law as a career in India.

Sports law is not a lawyer friendly term for many practitioners in India as it creates confusion in the minds of most of them. Confusions as to, what is the ambit of sports law? What would one do being a sports lawyer? Is there any work in this field that requires the attention of lawyers? The reason to all these questions and many more lies in the confusion caused between the functions of an administrator and a lawyer. In this field of law, there seems to be an intrinsic overlap of functions between these two service providers. Therefore,to establish as a sports lawyer in India is extremely tough. It might be astonishing to many that in a country like India with 1.2-billion population (approx.) the one and only name or face of the country successfully practicing sports law is Mr. Nandan Kamath. It also cannot be disregarded by the fact that the amount of support and participation GoSports Foundation gains exhibits that there is a keen interest among the young legal enthusiast to pursue a career in the legal side of sports. Few other Sports firms/companies where the legal front seems to be an important focus are: GameChange, GameChanger[1], which has its offices in Delhi and Bangalore in India; LAWNK in Bangaloreand TMT Law Practice[2] (Chennai, Bangalore, Delhi) which has Sports and Entertainment litigation listed as its area of practice. But, due to lack of substantial avenues and necessary spread of awareness amongst law students and young lawyers Sports Lawyering hasn’t emerged as a career option.

Another interesting thing to note is that the new generation Law schools have Law companies/firms coming down to their doorsteps to offer jobs to the graduating batch of students. The day for such on-campus-recruitment is colloquially called “Day Zero”. Of course not all potential recruiters make it on that one day; but the point being, that Sports Law firms don’t somehow feature in these list of firms visiting the law schools.

However in Europe or Australia, Sports lawyering is a big thing. People understand the importance of legal nuances in sports and provide for all the facilities possible to explore this area.

In India, when a sports lawyer tries to make his/hermark in this field, he is required to immensely engage in the field of administration. Apart from taking care of any future legal dispute, he is expected to carry out the work of agents, wherein he does managerial work of maintaining the player’s portfolio, advertisement, sponsorship, etc. As a consequence of this conflict of lack of definite identity in the kingdom of law, it becomes complicated for legal practitioners to establish themselves as a sports lawyer. What some of the existing sports administrators in fields like Tennis Officiating usually do before joining the professional turf is fetch themselves a Diploma Post Graduation Degree in Sports Management. There are a few institutes that offer these courses; and  Indian Institute of Social Welfare and Business Management which has been offering this course since 2010-2011 is one such institute operating in Kolkata. But, it isn’t quite clear if sports lawyer enthusiasts should get such a Diploma degree or not if they are to make more sense out of their work in managing legal disputes relating to Sports or would a legal degree in Law suffice.

The ambiguity of their role and the overlap of functions create an uncertainty among the clients of their existence. Therefore, the first and the foremost challenge of a sport lawyer in India, is to justify their existence, not just their existence in the field per say but also the existence of the field itself.

Going back to law schools; majority of the law students discover their area of interest while they study law. In addition, they work towards enhancing their knowledge in the field of their interest throughout law school period. In this exercise, law schools aid the students substantially by providing elective choice of subject, having conferences and having various research centers working on different fields of law. However, it is witnessed that in terms of sports law there is a gap, which stays unfilled. Most of the law students who graduate from law school do so without gaining even the basic idea of what a sports lawyer does. Unexpectedly, the foundational knowledge of the legislation governing sports law in India is unheard of by many. Such a lacuna suppresses the interest of the few who might be interest in taking up Sports Law as profession. Two main reasons due to which interested law students get discouraged to pursue this field of law; firstly, the lack of adequate teaching mechanism and secondly, lack of exposure between the students and the existing lawyers in the field of sports law.

 Problems or the negative side of sporting activity is well witnessed in IPL fiasco, the CWG catastrophe and the weight-lifting shame etc. -. Many questions have been raised by the critiques but unfortunately most of these questions have remained unanswered; since no one looks into the reasons for the same. A questions lead to more questions and the blame game goes on. The root of the matter stays unaddressed – Indian sports lacks good governance and a dynamic regulatory framework. Enlightenment of such matters is of utmost importance and to become a sports lawyer especially in a country like India.

