Thursday, January 30, 2014

Gold Purchase Schemes and CIS

In 2013, an Ordinance was promulgated to enhance SEBI’s powers to regulate investment pools. The Ordinance introduced section 11AA of the SEBI Act, which details the parameters of a collective investment scheme (CIS). It states that “pooling of funds under any scheme or arrangement” involving a corpus of Rs. 100 crores or more shall be deemed to be a CIS whether or not it is registered with SEBI. This considerably expands the scope of fund-raising that could potentially fall within (and be regulated as) CIS.

In this context, a recent informal guidance issued by SEBI clarifies the scope of this new provision as to its applicability to a gold purchase scheme. MMTC Limited approached SEBI for an informal guidance on a scheme, which presents to customers of MMTC-PAMP India Pvt. Limited (MPIPL) the flexibility to purchase and accumulate fractional amounts of gold in accordance with the customers’ own discretion as to time and quantity. The customer has the option to obtain physical delivery as low as one gram of gold. The question that arose was whether such a scheme would fall within the definition of CIS so as to the registered with, and regulated by, SEBI.

SEBI came to the conclusion that the purchase scheme does not fall within the definition of CIS as the same is a straightforward transaction for purchase and sale of gold, and that there is no unit, instrument or other form of “security” being issued or traded. It observed:

e.         The proposed business activity primarily contemplates purchase or accumulation of gold by such customers who aspire to purchase gold but have limited financial resources for an outright purchase. The timing, quantity, and frequency of purchase are at the discretion of the customer.

f.          For every 1 gram, the customer can take delivery and fractional entitlement can be redeemed.

g.         A customer entering the flexible gold purchase scheme of MPIPL retains control over his investment at all point of times. In other words, the customer is not under any obligation to make continuous or recurring payments. On the other hand, he can take delivery of gold and redeem the factional entitlements (if any).

The gold purchase scheme could potentially pose risks to the customers. On the one hand, SEBI’s powers under the 2013 Ordinance have been considerably (and consciously) expanded to cover different types of schemes that might involve investment risk. On the other hand, it appears from this advance ruling that SEBI will be unable and unwilling to deal with all those types of risks, and the key is whether they are in the nature of “securities” and therefore carry investment risk.

Sunday, January 26, 2014

Call for Papers: The Journal of Telecommunication and Broadcasting Law

[The following is an announcement from The Journal of Telecommunication and Broadcasting Law, National University of Juridical Sciences (NUJS), Kolkata]

The Journal of Telecommunication and Broadcasting Law (JTBL) accepts submissions on a rolling basis. Interested contributors are requested to send their submissions under the categories mentioned below. For general queries relating to your submissions, kindly write to us at <>. The last day to submit for consideration for Vol. III is 7 March 2014.


A. Articles (6000-10000 words, inclusive of footnotes)

B. Notes including Policy Notes (4000-6000 words, inclusive of footnotes)

C. Book Reviews (2000-3000 words, inclusive of footnotes)

Please note: Book Review should specify all relevant information relating to the book reviewed such as the name(s) of the author(s) and editor(s), edition of the book reviewed, year of publication, name of publisher and place of publication.

D. Case Notes (2500-4000 words, inclusive of footnotes)

Submissions in this category would include a comprehensive analysis of any judicial pronouncement relevant to contemporary developments in relation with telecommunication and broadcasting industry. It should provide an analysis of the law prior to the ruling as well as subsequent to it. Any inconsistencies with the ruling should be highlighted.

E. Legislative Comments (2000 – 3000 words, inclusive of footnotes)

The legislation should be analyzed with a view to provide the background, objectives and main provisions of the legislation to the readers. The comments must be objective in reporting facts and provisions. A section may be devoted to list down possible problems with the legislation or inconsistencies with other laws for further debate. Government surveys, committee reports and data from national and international organisations should be sourced for facts and figures.


