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Tuesday, August 13, 2024
Monday, August 12, 2024
NON-COMPETE CLAUSE IN THE EMPLOYMENT CONTRACTS & SOME IMPORTANT CASE LAWS
NON-COMPETE CLAUSE IN THE EMPLOYMENT CONTRACTS & SOME IMPORTANT CASE LAWS
Non-compete clauses are still very much part of employment contracts in India, despite being unenforceable under the law.
In April 2024, the US Federal Trade Commission banned such clauses for US workers.
WHY NON-COMPETE CLAUSE IS
INSERTED IN THE EMPLOYMENT
CONTRACTS IN INDIA?
Non-Compete clause typically restrict an employee’s ability to join a competitor for a certain period after quitting and are aimed at preventing employees, predominantly those at the top level, from joining with the business rivals. Companies also say such clauses are needed to ensure security of company’s data, trade secrets , its customers being attracted by their competitors.
Companies allege
non-compete clauses are against the provisions of Indian contract Act.
It is argued that non-compete
clauses keep wages low, suppress new ideas, and rob the Indian economy of
dynamism.
DATA PRIVACY
Industries where
non-compete clauses are more
.prevalent include information technology (IT),
IT-
enabled services (ITeS), tech, finance, healthcare
and professional services
where employees often
deal with sensitive information, client
relationships and
there’s intense competition for
talent. Of late, it has spilled over to micro,
small
and medium enterprises (MSMEs) as well.
A primary goal for including non-compete clauses is to safeguard proprietary information, protect trade secrets and intellectual property.
INDIAN CONTRACT ACT
Section 27 of the Indian Contract Act 1872
prohibits agreements that put restrictions on
trade. Article 19(1)(g) gives every citizen of India
freedom of trade and profession.
NIRANJAN SHANKAR GOLIKAR VS
. THE CENTURY SPINNING COMPANY
However, in the landmark case of Niranjan Shankar Golikar vs. The Century Spinning Company , the Court started acknowledging the non-compete clause by introducing the concept of ‘the rule of reasonableness’.
IMPORTANT CASE LAWS ON NON-
COMPETE CLAUSE
|
Superintendence Company of India (P) Ltd. vs. Krishan Murgai (1980) |
Supreme Court of India underscored the significance of upholding the
delicate balance between an employer’s legitimate business interests and an
employee’s fundamental right to pursue their chosen profession. This
landmark judgment set a significant precedent, establishing the principle
that non-compete clauses must be tailored to strike a fair balance between
the employer’s need for protection and the employee’s right to pursue their
livelihood. In this case , an employee was restricted from working with
competitors in Delhi for two years post-employment. The Supreme Court held
such a restraint as void and unenforceable. |
|
Percept D’Mark (India) Pvt. Ltd. vs. Zaheer Khan & Anr (2006) |
Whether the non-compete clause for the period of 3 years was valid
under Section 27 of the Indian Contract Act of 1872. The Bombay High Court
held that a non-compete clause that prevented a cricketer from endorsing any
competing brands of the company for three years after the expiry of the contract
was valid and enforceable. However , in 2006, Supreme Court refused to
enforce non-compete clause that prevented prominent Indian cricketer Zaheer
Khan from joining their rival for a specific period after the agreement ended. |
|
Orchid Pharma Ltd. vs. Hospira
Healthcare Pvt. Ltd. (2019) |
In this case, Competition Commission of India (CCI) observed
that a non-compete clause should be reasonable in terms of the duration, the
scope, and the geographical area of the restraint, so as to ensure that it
does not result in an appreciable adverse effect on competition. |
|
Diljeet Titus, Advocate vs. Alfred A. Adebare and Ors.2006 |
The Delhi High Court held that sensitive workplace information can be
covered even during the post-employment period. |
|
Niranjan Shankar Golikari vs. The Century Spinning and Manufacturing
Co. (1967) |
The Supreme Court held that a negative covenant during the period of
employment when the employee is bound
to serve his employer exclusively are not to be regarded as restraint of
trade and do not fall under Section 27 of Indian Contract Act. |
|
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After a 20-year-long career at Wipro, Jatin Dalal moved to Cognizant
(Wipro’s IT rival) as their CFO in September 2023. Wipro filed a lawsuit
against Dalal for breaching the non-compete clause in his employment
contract. Wipro sought from Cognizant ₹25 crore in damages for
the contravention of Non-Compete clause. Wipro argued that Dalal’s
new role at Cognizant, a direct competitor, would inevitably involve using
sensitive information acquired during his tenure at Wipro. Dalal’s
legal team pushed for arbitration, and the parties settled recently as
Cognizant paid Rs 4 Crores to Wipro. |
INFOSYS STAND ABOUT THE
CLAUSE
Infosys has called the
clause a standard part of employment contracts in many countries in which it
operate. They are added to protect client confidentiality and safeguard other
legitimate business interests. Infosys has justified the contentious clause. It
says this is a standard business practice in many parts of the world to protect
confidential information. It also says such controls are needed to protect the
“confidentiality of information, customer connection, and other legitimate
business interests.”
