Registration of Trade Marks

Trademarks are special unique signs that are used to identify goods or services from a certain company. They can be designs, pictures, signs or even expressions. It is important because it differentiates your products from the competitions. It can be associated with your brand or product. Trademarks are classified as intellectual property and therefore is protected from infringement. Trademarks and its rights are protected by the Trademark Act, 1999

To get the protection of trademark rights one has to register the trademark. It is important to register your trademark because it prevents others from copying your mark and misrepresenting other products with your mark. Trademarks help the customers to recognise the brand and the brand value in one look such as the logo of a tick sign for Nike or a jumping wildcat for Puma etc.

Unlike patents, trademark does not have a definite limitation period. Where a patent expires in 20 years a trademark registration expires after 10 years of its registration, but unlike patents, a trademark can be renewed again for another 10 years. This process can be indefinitely done, meaning as long as you keep renewing the trademark it will not expire and will continue to be under the protection of the Act.

Investing your time and money to build a particular brand and seeing the same brand name being used by another, robbing you of your hard-earned brand reputation is not an agreeable state of affairs. Many a time, trademark (TM) owners end up in protracted litigation because when the time was right, they did not do trademark registration in India of their brand name. Trademark registration process of the brand name is not a difficult task. A few simple steps, as explained below and you would have the much-needed legal protection of your brand name registration in India.

Trademarking a Brand Name

By trademarking your company’s name, you are protecting the brand, its reputation, and your ideas, all of which you undoubtedly invested a great deal of blood, sweat, and tear working on. And while the trademarking process itself will take time in all areas considered, nothing would be worse than not protecting your brand and potentially be faced with an infringement lawsuit from a larger company.

The process of brand trademark registration in India is now possible and convenient such that you can trademark any one of the below things or even a combination of the following:

  • Letter
  • Word
  • Number
  • Phrase
  • Graphics
  • Logo
  • Sound Mark
  • Smell or a mix of colors

Trademark Registry

The trademark registry was established in 1940 then came the Trademark Act which was passed in 1999. Currently, the trademark registry works as the operation or functional body of the Act. Or it can also be said to be working side by side. As a functioning body, the trademark registry implements all the rules and regulation of the trademark law in India.

The Head Office of the trademark registry is in Mumbai and it has branch offices in Delhi, Ahmedabad, Chennai and Kolkata. When registering a trademark, it is registered under the Trademark Act, 1999 and then the registry of trademarks registers it. In this process, the registry will check whether the registering mark meets all the conditions of the Act before registering it.

Step 1: Trademark Search

Many entrepreneurs do not comprehend the importance of a TM search. Having a unique brand name in mind is not good enough reason to avoid a TM search. TM search helps you to know if there are similar trademarks available and it gives you a fair picture of where your trademark stands, sometimes, it also gives you a forewarning of the possibility of trademark litigation. Why waste your money in time-consuming trademark litigation later when you can choose to avoid it in the first place?

Step 2: Filing Trademark Application

After you are sure that your chosen brand name or logo is not listed in the Trademark Registry India, you can opt for registering the same. The first step is to file a trademark application at the Trademark Registry India. Nowadays, filing is mostly done online. Once the application is filed, an official receipt is immediately issued for future reference.

Step 3: Examination

After a trademark application is filed, it is examined by the examiner for any discrepancies. The examination might take around 12-18 months. The examiner might accept the trademark absolutely, conditionally or object.

If accepted unconditionally, the trademark gets published in the Trademark Journal. If not accepted unconditionally, the conditions to be fulfilled or the objections would be mentioned in the examination report and a month’s time would be given to fulfill the conditions or response to the objections.

Once such response is accepted, the trademark is published in the Trademark Journal. If the response is not accepted, one can request a hearing. If in the hearing, the examiner feels that the trademark should be allowed registration, it proceeds for publication in the Trademark Journal.

Step 4: Publication

The step of publication is incorporated in the trademark registration process so that anyone who objects to the registering of the trademark has the opportunity to oppose the same. If, after 3-4 months from publication there is no opposition, the trademark proceeds for registration. In case there is opposition; there is a fair hearing and decision are given by the Registrar.

Step 5: Registration Certificate

Once the application proceeds for trademark registration, following publication in Trademark Journal, a registration certificate under the seal of the Trademark Office is issued.

Step 6: Renewal

The trademark can be renewed perpetually after every 10 years. Hence, your logo or brand name registration can be protected perpetually.

As seen from the above, trademark registration in India process does not require much effort. It is a simple process but one which is nonetheless very important for brand name registration. We, at Intepat, can help you with the entire process of registration without you worrying about deadlines and responses. Hence, understand the power of your brand name registration and take steps in protecting it today.

Rights of the Copyright Owner

Granting copyright seeks to protect the creative endeavor of an owner. Copyright gives an exclusive right to the owner to do certain acts in relation to literary, dramatic, musical, and artistic works, cinematography and sound recordings. Copyright is valid till the life of the originator plus 50 years after his death. In the case of cinematographic work, the copyright is valid until 50 years after the work has been made available to the public while for photographic works 25 years after the making of the work.