1. Format of Submission: Submissions must be in electronic form only. All submissions must be MS-Word-processed. Main text should be in Times New Roman, font size 12 with double line spacing. The footnotes should be in Times New Roman, font size 10 with line spacing 1.15. All
pages must be numbered. Endnotes are not allowed.

2. Abstract: All submissions must contain an abstract of about 250 to 500 words describing the relevant points of discussion attempted in the paper and the relevant conclusions drawn.

3. Headings: The main title should be centred, typed in small capitals and emphasised in bold with font size 14. The sub-titles must be left indented, emphasized in bold with font size 12.

4. Citation: The Rules of Citation as prescribed by the Oxford Standard for Citation of Legal Authorities (OSCOLA), 4th edition are to be followed for references and citations. A simplified version of the OSCOLA may be downloaded from the JTBL website.


1. Co-authoring: is permitted.

2. Cover Letter: The cover letter shall contain the name of the author, institutional affiliation, title and category of the submission. Submissions should be sent as attachments with the title of the write-up as the file name in .doc or .docx format only.

3. Contact Address: The Journal accepts only electronic form of submissions which must be mailed to <>.

4. Identification Details: The body of the write-up must not contain any identification of the author(s) or their institutional affiliation.

For further details, please see the website,

Saturday, January 25, 2014

Transposed Wills: The Supreme Court on Interpretation of Contracts

In 1999, Alfred and Maureen Rawlings each decided to execute a will leaving everything to each other and, should the other not survive, to Terry Marley, whom they treated as their son. Their solicitor prepared two simple wills in accordance with these instructions: each will was a mirror image of the other. He presented it to them for signature. Unfortunately, Mr Rawlings signed Maureen’s will and Mrs Rawlings signed Alfred’s will. There was not the slightest doubt that this was a mistake. Could the court nevertheless give effect to the testator’s intention? No, said Mrs Justice Produman and the Court of Appeal. Yes, says Lord Neuberger, in giving the Supreme Court’s widely anticipated judgment this week in Marley v Rawlings, which contains some important (and controversial) observations about the interpretation of commercial contracts.

There is little more to be said about the facts, except that the mistake did not come to light when Mrs Rawlings died in 2003. It was discovered only on Mr Rawlings’ death three years later. As Mrs Rawlings had predeceased him, Mr Marley would inherit if the will was valid. If the will was invalid, Mr Rawlings be treated as having died intestate, and the property would pass to his natural sons. Mr Terry Rawlings, the natural son, duly contested the validity of the will. Mr Marley admitted that Mr Rawlings had signed the wrong will but contended that the court had the power to rectify it. In the general law, there was some doubt over whether the jurisdiction to rectify—which undoubtedly did and does exist for contracts—can be exercised for wills. In 1982, Parliament intervened to expressly confer the power by way of section 20 of the Administration of Justice Act, 1982. But the argument for Mr Terry Rawlings was that: (1) this section only applies if ‘a will is so expressed that it fails to carry out the testator’s intentions’; there is no ‘will’ unless it has been signed by the testator (under section 9(a) of the Wills Act, 1837) and therefore no power to rectify; (2) in any event, the power to rectify is confined to the correction of ‘clerical errors’ and signing the wrong will is not a clerical error. Mrs Justice Proudman accepted both objections and, echoing the words of Sir James Hannen in an old case, said ‘much as I regret the blunder, I cannot repair it’. In the Court of Appeal, Lady Justice Black, giving the leading judgment, agreed with the view that there was no jurisdiction to rectify as this document was not a ‘will’ and therefore did not decide the second point. Mr Marley appealed to the Supreme Court.