Infosys also pointed out
that the conditions are fully disclosed to all job aspirants before they decide
to join Infosys. They do not have the effect of preventing employees from
joining other organizations for career growth and aspirations, the software
major claims.
CONCLUSION
In Cognizant Vs Wipro case
, how a confidentiality clause will protect everything from trade secrets to
customer lists for an employer.If the other party begins competing against you
unfairly, you can rely on the contract to seek injunctive relief to stop the
behavior.
The governing body for
non-compete clauses is Section 27 of the Indian Contract Act of 1872, which
says that every agreement is void if it’s restraining someone from exercising a
lawful profession, trade or business. However, non-compete clauses are mutually
agreed upon and allowed in some exception cases. Therefore, it can be concluded
that non-compete clauses require a balanced approach to save the interests of
both the employer and employee.
Wednesday, August 7, 2024
CONVERTING SOLE PROPRIETORSHIP TO ONE PERSON COMPANY (OPC)- STEP BY STEP PROCEDURES
CONVERTING SOLE PROPRIETORSHIP TO ONE PERSON COMPANY (OPC)- STEP BY STEP PROCEDURES
Proprietorship cannot be converted into any new company but it can be only takeover by an existing company or by forming an OPC.
Hence, it is advised to incorporate an OPC with a MoA having clause to take over the business of sole proprietorship.
SOLE PROPRIETORSHIP
A sole proprietorship is a type of business entity where an individual, known as the sole proprietor, operates and owns the business. It is the simplest form of business organizaton and but it is not considered as a separate legal entity from its owner. In a sole proprietorship, the owner is personally responsible for all the business's debts and obligations. His estates can be attached by creditors for the amount due to them.
OPC" REFERS TO A ONE PERSON COMPANY.
The concept of One Person Company was introduced in the Companies Act, 2013 under Section 2(62) , to enable single entrepreneurs to operate as a separate legal entity and enjoy limited liability protection similar to that of a company, while still being a single owner.
ADVANTAGES DERIVED BY CONVERTING SOLE PROPRIETORSHIP INTO OPC
LIMITED LIABILITY
One of the chief benefits of conversion is that an OPC offers limited liability protection. In sole proprietorship, one is personally liable for any debts or legal obligations of the business. Nonetheless, by converting to an OPC, one’s liability becomes limited to the extent of his your investment in the one man company.
SEPARATE LEGAL ENTITY
An OPC is considered a separate legal entity distinct from its owner. This offers advantage while dealing with larger clients or seeking external funding.
PERPETUAL EXISTENCE
An OPC has perpetual existence. The company continues to exist even in the event of the owner’s death or incapacitation. This feature adds stability and longevity to one’s business, making it easier to attract investors and business plan for long-term growth.
EASE OF TRANSFERABILITY
OPC provides for easy transfer of ownership. In an OPC, shares can be easily transferred, making it simpler to investors mainly to facilitate business expansion.
BORROWING AND FUNDRAISING OPPORTUNITIES:
Banks and financial institutions are often more willing to lend to companies that have a separate legal identity and limited liability structure.
Fewer Compliance Requirements:
OPCs have fewer compliance requirements compared to other types of companies. The regulatory burden is lower, making it easier for the owner to comply with legal formalities and focus on business operations.