Being a Sports lawyer in India is much different from being one  in Australia. Unlike India, in Australia there is national Act i.e. Australian Sports Commission Act, 1989. It was enacted to establish the Australian Sports Commission (“ASC”). It is a statutory authority of the Australian Government that is governed by the board of Commissioners appointed by the Minister for Sports.  It is responsible for distributing funds and providing strategic guidance for sporting activity in Australia. The “ASC’s roles and responsibility are prescribed in the Australian Sports Commission Act, 1989. It is also involved in the implementation of major policy decision principally through three divisions, the Australian Institute of Sports, Community Sport and Sport Performance and Development. For the efficiency of the implementation of these policy decisions it works closely with a range of sporting organisations, state and local governments, schools and community organisations. This ensures that sports in the country is run well and is accessible to all. Therefore, there is recognition of this field more than in India and that makes it much simpler for one to establish themselves in this field of law there, than here.Hence, there is an imminent need that we strive to create awareness along with educational facilities to understand Sports Advocacy better.



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Is Companies Act, 2013 actually Changing Fortunes?

Is Companies Act, 2013 actually Changing Fortunes?

The Companies Act, 1956 had been in need of a substantial revamp for quite some time. The 1956 Act was passed in the first decade of free India and the business landscape has changed radically ever since. The opening of the Indian economy in the early 1990s posed newer and greater challenges for the corporate world. The Companies Act, 2013 seems to focus on the factors which have an impact on the governance of the company such as risk management, due diligence, etc. In several other areas also an attempt has been made to harmonise the law with international requirements. The new Act is a modern legislation which would enable growth and greater regulation of the corporate sector in India in a rapidly changing economic, commercial and technological environment, both nationally and globally. The new Act emphasises on two concepts i.e. democracy of shareholders and supremacy of shareholders. The new Act facilitates stricter enforcement of provisions, higher levels of transparency, business friendly corporate regulations, improved corporate governance[1] norms, e-management (electronic management), enhanced accountability on the part of key management and auditors, protection of interest of investors, employee friendliness, whistle blower protection[2], and corporate social responsibility[3].

One of the major objectives behind the new Act is Shareholders democracy. It has been considered as a mode of Corporate Governance which also increases independence of shareholders with a view to make the shareholders more knowledgeable and informed about their rights. As specified in the new Act[4], all major transactions such as inter-corporate investments, guarantees, securities, managerial remuneration, related party transactions etc., need approval from shareholders. The concept of class action suits has also been introduced under Section 245 which provides for shareholder rights or protection because it gives scope to consumer organizations to bring claims on behalf of large groups of consumers.

The concept of e-governance tends to reduce paper work and provide higher level of transparency and disclosure as the important and specified documents such as financial statements have to be available on the company’s website. It also tries to promote user friendly environment by making maintenance and inspection of the documents easier, simpler and faster. The concept of e-voting and video-conferencing in meetings facilitates the participation of the shareholders and directors from around the globe and these have been introduced under Sections 174 and 175 of the Companies Act, 2013 where the quorum for the meetings of board and passing of resolutions can be achieved through audio visual means. The new Act also lays emphasis on higher levels of transparency as well as enhanced accountability on the part of key management by introducing some new regulatory bodies such as National Company Law Tribunal under Section 408, National Financial Reporting Authority under Section 132, and Special Courts for speedy trial under Section 435.

The new Act seems to be employee friendly as it mandates the disclosure of difference of salaries of the Directors and the average employees. It also gives a provision for Auditor rotation after every 5 years which will increase efficiency of the company as it will bring the books of accounts of the company under fresh eyes which may help to point out issues which the previous Auditor may not have been able to identify. Also, the Auditors tend to lose their independence after a certain period of time if they keep working for the same company as they come under the dominance of the key managerial personnel.

Making it mandatory for the audit firms to rotate is one of the measures of improving the independence, objectivity, and professional scepticism of auditors.[5] The rotation of Auditors is now mandatory not just for listed companies but for all companies including private companies covered in class of companies mentioned in Rule 5 of Companies (Audit and Auditors) Rules, 2014.[6]

Every listed or any other company as prescribed under the Act has to mandatorily establish a vigil mechanism for staff and Directors for reporting genuine concerns under Section 177(9). This mechanism needs to be established to provide safeguards against victimization of the whistleblower, who may be an employee, Superior Officer or any Designated Officer.[7] It ensures anonymity of whistle blower. The details of this mechanism have to be disclosed on the company’s website as well as in the Board’s report.