In the Supreme Court, leading counsel for Mr Marley advanced the argument that it was open to the court to interpret (not rectify) the will to give effect to what was plainly Mr Rawlings’ intention. The inspiration for this argument—and the reason for the difficult issues that have arisen in recent years about the difference between interpretation and rectification—was the approach of Lord Hoffmann in Investor Compensation Schemes v West Bromwich Building Society and other well-known cases. As we have noted on this blog, Lord Hoffmann in these cases—dealing with contracts, not wills—explains that interpretation is the ascertainment of the meaning the document would convey to a reasonable third person with all the background knowledge the parties to the contract would reasonably have had, except pre-contractual negotiation and evidence of subjective intention. It follows, said Lord Hoffmann, that it is misleading to suggest that a judge is bound by the ‘natural and ordinary’ meaning or ‘grammatical’ meaning of the words used: if it is clear that ‘something has gone wrong’, the judge can interpret the document as a reasonable third person (realising that something has gone wrong) would have done (his famous example of Mrs Malaprop illustrates the point). So ‘January 12’ can mean ‘January 13’ and “any claim (whether sounding in rescission for undue influence or otherwise)" can mean “any claim for rescission (whether sounding in undue influence or otherwise)", in both cases without resorting to rectification.

As the Supreme Court notes, Lord Hoffmann’s approach has raised many difficult issues. Lord Justice Buxton and Lord Justice Lewison (see Chapter 9) have suggested that it virtually renders rectification redundant (except that pre-contractual negotiation is admissible in a rectification action) and Lord Grabiner (2012 LQR) has argued that the words chosen by the parties nevertheless remain the starting point—and often the final destination. In Marley, Lord Neuberger began by holding that there is no obvious reason to not apply the same principles of interpretation to contracts and wills: the fact that contracts are bilateral while wills are unilateral makes no difference. With respect, although it would have made no difference on the facts of this particular case, it is not obvious this is correct: the fulcrum of the modern approach to the interpretation of contracts is founded on the common law’s ‘objective’ theory of contract which is concerned not with what the parties actually intended but with the manifestation of their intention. As Professor Atiyah pointed out on numerous occasions, one of the justifications for adopting this theory is to protect the reasonable expectations of the counterparty, which it is not obvious carries over to wills.

Turning to the merits, Lord Neuberger cast some doubt on the language used by Lord Hoffmann in setting out his (now famous) five propositions of interpretation in West Bromwich (‘the language in which the propositions are expressed may be a little extravagant’) and described the all-important second sentence of Proposition 5 as ‘controversial’. Although he preferred not to express a concluded view on this ‘difficult’ question as it was unnecessary to do so, he did explain why the difference between rectification and interpretation can have important practical consequences:

40. At first sight, it might seem to be a rather dry question whether a particular approach is one of interpretation or rectification. However, it is by no means simply an academic issue of categorisation. If it is a question of interpretation, then the document in question has, and has always had, the meaning and effect as determined by the court, and that is the end of the matter. On the other hand, if it is a question of rectification, then the document, as rectified, has a different meaning from that which it appears to have on its face, and the court would have jurisdiction to refuse rectification or to grant it on terms (eg if there had been delay, change of position, or third party reliance).This point is made good in relation to wills by the provisions of section 20(2) and (3).

The reason it was unnecessary to decide the interpretation point was that Mr Marley was able to persuade the Supreme Court that it had jurisdiction to rectify the will. This, of course, turned entirely on the two questions set out above: could the will signed by Mr Rawlings be described as a ‘will’ for the purposes of section 20 of the 1982 Act and if so was the error a ‘clerical error’? Lord Neuberger held that the will signed by Mr Rawlings is a ‘will’ even though the person named in it as the testator is Mrs Rawlings. This was because one must separate the existence of a will (and formality requirements) from its construction: the signature appended to the will was undoubtedly Mr Rawlings’ and therefore the section 9 hurdle was crossed. Further, the Court held that the expression ‘clerical error’ should be construed widely and accordingly includes not only errors of ‘copying’ or ‘typing’ but also errors of this type.

