Role of Legal Acumen in Business Decision Making

Group 1 | Section D Puja (abm09022) | Yogesh (pgp28171) | Esther (pgp28181) | Tripta (pgp28191) | Hitesh (pgp28201) | Navneet (pgp28211) | Iniyan (pgp28221) IIM Lucknow 10/09/2012

ContentsIntroduction .................................................................................................................................. 3 Role of Legal Acumen in Business Decision-Making ........................................................................... 3 International Business- an Introduction ............................................................................................. 3 Business and Law .............................................................................................................................. 5 Important Laws That Affect ones Business [6] ................................................................................... 5 Role of Directors or Board of Directors in a Company [7] ................................................................... 7 Utkarsh Mandal Case ................................................................................................................... 11 Background of the case ................................................................................................................... 12 Laws violated/applicable in the case ................................................................................................ 13 Proceedings of the case ................................................................................................................... 15 Conclusions and Inferences from the case ....................................................................................... 18 Vodafone Case ............................................................................................................................ 20 Background of the case ................................................................................................................... 20 Laws Violated according to IT Authority ........................................................................................... 21 Proceedings of the case ................................................................................................................... 23 Conclusions of the case ................................................................................................................... 30 Rajat Gupta Insider Trading Case ................................................................................................. 32 Background of the case: .................................................................................................................. 32 Laws Violated, Charges & Trial against Rajat Gupta: [17] [2] ............................................................ 34 Proceedings of the case ................................................................................................................... 36 Conclusion and Inferences from the case......................................................................................... 39 References .................................................................................................................................. 41

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IntroductionRole of Legal Acumen in Business Decision-Making

Among nations, the spirit of free trade has become contagious. Examples can be seen everywhere: The rush of nations to join the World Trade Organization, the growth of regional economic integration, the privatization of national economies, and the opening of once tightly controlled markets in developing countries and in formerly communist countries as well. The outcome has been the globalization of the worlds economy and of world markets for goods and services. It is in this climate that we have seen the greatest renewal of interest in international business education in Americas history. Through this project, we have attempted to bring out the Importance of Legal Acumen in a Business-Decision Making. We have tried to cover, in our study, what a business is, what a business decision is, what the characteristics of a good manager are, what the role of the Board of Directors is, what the role of a business lawyer is, what legal acumen or knowledge he/she should possess, what are the different laws that are applicable to a company, etc., besides talking about International business. In an attempt to bring out the essence of legal acumen in business decision making we have studied and analysed 3 cases, wherein our report includes:

The background of the case The laws violated Details of proceedings Outcome, implications and inference from the case

Beginning our discussion/report with an introduction to International Business-

International Business- an Introduction

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The world today is more economically interdependent than at any other time in history, which has led to the globalization of product, service, and capital markets. While globalization has created a world in which virtually no country (even N. Korea) is truly isolated from the trade of foreign goods, there are still some types of goods that we try not to trade or create an expanded market for (drugs, weapons, etc.). [4] Hence, the globalized goods and services are getting commoditised. Some Features of International Business Transactions are Cross border participation Foreign currency Different laws applied across borders Transfer of goods/services across borders Basically, any flow of value across borders The main thing that makes international business transactions international is the fact that foreign currency is involved. Foreign currency is the main thing that distinguishes domestic business from international business. INTERNATIONAL CONTRACTING & SPECIFIC FORMS OF TRANSACTIONS Examples of international commercial transactions- Cash Transaction, Invoice Payment Transaction & Lending Transaction. Three Parts of an International Contract (1) The Business Deal: description which reflects what the parties, as business parties, feel that they are doing. (2) Legal Enforcement Provisions: lawyer writes provisions that make sure the business deal is enforceable, including choice of law and arbitration provisions. (3) Business Protections Provisions: provisions that make sure business deal cannot be changed directly or indirectly.

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Business and Law

Law permeates every aspect of business. It regulates production standards, sets quality standards and deters unfair trade practices. It stipulates how finances should be raised, deployed, managed and accounted for. It makes businesses worry about the font size of the declaration on a package. And it treats organizations as if they were persons.

Commercial law also known as business law is a body of law that governs business and commercial transactions. It is often considered to be a branch of civil law and deals with issues of both private law and public law. Its branches are: Companies law (Corporate law), Competition law (antitrust), Consumer protection, Contract law, Intellectual property law (Copyright law, Patent law, and Trademark law), International trade law, Labour law. [5]

Important Laws That Affect ones Business [6]

It is important for all business owners to know and understand the laws that affect their businesses. It is equally important to comply with those laws. Ignorance of the laws has never been a valid excuse in any Court of Law, and it never will be. As a business owner, it is ones responsibility to know what laws affect ones business.

Since every business, in every state, in every country is different, the laws that affect ones business may be different than the laws that affect other businesses. For that reason, it is impossible to give an account of all laws that affect all businesses. You will need to find out what the laws are that affect ones business, however, these tips will help you know what questions to ask in regards to certain laws. Business Structure: If ones business is a sole proprietorship, one may need a DBA certificate, and a business license for the city one is doing business in. Corporations have other

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requirements, which also vary from state to state. One should find out what laws affect one based on ones business structure. Zoning Laws: It is illegal to operate certain types of businesses in certain areas. One should check with ones local zoning commission to find out where one can operate the type of business that one has. Licenses and Permits: Different businesses may require specific licenses and permits. One should make sure one has all the necessary licenses and permits specific to ones business. Laws specific to Corporations: There are many tax laws and other laws that are specific to corporations. These laws vary from state to state, and generally affect how the corporation is set up, managed, and how stocks and securities are handled.

Environmental Laws: If ones business handles chemicals, hazardous wastes, or other materials that affect the environment, the Environmental Protection Agency will have laws that affect ones business.

Employment Laws: Employment laws will affect how one hires employees, how one pays them, and how one treats them. Failure to comply with employment laws will almost always result in a lawsuit, or an investigation by the Labor Board in ones state.

Tax Laws: There are too many tax laws for most business owners to keep up with - unless they are tax professionals. In order to comply with the tax laws, it is best to hire a tax professional. Business and Contract Laws: Just as tax laws are complicated, contract laws are complicated as well. One should6

protect oneself and ones interests by hiring a business lawyer to help one comply with these laws, and to use these laws to protect oneself and ones business.

Consumer Protection Laws: These laws are designed to protect consumers from fraud and from defective or dangerous products. A business lawyer can usually help one in this area as well.

Internet Laws: If one conducts any portion of ones business on the Internet, one must comply with specific laws. The biggest issue facing business owners conducting business on the Internet is the new SPAM laws. Failure to comply with the laws that affect ones business can cost one a lot of money in fines and penalties. Being forced to close ones business down may be the result of not complying with certain laws. Save oneself time, money, and grief by finding out what laws will affect ones business ahead of time, and keep up-to-date on changes in the laws as time goes by. There may be other types of laws that are specific to ones business. By consulting with a business lawyer, one will be able to find out what these laws are, and how to comply with them.