In India matters related to copyright are governed by the Copyright Act in 1957, which was subsequently amended in the year 1994 and 2002. Copyright cannot be granted in some cases like:

  • Copyright cannot be said to be violated if the idea or concept of any person is used in a different manner.
  • Copyright is not granted for ideas.
  • Copyright is not granted in live events.

The Copyright Act, 1957 provides copyright protection in India. It confers copyright protection in the following two forms:

(A) Economic rights of the author, and

(B) Moral Rights of the author.

Rights of the copyright owner

Right to Distribute

Right to distribute is an off-shoot of the right of reproduction. The person who owns the copyright owner may distribute his work in any manner he deems fit. The owner is also entitled to transfer the whole or some rights in favor of any other person while retaining others. For example, he can entitle any person to translate his work.

Right of Reproduction

This is the most prominent right which is acquired after the copyright protection. This right authorizes the person having such copyright to make copies of the protected work in any form. In the modern context copying, a song on a Compact Device or any sound and visual recording can be considered as a reproduction of the content. Prior to copying the permission of the author is required unless it can be shown that such copying is not intended to make any commercial benefits out of it.

Private Copying

This is an exception to the reproduction rights which are attained by the owner. According to this right, any person can make copies of the copyright protected work if it is proved that such copying is for educational purpose and that there is no commercial motive behind such copies being made.

Sui Generis Rights

The ordinary copyright law often fails to protect the computer software and databases since the essential element of creativity is not present in such databases. Therefore, there was a need for new law to protect such software and databases. The law of sui generis was introduced to resolve the problem of resolving databases on the whole. A database is a compilation or arrangement of information which may not be creative; it may still require protection from unauthorized copying. However, this may require certain modifications such as the making of copies has to be excluded from such copyright protection. Such database right exists for a fifteen-year period.

Right of Paternity

The Right of Paternity or Attribution gives the copyright owner a right to claim authorship of the work. Under the Right of Paternity, a copyright owner can claim due credit for any of his works. Thus, if a movie is produced based on a book by an author, and he hasn’t been given due credit in it, he can sue the makers to acknowledge his work.

Right to Follow

This right is granted generally only to the authors and artists. This empowers the authors to obtain a percentage of the subsequent sales of his work and is called Droit de Suite or Right to Follow. The right is also available to artists on resale of their work.

Right to Publicly Perform

The owner of the copyright has the right to publicly perform his works. Example, he may perform dramas based on his work or may perform at concerts, etc. This also includes the right of the owner to broadcast his work. This includes the right of the owner to make his work accessible to the public on the internet. This empowers the owner to decide the terms and conditions to access his work.

Right to make Derivative Works

The copyright has the right to use his work in various ways, for instance making adaptations or translations. One example of adaptation is making a movie based on a novel, so here to make any derivative work the consent of the owner is mandatorily required. In these situations, certain other rights of the owner also come into play, like the right to integrity which protects the owner against deformation, defacement or modification of his work in a way that it is harmful for his reputation.

Rights of the Patentee

The patent holder enjoys various rights including the right to assign licenses to other persons and authorise them to manufacture and sell the patented item. However, these are not absolute rights and are subject to various constraints and limitations.

Exclusive rights according to Article 28 of the TRIPS agreement

Article 28 of the TRIPS agreement provides the following rights:

A patent shall confer on its owner the following exclusive rights:

  • Where the subject matter of a patent is a product, to prevent third parties not having the owner’s consent from the acts of making, using, offering for sale, selling, or importing for these purposes that product;
  • where the subject matter of a patent is a process, to prevent third parties not having the owner’s consent from the act of using the process, and from the acts of using, offering for sale, selling, or importing for these purposes at least the product obtained directly by that process.

Patent owners shall also have the right to assign, or transfer by succession, the patent and to conclude licensing contracts.

  • Right to exploit the patent

In India, the patent holder is provided with the right to manufacture, use, sell and distribute the patented product. In case the invention is a process of production, the owner of the patent has the right to direct the procedure to the other person who has been authorised by the patentee. This right can be enforced by the agent of the patent holder.

  • Right to assign and license

The patent holder is granted with the rights of assigning or granting licenses for manufacture and distribution of the patented products to others. In case there are co-owners of the patented product, the permission to grant license to the other person shall be sought from the co-owners. The license would be considered to be granted when the request has been duly authorised by the controller.

  • Right to surrender the patent

The owner of the patent has the right to surrender his patent after seeking permission from the controller. The controller then advertises about this surrender as per the procedure laid down in the Indian Patents Act. The parties interested in getting the ownership of the patent can then approach the controller. The controller examines the party’s claims and. Surrenders the ownership respectively.

  • Right before sealing

Section 24 of the Indian Patents Act implies that a patent is sealed from the date of notification for acceptance to the date of acceptance of the notification. The right of the patentee begins after the notification for acceptance has been presented.