The case is an important one: for commercial lawyers, it is a reminder, if one was needed, that the common law is yet to fully work out the implications of Lord Hoffmann’s approach to the interpretation of documents.

Thursday, January 23, 2014

Essay Competition on International Contracts

The Gujarat National Law University (GNLU) and the Oil & Natural Gas Corporation Ltd. (ONGC) are conducting the 1st GNLU – ONGC International Essay Competition on International Contracts.

The theme is “Recent Trends in International Contract, Jurisdictional Issues and the Global Commercial and Investment Governance”, which also has several sub-themes.
Details of the competition are available at
The deadline for submissions is 25 March 2014.

Guest Post: Rights of MBS Bondholders Against the Company: Part 2

[The following post is contributed by Nidhi Bothra of Vinod Kothari & Company. The author may be contacted at

This is continuation of a previous post accessible here]

Does a trust put complete cloak over the identity of beneficiaries?

In the several rulings discussed in the preivous post, the privity of contract between the bondholders / debenture holders has been put to question. The rights of the debenture holders and the obligations of the company have been determined in terms of the agreement to the tee and not on the basis of equity or law. Before we delve into the question in details we need to understand the need for a trustee and the role conferred on such trustees in issuance of such instruments.

A debenture is a capital market instrument and it is commonplace for the beneficiary debenture holders put their trust in the appointed trustee to protect the interest of the debenture holders at all times. A debenture trust deed creates an express trust and the property is vested in the trustees and the trustee holds such property in trust for the benefit of the beneficiary. The arrangement renders logistical convenience to the issuer and the debenture holders as each time the debentures would change hands the security interest will have to be modified accordingly affecting the transferability of the instrument. If security interest is held by the trustee, the trustee can act expeditiously and effectively in safeguarding the interests of the debenture-holders; and enforcing the security on their behalf.
In some cases, the locus standi of the debenture holders has been questioned, on the ground that the company enters into covenants with the debenture trustees, and not with the debenture holders.

Thus, in Uruguay Central and Hygueritas Railway Co. of Monte Video, In re [1879] 11 Ch 372, the company had issued bonds or debentures and had created a debenture stock. There was no direct covenant between the company and the debenture stock-holders for payment of any amount to the stock-holders. The covenant was between the company and the trustees for payment of the amounts. The court held that in view of the terms of the deed, the holders of bonds were not creditors of the company; they were merely cestui que trust of a charge, having a right, no doubt, to put their trustees in motion to compel payment under the covenant, but not having any independent right to sue the company either at law or in equity.

Similarly, in Dunderland Iron Ore Co. Ltd., In re [1909] 1 Ch 446, a trust deed for securing debenture stock made between the company and the trustees for the stock-holders, provided that the company would pay the interest to the stock-holders. But the certificate delivered to each stock-holder did not contain any direct covenant with the stock-holder to pay him interest. It was held that stock-holders whose interest was in arrears were not entitled to present a winding-up petition as creditors under section 82 of the English Companies Act, 1862.

In both these cases, a debenture holder was held not to be a creditor of the company on the basis of covenants contained in the debenture certificate which was issued to him by the company. There are a number of cases, however, where English courts have construed the debenture holder as a creditor of the company wherever there has been such a direct covenant between the company and the debenture-holder.

In Olathe Silver Mining Co., In re [1884] 27 Ch 278, the earlier decision in Uruguay Central and Hygueritas Railway of Monte Video, In re [1879] 11 Ch 372 was distinguished. Looking to the covenants contained in the debenture certificate, the holder of the debenture in that case to whom interest was overdue was held entitled to petition for the winding-up of the company.

In the case of Bachharaj Factories Ltd. v. Hirjee Mills Ltd. [1955] 25 Comp Cas 227, a Division Bench of this court distinguished the case of Dunderland Iron Ore Co. Ltd., In re [1909] 1 Ch 446 and held that in the case before the Division Bench, there were debentures and not stock certificates. The debentures contained a personal covenant by the mills to pay to the debenture-holders. Hence the circumstances which prevailed upon the court in Dunderland Iron Ore Co. Ltd., In re [1909] 1 Ch 446 were not present in the case before them and the debenture-holder was entitled to present a winding-up petition as a creditor of the company.