Role of Directors or Board of Directors in a Company [7]

In Private Limited Companies or the Public Companies, the role and responsibility of the Directors or the Board of Directors depend upon the regulations in the Articles of the Company and the provisions of the Companies Act, 1956. When it comes to listed Public Companies, other provisions like the SEBI guidelines, regulations, provisions in the listing agreement etc. deserve consideration. Directors or the Board of Directors has a very big role to play in any Company and they conduct the day-today affairs of the Company and it may not possible for the AGM to give directions to the Company from time to time though every Company should act as per the provisions of the Companies Act, 1956 and certain decisions can only be taken by the Shareholders in the Annual General Body Meeting (AGM). Taking reality in the corporate world in consideration, considering the legal provisions and on the role of7

the Directors or the Board of Directors (BoD), the Honble High Court of Delhi, in Crl. M.C. No. 2652 OF 2010, between Raj Travels & Tours Ltd. & Others vs. Destination of the World (Subcontinent) Private Limited, was pleased to observe as follows: It is a matter of common knowledge that when companies are floated and public issues are brought, big advertisements are issued giving big names as directors and promoters of the company. These names are the names of successful CEOs, or directors who have achieved success in other fields. Due to these names at the very inception and formation of company, when there is no wealth or property of the company, the share of the company is sold at a premium promising big business and success. Once money is mopped up from the public, in all those cases where the companies were created only for the purpose of mopping up hard earned money of public or to befool them, it is found that those big names disappear and in almost every litigation those directors who formed part of the core of the company and gave promises that the Company would do roaring business quietly disappear from the scene or take plea that they were not responsible for business of the company. Let us examine the role of Board of directors (BoD) in terms of Companies Act and other legal provisions. Company is a legal personality and Board of Director acts as its body and mind. Under Section 291 of the Companies Act, BoD is authorized to do what the company is authorized to do, unless barred by restrictions on their power by the provisions of the Companies Act. It is well settled that directors, while exercising their powers, do not act as agents for the majority or even all the members and so the members cannot by a resolution passed by a majority of even unanimously, supersede the directors power and instruct them how they shall exercise their power. The powers of management are vested in directors and they and they alone can exercise these powers. The only way in which the General Body of a company can overrule the BoD is altering the Articles and refusing to re-elect the directors, whose actions they disapprove. The shareholders cannot themselves usurp the powers, which by Articles are vested in the directors. Thus the relationship of BoD with the shareholders is more of a federation than that one of subordinate and superior. Under the Companies Act, BoD has powers to make calls on shareholders in respect of money unpaid on their share, power to authorize the buy-back, power to issue8

debentures, power to borrow moneys otherwise than on debentures, power to invest the funds of the company and power to take and make loans. There is no doubt that BoD may, by a resolution passed at a meeting, delegate to any committee of Directors, the Managing Director, the Manager or any other principal officer of the company, the above powers. However the principal power still vests in BoD and the Manager or Managing Director acts only as an agent of the BoD. Apart from this, BoD has power to form opinion about the solvency of the company in respect of buy back shares (Section 77A), power to fill up casual vacancies in the office of Directors (Section 262), power to constitute Audit Committee and specify terms of reference thereof (Section 292A), power to make donation to political parties [Section 293A(2)], power to accord sanction for specified contracts in which one or more directors are interested [Section 297(4)], power to receive notice of disclosure of directors interest [Section 299(3)(c)], power to appoint or employ a person as Managing Director or Manager [Section 316(2)], power to invest in shares or debentures of any other body corporate (Section 372A), power to appoint or employ a person as its Manager [Section 386(2)], power to make a declaration of solvency, where it is proposed to wind up the company voluntarily [Section 488(1)], power to approve the text of advertising for inviting public deposits [Section 58A r/w Rule 4(4)]. Some of the powers can only be exercised by resolution passed at the meeting with consent of the Directors present at the meeting. Normally, the banks or other financial institutions give huge loans to the companies and in order to protect their interests, they nominate their Directors on the Board of Companies. These directors are called nominee directors and the function of these directors is to safeguard the financial interest of the institution who nominated them and to ensure that no decision is taken by BoD which goes against the financial institution. Such directors are not considered responsible for the business of the company.

Business Lawyers [8] Hiring a good lawyer is crucial to any successful business. There are two professionals every business will need early on: an accountant and a lawyer. The

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reason for hiring a business attorney may not, however, be very apparent. A good business attorney will provide vital assistance in almost every aspect of ones business, from basic zoning compliance and copyright and trademark advice to formal business incorporation and lawsuits and liability. The role of the business lawyer has evolved beyond the formation of business entities and the litigation of commercial disputes. An effective business lawyer adds value to a transaction by understanding and achieving the clients business goals. Today, the rapidly shifting business and economic landscape demands support from professionals with finely tuned legal acumen as well as a practical understanding of the business world.

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Utkarsh Mandal CaseMANU/DE/3070/2009 IN THE HIGH COURT OF DELHI Writ Petition (Civil) No. 9340/2009 and CM Appl Nos. 7127/09 and 12496/2009 Decided On: 26.11.2009 Appellants: Utkarsh Mandal Vs. Respondent: Union of India (UOI) Hon'ble Judges: Ajit Prakash Shah, C.J. and S. Muralidhar, J. Counsels: For Appellant/Petitioner/Plaintiff: Sanjay Parikh, Ritwick Dutta and Rahul Choudhary For Respondents/Defendant: A.S. Chandhiok, Addl. Solicitor General, Atul Nanda, Bhagat Singh and Nakul Sachdeva, Advs. for R-1/UOI, Bhavanishankar V. Gadnis, Adv. for R-2 and Joaquim Reis, Santosh Paul, Sabina Paul and H.K. Bhat, Advs. for R-3 Subject: Environment Acts/Rules/Orders: Environment (Protection) Act, 1986 - Sections 3(1) and 3(2); Mines and Minerals Development and Regulation Act, 1957 - Section 5(2); Forest (Conservation) Act, 1980 - Section 2; Right to Information Act, 2005; Constitution of India - Articles 19 (1) and 226 Cases Referred: M.J. Sivani and Ors. Vs. State of Karnataka and Ors. (1995) 6 SCC 289; Tata Cellular Co. v. Union of India (1994) 3 SCC 651; Union for Civil Liberties v. Union of India (2003) 4 SCC 399; R v. Lambeth LBC ex p Walters (1994) 26 HLR 170; Hameetman v. Chicago 776 F.2d 636

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Disposition: Petition allowed Judgment: S. Muralidhar, J.

Background of the case

The background facts leading to the petition are that the Respondent No. 3 is the lessee of Borga Dongrachem Fall Mine [71.1980 hectares, TC No. 29/52] and Sociedade TimbloIrmaos Ltd is the lessee of Oiteiro Borga Do Bairro Queri Mine [89.5 hectares, TC No. 34/50]. The said mines produce 0.20 MTPA iron ore and are located at Village Rivona, Tehsil Sanguem in District South Goa in Goa. In the 1980s the leases were operated by Respondent No. 3 for iron, manganese and ferro manganese. The mines are stated to have been worked till 1994. With the increase in the demand for iron ore from countries like China, South Korea and Japan, there was renewed interest in re-starting the mining operations. It is stated that on 13th January 2006 a Combined Mining Scheme along with a Progressive Mine Closure Plan was approved by the Government of Goa. On 17th April 2006 the Respondent No. 2 applied for renewal of the lease which was due on 22nd November 2007.

Environmental laws in India In the Constitution of India it is clearly stated that it is the duty of the state to protect and improve the environment and to safeguard the forests and wildlife of the country. It imposes a duty on every citizen to protect and improve the natural environment including forests, lakes, rivers, and wildlife. Reference to the environment has also been made in the Directive Principles of State Policy as well as the Fundamental Rights. The Department of Environment was established in India in 1980 to ensure a healthy environment for the country. This later became the Ministry of Environment and Forests in 1985. The constitutional provisions are backed by a number of laws acts, rules, and notifications. The EPA (Environment Protection Act), 1986 came into force soon after the Bhopal Gas Tragedy and is considered an umbrella legislation as it fills many

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gaps in the existing laws. Thereafter a large number of laws came into existence as the problems began arising, for example, Handling and Management of Hazardous Waste Rules in 1989. Following is a list of the environmental legislations that have come into effect: [9] General Forest and Wildlife Water Air

Laws violated/applicable in the case1986 - The Environment (Protection) Act Section 3(1) and 3(2) authorizes the central government to protect and improve environmental quality, control and reduce pollution from all sources, and prohibit or restrict the setting and /or operation of any industrial facility on environmental grounds. Following are some of the details of the section 3 of the law:

Environmental Pollution: It means any solid, liquid or gaseous substances present in such concentration as may be or tend to be injurious to environment and human being are known as pollutant and presence of any pollutant in the environment in such proportion and concentration that has bearing on health and environment is termed as "Environmental Pollution".