  • Right to apply for the patent of addition

This provision is provided in Section 54 to 56 of the Indian Patents Act. This provision provides for the modifications in the existing invention. In such a case, the patent holder is granted the right to the modified invention after the notification of the acceptance comes out. Once the notification is presented, the owner is provided with the same rights as provided to the previous patent.

  • Right in case of infringement

When any of the rights of the patent holder is violated, then it is termed as patent infringement. This is to mean that if the patented invention is used, manufactured or sold for commercial purposes by any person, then it will be accused of patent infringement. In case of violation of patentee’s rights, the patentee can approach either the district court or a high court. If the person is proven guilty of infringement, the courts will either grant permanent injunction or damages or both.

Terms of Copyright

Copyright term is the length of time copyright subsists in a work before it passes into the public domain.

The general rule is that copyright lasts for 60 years. In the case of original literary, dramatic, musical and artistic works the 60-year period is counted from the year following the death of the author. In the case of cinematograph films, sound recordings, photographs, posthumous publications, anonymous and pseudonymous publications, works of government and works of international organisations, the 60-year period is counted from the date of publication.

Implications

Copyright term and the public domain

The extension of copyright term imposes tangible restrictions on the public domain. For instance, scholar Neil Netanel argued that Copyright Term Extension Act 1998 prevented the entering of works central to cultural heritage of the US into the public domain. He argued, culturally important dissemination, recasting, or incorporation into new expression is prevented due “to the copyright holder’s veto”. As examples he gave the adaption of the plot from novels such as The Great Gatsby and Peter Pan, the refashion of characters like Mickey Mouse, or the use of Tin Pan Alley songs like “Let’s Do It (Let’s Fall in Love)” for documentaries about the Great Depression.

Copyright term and orphan works

For the millions of older copyrighted works of less enduring popularity, it is difficult, or impossible, to trace the copyright ownership and determine who holds the particular rights that would have to be licensed for the use of the work. The problem of such orphan works stems from the extension of copyright term and the lack of requirement for the copyright owner to renew or register their copyright. In order to tackle this perceived problem some jurisdictions have revised their copyright laws to allow use of orphaned works, after diligent searches.

Length of copyright

Copyright subsists for a variety of lengths in different jurisdictions. The length of the term can depend on several factors, including the type of work (e.g. musical composition or novel), whether the work has been published or not, and whether the work was created by an individual or a corporation. In most of the world, the default length of copyright is the life of the author plus either 50 or 70 years. In the United States, the term for most existing works is a fixed number of years after the date of creation or publication. In most countries (for example, the United States and the United Kingdom) copyright expires at the end of the calendar year in question.

The length and requirements for copyright duration are subject to change by legislation, and since the early 20th century there have been a number of adjustments made in various countries, which can make determining the copyright duration in a given country difficult. For example, the United States used to require copyrights to be renewed after 28 years to stay in force, and formerly required a copyright notice upon first publication to gain coverage. In Italy and France, there were post-wartime extensions that could increase the term by approximately six years in Italy and up to about 14 in France. Many countries have extended the length of their copyright terms (sometimes retroactively). International treaties, like the Berne Convention, establish minimum terms for copyrights, but these only apply to the signatory countries, and individual countries may grant longer terms than those set out in a treaty.

Trade Secrets, Geographical Indications

Trade Secrets

Trade secrets are a type of intellectual property that comprise formulas, practices, processes, designs, instruments, patterns, or compilations of information that have inherent economic value because they are not generally known or readily ascertainable by others, and which the owner takes reasonable measures to keep secret. In some jurisdictions, such secrets are referred to as confidential information.

Trade secrets are the secrets of a business. They are proprietary systems, formulas, strategies, or other information that is confidential and is not meant for unauthorized commercial use by others. This is a critical form of protection that can help businesses to gain a competitive advantage.

Although intellectual property rights protection may seem to provide a minimum amount of protection, when they are utilized wisely, they can maximize the benefit and value of a creation and enable world-changing technology to be developed, protected, and monetized.

A trade secret is information that

  • Is Not Generally Known to The Public
  • Confers Economic Benefit on Its Holder Because the Information Is Not Publicly Known
  • Where the Holder Makes Reasonable Efforts to Maintain Its Secrecy.

Protection of undisclosed information (trade secrets) is dealt with under Article 39 of TRIPS. Companies and individuals can prevent information from being disclosed without their consent if;

  • It is not known or readily accessible to people within the circles that usually deal with the information in question.
  • Has commercial value being secret and has been made subject to steps, by the person lawfully in control of the data, to keep it protected.

Types of trade secrets

  • The ingredients used in the product:

For example, soft drinks manufacturer Coca-Cola keeps its ingredients a closely-guarded secret and the recipe is accessible only to a select few.

  • Way of manufacturing:

A company may get a competitive edge just by finding a new way of making things. These may include types of manufacturing equipment, processes or systems. For example, computer chip maker Intel came up with ‘Copy Exactly!’ to ensure consistent quality of products regardless of where it was manufactured.