Every company having a net worth of INR500 crores or more or a turnover of INR1000 crores or more or a net profit of INR5 crores or more in any financial year shall constitute a Corporate Social Responsibility (CSR) Committee.[8] This CSR committee will formulate and recommend CSR activities to the Board. The Committee will recommend the amount to be incurred and monitor the CSR activities of the company. The company should comply with the policies of the committee and disclose the policy in the Board Report. In case of any failure, reasons have to be disclosed in the Report. The company should give preference to the local area where it operates, for spending the amount earmarked for CSR activities. This will help in improving the conditions of the weaker sections of society, in return for which the company will gain in terms of goodwill and long- term survival.

The new Act not only brings some new provisions but also strikes off some old provisions which have become obsolete with time. A large number of sections have not been notified yet and the other provisions are largely to be tested. A number of provisions still need some clarifications.

The new Act which has a number of new provisions faces a few challenges as well:

The term ‘shareholders democracy’ which sounds so fascinating is not that easy to attain. The challenge which the new Act faces is whether this objective of shareholders’ democracy is actually attainable? Also, it is not only the shareholders whose interests have to be safeguarded by the company; there are some other people also who are related to it. Any person directly or indirectly related to the company is referred to as ‘stakeholder’. Now the question that arises is will this democracy improve the conditions of non-shareholders i.e., ‘stakeholders’ such as employees, creditors, consumers, etc?

The Companies Act, 2013 has tried to change the rules of the game by providing provisions for mandatory approval from shareholders in certain cases by making them the major players, but these major players i.e., the shareholders are often ill-informed to take important decisions such as intercorporate investments, managerial remuneration, etc.

The new Act creates a doubt as to whether making CSR will actually benefit the society or will it just provide tax benefit to the companies. It can be seen now that these companies are the way for emergence of CSR consultants who help companies to make tax beneficial policies.

The companies Act has tried to change the fortunes of the companies by changing the rules for them. Now, the major questions that arise after the new Act are: Can an Act become redundant in six decades? Whether the 1956 Act has become totally obsolete? Whether the companies will be able to adapt to the new Act when it needs a plethora of clarifications? It can be hoped that the MCA and the concerned regulatory bodies will soon address such challenges to truly make the new Companies Act, an exemplary reformative step forward in empowering India Incorporated.[9]

[1] Corporate Governance: The system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company – these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

[2]Whistle blowing’ is when a worker reports suspected wrongdoing at work. Officially this is called ‘making a disclosure in the public interest’.

A worker can report things that aren’t right, are illegal or if anyone at work is neglecting their duties, including:

  • someone’s health and safety is in danger
  • damage to the environment
  • a criminal offence
  • the company isn’t obeying the law (like not having the right insurance)
  • covering up wrongdoing

[3] Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.

[4] Section-185: Loan to Directors

Section-186: Intercorporate Loans or Investments

Section-188 and Rule 16: Approval and Disclosure of Related Party Transactions

Section-197: Managerial Remuneration

All the above-mentioned provisions need shareholders’ approval

[5] As specified under Section 139(2) of the Companies Act, 2013


[7] As per Section 177(10) of the Companies Act, 2013

[8] As provided under Section 135 of the Companies Act, 2013


Related Party Transaction Simplified

A 4th year student of W.B.N.U.J.S, Kolkata

What is a related party?

A related party is a director or key managerial personnel or their relative, or a firm or company in which they are interested, e.g. by being a director or partner, or by holding along with his relatives more than 2% of its paid-up share capital. “Key managerial personnel” include the Chief Executive Officer, Managing Director , manager, company secretary, whole-time director, or Chief Financial Officer. Every director must disclose his concern or interest in any companies or bodiescorporate, firms, or other associations, including shareholding (i) at the first meeting of the Board in which he participates asa director; thereafter, (ii) at the first meeting of the Board in every financial year; and (iii) wheneverthere is any change in the disclosures already made, at the first Board meeting afterthe change.


Which transactions are permitted?

Related party transactions are permitted with a resolution of the Board. Thus, a company is not permitted to enter into a contract or arrangement with a related party for the exchange of goods and services or transfer of property, and a related party cannot be appointed as an agent for purchase or sale of goods, materials, services or property, or to any office or place of profit in the company (having remuneration above that already received as salary, fee, perks, etc.),its subsidiary company or associate company, or to underwrite the subscription of any securities or derivatives of the company, without a resolution of the Board. If the related party with reference to that contract or arrangement[i] is a director, his relative or a company or firm in which he is interested, he is not permitted to vote on the resolution, or be present at the meeting in which the contract or arrangement is discussed.