The Act provide power to make rules to regulate environmental pollution, to notify standards and maximum limits of pollutants of air, water, and soil for various areas and purposes, prohibition and restriction on the handling of hazardous substances and location of industries (Sections 3-6) [10]

1957 - Mines and Minerals Development and Regulation Act - Section 5(2)

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No mining lease shall be granted by the State Government unless it is satisfied that-[(a) there is evidence to show that the area for which the lease is applied for has been prospected earlier or the existence of mineral contents therein has been established otherwise than by means of prospecting such area; and

There is a mining plan duly approved by the Central Government, or by the State Government, in respect of such category of mines as may be specified by the Central Government, for the development of mineral deposits in the area concerned. [11]

1980 - Forest (Conservation) Act Section (2) It provides restriction on the dereservation of forests or use of forest land for nonforest purpose. Notwithstanding anything contained in any other law for the time being in force in a State, no State Government or other authority shall make, except with the prior approval of the Central Government, any order directing

that any reserved forest (within the meaning of the expression "reserved forest" in any law for the time being in force in that State) or any portion thereof, shall cease to be reserved;

that any forest land or any portion thereof may be used for any non-forest purpose;

that any forest land or any portion thereof may be assigned by way of lease or otherwise to any private person or to any authority, corporation, agency or any other organisation not owned, managed or controlled by Government;

that any forest land or any portion thereof may be cleared of trees which have grown naturally in that land or portion, for the purpose of using it for reforestation. [12]

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Proceedings of the casePublic Hearing and objections A public hearing was held on 31st January 2007 where 67 persons submitted objections to the restarting of the Borga mine. On 2nd February 2007 Goa State Pollution Control Board wrote to the Ministry of Environment and Forests (MoEF) highlighting the concerns expressed against restarting of the mine. Objections were also raised by the Goa State Agricultural Marketing Federation. On 9th March 2007 57 residents of Village Rivona and nearby villages to the Collector, South Goa showed their support in the renewal of the lease of the Borga mine. On 9th April 2007 the Government of Goa wrote recommending the clearance to the Inspector General of Forests (Forest Conservation), Government of India, MoEF. On June 14th 2007 Expert Appraisal Committee (EAC) okayed the proposal for environmental clearance and the approval was granted by the Ministry of State for Environment and Forests on 19 th July 2007. A letter of the same was issued on 26 th July 2007. National Environment Appellant Authority (NEAA) hearing The grant of environmental clearance by the order dated 26th July 2007 was challenged by the Appellant before the NEAA. Before the NEAA, the Appellant challenged the grant of environmental clearance on three main grounds. 1. The first was that the EIA report was defective/deficient. 2. The second ground was that the public hearing conducted by the Respondent No.2 was defective. 3. The third issue dealt with by the NEAA was whether the project would have an adverse environmental impact on the neighborhood. The NEAA did not find any of the points challenged by the petitioner as valid. But NEAA noted that the committee other than considering the technical and

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environmental issues did not consider the whole scale opposition from the public and that sufficient reason were not given to why oppositions were being ignored. Before the court Petitioners case The environmental clearance granted by the MoEF was challenged as being given without proper consideration to the objections of the public. Also the Executive Summary was not submitted 30 days in advance to the public hearing. It was made available only nine days before the date of public hearing the objectors could not be expected to respond meaningfully to the notice. The procedure for granting clearance was in violation of the letter and spirit of the EIA notification. Mr. Majumdar, the Chairperson of the EAC (Mines) which had cleared the proposal for grant of EIA clearance was at the relevant time himself a Director of four mining companies, viz., Uranium Corporation of India Limited, R.B.G. Minerals Industries Limited, Hindustan Dorr-Oliver Limited and Adhunik Metaliks Limited. This represented a conflict of interest. Also the Additional EAC on mining had cleared 410 mining projects till June 2009 but only four site visits were done by the Additional EAC Committee on mining till date. Respondents case The respondents responded that even though the objections were not discussed in the EAC meeting they were on the note prepared by the Director MoEF for approval by the MOS. The note explained why the objections were not valid. The Chairman of the EAC (Mines) was a Director of four mining companies but it was as part of a twelve member committee. The respondents also raised objections that the petitioners were the legal representatives of late Mr. Premanath Damodar Prabhu Dessai with whom the settlement had been arrived in the civil suit way back in 1997. According to him, the objections at the public hearing were raised by those disgruntled litigants although they had received the compensation agreed upon. He pointed out that there are other nine mines operating in the area and it was the Borga Mine alone that was being singled out by the Appellant. He submitted that the environmental clearance16

had been granted subject to various conditions which would duly be complied. Each of the objections raised at the public hearing has been answered in the detailed and had proposed to undertake compensatory afforestation and it would abide by that undertaking. The grant of environmental clearance had been notified in the newspapers within seven days. As such the respondents cannot be penalized for any procedural violation on the part of the EAC to state the precise reasons for negativing the objections raised at the public hearing. Courts decision The first concerns the requirement of making available the Executive Summary at least 30 days prior to the date of the public hearing and whether the failure to do so in the present case negates the environment clearance. The second issue reflects the legal requirement of compliance with the principles of natural justice. It touches on the aspect of bias in the functioning of the EAC. It is whether the fact that the EAC (Mines) was chaired by a person who was the Director of four mining companies himself impaired the fairness and credibility of its decision. The third issue reflects the aspect of procedural fairness and the requirement of the administrative decision-making body to furnish reasons for its decision. The ultimate question is whether the non-compliance with any of the above procedural requirements vitiates the grant of environmental clearance. The court found that although there is no mandatory requirement for making available the Executive Summary available 30 days before the date of hearing, since the information was not available to the public, it was necessary for the information to be available to make informed decisions. But owing to the fact that the public hearing was attended by a large number of people and as many as 67 written objections were submitted, the Court found it unnecessary to conduct a public hearing again. The court then found that as the EAC advises the MoEF on the decisions taken, therefore it is mandatory that EAC too be bound by the same level of standards as the MoEF. Therefore it was necessary on the part of EAC to discuss the objections raised in the public hearing. And failure to do so can result in the grant being non

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application of mind to related matters. The court also found the basis for the objections valid and not vindictive as the respondent tried to portray. The criticized the fact that the Chairperson of EAC was also a Director of four mining companies. This was seen as a direct clash of interest. The court directed that a fresh decision to be taken by the new chairman. The court also directed the EAC to consider each proposal carefully and not approve of proposals in bulk and also to carry out field visits to gauge the amount of environment effect the mines are having as raised by the objections in the public hearing. The court also found that the MoEF had given the clearance on the grounds of compliance to certain regulations. It was directed that respondents should be directed to comply with the regulations first then start operating the mines. This would ensure that no environmental damage would be done if the regulations are not followed.