  • Way of selling and distribution:

Companies often devise unique methods of selling and distributing products, which may give them an extra edge. A fitting example would be food brand Kellogg’s coming up with a data-sharing strategy with retailers to reduce unsold inventory.

  • Advertising strategies:

The success of any product or service also depends on the way of advertising. Firms will always want to keep their ad strategies protected. Most firms take necessary precautions to prevent inadvertent disclosure of trade secrets. This is because if a trade secret is disclosed, it is no longer possible to protect information, particularly, in the age of social media. This is why most companies, while recruiting an agency to create an advertisement for business, will be required to keep a watch on who has access to the company’s confidential business.

Geographical Indications

A geographical indication (GI) is a name or sign used on products which corresponds to a specific geographical location or origin (e.g., a town, region, or country). The use of a geographical indication, as an indication of the product’s source, acts as a certification that the product possesses certain qualities, is made according to traditional methods, or enjoys a good reputation due to its geographical origin.

Appellation d’origine contrôlée (‘Appellation of origin’) is a sub-type of geographical indication where quality, method, and reputation of a product originate from a strictly defined area specified in its intellectual property right registration.

Legal effect

Geographical Indications protection is granted through the TRIPS Agreement. Protection afforded to geographical indications by law is arguably twofold:

  • On one hand it is granted through sui generis law (public law), for example in the European Union. In other words, GI protection should apply through ex officio protection, where authorities may support and get involved in the making of GI collective dimensions together with their corresponding GI regulatory council, where ongoing discourse with the government is implied for effective inspection and quality control.
  • On the other hand, it is granted through common law (private law). In other words, it is similar to the protection afforded to trademarks, as it can be registered through collective trademarks and also through certification marks, for example in the United States of America.

The geographical origin of a product can create value to producers by:

  • communicating to consumers the product’s characteristics, which derive from the climate, soil and other natural conditions in its particular area
  • promoting the conservation of local traditional production process
  • protecting and adding value to the cultural identity of local communities.

The consumer-benefit purpose of the protection rights granted to the beneficiaries (generally speaking the GI producers), has similarities to but also differences from the trademark rights:

  • While GIs denote a geographical origin of a good, trademarks denote a commercial origin of an enterprise.
  • While comparable goods are registered with GIs, similar goods and services are registered with trademarks.
  • While a GI is a name associated by tradition with a delineated area, a trademark is a badge of origin for goods and services.
  • While a GI is a collective entitlement of public-private partnership, a trademark refers entirely to private rights. With GIs, the beneficiaries are always a community from which usually, regardless of who is indicated in the register as applicant, they have the right to use. Trademarks distinguish goods and services between different undertakings; thus, it is more individual (except collective trademarks which are still more private).
  • While the particular quality denoted by a GI is essentially related to a geographical area, although the human factor may also play a part (collectively), with trademarks, even if there is any link to quality, it is essentially because of the producer and provider (individually).
  • While GIs are an already existing expression and are used by existing producers or traders, a trademark is usually a new word or logo chosen arbitrarily.
  • While GIs are usually only for products, trademarks are for products and services.
  • While GIs cannot become numerous by definition, with trademarks there is no limit to the number that might be registered or used.
  • While GIs may not normally qualify as trademarks because they are either descriptive or misleading and distinguish products from one region from those of another, trademarks normally do not constitute a geographical name as there is no essential link with the geographical origin of goods.
  • While GIs protect names designating the origin of goods, trademarks collective and certification marks where a GI sui generis system exists protect signs or indications.
  • While with GIs there is no conceptual uniform approach of protection (public law and private law / sui generis law and common law), the trademark concepts of protection are practically the same in all countries of the world (i.e., basic global understanding of the Madrid System). In other words, with GIs there is no international global consensus for protection other than TRIPS.
  • While with GIs the administrative action is through public law, the enforcement by the interested parties of trademarks is through private law.
  • While GIs lack a truly global registration system, trademarks global registration system is through the Madrid Agreement and Protocol.
  • While GIs are very attractive for developing countries rich in traditional knowledge, the new world, e.g., Australia, with a different industry development model they are more prone to benefit from trademarks. In the new world, GI names from abroad arrive through immigrants and colonisation, leading to generic names deriving from the GIs from the old world.

Transfer of the Patent Rights

The importance of intellectual property in today’s world is unfathomable. People today are more vigilant about their intellectual property than they were a decade ago. The protection of intellectual property is integral in order to encourage innovation and creativity in inventions and also to give an incentive to the inventors and creators. In order to avoid any discrepancies, various global organizations have ever since formulated numerous treaties for the systematic working and smooth facilitation for the registration and commercial exploitation of one’s intellectual property rights. We now have half a dozen laws to protect and provide for transfer and distribution of copyrights, trademarks, patents and industrial designs among other intellectual property. In this article, we’re specifically going to focus on how the ownership of a patent can be completely transferred, its legal requirements and the legal procedure. We’re going to look at how a patent can be transferred, different methods of transfer, requirements of a transfer, and how to defend or file claims over a patent in different jurisdictions.