However, there are no special requirements for transactions entered into by the company with a related party in its ordinary course of business on an arm's length basis, i.e. conducted as if they were unrelated so that there is no conflict of interest. This means that the transactions should be independent and on such terms and conditions as a transaction with any other party. This provision replaces the requirement under the 1956 Act that the transaction between the company and its related party be in cash at prevailing market price.

Similarly, loans by a company to its director or a party the director is interested in is also not permitted, except as a part of the conditions of service extended by the company to all its employees, or pursuant to any scheme approved by the members by a specialresolution. Loans to the company by the director are still permitted.

Transactions below an amount to be prescribed, or contracts by a company having a paid-up share capital more than an amount to be prescribed, also require a special resolution. The 2013 Act requires that every such contract or transaction must be justified in the Board's report to shareholders. Fortunately, the 2013 Act omits the blanket requirement under the 1956 Act for a company having a paid-up share capital of Rs. 1 crore or more to obtain the prior permission of the Central Government to contract with a related party.


Do older contracts or arrangements need to be reviewed?

Section 188 of the 2013 Act (“Related party transactions”) came into force on 1 April 2014. Before this date, the applicable provisions were Sections 297, 300 and 314 of the 1956 Act. Contracts and arrangements entered into before 1 April 2014, so long as they comply with the requirements under the 1956 Act, do not require fresh approval until their original term expires.[ii] If they are to be renewed thereafter, or modified after 1 April 2014, then they must comply with Section 188 of the 2013 Act.[iii]


What are the consequences of violating the requirements?

Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a special resolution, and if it is not ratified by the Board or, as the casemay be, by the shareholders at a meeting within three months, it shall be voidable atthe option of the Board. In the same manner, if such a contract or arrangement is entered into, and the Director has not made a disclosure, or has participated in the discussions, etc. on it, it is voidable at the option of the Board. Such an act is punishable with a stiff fine, and in the case of a listed company, may even attract imprisonment. If the contract or arrangement is with a related party of anyDirector, or is authorised by any other Director, the Directors concerned shall indemnify thecompany against any loss incurred by it.

For extending a prohibited loan to a director, both the company and director may face fine of up to Rs. 25 lakhs for violation of this provision, and the director may face imprisonment as well.

[i] Ministry of Corporate Affairs, Government of India, General Circular No. 30/2014 dated 17 July 2014 (“Clarifications on matters relating to Related Party Transactions”), para 1.

[ii]          Ibid, para 3.

[iii]         Ibid.

Notice or a Heads up?

a 4th year student of ITMU Law School, Gurgaon

Notice or a Heads up?

 “Water and air, the two essential fluids on which all life depends, have become global garbage cans.” By Jacques-Yves Cousteau


As much as the domain of environmental law needs good lawyers to defend it in a court of law it also needs effective statutes. Statutes must serve the ends of justice rather than the purpose of perpetrators.

It is an undeniable fact that mankind is known for its destructive nature, for we are the only animals who hunt, not merely to feed but for greed. Our debauching thirst for development and expansion gave a boom to industrialization. This in turn resulted in production of unfathomable and unmitigated pollutants. We do recognize the fact that these issues are problematic but are unable to perceive their real intensity. Environment legislations serve as sentinels for protection of mankind. However a chain is only as strong as its weakest link. Our sentinels are equipped with loopholes instead of weapons of defense. We definitely need a wakeup call for we sleep a lot.

Who could possibly deny that a forewarned comes forearmed? The saying holds true when we go through the existing provisions of the Air (Prevention and Control of Pollution) Act, 1981 and Water (Prevention and Control of Pollution) Act, 1974. Current provisions look like handcuffs on the hands of the pollution control authorities. Apparently there is something weird about the existing statutes. It is extremely essential to give a very clear interpretation to the said section to understand the intended purpose and effect of it. Section 21 of the Water (Prevention and Control of Pollution) Act, 1974 focuses on power to take samples of effluents and procedure to be followed in connection therewith. The State Board or any officer empowered by it in this behalf have the power to take, for the purpose of analysis samples of water from any stream or well or samples of any sewage or trade effluent which is passing from any plant or vessel or from or over any place into any such stream or well as per the section. The samples so taken are admissible as evidence in a court of law. Sub-section (3) of Section 21 requires the authoritative person to serve a notice before such evidence is to be collected. In simple terms, if the notice is not served the evidence is not admissible. Section 26 of the Air (Prevention and Control of Pollution) Act is more or less the same. Both the provisions happen to be identical in nature.

