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Respecting First Principles

Published on Mon, Jan 05,2015 | 23:01, Updated at Mon, Jan 05 at 23:01Source : 

By: Raj Ramachandran, Partner, JSA

Each time there are changes to the law, the first question that arises is what would happen to matters and actions which were taken under the law previously applicable. This may seem like a fairly simple question but the answer may reveal minute jurisprudential issues that are required to be duly considered by law makers.

A couple of instances will illustrate why jurisprudence in such matters assumes great significance.

Let’s take the Companies Act, 2013 for instance - while a set of sections under the new 2013 Act was first notified in September 2013, a second set was notified in April 2014. There still remain a significant number of provisions which are yet to be notified, and to that extent the provisions of the old Companies Act, 1956 continue to remain applicable. We are therefore today faced with two legislations on one subject. What is therefore the fate of matters transacted under the 1956 Act? The saving provisions under the 2013 Act are typically expected to come to the fore to deal with such matters. Strangely though, the specific section 465 (2) is yet to be notified leaving to interpretation the answer to the fundamental question raised above.

While the provisions of the 2013 Act that were brought into force in 2 stages raised several questions, the ministry issued clarifications and general circulars – one of which makes interesting reading. The circular issued in July 2014 provides a clarification on transitional period for resolutions passed under the 1956 Act. Effectively, the Ministry acknowledged that if resolutions were passed under the 1956 Act in the six month period preceding March 31, 2014, those can continue to be implemented in accordance with the provisions of the 1956 Act notwithstanding the repeal. The conditions attached to this beneficial provision was firstly that the implementation of the resolution should have actually commenced before April 1, 2014 and secondly that such benefit will be available upto the expiry of 1 year from the passing of the resolution or six months from the commencement of the corresponding provision in the 2013 Act, whichever is later. In substance, this means that there are certain provisions under the 1956 Act that will remain to be valid despite the 2013 Act having superceded them.

The key reference point in such cases is the General Clauses Act of 1897 which has a specific provision to deal with the effect of repeal. The provision under the General Clauses Act specifies that where any central Act or Regulation repeals any enactment, then, unless a different intention appears, the repeal shall not inter alia affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder. Then there is also the oft quoted principle of promissory estoppel, which is a doctrine based on equity, and protects a party who has relied on a certain promise/ set of provisions and taken certain actions.

Another case in point is the Foreign Exchange Management Act, 1999. When the RBI had reduced the limits for overseas direct investment, one of the specific clarifications was that the revised provisions would come into effect with immediate effect and would apply to all fresh overseas direct investment proposals on a prospective basis but would not apply to the existing JV/WOS set up under the extant regulations. However, there were various cases where commitments were made even for new JV/ WOS on the basis of the erstwhile provisions. Therefore, the RBI had forthwith issued a follow-on circular that all financial commitments made on or before the date when the law was revised, in compliance with the earlier limit under the automatic route will continue to be allowed. In other words, such investments should not be subject to any unwinding or approval from the RBI. This merely reiterates the principle of promissory estoppel and reinforces the point that any subsequent change in law should not alter the position of the parties who acted in accordance with applicable law prevailing when the actions were taken.

The foreign direct investment policy governing inbound investments also undergoes regular consolidation of policy pronouncements, which is now an annual affair. The consolidated FDI policy currently applicable is effective from April 17, 2014 and clearly stipulates that notwithstanding the rescission of earlier press notes/ circulars, anything duly done or any action duly taken or purported to have been duly done or taken under the rescinded press notes/ circulars, shall be deemed to have been done or taken under the corresponding provisions of the new circular and shall be valid and effective.

This principle forms the cornerstone of policy and legislative changes to ensure that no action taken relying on/ basis applicable law prevailing at any given point in time is rendered redundant by a subsequent revision to the policy/ law. Any deviation from this can prove to be detrimental not only to the parties in question but also largely affect the sentiment of investors who always look to making investments based on a stable legislative position. The same holds goods for retrospective changes to laws since they go against first principles of legislation.

With a seemingly proactive government at the centre and a positive sentiment looming large, it is expected that appropriate mechanisms will be put in place to ensure sufficient safeguard each time there is a change in law. We are at the cusp of several legislative changes that are likely to significantly alter the manner of doing business, and the industry as well as investing community would appreciate if first principles are duly respected.


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