As objects of intellectual property or intangible assets, patents and patent applications may be transferred. A transfer of patent or patent application can be the result of a financial transaction, such as an assignment, a merger, a takeover or a demerger, or the result of an operation of law, such as in an inheritance process, or in a bankruptcy.

United States

In the United States, assignment of a patent is governed by statute. Assignment of an interest occurs only by an “instrument in writing”. The statute also permits recording an assignment with the United States Patent and Trademark Office, but recording is not required except to protect against “any subsequent purchaser or mortgagee for a valuable consideration, without notice….”

Security agreement

A security agreement is a conditional transfer of patent ownership when patents are used as collateral for a loan. The borrower will agree to transfer ownership of the patents to the lender if the borrow defaults on the loan. Security agreements on patents in the US are registered with the United States Patent and Trademark Office.

Requirements of Transfer

Before you’re all set to hand over your patent/invention to the designated person, you need to consider certain aspects which are important in the transfer.

  • Transfer to be documented

When you transfer a patent, you need to make sure that the same is done in a written and duly executed document, regarding the rights that you are handing over to the assignee/licensee so that in case complications arise in future, with the legal backing support in your contentions that creates a clear chain of transfer of rights to prove ownership over a property.

  • Establish your ownership

Before you make the transfer, it is pertinent to determine whether you actually own the IP you are transferring as without ownership no rights can be transferred. For example, if you invented the patent under the employment of a company or a person, you are said to be under the contract of service and therefore whatever you invent, is legally the property of the company or the person you’re employed under. However, if you invented the patent before getting employed under another authority, you are said to be under the contract for service and you are the original owner of your invention.

  • Careful filing and notarization of documents

Make sure to include complete bibliographic information about the patent like patent number, title, priority application detail etc. Correctly spell the names like legal name if the assignee is a business or a company, if there are multiple owners of the patent, name all the owners. Also, make sure all official documents are notarized. This provides credibility to your documents. If you can’t get it notarized, get it attested by at least two witnesses.

  • File a Proprietary Information Agreement

Make sure to ask the employees to sign a proprietary information agreement. This automatically assigns inventions and designs to the business. Other options include signing an automatic assignment or an explicit assignment. This will provide further clarity in identifying ownership.

Types of Transfer

A patent can either be transferred permanently via assignment or partly or temporarily via license. However, it can also be transferred by operation of law.

Assignment

You should assign your patent only if you want to part with your patent/invention and the rights related to it permanently. Here Patent Attorney in India would like to inform you that once you assign your patent to the assignee, you will not be able to get the same back. These are usually made under contractor agreements or under employment. For example, when a company acquires another company, it also acquires the intellectual property of the latter for life. Assignment is also preferred by movie studios in cases wherein they need capital to make the movie. They henceforth assign rights of the movie to an investor in return for financial capital for the movie.

An assignment can be done by way of legal assignment, wherein the assignee enters his name as the patent owner after which he becomes the proprietor of the patent and is henceforth entitled to all the rights concerning the patent. An assignment can also be done by way of equitable assignments, where the patentee agrees to share the ownership of the patent with another person via an agreement. In such a scenario, he therefore cannot register his name as the proprietor, but the assignee may have notice of his interest in the patent entered in the register. Moreover, a patent can be transferred by means of mortgages, wherein the patent owner assigns his entire/ part of his rights to the assignor in return for a financial consideration. Once the owner repays the same consideration back to the assignee, the rights are restored to the owner.

License

License refers as temporary transfer of your intellectual property rights and allows you to maintain a certain chain of command over the transferred intellectual property. When licensing, you can decide the duration of the exploitation, the jurisdiction as to where the IP can be exploited as well as whether the licensee can further sub-license the patent/invention. License upholds the principle of reversion of property, that is, your rights return to you after a certain condition like disputes. A license ends when:

i) The time period of license is over

ii) The licensee fails to fulfill the conditions like it’s commercialization

iii) Licensee breaches any terms of the license agreement

A patent can be Transferred by means of:

i) voluntary licenses where the terms of the agreement are mutually agreed to by the licensor and the licensee. By way of a voluntary license, the patent owner gives the rights to make, use or sell the patented article

ii) Statutory license is basically granted by the government to a third party to make use of the patented product in view of public interest.

An example of statutory licenses is compulsory licenses which are also granted by the government without the permission of the patent holder. This is granted if the government feels that the patented article is not available to the general public at an affordable price or if the article is unable to fulfill the requirements of the public.

iii) Exclusive Licenses and Limited Licenses where an exclusive license excludes all other parties from the right to use the invention. The rights may be divided and assigned, restrained entirely or in part. In a limited license, the limitation may arise as to persons, time, place, manufacture, use or sale.

iv) Express and Implied Licenses: An express license is one in which the permission to use the patent is given in express terms. Such a license is not valid unless it is in writing in a document embodying the terms and conditions. In case of implied license though the permission is not given in express terms, it is implied from the circumstances.