The crux of the matter is that the authorities are under an obligation to provide a notice in advance to the owner or the person in charge of the industry about such an investigation. So here is what it actually looks like- “Hello Mr. Thief I am a police officer and I am planning to drop by your house in the evening. Please be ready with all the incriminating evidence if any.”

By now you must have started thinking that there must be something reasonable behind the notice, after all the Indian Legislature would not make such a blunder while drafting an environmental legislation. To your surprise, perhaps the only reasoning is that the notice helps the owners/person in charge to facilitate the process. They are in a position to accumulate required documents and arrange for keys to the locks which are otherwise closed. Frankly speaking the rationale behind the serving of the notice is not even close to what we can call adequately reasonable.

The said notice gives enough time to the owners of the premises to make arrangements which ensure that they have complied with the set norms. That is why India is the cleanest country on paper and the most polluted in reality. Effluent treatment is often a costly business which is directly proportional to what one produces. Due to the immense pressure applied by the Supreme Court by virtue of its decisions, industries have been forced to install appropriate effluent treatment instruments/plants. However these plants are not switched on until and unless the pollution control officer is planning to pay a visit. Industry owners find it convenient to discharge their waste untreated as it saves them a few thousands or lakhs of rupees in the form of electricity and raw materials used in effluent treatment. The rest is taken care of by the lawyers of industries who know how to use a poorly drafted statute to their benefit.

We have already seen what happened in the Vellore Citizens Welfare Forum v. Union of India[1] case where untreated effluents were discharged in the Palar river. The river was polluted to the core. Water of more than 300 nearby wells was rendered unfit for drinking. The lands adjoining the Palar were poisoned due to chemicals making them infertile and unfit for any agricultural purpose. Similarly there are hundreds of industries on the banks of the river Yamuna. The appropriate authorities try to keep a constant vigil on these industries. However Yamuna is still being polluted. If you go to the Wazirabad area in Delhi you would be able to see a blend of effluents being discharged into the Yamuna. Despite massive governmental expenditure on cleaning the Yamuna, the status quo prevails.[2] The Yamuna's polluted stretch was about 500 km from Wazirabad in Delhi to Juhika in the downstream reaches of the river near Etawah in Uttar Pradesh, according to CPCB's 2010 data. Central Pollution Control Board (CPCB) revised report says the polluted length of the river has increased from 500 km to 600 km.[3]

The truth is that the Yamuna cannot be restored. The same applies to any other river which has literally been sacrificed in the name of the industries which deal with toxic chemicals. Our laws look more polluter friendly and less environment friendly. The industries near the Yamuna should be re-examined. And this time the authorities can surely use some surprise element. But this is not possible until and unless our legislature thinks about amending the existing regulations.

Section 21 of the Water (Prevention and Control of Pollution) Act, 1974 and Section 26 of Air Act, 1981 are notoriously unreliable and mischievous in nature. These sections offer undue safeguards for the industry owners.  Money minded industry owners use such regulation to the prejudice of the environment and the people at large. The authorities must be empowered to infiltrate the premises of industries at any time they deem fit and proper.

          There is a strong link between the loopholes in the above statutes and continuous polluting of river and air. Had the authorities been empowered to pay surprise visits to industries, several such industries discharging untreated waste would have been caught red handed and prosecuted. But surprisingly they are not empowered with such authority. Their visits to the manufacturing plants are does not bear the desired results.

       The Supreme Court has also expressed its dissatisfaction towards the slow pace of work despite such a big investment in the Yamuna’s case. The Hon’ble bench of Justices Swatanter Kumar and Madan B. Lokur pointed out – “All the agencies have spent crores of rupees. What is the purpose? What work has been done ultimately?” The Bench noted that despite there being as many as 18 sewage treatment plants to treat the effluents; the treated water has “a high rate of pollution”.