Tax Benefits:
Certain tax advantages may be enjoyed by OPCs, including tax deductions and allowances, contributing to the reduction of the overall tax liability. Furthermore, in some instances, OPCs might be subject to lower tax rates compared to individual business owners, potentially resulting in cost savings and heightened profitability.
FURTHER STEPS TO BE TAKEN FOR CONVERSION OF SOLE PROPERITORSHIP INTO AN OPC
· To Obtain Director Identification Number (DIN) and Digital Signature Certificate (DSC) for the proposed director.
· Select a Unique Name for the OPC. Check the availability of the chosen name through the MCA portal and reserve it if available.
· Draft the MOA and AOA documents, which outline the objectives, share capital, shareholding structure, and operational rules of the OPC.Include provisions related to the conversion of the sole proprietorship into an OPC in these documents.
· Conduct a board meeting of the sole proprietorship and pass resolutions approving the conversion of the business into an OPC. Authorize a director or an authorized person to execute the necessary documents, including the MOA and AOA.
· No-Objection Certificate (NOC): Obtain NOCs from relevant parties like creditors, customers and suppliers, indicating their non-objection to the conversion and willingness to continue association with the new OPC.
· Filing of Forms with the Registrar of Companies: Prepare the required forms like INC-32, INC-33 and INC-34 that contain information about the company and its directors and submit them to the Registrar of Companies along with the necessary documents and fees.
· RoC Approval: The RoC will review the submitted documents and forms. If everything is in order, the RoC will issue a Certificate of Incorporation for the OPC.
Saturday, August 3, 2024
WHETHER VALUATION OF SHARES IS REQUIRED FOR A RIGHTS ISSUE?
WHETHER VALUATION OF
SHARES IS REQUIRED FOR A RIGHTS ISSUE?
Whether valuation report is
necessary for rights issue of share ( at premium) face value 100 and premium
260 so issue price at 360. As per income tax act, valuation report needed.
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The existing shareholders have a
right to participate in the rights issue partly or fully. In the event the
shares are offered to persons other than the existing shareholders, there will
be a cause for concern to the existing shareholders whether the shares are
being allotted less than the market price of the shares and thus a valuation
report is the only report which will protect the interest of the existing
shareholders, like in the case of preferential issue under Section 62(1)(c) of the Companies Act, 2013, a
valuation report is necessary. But for Rights Issue there is no requirement of
a Valuation Report of Shares.
But for Rights Issue there is no
requirement of a Valuation Report of Shares.
UNDER THE COMPANIES
(SHARE CAPITAL AND DEBENTURES) RULES, 2014H
The Companies (Share Capital and
Debentures) Rules, 2014 which contains the procedure and conditions for issue
of Rights issue did not prescribe any valuation of shares.
UNDER THE FOREIGN
EXCHANGE MANAGEMENT ACT
Central Government vide
notification dated 17th October, 2019 prescribed the Foreign Exchange
Management (Non-debt instrument) Rules, 2019 (FEMA) that prescribe the
provisions related to investment made by non-resident in India in the non-debt
instrument. The non-debt instrument refers to equity shares issue. Hence , FEMA
requires a valuation report in case shares are issued to non-residents .
RULE 21 OF FEMA
Under the Articles of Association
of the Company Sub-rule 2 mentions that
ii) the
valuation of equity instruments done as per any internationally accepted
pricing methodology for valuation on an arm's length basis duly certified by a
Chartered Accountant or a Merchant Banker registered with the SEBI or a
Practicing Cost Accountant, in case of an unlisted Indian Company"
Hence, it can be said that in the
event the shareholders entitled for rights issue as well as the renouncees are
resident in India there is no requirement for valuation.
In view of the above FEMA rules,
in the event the Indian shareholders renounce their rights to person resident
outside India, then Valuation is required under FEMA Rules.
COMPANY’S ARTICLES OF
ASSOCIATION
In the event, the Company's Articles of Association did not contain any provisions relating to valuation of shares in case the Company comes out with Rights Issue of Shares or for renouncement of rights shares then there is no requirement for valuation.