By Operation of Law

This mostly happens on the death of the patent holder/owner. When the owner of an IP dies, his rights pass on to his/her legal heir. The provisions of law also come into play in case of winding up or dissolution of a company.

Director Loans, Remuneration

Director Loans

Section 185 of the Companies Act, 2013 lays down certain restrictions with regard to the granting of loans to Directors in order to monitor their working.

When the Companies Act, 1956 was in force, public companies were permitted to grant loans, guarantees, and securities as long as they obtained prior permission from the Central Government to do so. The companies used to exercise a practice of borrowing funds and passing them to subsidiaries and other associate companies through inter-corporate loans.

However, when it came to compliance with the terms of the loan agreement, the holding companies used to take a step back, leaving the subsidiaries in the lurch. In order to put a stop to the exploitation of the subsidiaries, Section 185 of the Companies Act, 2013 came into force.

Section 185 (as amended by the Companies (Amendment) Act, 2017):

  • Limits the prohibition on loans, advances, etc. to Directors of the company or its holding company or any partner of such Director or any partner of such Director or any firm in which such Director or relative is a partner.
  • Allows the company to give a loan or guarantee or provide security in connection with any loan to any person/ entity in whom any of the Directors are interested, subject to:-
    • Passing of Special Resolution by the company in a General Meeting (Approval of at least 75% of the members is required).
    • Utilization of loans by the borrowing company shall be solely for its principal business activities.
  • The penalty provisions as set out under Section 185 (4) of the Act, in addition to the Company, now extends to an officer in default of the company (which includes any Director, Manager or KMP or any person in accordance with whose directions BODs are accustomed to act).

Exemptions with Regard to Loans Given to Directors

  • Loans to the Managing Director or Whole Time Director:
  • The loans to MD or WTD may be given only if the following conditions are met with:
    • Where it is part of the Policy of Service of the company to grant loans to all employees.
    • Pursuant to any scheme which is duly approved by the members by way of a Special Resolution
  • Loans to Subsidiary Company:

Where the holding company grants the loan, guarantee or security to its wholly-owned subsidiary company, which uses the same for its principal activity of business only.

  • Loans to Companies as part of Ordinary Business:

If the rate of interest charged on such loans is not lesser than the rate prescribed by RBI at the time, loans may be given to companies in the ordinary course of business.

  • Loans given by Banks and Financial Institutions to Subsidiaries:

Grant of loan is permitted based on:

  • Where the holding company provides the security or guarantee with respect to the loan made by the bank or any financial institution to the subsidiary company.
  • The loan must be utilised for the subsidiary’s principal activity of the business.

Director Remuneration

‘Remuneration’ means any money or its equivalent given to any person for services rendered by him and includes the perquisites mentioned in the Income-tax Act, 1961.

Managerial remuneration in simple words is the remuneration paid to managerial personals. Here, managerial personals mean directors including managing director and whole-time director, and manager.

Directors’ remuneration is the process by which directors of a company are compensated, either through fees, salary, or the use of the company’s property, with approval from the shareholders and board of directors.

The process of directors’ remuneration came about because of shareholder concerns that directors were rewarding themselves large salaries despite showing poor profits or revenue.

Therefore, the process was initiated by which shareholders were able to agree to or reject fees paid to directors in general. This amount is the upper limit that can be paid to the board of directors.

The board of directors, in turn, will determine how those fee payments are split up among the directors, including the general director of the company.

On the other hand, director’s remuneration, meaning the salaries and bonuses paid out to directors, is part of the directors’ employment contract signed with the company. The board of directors then has direct control over that remuneration agreement.

Shareholders may sue the directors if they pay excessive amounts that exceed the agreed payment or if they pay themselves a disproportionately large number of profits instead of distributing it to the stockholders as dividends.

Permissible managerial remuneration

  • Total managerial remuneration payable by a public company, to its directors, managing director and whole-time director and its manager in respect of any financial year:
Condition Max Remuneration in any financial year
Company with one Managing director/whole time director/manager 5% of the net profits of the company
Company with more than one Managing director/whole time director/manager 10% of the net profits of the company
Overall Limit on Managerial Remuneration 11% of the net profits of the company
Remuneration payable to directors who are neither managing directors nor whole-time directors
For directors who are neither managing director or whole-time directors 1% of the net profits of the company if there is a managing director/whole time director
If there is a director who is neither a Managing director/whole time director 3% of the net profits of the company if there is no managing director/whole time director

The percentages displayed above shall be exclusive of any fees payable under section 197(5).

Until now, any managerial remuneration in excess of 11% required government approval. However, now a public company can pay its managerial personnel remuneration in excess of 11% without prior approval of the Central Government. A special resolution approved by the shareholders will be sufficient.

In case a company has defaulted in paying its dues or failed to pay its dues, permission from the lenders will be necessary.