Conclusions and Inferences from the caseThe court found that since the objections made in the public hearing were not taken into consideration while deciding to grant the approval for the restarting of the Borga mines, the environmental clearance granted by the MoEF on the 26 th July 2007 would be nullified. A fresh review would be taken of the project proposal keeping in mind the directives given by the court to the MoEF and EAC regarding the functioning and also the consideration of each and every point made in the public hearing. The Court also gave specific timelines to be followed in reviewing the project proposal. The respondents were also directed to pay an amount of Rs. 10,000 to the petitioners within a period of four weeks. High Court of Delhi passed the judgement that, they had no hesitation in setting aside the impugned order dated 26th July 2007 passed by the MoEF. They were of the view that while the NEAA was right in its conclusion that the EAC (Mines) ought to have given reasons for its decision, they are unable to concur with the NEAA that the failure to give reasons did not vitiate the decision to grant environment clearance.18

Consequently, they set aside the impugned order dated 14th October 2008 of the NEAA affirming the order dated 26th July 2007 issued by the MoEF granting environmental clearance to the Respondent No. 3. The matter was remanded to the EAC (Mines) which was to be constituted by the MoEF afresh keeping in view the observations made in the order. The EAC (Mines) had to consider each of the objections raised at the public hearing held on 31st January 2007 as well as the response thereto by the Respondent No. 3. Before taking a fresh decision, the EAC (Mines) was suppose to undertake a site visit or visits, either by itself or through a sub-committee of itself comprising not less than three members. The EAC (Mines) had to render its fresh reasoned decision within a period of twelve weeks from the date of the receipt of the courts order by the Secretary, MoEF. Th e final decision thereon was taken by the MoEF within eight weeks thereafter in accordance with law. The fresh decision of the MoEF was communicated to Respondent No. 3 as well as the Appellants within a week after the order. It was kept open to the party aggrieved by such decision to seek whatever remedies are available to such party in law. It was made clear that if the MoEF reiterates its decision to grant environment clearance then there will be no need for Respondent No. 3 to again obtain fresh consequential permissions from other authorities. If not, then the grant of such permissions will not by themselves give any right to the Respondent No. 3 to operate the mine in question. The petition was accordingly allowed with the above directions with costs of Rs. 10,000/- which were paid by each of the Respondents to the Appellants within a period of four weeks.

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Vodafone CaseBackground of the caseVodafone Group is a British multinational telecommunications company whose headquarter is in London. It is the world's second largest mobile telecommunications company measured by both subscribers and 2011 revenues. IT has 439 million subscribers as of December 2011.Vodafone owns and operates networks in over 30 countries and has partner networks in over 40 additional countries. Its Vodafone Global Enterprise division provides telecommunications and IT services to corporate clients in over 65 countries. [13] In 2007 Vodafone group acquires a 67% stake in Hutchison Essar Ltd (HEL) for $10.7 billion. The company is renamed as Vodafone Essar. In 2008 Vodafone acquires the licenses in remaining 7 circles and has starts its pending operations in Madhya Pradesh circle, as well as in Orissa, Assam, North East and Bihar. In July 2011, Vodafone Group agreed upon the terms of buying its partner Essar from its Indian mobile telephone industry. The UK based firm paid $5.46 billion to its Indian counterpart to buy Essar out of its 33% stake in the Indian subsidiary. It will leave Vodafone owning 74% of the Indian business, while the other 26% will be owned by Indian investors, in compliance with Indian law. [14] Ina tax dispute involving the Vodafone Group with the Indian Tax Authorities, in relation to the acquisition by Vodafone International Holdings BV, a company resident for tax purposes in the Netherlands, of the 100% share capital of CGP Investments Ltd. from Hutchinson Telecommunications International Limited (HTIL), a company resident for tax purposes in the Cayman Islands vide transaction dated 11.02.2007. CGP, through various intermediate companies/ contractual

arrangements controlled 67 percent of Hutchison Essar Limited, an Indian company. This acquisition resulted in Vodafone acquiring control over CGP and its downstream subsidiaries including, ultimately, HEL, whose stated aim, according to the IT authority, was acquisition of 67% controlling interest in Hutchison Essar Ltd, being a company resident for tax purposes in India which is disputed by the appellant saying

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that Vodafone agreed to acquire Hutchison Essar Limited. According to the appellant, CGP held indirectly through other companies 52% shareholding interest in HEL as well as options to acquire a further 15% shareholding interest in HEL, subject to relaxation of foreign direct investment Norms. The IT department seeks to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, which is not a tax resident in India, holds the underlying Indian assets.

Laws Violated according to IT AuthorityIn September 2007, the tax department issued a show-cause notice to Vodafone to explain why tax was not withheld on payments made to HTIL in relation to the acquisition. The tax department contended that the transfer of shares in CGP had the effect of indirect transfer of assets situated in India. Income-tax Act, 1961 The IT department held that they had jurisdiction to proceed against Vodafone for their alleged failure to withhold tax from payments made under Section 201 of the Income-tax Act, 1961. Section 195 provides for deduction for tax at source upon a payment to a nonresident or foreign company. It casts an obligation on the payer to deduct tax at source from payments made to non- residents which payments are chargeable to tax. Such payments must have an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise. If shareholding in companies incorporated outside India, is property located outside India then such shares become subject matter of offshore transfer between two non-residents, there is no liability for capital gains tax. In such a case, question of deduction of tax at source would not arise. If in law the responsibility for payment is on a non-resident, the fact that the payment was made, under the instructions of the non- resident, to its agent/nominee in India or its branch office will not absolve the payer of his liability under Section 195 to deduct tax. Section 195(1) imposes a duty upon the payer of any income specified therein to a non-resident to deduct there from the tax at source unless such payer is himself liable to pay income-tax there on as an agent of the21

payee. Section 201(1) of IT act states that If any such person the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. Given that no penalty shall be charged from such person, principal officer or company unless the Assessing Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax. [15] The main controversy of the case was the interpretation of Section 9(1) (i) of the Act. Section 9(1) explains the circumstances in which income is deemed to accrue or arise in India and includes all income accruing or arising in India, whether directly or indirectly through or from any business connection in India; or through or from any property in India; or from any asset or source of income in India; or through the transfer of a capital asset situated in India. As per the said section, income accruing or arising directly or indirectly from the transfer of a capital asset situated in India is deemed to accrue/ arise in India in the hands of a non-resident. In connection with the above, the Supreme Court observed that the Charge to capital gains under Section 9(1) (i) of the Act arises on existence of three elements, viz, transfer, existence of a capital asset and situation of such asset in India. The legislature has not used the words indirect transfer in Section 9(1) (i) of the Act. If the word indirect is read into Section 9(1)(i) of the Act, then the phrase capital asset situate in India would be rendered nugatory. Section 9(1) (i) of the Act does not have look through provisions, and it cannot be extended to cover indirect transfers of capital assets/ property situated in India. The proposals contained in the Direct Taxes Code Bill, 2010, on taxation of off-shore share transactions indicate that indirect transfers are not covered by Section 9(1) (i) of the Act. A legal fiction has a limited scope and it cannot be expanded by giving purposive interpretation, particularly if the result of such interpretation is to transform the concept of chargeability which is also there in Section 9(1) (i) of the Act. [14]

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Proceedings of the caseIn our post on the judgment of the Bombay High Court, Business world hoped that the Supreme Court would take a different view. That the Court has now done so has been welcomed as much needed respite in bad times. Even more importantly, it is heartening that the Court has taken what it is submitted is the correct view especially on the facts of Vodafones case. But from that qualification it follows that the prevailing assumption that this judgment is a complete victory for tax planning over a more robust approach may not be entirely accurate. Much of the Courts reasoning, particularly in the judgment of the Chief Justice, is premised on a factual finding that the Vodafone-Hutch deal did not lack commercial substance or business purpose, and its analysis of the legal principles suggests that a finding for the assessee is not a foregone conclusion in similar cases. It is easiest to analyze the two judgments by identifying seven issues of law that emerge from it. This post deals with the two of these issues. The seven issues are: (i) (ii) (iii) (iv) Approach to tax avoidance Controlling interest and the situs of shares; The law on lifting the corporate veil the meaning of extinguishment under section 2(14) of the Income Tax Act, 1961 Before considering these issues, it should be noted that two crucial findings on fact are at the heart of the conclusion of the Chief Justice and K.S. Radhakrishnan J. that the IT Department lacked jurisdiction first, the rejection of the Revenues argument that CGP was fished out at the last minute from the HTIL structure solely to avoid tax and secondly, the explanation given in respect of an application made by VIH to the FIPB. As far as CGP is concerned, the Revenue relied on a Due Diligence report submitted by Ernst & Young in which it was stated that the parties had originally envisaged transferring Array Holdings Ltd. [Array], a company incorporated in Mauritius, and later decided to instead transfer CGP. The Chief Justice and K.S. Radhakrishnan J. explain that this change was for an important commercial reason