In a later case of Sholapur Spg. and Wvg. Co. Ltd.[1], the court had held that a winding-up petition by a debenture-holder was maintainable in view of the direct covenant contained in the debenture certificates between the company and the debenture-holder to pay the amount to the debenture-holder, although in that case one of the relevant conditions was to the effect that the debenture was issued subject to the provisions of the trust deed whereby all remedies for the recovery of the principal money and interest secured by the debenture were vested in the trustees on behalf of the shareholders.

In the eyes of equity

The intent of the covenants of the trust deed irrespective of the provisions spelt out is to confer certain rights on the trustees for the benefit of the debenture holders not to refrain those rights from the debenture holders which originally would have vested in them in absence of the trustee acting on behalf of the debenture holders. Although certain rights may be conferred on the trustees and the debenture holders may not be direct party to such rights but as beneficiaries their entitlement to such rights cannot be denied in equity.

Similarly in the above judicial pronouncements the purpose of the bar on the debenture holders/ bondholders was to ensure that an individual bondholder did not jeopardise the benefit of all the bondholders and that a single trustee may act on behalf of the wider and common interest of all bondholders.

In the case of M. C. Chacko vs. State Bank of Travancore[2], the Supreme Court has observed as follows (at page 508) :

"... It has, however, been recognised that where a trust is created by a contract, a beneficiary may enforce the rights which the trust so created has given him. The basis of that rule is that though he is not a party to the contract, his rights are equitable and not contractual. The Judicial Committee applied that rule to an Indian case Khwaja Muhammad Khan v. Husaini Begum [1910] 37 IA 152; [1910] ILR 31 All 410. ... It must, therefore, be taken as well settled that except in the case of a beneficiary under a trust created by a contract or in the case of a family arrangement, no right may be enforce by a person who is not a party to the contract."

The right of the bondholder may be barred for logistical convenience but not in equity.


Can the beneficiaries proceed against the trustee?

The Indian Trust Act, 1882 explicitly lays down the rights of the beneficiary. The trustee is bound to fulfil the purpose of the trust and he must deal with the trust property as a man of ordinary prudence would deal with such property as if it were his own. The trustee is also bound to maintain and defend all such suits and take such other steps as may be reasonably requisite to preserve the trust property and assert or protect the title thereto (section 13 of the Act).

Under section 61 of the Trust Act the beneficiary has the right to compel the trustee to perform any particular act of his duty and restrained from committing any contemplated or probable breach of trust. Where there is a breach of trust the trustee shall be required to make good such loss which the trust property or the beneficiary have sustained (section 23 of the Act).

In light of the above, the debenture holders surely have the right to proceed against the trustees where it can be established that the trustees have acted in a manner jeopardizing the interest of the beneficiary or the trust property.


Future of such capital market instruments

The age old rule of substance over form must be relied upon for determining the rights of the bondholders.

The very essence of capital market instruments is free transferability of the securities. If the judicial pronouncements bar the rights of the bondholders based on the form, merely because the logistic convenience is acting as a hindrance for the bondholders to exercise their equitable rights surely does make a dent on their acceptability amongst investor classes. The more the complex instruments, the more such issues act as a hindrance on their acceptability. The judiciary may require the trustees to join any suit filed against the originator and/ or require other bondholders to join the class action, however merely on the pretext that the agreement explicitly rests this right on the trustee cannot deny the right of the bondholders on the equitable grounds. Hence the judiciary should remove the cloak and look at the substance of the transactions to render justice.


- Nidhi Bothra

[1] [1965] 35 Comp Cas 165
[2] AIR 1970 SC 504