  • When the company has inadequate profits/no profits:In case a company has inadequate profits/no profits in any financial year, no amount shall be payable by way of remuneration except if these provisions are followed.
Where the effective capital is: Limits of yearly remuneration
Negative or less than 5 Crores 60 Lakhs
5 crores and above but less than 100 Crores 84 Lakhs
100 Crores and above but less than 250 Crores 120 Lakhs
250 Crores and above 120 Lakhs plus 0.01% of the effective capital in excess of 250 Crores

Director Qualification, Disqualification

Qualifications of a Director:

The Act has a dedicated provision which is Section 162 that underlines the reasons for which a person may not appoint as a director. There is no such provision regarding the qualification under the Act.

As regards to the qualification of directors, there is no direct provision in the Companies Act, 2013.But, according to the different provisions relating to the directors; the following qualifications may be mentioned:

  1. A director must be a person of sound mind.
  2. A director must hold share qualification, if the article of association provides such.
  3. A director must be an individual.
  4. A director should be a solvent person.
  5. A director should not be convicted by the Court for any offence, etc.

Rule 5 of The Companies (Appointment and Qualification of Directors) Rules, 2014 states the qualification of the Independent Director as follows

“An independent director shall possess appropriate skills, experience, and knowledge in one or more fields of finance, law, management, sales, marking, administration, research, corporate governance, technical operations, or other disciplines related to the company’s business.”

Disqualifications of a director:

The relevant provision of the law that deals with the disqualification of directors are Section 152, 164, 165, and 188 of the Act and The Companies (Appointment and Qualification of Directors) Rules, 2014.

Section 164 of Companies Act, 2013, has mentioned the disqualification as mentioned below:

1) A person shall not be capable of being appointed director of a company, if the director is

(a) Of unsound mind by a court of competent jurisdiction and the finding is in force;

(b) An undischarged insolvent;

(c) Has applied to be adjudicated as an insolvent and his application is pending;

(d) Has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence;

(e) Has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or

(f) An order disqualifying him for appointment as director has been passed by a court in pursuance of section 203 and is in force, unless the leave of the court has been obtained for his appointment in pursuance of that section;

2) Such person is already a director of a public company which:

(a) Has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; or

(b) Has failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more:

Effects of Disqualification

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company. This restriction is imposed for a period of five years or as the case may be. Since the year 2017, the Ministry of Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act. It has recently published the names of the disqualified Directors on the government website.

Remedies against Disqualification

In case of disqualification, a director can appeal to the National Company Law Appellate Tribunal (NCLAT). He/she can temporarily ask for a stay order. Under the Companies Act 2013, an order disqualifying a Director does not take effect within the next 30 days of it being passed. As soon as an appeal is initiated, the disqualified person will still continue to be a director for the next seven days. Within this period, he can file his annual returns to stay the order of disqualification. However, there exists no procedure to reappoint a disqualified director. He can only be reappointed after a period of five years has elapsed from the date of disqualification.

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or paid dividend referred to in clause (B).

Meeting Notice, Proxy

When a meeting is to be convened, a notice is required to be sent to all who are to attend it.

It should satisfy these conditions:

  1. It should be under proper authority
  2. It should state the name of the organisation
  3. It should state the day, date, time, and place. Also, sometimes, how to reach the place
  4. It should be well in advance. Some require seven days’ notice, some 48 hours’
  5. It should state the purpose and, if possible, the agenda
  6. It should carry the date of circulation and convener’s/secretary’s signature
  7. It should go to all persons required at the meet
  8. It should mention the TA/DA etc. payable and the arrangements for this

In practice, it is necessary to ensure that the notice has reached in time. This may be done telephonically. Dispatch section and post are prone to delays

We often find that between the date of a letter from a major public organisation and the post mark on the letter, there is a gap of 10-12 days. A notice that should reach seven days before a meet should not reach seven days after the meet.

Proxy

Proxy means substitute. In the world of meetings proxy means a substitute sent by a member to attend a meeting on his behalf. The idea comes from the Companies Act. Sec. 176 of the Act provides that a member of a company is entitled to send another person to attend a meeting and to vote on his behalf.

According to Sec. 176 of the Companies Act:

(1) Any member entitled to attend a general meeting and to vote may send a proxy to attend the meeting and to vote on his behalf.

But the following rules have to be followed for the purpose:

(a) In case of a company not having share capital, a proxy can be sent provided it is mentioned in the Articles of the company.

(b) A member of a private company cannot send more than one proxy unless otherwise provided in the Articles.

(c) A proxy can vote at the meeting only by poll unless otherwise provided in the Articles but he cannot speak.

(d) In the notice for the meeting it shall be clearly mentioned that a proxy can be sent and a proxy form is attached to the notice.

(e) A member intending to send a proxy shall fill in the form naming the proxy and signing on stamps of prescribed value and send it to the company at least forty-eight hours before the meeting. A legally appointed representative of the member may sign on his behalf on the proxy form.

(f) The proxy sent by a member need not be a member and may be an outsider.

(g) Any member may inspect the proxy forms sent by other members provided he gives three days’ notice to the company.

(h) Inspection shall be allowed by the company at least twenty-four hours before the meeting, during business hours.