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and not simply a device to avoid tax Global Services Pvt Ltd. [GSPL], one of the entities which held call options in respect of HEL shares held by companies controlled by Mr. Asim Ghosh and Mr. Analjit Singh, was a wholly owned subsidiary of Hutchison Teleservices Holdings Ltd. (HTIHL), which was in turn a wholly owned subsidiary of CGP, but not a wholly owned subsidiary of Array. Therefore, as both judgments note, transferring CGP instead of Array had distinct commercial advantages. As for FIPB, the Revenue relied on a letter dated 19.03.2007 addressed by it to VIH asking why VIH proposed to pay $11.08 billion for acquiring approximately 67 % of the equity of HEL when in fact its equity acquisition was only 51.96 %. To this VIH replied that the $11.08 billion was paid not only for the 51.96 % equity but also for control premium, the entitlement to acquire an indirect 15 % interest (through the GSPL call options) and stated that it in sum represented payment for 67 % of the economic value of HEL. The Chief Justice rightly notes that some of these differences arose out of the different accounting standards prevalent in the USA and India, and that i n any event, valuation cannot be the basis of taxation. There are many other important questions of fact which illustrate the scope of the legal principles set out by the Court. It is worth bearing in mind, however, that the assessee appears to have prevailed largely because it was able to persuade the Court that there was commercial substance and business purpose, and not on the ground that business purpose is irrelevant. Approach to Tax Avoidance The correct approach to cases involving tax avoidance has historically been a contentious issue. In India, this has come to consist of two distinct questions: first, whether the approach of the Court in Azadi Bachao Andolan is contrary to the Constitution Benchs judgment in McDowells case; and secondly, independent of this question, the proper approach to tax avoidance. On the first question, doubts had arisen because of the exiguous observation in paragraph 46 of the majority judgment in McDowell endorsing on this aspect the concurring judgment of Chinnappa Reddy J., in which the ghost of the Duke of Westminster had been duly exorcised.

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While the Chief Justice and K.S. Radhakrishnan J. reach the same conclusion that Azadi Bachao remains good law, there are some differences in the reasoning. The Chief Justice holds that the words this aspect indicate that the majoritys agreement with Reddy J. was confined to the use of tax evasion through the use of colorable devices. The final sentence in that paragraph reiterates that in cases of treaty shopping and/or tax avoidance there is no conflict at all. While it may be suggested that this means that the Chief Justice has equated treaty shopping and tax avoidance with colorable devices, it is submitted that the better view is that the Chief Justice has distinguished between tax avoidance/treaty shopping on the one hand and the use of colorable devices on the other, especially since the expression tax evasion has been used with reference to the former in the same paragraph. K.S. Radhakrishnan J. has gone considerably further, and has clearly stated that: (i) the judgment of Ranganath Misra J. constitutes the ratio of McDowell; and (ii) Reddy J.s remark that the Duke of Westminster is not good law is incorrect even as a matter of English law. Having clarified that it was therefore unnecessary to overrule Azadi or

refer McDowell to a larger Bench, the Court considered the question of tax avoidance independently. This involved an analysis of the English case law, which has had considerable influence on this subject in India (as elsewhere). In English law, despite many caustic remarks about the Duke of Westminsters case (perhaps none better than Templeman L.J.s famous description of it in the Court of Appeal in Ramsay), the recent cases suggest that Ramsay and perhaps even Furniss v Dawson is not an overarching principle of construction, but simply a result of the usual process of interpreting legislation. The Chief Justice accepts this. K.S. Radhakrishnan J. examines it in more detail and interestingly appears to suggest that the distinction between Ramsay and IRC v Plummer lies in the fact that Ramsay was a readymade scheme. While this is not implausible, the force of the suggestion is diminished by the fact that Plummer was a readymade scheme too, as the judgment of Walton J. at first instance suggests, and also by a subsequent decision of the House of Lords (Moodie v IRC 65 TC 610), in which Lord Templeman expressed the view that Plummer would have been decided differently had the Ramsay principle been applied.

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One more point must be made about K.S. Radhakrishnan J.s approach to this issue. His judgment appears to endorse Lord Hoffmanns celebrated analysis of the law on tax avoidance in his speech in MacNiven v Westmoreland Investments, in which it was suggested that the apparent difficulty in reconciling the cases on tax avoidance was a failure to appreciate that the legislature sometimes defines a term in a legal sense and sometimes in a commercial sense. That formulation has subs equently been criticized, and the UK Supreme Court has virtually rejected it in recent case Tower MCashbackv Revenue and Customs Commissioners (not cited in Vodafone). It is submitted, however, that Lord Hoffmanns approach is in fact a most useful way of analyzing this issue, and some of the criticism is perhaps a result of the belief that Lord Hoffmann intended a formulaic classification of definitions as legal or commercial. While it is not possible to develop this point in more detail here, it suffices to state that what Lord Hoffmann really appears to have intended is a test to distinguish cases in which legislative intent is consistent with a degree of artificiality (for instance Lord Hoffmanns own example of conveyancing) from those in which it is not. It is therefore submitted that K.S. Radhakrishnan J.s remarks on this test are to be welcomed, notwithstanding, with respect, the comments of Lord Walker in Tower MCashback. Controlling Interest and Situs of Shares The judgment of the Bombay High Court had accepted that in principle controlling interest is not an independent capital asset, although it had eventually found that there was something other than the transfer of a single share of CGP. On this issue, the Chief Justices judgment is especially interesting. It begins by observing that controlling interest is a mixed question of fact and law, and rejects the Revenues case not only on the ground that controlling interest is not a distinct capital asset, but also on the ground that Vodafone did not acquire 67 % controlling interest. The Chief Justice reaches the latter conclusion by holding that GSPLs right under the Call Options with the Asim Ghosh and Analjit Singh companies is at the highest analogous to a potential share because till exercised it cannot provide right to vote or management or control. Similarly, the practice before the SPA was that HTIL would appoint six directors, Essar (which held 33 %) would appoint four, and TII (which indirectly held 19.54 % in HEL) would appoint two directors, who in

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practice were Mr. Ghosh and Mr. Singh. In a Term Sheet Agreement entered into between VIH and Essar on 15.03.2007, it was agreed tha t this practice would continue (i.e. VIH would appoint 8, and Essar 4). The Chief Justice holds that an agreement to continue the practice concerning nomination of directors on the Board of Directors of HEL which in law is different from a right or power to control and manage did not give VIH controlling interest. In 88, the Chief Justice holds that in any event a sale of shares cannot as a general rule be broken up into separate individual components and that such components are not distinct capital assets (approving in this respect the well-known judgments in Maharani