          The real question is not whether the Yamuna is being cleaned or not. The million dollar question is whether we will ever stop polluting it. Evidently the water of the Yamuna still contains toxic chemicals. These are fresh chemicals which were not present earlier. Since the city’s sewage and other drainage channels cannot discharge chemicals in the river, suspicion veers towards the industries situated on the banks of the Yamuna. These industries were given a clean chit by the Pollution Control Board. The approvals so granted could have been a result of notices served under Section 21 and Section 26 of the two Acts. If the visits of the officials of the Pollution Control Board were not pursuant to a notice, the result might have been different.

          Despite the strict attitude of the Supreme Court and the Pollution Control Board it turns out that our statutes have severely failed us.  The key to the answer lies in revamping the existing statutes. Our courts have always given importance to public interest over private interest. Private interest in the present case- that of the ‘right to be present while evidence is taken’ must be relaxed against public interest which is ‘right to safe and healthy environment’.  Since the courts have to stick to the letter of the law while deciding cases, it is equally difficult for them to give a beneficial construction to statutes. Let us hope that the wisdom of our authorities revive before the damage caused by hibernated statutes turns our natural resources into garbage cans.

[1]Vellore Citizens Welfare Forum v. Union of India AIR 1996 SC 2715

[2] See; Also see  as visited on 15/06/2014

[3] Refer Annual Report (2010) of Central Pollution Control Board available at


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Insider Trading and the Chinese Wall Defense

 By Tanaya Sanyal, 5th Year, WBNUJS, Kolkata


The concept of a Chinese Wall has been a widely acknowledged method of preventing conflict of interests in financial institutions for a considerable period of time. The House of Lords recognised this principle when they defined a Chinese Wall as the “existence of established organisational arrangements which preclude the passing of information in the possession of one part of the business to other parts of the business” in Bolkiah v. KPMG. [1] Such an arrangement is usually characterised by a physical separation of various departments to prevent leakage of information, an informative and ethics based programme to sensitise the employees of the need to prevent divulging of information, clearly defined situations in which the separation can be compromised and guidelines to regulate such exchange, constant monitoring of compliance with the wall and finally imposition of sanctions in the event of an unauthorised contravention. [2]

The use of The Chinese Wall is not only limited to rein insider trading activities, but has also found widespread application in protecting the integrity of research reports prepared by analysts in mammoth investment concerns. It attempts to insulate the analysts from the banking wing of the organisation, to ensure independence in the research reports based on which investors weigh their options.[3] In this blog post, I shall only be examining the Chinese Wall as a defence to insider trading in the Indian regulatory framework and its viability.


1. Regulatory framework in India

Regulation 12 of the Insider Trading Regulations[4] mandates all listed companies and organisations associated with the securities market to frame and adopt a code of internal procedures.[5] This Code must comply with the terms of the Model Code of Conduct[6] which is also annexed to the Regulations. The conditions in the Code can be in addition to what has been suggested in the Model Code but shall not dilute the terms laid down in it. The Model of Code Conduct is divided into two parts: Part A prescribes conditions for the listed companies while Part B lays down conditions for operation of residuary entities such as intermediaries, professional firms and any other entity associated with the securities market.[7]


2. Statutory recognition of the “Chinese Wall” principle

As part of the obligations under Part B of Schedule I of the Regulations, entities associated with the securities market shall be required to follow a Chinese Wall policy.[8] The Code speaks of creation of ‘insider areas’ and ‘public areas’ within the organisation, for the purpose of segregation of the two zones. Access to insider areas (zones of confidential information) shall be restricted and segregated from public areas and accordingly, employees engaged in the former shall not communicate price sensitive information to the latter. If in any exceptional circumstance, the employees of the public area have to be given confidential information, it shall be on a ‘need to know’ basis and shall take place within the insider area.[9] Such exchange must be cleared by the compliance officer.