(2) A proxy is not counted when quorum is counted. But at an annual general meeting held at the order of the Central Government (Sec. 167) or at a meeting of members held at the order of the Company Law Board (Sec. 186), only one member on whose complaint meeting has been so ordered, may be present by proxy and that proxy will make the quorum.

(3) It has to be noted that no proxy can be sent by a director to attend a Board meeting on his behalf.

(4) Generally, associations other than companies do not allow proxy.

(5) It is a duty of the secretary to collect the proxy forms and prepare a Proxy List.

(6) In case of Government Companies, the shares are often held in the name of the President of India or a Governor, who invariably sends a representative (Sec. 187 A). Same is true when one body corporate (not necessarily a ‘company’) holds shares in another body corporate then the shareholder body corporate send a representative to the meetings.

Such a representative is selected by a resolution of the Body of Directors (or Governing Body) of the shareholder body corporate. A representative is not merely a proxy (Sec. 187). A representative is counted for counting quorum and can speak at the meeting unlike a proxy. The word ‘proxy’ has double meaning. It means the person who is sent as substitute as well as the form or the instrument to be filled in by a member for appointing a proxy.

Shareholder Meeting Meanings, Importance, Components, Advantage and Disadvantages

Shareholder Meeting is a formal gathering of the shareholders of a corporation, where they come together to discuss significant issues concerning the company. These meetings can be annual or special and serve as a platform for shareholders to exercise their rights, express opinions, and make decisions on key matters affecting the company. They play a crucial role in corporate governance and ensure that shareholders have a say in the direction of the company.

Importance of Shareholder Meetings:

  • Democratic Process:

Shareholder meetings embody the democratic principle of corporate governance, allowing shareholders to voice their opinions and vote on critical issues.

  • Decision-Making:

These meetings are crucial for making decisions regarding the appointment of directors, approval of financial statements, dividends, mergers, and other significant corporate actions.

  • Transparency:

Shareholder meetings provide an opportunity for management to present the company’s performance and future prospects, promoting transparency and accountability.

  • Shareholder Rights:

They protect shareholders’ rights by enabling them to participate in decisions that affect their investments and hold management accountable.

  • Communication:

Shareholder meetings facilitate direct communication between management and shareholders, allowing for questions and discussions about the company’s operations and strategies.

  • Legal Compliance:

Conducting annual shareholder meetings is often a legal requirement under corporate laws, ensuring that the company adheres to regulatory obligations.

  • Building Trust:

Regular engagement with shareholders through meetings can foster trust and confidence in management and the company’s strategic direction.

Components of Shareholder Meetings:

  1. Notice of Meeting:

A formal communication sent to shareholders detailing the date, time, location, and agenda of the meeting.

  1. Agenda:

A list of topics to be discussed during the meeting, ensuring all relevant matters are covered.

  1. Minutes of Meeting:

A written record of the proceedings, including discussions, decisions made, and action items assigned.

  1. Participants:

Shareholders who attend the meeting, which can include both individual and institutional investors.

  1. Chairperson:

An appointed individual who leads the meeting, ensuring it runs smoothly and that all agenda items are addressed.

  1. Voting Procedures:

Guidelines for how decisions will be made, including methods for casting votes (e.g., show of hands, ballots, electronic voting).

  1. Financial Statements:

Presentation of the company’s financial performance, often a key agenda item for annual meetings.

Advantages of Shareholder Meetings:

  • Empowerment of Shareholders:

Shareholder meetings empower investors to influence company decisions and express their views on corporate governance.

  • Enhanced Accountability:

Meetings create a forum for shareholders to hold management accountable for their actions and company performance.

  • Opportunity for Dialogue:

They provide a platform for open dialogue between shareholders and management, fostering better relationships.

  • Transparency in Operations:

Shareholders can gain insights into the company’s strategies and performance, promoting transparency.

  • Networking Opportunities:

Meetings allow shareholders to network with other investors, management, and board members.

  • Compliance with Regulations:

Holding regular meetings ensures that the company complies with legal and regulatory requirements.

  • Facilitates Long-term Planning:

Shareholder involvement in discussions encourages a focus on long-term strategic goals and sustainability.

Disadvantages of Shareholder Meetings:

  • Time-Consuming:

Meetings can be lengthy and require significant time from both management and shareholders.

  • Cost Implications:

Organizing meetings incurs expenses, such as venue costs, printing materials, and refreshments, which can be burdensome for the company.

  • Potential for Conflict:

Shareholder meetings can lead to disagreements or conflicts, particularly when there are opposing views among shareholders.

  • Inefficiency:

Poorly organized meetings may result in unproductive discussions or a lack of focus on critical issues.

  • Limited Participation:

Not all shareholders may attend, especially smaller ones, leading to decisions that may not represent the views of the entire shareholder base.

  • Pressure from Activist Shareholders:

Meetings can attract activist shareholders, whose demands may disrupt the meeting’s agenda and lead to tensions.

  • Decision Delays:

Complex discussions can delay decisions that may be critical for the company’s immediate needs or future direction.

error: Content is protected !!