Ushadevi and Venkatesh (Minor) v CIT). It is submitted that this conclusion is entirely correct as a matter of law, if it were possible in every circumstance to vivisect the sale of the whole into the sale of its component parts, it would have been entirely unnecessary for Parliament to expressly provide that the sale of the whole is taxable if certain conditions are satisfied. There are two other important issues Indias approach to the corporate veil, and the scope the extinguishment provision under section 2(47) of the Income Tax Act, 1961. Corporate Veil It is as easy to state that the origin of the separate entity principle is often traced to Salomon v Salomon as it is difficult to outline when a court will lift the veil. One of the best attempts in the literature to extract coherent principles in this branch of the law is Professor Ottolenghis essay published in t he Modern Law Review in 1990, and perhaps the best judicial analysis is Slade LJs masterly treatment of the subject in Adams v Cape Industries. In Vodafone, there are important differences in the approach of the Chief Justice and K.S. Radhakrishnan J., and the Chief Justices judgment suggests that the court may more readily lift the veil than is commonly supposed. The Chief Justice begins by affirming that a subsidiary and its parent are totally distinct taxpayers, and that the fact that a parent exercises substantial control over the affairs of its subsidiary is not in itself a reason to depart from this principle. The Chief Justice then outlines important exceptions to this principle in particular, that it is permissible to ignore the separate legal status of the subsidiary if its decision-making is fully subordinate to the holding company or if the parent27

company makes an indirect transfer through abuse of legal form and without reasonable business purpose, and clarifies that these are by no means exhaustive. At first sight, the fully subordinate language the Chief Justice uses may suggest that a court will readily lift the veil, but it is submitted that the better view is that the Chief Justice is simply referring to the well-known exception (accepted in Adams) in which the business of the subsidiary is in fact the business of the holding company. The Chief Justice then holds that India has a judicial anti -avoidance rule which allows the Revenue to invoke substance over form or pierce the corporate veil if it discharges its burden of establishing that the transaction in which the corporate entity is used is a sham or tax avoidant. While the word tax avoidant may give rise to the impression that every case in which the use of a corporate entity leads to a reduction in the tax liability of the assessee is covered, it is submitted that the better view, and one which is consistent with the rest of the Chief Justices analysis in 67 and 68, is that no substantial departure is intended from the limited grounds on which the veil may presently be lifted. That view is reinforced by the fact that sham is used in conjunction with tax avoidant, and by the examples given by the Chief Justice in the sentence that immediately follows round tripping and payment of bribes. The example of lack of business purpose is also given, but the Chief Justice clarifies that this lack of business purpose must not be a result of dissecting the legal form of a transaction as the Revenue sought to do in Vodafones case. The most important part of the Chief Justices analysis is the list of six factors set out to assist the Court in determining on which side of this test a particular transaction falls: participation in investment, duration of existence of holding structure (prior to acquisition), period of business operations in India, generation of taxable revenues in India, timing of exit and continuity of business on exit. This analysis suggests that it may be a mistake to read this judgment as a complete victory for tax planning, because the dominant purpose of a transaction may easily be found, on the application of these factors, to lack commercial substance, even though it may not satisfy the traditional tests of lifting the corporate veil. It also suggests, so far as tax avoidance is concerned, that the test in India, unlike in English law

after MacNiven and BMBF, is not simply statutory construction, which is difficult to reconcile with the Courts subsequent finding that it is.

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It is also interesting to contrast this with the analysis in Adams v Cape Industries. In that case, Slade LJ clearly stated that the fact tha t justice so requires is never a reason to treat a subsidiary as anything other than a separate legal entity; that certain observations of Lord Denning MR in DHN Food Distributors may have gone too far; that it is settled in English law that a subsidiary can be ignored only if it is the alter ego or agent or part of a single economic entity with, the parent; and that it is such only if the business of the holding company is the business of the subsidiary. This test may be considerably narrower than the factors outlined in the Chief Justices judgment (duration of existence of holding structure etc.). Indeed, the application of the Adams test to the facts of that case so suggest in that case, although the Court concluded that AMC (the Liechtenstein corporation) was a faade, it held that CPC (the American marketing company set up after NAAC was liquidated) was not the alter ego of Cape and Capasco even though Cape exercised substantial control over it, because CPC had control over its day to day activities, paid rent for its premises, paid income tax separately etc. K.S. Radhakrishnan J.s judgment appears to endorse Adams (but see below), and recognizes that members of a company have no interest in its assets. More significantly, the judgment appears to implicitly hold that the separate entity will prevail except in very limited circumstances, for it repeatedly observes that the veil can be lifted only if the Revenue establishes that the corporation has been used for a fraudulent or dishonest purpose (as opposed, for example, to a benign purpose through an entity that is part of a single economic unit). It begins by holding that many factors may guide the choice of a vehicle for doing business through a corporation, of which one can legitimately be a desire to minimize tax liabilities. K.S. Radhakrishnan J. then holds that the burden is on the Revenue to show that the corporation was used for a fraudulent, dishonest purpose, so as to defeat the law. In 58 and 59, it is held that the fact that a parent and a subsidiary may have economic union of interest and a consolidated balance sheet does not mean that they are not distinct legal entities and that the veil can be lifted only if the Revenue shows that the company has been used to perpetrate fraud or wrongdoing. Even in approving Adams , K.S. Radhakrishnan J. specifically observes that the Court of Appeal emphasized in that case that a subsidiary can be ignored where special circumstances exist indicating that it is a mere faade concealing true facts. This29

theme is repeated subsequently, when K.S. Radhakrishnan states that the court will not permit a corporate entity to be used as a means to carry out fraud or evade tax. All of this indicates that K.S. Radhakrishnan J. has virtually rejected the single economic entity or alter ego grounds for lifting the veil (or confined its application to rare instances), although there is one reference to sham and agent. It is submitted that K.S. Radhakrishnan J.s approach, even if it perhaps goes too far, is, with respect, preferable to the approach of the Chief Justice, for the latter analysis would permit the veil to be lifted on a number of grounds that may not be entirely consistent with the sanctity of the separate entity principle. Indeed, the Chief Justices analysis leaves one with the impression that Vodafone prevailed not on the ground that the veil cannot be lifted except on Adams grounds, but on the ground that the veil should not be lifted for it had demonstrated business purpose and commercial substance.

Conclusions of the caseThe Revenues primary case in the Supreme Court was that there was a capital asset situate in India in the form of various rights that HTIL had which were extinguished when the SPA was entered into on 11.02.2007. For example, HTIL by virtue of its shareholding had the right to appoint directors, the right to use certain licenses, redeem certain shares etc. The Chief Justice rejected this argument inter alia on the ground that the Court was concerned with the sale of shares, not the sale of assets, and that a sale of shares cannot be dissected as the sale of assets unless the six factors set out in Para 68 (discussed above) are satisfied. It is implicit in this analysis that there cannot be, at the same time, a sale of property and the extinguishment of rights comprised in the bundle of rights that is sold. It is submitted that this conclusion is entirely correct indeed, extinguishment did not exist in the 1922 Act, and was inserted by Parliament to widen the scope of section 2(47) in order to cover transactions in which there is no sale in the ordinary sense. Although section 2(47) does not so provide, it is submitted that it is not open to the Revenue to invoke extinguishment in a transaction in which there is admittedly a sale, simply because that sale is not taxable.

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The Chief Justices implicit approval of this proposition is, it is submitted, to be welcomed. To put it differently, the Revenue was attempting to convert the sale of a non-taxable whole (situate outside India) into the sale of its taxable component parts (situate in India). There is an interesting parallel to be drawn with the analysis of the Court of Appeal in IRC v Rysaffe Trustee Co [2003] EWCA Civ 356, in which Mummery LJ held that it is not open to the Revenue to invoke a legal fiction when there is a disposition of property in its ordinary and natural sense. In this case, the transaction was a disposition in its ordinary and natural sense of an asset situated outside India the Revenue could not invoke a legal fiction to overcome this fact.