PREFERENTIAL
ALLOTMENT
As against the Rights Issue,
Valuation Report is mandatory for making preferential allotment under Section
62(1)(c) of the Companies Act, 2013. Further, as per Rule 13(2)(g) & Rule
13(3), the price of shares or other securities to be issued on preferential
basis shall not be less than the price determined on the basis of valuation
report of a registered valuer. In case of preferential allotment as per Rule
12(7), it is mandatory to attach the valuation report with PAS-3 Form, which is
filed with the Registrar of Companies.
CONCLUSION
Ordinarily, for a Rights Issue of
shares a Valuation Report is not required. In the event, the Indian
shareholders to whom the rights issue has been offered are renounced to persons
resident outside India, then FEMA Rule will apply and as per FEMA Rule, a
Valuation Report is required even for a rights issue.
In view of the above, there is no
valuation of shares required for a company to issue rights issue of shares
under the Companies Act, 2013.
Courtesy : Sri T V Ganesan /
Taxmann
Thursday, August 1, 2024
How TO CLOSE A COMPANY BY FILING FORM STK-2 WITH MCA,
STEP BY STEP GUIDE TO CLOSE A COMPANY BY FILING FORM STK-2 WITH MCA
STEP BY STSTEP BY STEP GUIDE TO CLOSE A COMPANY BY FILING STK-2 WITH MCAEP GUIDE TO CLOSE A COMPANY BY FILING STK-2 WITH MCA
MAJOR STEPS INVOLVED:
· Companies must complete annual filings for active business years. All company forms should have been filed .
· Eligible Companies to close companies by filing form STK-2 – Only active, dormant, or under-process strike-off statuses companies can be closed under this method.
· Non-Eligible companies to close companies by filing of STK-2 are Section 8 and listed companies.
· Such companies should file the Statement of Assets and Liabilities and it must be recent a recent one, not older than 30 days.
· Affidavits and indemnity bonds obtained from the directors of the company must be notarized, with the Affidavit on Rs. 100 stamp paper and the Indemnity Bond on Rs. 500 stamp paper.
· Director DSC should be active and a fee of Rs 10000/= has to be paid to MCA.
· Notarized documents as mentioned above and KYC of directors are mandatory and it should be in the prescribed format.
· If there are any defects in the form ,the ROC may reject the form if the SRN process is not completed in time.
· Once the form is found to be correct with all its annexures, the proposed strike off company’s name will be published in a public notice for 30 days, and then after which the ROC will strike off the company if no objections are raised by public or creditors or other stakeholders of the company.
· Company is required to complete all the Annual filings only for those financial years in which business was operative notwithstanding of any loss or revenue .
· The Company can file MGT-14 and can mention SRN of same in STK-2 and attach MGT-14 challan in STK-2 or it Can enclose Consent of shareholders for strike of (Minimum 75% paid up shareholders whose consent individually signed by them).
· The Statement of Assets and Liabilities should be certified by a Chartered Accountant who should file UDIN for the same.
· It is compulsory to attach along with Affidavit self attested PAN and AADHAR of all the respective directors as a part of KYC document.
· Cancellation of SRN- In case the stakeholder does not successfully upload the DSC affixed PDF within 15 days of SRN generation date and complete the payment within 7 days of successful upload of DSC affixed document or due date of filing of the webform + 2 days, whichever is earlier, the SRN will be cancelled.
· PROCESSING OF STK-2 FORM BY ROC - Once the form is duly filed with MCA portal the concerned ROC will review the same and if all seems to be correct , then a PUBLIC NOTICE [Pursuant to sub-section (2) and sub-section (4) of section 248 of the Companies Act, 2013 and rule 7 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016] the name of Company is published in notice for general public for 30 days if no objection is raised from any stakeholders , then the concerned ROC issue a notice containing the striking off of the concerned Company.
CONCLUSION
For closing a company under the Companies Act 2013, filing Form STK-2 needs scrupulous observance to techniques and documentation. Non adherence of procedures may end up in time and monetary loss. It is better to engage experienced professional to do such filings. If you need any help in this regard, you may please contact the undersigned for further help.
R V Seckar , Practicing Company Secretary
+91 79047 19295 rvsekar2007@gmail.com
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