3. Enforcement of the principle

It is not feasible to physically segregate the departments of an organisation handling confidential information and those dealing with sales or investment. If the organisation is allowed to trade in client securities, based on the information it has been privy to on account of close association or interaction with any of its client it would be considered as a violation of the Regulations. It is for this purpose that ‘restrictive or grey lists’ have been mandated under the Regulations. [10] For instance, if an organisation by virtue of preparing an appraisal report, credit rating or handling any assignment for a company is privy to price sensitive information, the securities of the company shall be put in a ‘restricted/grey’ list and trading shall be restricted in such securities.[11] The rationale behind such lists is to ensure compliance with the Chinese Wall principle and ensure that the interests of clients of an organisation are not compromised with. To quote a live example, Merrill Lynch, a consultancy firm, was alleged to have engaged in practices that compromised its client, the Douglas Aircraft Co. Merill Lynch was the underwriters working on a public offering by the client.[12] When the underwriters became aware of the fact that the client was going to re-issue a revised estimate of their earnings which was lower than the previous projections, they passed on the information to the sales wing of the firm which subsequently fed the news to many of its other institutional clients. Before the revised estimate was to be published, Merill Lynch, along with its other clients, had dumped large number of shares belonging to the Co. in order to minimise losses.[13] Such examples underscore the need for a restriction on trading in the securities of the client during an ongoing assignment due to the organisation’s knowledge of price sensitive information.

A question thus arises as to why even with the existence of rigid Chinese Wall policies do price sensitive information get abused? Is the policy deficient to address concerns of insider trading.?


4.Inadequacies of the Chinese Wall.

It has been averred that the above policy is only equipped to impede accidental exchange of information among the departments of an organisation. It cannot curb those situations when there is a deliberate disclosure of information by the investment advisors to clients as in the case of “givingtips”.

However, at times the firm’s compliance with the Chinese Wall policy can also be counterproductive in light of the duty it owes to its customers. It is an uphill task to strike a balance between the duty to maintain confidentiality of information obtained from its corporate clients and its duty of providing accurate information of all material facts and circumstances to its customers. This is exactly what happened in Slade v. Shearson, Hammill & Co,[14] where Slade did not act on the adverse information of a company’s financial stability that its underwriting department was privy to and continued to recommend stock to its clients. As a result, it was sued –by its clients. The defense of a Chinese Wall did not hold good in court as it was of the opinion that the firm was unable to recognise its ‘conflicting fiduciary relationships’ and its duty not to recommend the said stock which it failed to fulfil. [15] Hence, compliance with the Chinese Wall policy can often conflict with other fiduciary duties in securities trade, producing adverse consequences.



Hence, from an above analysis, it is clear that the concept of Chinese Walls as existing is not self-sufficient in checking the flow of price sensitive information. It often discourages the traders to comply with the regulations since they cannot perform their duties towards clients with the most updated information available. Also, it discourages collective pooling of resources within an organisation due to watertight compartmentalisation of the various wings. Hence it is argued that the Chinese Wall defense itself will not be a sufficient defence to insider trading. It must be coupled with other defences for the organisation to immunise itself from claims of insider trading. To this end, the additional defences suggested in the J. Sondhi Committee Report may provide useful guidance.[16]



[1] [1998] UKHL 52, Lord Millet.


[3] Christopher M Gorman, Are Chinese Walls the Best Solution to the Problems of Insider Trading and Conflicts of Interest in Broker-Dealers?, available at (Last visited on March 27, 2014). Hereinafter ‘Regulations’.

[4] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992.

[5]Hereinafter ‘Code of Conduct.’

[6] Regulations, Schedule 1, Part A & B.

[7] Regulations, Reg. 12(1): “. (1) All listed companies and organisations associated with securities markets including : (a) the intermediaries as mentioned in section 12 of the Act, asset management company and trustees of mutual funds ; (b) the self-regulatory organisations recognised or authorised by the Board; (c) the recognised stock exchanges and clearing house or corporations; (d) the public financial institutions as defined in section 4A of the Companies Act, 1956; and (e) the professional firms such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising listed companies, shall frame a code of internal procedures and conduct as near thereto the Model Code specified in Schedule I of these Regulations 45[without diluting it in any manner and ensure compliance of the same].”

[8] Regulations, Schedule I, Part B, ¶2.4.

[9]Ibid., ¶ 2.4.5.

[10]Ibid., ¶4.0.

[11] Ibid., ¶ 4.2.

[12]Supra note 3, at 483.


[14] 517 F.2d 398, 400 (2d Cir. 1974).

[15]Supra note 3, at 491-92.

[16] SEBI, Report of the High Level Committee to Review The Sebi (Prohibition of Insider Trading) Regulations, 1992, December 7, 2013, available at (Last visited on March 25, 2014).