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Rajat Gupta Insider Trading CaseBackground of the case:The Raj Rajaratnam/Galleon Group, Anil Kumar, and Rajat Gupta insider trading cases are parallel and related civil and criminal actions by the United States Securities and Exchange Commission and the United States Department of Justice against three friends and business partners: Galleon hedge fund founder-owner Raj Rajaratnam and former McKinsey & Company senior executives Anil Kumar and Rajat Gupta. In these proceedings, the men were confronted with insider trading charges: Rajaratnam was convicted, Kumar pleaded guilty and testified as key witness in the criminal trials of Rajaratnam and Gupta, and Gupta was convicted in Federal district court in Manhattan in June 2012. The case was clearly the breach of Confidentiality agreement between a company and its employee. The case also had after effects on both the company with which they have been associated with either in past or present and the persons convicted. [16] Summary of the case 1. This matter concerns insider trading by Rajat K. Gupta (Gupta), who on a number of occasions disclosed material non-public information that he obtained in the course of his duties as a member of the Boards of Directors of The Goldman Sachs Group, Inc. (Goldman Sachs) and The Procter & Gamble Company (Procter & Gamble) to Raj Rajaratnam (Rajaratnam), the founder and a Managing General Partner of the hedge fund investment adviser Galleon Management, LP (Galleon). Rajaratnam, in turn, either caused the Galleon hedge funds that he managed to trade based on the material non-public information, or passed the information on to others at Galleon and caused trades based on the information.

2. Specifically, Gupta disclosed to Rajaratnam material non-public information concerning Berkshire Hathaway Incs (Berkshire) $5 billion investment in Goldman Sachs before it was publicly announced on September 23, 2008, as well as Goldman32

Sachss

financial

results

for

both

the

second

and

fourth

quarters

of

2008.Rajaratnamcaused the various Galleon hedge funds that he managed to trade based on the material non-public information, generating illicit profits and loss avoidance of more than $17 million. In addition, Gupta disclosed to Rajaratnam material non-public information concerning Procter & Gambles financial results for the quarter ending December 2008. Rajaratnam relayed this information to others at Galleon, who caused Galleon funds to trade based on the information, generating illicit profits of over $570,000. 3. In the course of carrying out the insider trading scheme, Rajaratnam informed certain conspirators that he obtained non-public information concerning Goldman Sachs from his source on the companys Board. Rajaratnam informed at least one other conspirator that he obtained non-public information concerning Procter & Gamble from his source on Procter & Gambles Board. As set forth below, Gupta was Rajaratnams source on both companies Boards and knowingly or recklessly disclosed material non-public information to Rajaratnam for use in trading activities. 4. During the relevant period, Gupta had a variety of business dealings with Rajaratnam and stood to benefit from his relationship with Rajaratnam. In addition, Gupta was an investor in, and a director of, Galleons GB Voyager Multi -Strategy Fund SPC, Ltd., a master fund with assets that were invested in numerous Galleon hedge funds, including those that traded based on Guptas illegal tips. 5. By virtue of his conduct, Gupta wilfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 hereunder: SEC. 17. (a) It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement (as defined in section 3(a) (78) of the Securities Exchange Act) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly To employ any device, scheme, or artifice to defraud, or 1. To obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the33

statements made, in light of the circumstances under which they were made, not misleading; or 2. (a) To engage in any transaction, practice, or course of business this operates or would operate as a fraud or deceit upon the purchaser. (b) It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof. (c) The exemptions provided in section 3 shall not apply to the provisions of this section. (d) The authority of the Commission under this section with respect to security-based swap agreements (as defined in section 3(a) (78) of the Securities Exchange Act of 1934) shall be subject to the restrictions and limitations of section 2A (b) of this title.

Laws Violated, Charges & Trial against Rajat Gupta: [17] [2]In the high-profile insider trading case U.S. v Rajaratnam unfolding near the same time (March 2011), wiretaps were played of Gupta describing to Rajaratnam elements of the confidential meetings of the board of directors of Goldman Sachs, including its possible willingness to purchase commercial bank Wachovia or insurer AIG. On March 15, 2011 an FBI wiretap from July 28, 2008 was played in the U.S. v Rajaratnam trial between Rajat Gupta and Raj Rajaratnam in which the two men discuss Goldman Sachs, Anil Kumar, Galleon International and Kohlberg Kravis Roberts. The tapes caused concern for several reasons:

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Confidentiality: Gupta revealed board-privileged material on Goldman Sachs to Rajaratnam, after a 34-year career respecting client confidentiality at McKinsey. This by itself, however, is unlikely to be sufficient to criminally charge Gupta, as it may not meet the standard for insider trading. It should also be noted that the call can simply be construed as one friend calling another for help in preparing for a meeting with Gary Cohn, Goldmans president.

Habituality: Gupta's information to Rajaratnam was delivered very casually, as though it were not uncommon. A Bloomberg profile quotes a CEO saying the wiretaps "sounded to him just like Gupta consulting a client."

Gain: A key notion in insider trading is that of benefit to the tipper. This benefit does not have to be monetary; in the case of Galleon co-conspirator Robert Moffat of IBM, the gain was relational with Danielle Chiesi. Here the gain is clearly a chairman role in Rajaratnam-owned Galleon International and further investment opportunities with Rajaratnam, including New Silk Route and other Galleon funds.

Complicity: Gupta, as head of McKinsey for a decade, was well aware of McKinseys rules prohibiting outside consulting. Yet he was neither surprised nor upset at protg and business partner Anil Kumars illegal (by McKinsey rules) external dealings with Rajaratnam, particularly the offshore cash payments. It remains unclear whether Gupta was aware Rajaratnam was paying Kumar for inside information.

Legal manoeuvring: Gupta's lawyer had released statements saying "There are no tapes or any other direct evidence of me tipping Mr Rajaratnam" and that "the business relationship between Mr Rajaratnam and I were strained." Yet the tapes reveal Gupta divulging confidential (if not material non-public) information, and Gupta asking Rajaratnam for career advice.

Fragmentation: In another tape, Anil Kumar asks Rajaratnam, "Its now reached a point where its physically and humanly impossible to do the things hes doing, right?" and the two wonder about Gupta's "fragmented" state. In

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another wiretap, Rajaratnam suggests to Kumar that Gupta "seemed tormented" at their last meeting. [16]

Proceedings of the case

As the tapes were released McKinsey was holding its regular annual partners conference, and according to a spokeswoman was "monitoring the matter and taking it seriously as you would expect. They later released a statement saying they were "appalled and deeply dismayed." The firm has come under heavy criticism for having its former long-time senior partners and leaders (Gupta and Kumar) as well as a junior partner (Palecek) all involved in the insider trading scandal. On March 18, 2011 Gupta countersued the SEC (SDNY 11 Cv. 1900). The court filing read, "Mr. Gupta denies all allegations of wrongdoing and stands ready to mount a defense against each and every one of the Commission's charges. Yet under current Commission rules, Mr. Gupta would be deprived of a jury trial, the right to use the discovery procedures of the federal court to shape his defense and the protections of the federal rules of evidence, which were crafted to bar unreliable evidence." The countersuit said the SEC action "'unfairly and unconstitutionally' singles him out, as he is to date the only person not employed by a broker-dealer ever charged by the SEC in administrative proceedings. It is not known whether the provisions of DoddFrank (the law allowing for SEC administrative proceedings in this instance) may be applied retroactively to before the laws existence, as the SEC has claimed in charging Gupta. On March 23, 2011 Goldman Sachs CEO Lloyd Blankfein testified that Gupta had in fact divulged board-privileged material to Rajaratnam, though the particular information was allegedly confidential and not material non-public (the legal standard for insider trading). In July 2011, U.S. District Judge Rakoff refused to throw out the countersuit against the SEC and in August, Gupta and the SEC agreed to drop their respective actions against each other. The judge had drawn attention to the fact that all 28 other SEC actions stemming from the Galleon case had been filed in federal court. As part of the August agreement, the SEC agreed to file any future charges against Gupta in36

federal court in New York where they would be assigned to Rakoff. There was no comment on whether such charges would be filed. Just over three months after the SEC allegations of insider trading, Goldman Sachs shareholder James Mercer filed suit against Gupta seeking to recover any 'short swing' profits on Goldman's behalf." In late September, 2011, The Wall Street Journal reported that federal prosecutors were "fully committed" to filing criminal charges and were "moving closer toward bringing" them. They had previously sparred over how, when, and whether to arrest or sue Gupta, in "a bitter dispute between federal prosecutors and securities regulators." On October 26, 2011 the United States Attorney's Office filed charges against Gupta. He was arrested in New York City by the FBI and pleaded not guilty. He was released on $10 million bail (secured by his Connecticut house) on the same day. Gupta's lawyer wrote in an e-mail quoted in Bloomberg, Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless .... He did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo."The tips generated 'illicit profits and loss avoidance' of more than $23 million, the SEC alleged in the lawsuit. 'Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel,' said Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case." Former Federal prosecutor Douglas Burns, who in March had said he expected an SEC-Gupta consent agreement also previewed a Gupta no-quid pro quo defense plan on Bloomberg the day of the arrest. Three days before Gupta's arrest, Rajaratnam was reported to have said that the prosecutors had wanted him to wear a wire and tape his conversations with Gupta. "It was Rajaratnam understands that were he to plead guilty and wear a wire, he might be offered a sentence of as little as five years. With good behavior, he could be out in 85 percent of that time," the report continued. Rajaratnam did not and

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has not ever, at time of writing cooperated with federal prosecutors. He has been sentenced to 11 years in prison. The trial on six counts of securities fraud and one count of conspiracy will commence before Judge Rakoff May 21, 2011. The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan). The date represents a sixweek delay granted the defense after the prosecution broadened the indictment, adding a new charge based on a March 12, 2007, conference call and also regarding Goldman information. Each of the fraud counts carries up to 20 years in prison and the conspiracy count up to five years. Gupta also faces a fine of as much as $5 million, prosecutors said. They also said that his "investments with Rajaratnam -- $10 million and an ownership stake in at least two funds -- gave him the motive to engage in insider trading", according to one news report. The parties also discussed another possible Rajaratnam "tipster" being investigated at Goldman. The second individual had no relation to the Gupta charges and the judge agreed with the prosecution to keep the witness statements on the individual under seal. David Loeb, a Goldman Sachs managing director, Henry King, a Goldman Sachs analyst, and Matthew Korenberg, a Goldman Sachs analyst, are being investigated by the government as tippers to hedge funds. The same day as US v. Gupta, the SEC sued Gupta again (this time not in an administrative proceeding) over civil claims related to the criminal charges in US v. Gupta. In April, 2012, another charge relating to passing P&G information was added by the prosecution. Gupta's lawyers said that "newly added charges -- like the ones brought last year -- are not based on any direct evidence, but rely on supposed circumstantial evidence". More new charges based on new information may follow. Also in April, CNBC reported that the U.S. Attorney's office in Los Angeles was investigating an unnamed current Goldman employee for providing inside information about Apple and Intel to Rajaratnam. The defense has maintained that "the wrong person is on trial". In early May, 2012, a pre-trial defense motion for access to SEC settlementnegotiation documents was denied by Judge Rakoff. Also in early May, the

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prosecution made a motion to play in trial three FBI wiretaps of two Rajaratnam "conversations with his principal trader and another with Galleon's then portfolio manager" related to the Goldman Sachs information. As well, details of wiretap recordings and trading activity related to the charges were analyzed at length in the media, assessing the strengths and weaknesses of the prosecution's and defences cases. Gupta was found guilty of conspiracy and three counts of securities fraud on June 15, 2012. He was acquitted on two counts of securities fraud in federal court in New York. He now faces up to 20 years in prison on each of the fraud charges and five years on the conspiracy charge. Sentencing is set for Oct. 18. [18]

Conclusion and Inferences from the case

The outcome of the case has been an eye-opener for all such senior officials, who indulge in such insider trading and passing of information. Rajat Gupta was convicted in four out of six charges made against him. It shows that federal prosecutors can win the case based circumstantial evidences also, which in this case were the wiretaps. The jury convicted Mr. Gupta on tips he made to Mr. Raj Rajaratnam in September and October 2008, about development at Goldman Sachs. Although the prosecution of Mr. Gupta did not involve extensive wiretap evidence, it is clear that the three recordings played by prosecutors were crucial in securing convictions. Mr. Rajaratnams reference to his source on Goldmans board appeared to provide a substantial boost to a case that otherwise relied on telephone records showing extensive contacts from which the jury needed to infer that Mr. Gupta was a tipper. The defense can also claim that there was insufficient evidence to convict Mr. Gupta, but that is a difficult argument to win on appeal. Unlike at trial when the defendant is presumed innocent, after a guilty verdict the appellate court views all of the evidence in favor of the jurys decision. That means any close calls go in favor of affirming, rather than overturning, the conviction. The prison term recommendations would be based on financial gains made by the defendant. Mr. Gupta did not personally trade in Goldman Sachs or Procter &

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Gamble shares based on the inside information he received. But by tipping off Mr. Rajaratnam, he is responsible for the transactions conducted through Galleon Group based on the information he provided. In short, to sum the whole case, it can be said that, in todays extreme advanced technology world, one cannot evade crimes like insider trading and tipping. This case which relied largely on circumstantial evidences supports the argument. Therefore, officials at senior positions have to be much more alert and responsible today than ever before.

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References1. Legal Aspects of Business Akhileshwar Pathak 2. Introduction to Company Law- Avtar Singh 3. International Business Law and its Environment- Schasser, Earle, Agusti 4. http://www.wcl.american.edu/sba/outline_databank/outlines/InternationalBusin essTransactions_Anderson_Fall1997.pdf - Accessed on 04/09/2012 at 02:15 p.m. 5. http://en.wikipedia.org/wiki/Outline_of_commercial_law - Accessed on 04/09/2012 at 2:47 p.m. 6. http://www.globalbx.com/a_Important-Laws-That-Affect-Your-Business.asp Accessed on 04/09/2012 at 3:43 p.m. 7. http://taxguru.in/company-law/the-role-of-directors-or-board-of-directors-bodin-a-company.html - Accessed on 04/09/2012 at 5:15 p.m. 8. http://law.hamline.edu/businesslaw/ - Accessed on 05/09/2012 at 8:12 p.m. 9. http://edugreen.teri.res.in/explore/laws.htm - Accessed on 05/09/2012 at 10:03 p.m. 10. http://nihfw.org/NDC/DocumentationServices/Legislations/THEENVIRONMEN T(PROTECTION).html - Accessed on 06/09/2012 at 01:23 a.m. 11. http://mines.nic.in/rdgnrest.html - Accessed on 06/09/2012 at 01:47 a.m. 12. http://www.moef.nic.in/legis/forest/forest2.html - Accessed on 06/09/2012 at 02:15 a.m. 13. http://en.wikipedia.org/wiki/Vodafone_Group_Plc - Accessed on 04/09/2012 at 12:21 a.m. 14. http://indiankanoon.org/doc/115852355/ - Accessed on 05/09/2012 at 07:32 p.m. 15. http://www.vakilno1.com/bareacts/incometaxact/incometaxact2.html Accessed on 05/09/2012 at 10:37 p.m. 16. http://en.wikipedia.org/wiki/Raj_Rajaratnam/Galleon_Group,_Anil_Kumar,_an d_Rajat_Gupta_insider_trading_cases Accessed on 03/09/2012 at 06:40 p.m.41

17. https://www.sec.gov/litigation/admin/2011/33-9192.pdf - Accessed on 05/09/2012 at 05:41 p.m. 18. Federal Securities law blog- www.lexblog.com - Accessed on 05/09/2012 at 09:41 p.m.

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