REGULATORY UPDATES - Khaitan & Co
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VOL 2 | ISSUE 3 | MAR 2020
Welcome to the third edition of the E-Bulletin (Volume II) brought to you by the
Employment, Labour and Benefits (ELB) practice group of Khaitan & Co. This e-
Bulletin covers regulatory developments, case law updates and insights into
industry practices that would impact businesses from a sector agnostic
standpoint.
REGULATORY UPDATES
COVID-19 coronavirus: What employers should know
A global pandemic now, COVID-19 was not something the world seemed to have been
ready for when it was first discovered in Wuhan, China, in December 2019. A member of
the larger family of coronavirus (including Middle East Respiratory Syndrome (MERS) and
Severe Acute Respiratory Syndrome (SARS)) which causes illness in both humans and
animals, COVID-19 impacts the respiratory system of its target. Having the capability to
spread from person to person through droplets from mouth or nose, COVID-19 has
transmitted far and beyond. The number of confirmed COVID-19 coronavirus cases has
been increasing rapidly in India. Employers are, therefore, expected to exercise caution in
respect of their employees.
While the Government of India is regularly releasing travel and health advisories which
should be borne in mind by employers while approving any business / personal trip of their
employees, few state governments such as Karnataka are releasing advisories on workplace
management in the event of the outbreak. To read further about these advisories and about
general measures which employers may consider to ensure safety of their employees,
please read the advisory note released by us on 5 March 2020.
1VOL 2 | ISSUE 3 | MAR 2020
EPFO releases guidelines for conduct of inquiries under Section 7A
On 14 February 2020, the Employees’ Provident Fund Organisation (EPFO) released
guidelines on initiation of inquiries under Section 7A of the Employees’ Provident Funds
and Miscellaneous Provisions Act 1952 (EPF Act). Section 7A of the EPF Act provides for
inquiry by a Provident Fund Commissioner for the purposes of either deciding on the
applicability of the EPF Act or determining the amount due from an employer under the
EPF Act or the schemes framed thereunder. The provision as such does not prescribe a
limitation period for initiation of inquiry by the competent officer.
EPFO’s guidelines acknowledge that the practice of initiating inquiries after a substantial
period of time (5-20 years) is legally untenable and accordingly provide that the same must
not be adopted by field officers. Further, any inquiry sought to be initiated by the
competent officer must be backed by documentary proof clearly evidencing a prime facie
case against the company. Our detailed analysis of the guidelines can be found in our ERGO
released on 18 February 2020.
SEBI releases important ESOP-related informal guidance
As part of its informal guidance scheme, the Securities and Exchange Board of India (SEBI)
recently issued guidance to the concerned applicants on certain aspects relating to the
SEBI (Share Based Employee Benefits) Regulations 2014 (SBEB Regulations). We set out
below an overview of the views taken by SEBI in the specific cases:
a) SAR scheme floated by a group company for ‘its employees’ but linked to the shares
of a listed company:
In an application made by JSW Steel Limited (JSW Steel) to SEBI, it was provided
that certain joint ventures (group companies) of JSW Steel (such entities having less
than 50% of JSW Steel’s stake) wished to formulate cash-based Stock Appreciation
Rights (SAR) schemes for their own employees. In each of these joint ventures, one
unit of SAR was to derive value from one equity share of JSW Steel. The question
before SEBI was whether these SAR schemes were governed by the SBEB
Regulations.
SEBI answered in the negative. It referred to Regulation 1(4) of the SBEB Regulations,
which provides that the regulations shall apply to a listed company which has a
scheme for direct or indirect benefit of employees involving dealing in / purchasing
of its securities. While such scheme may be framed by a group company, it should be
for the benefit of the employees of the listed entity. Since, in the present case, the
benefit under the schemes was not supposed to be enjoyed by the employees of JSW
Steel, the SBEB Regulations will not apply.
b) Allotment of equity shares pursuant to exercise of RSUs during the restricted period
from the end of a buy-back:
SEBI’s buy-back regulations provide that a company cannot raise further capital for
a period of one year from the expiry of a buy-back, except for the discharge of its
subsisting obligations (Restricted Period).
2VOL 2 | ISSUE 3 | MAR 2020
In an application made by Infosys Limited, the question before SEBI was whether the
company could allot equity shares upon exercise of restricted stock units (RSUs)
during the Restricted Period.
The relevant timelines in the instant case are:
i. Commencement of buyback: 20 March 2019;
ii. Approval of the plan for grant of RSUs (Plan) through an AGM: 22 June 2019;
iii. Conclusion of buyback: 29 August 2019.
SEBI observed that allotment of equity shares was made by the company as part of
fulfilment of its subsisting obligations under the Plan. Therefore, the Company could
allot equity shares during the Restricted Period.
EPFO reduces the interest rate on deposits to 8.50%
While an official notification in this regard is awaited, the Minister of State (Independent
Charge) for Labour and Employment, Mr Santosh Gangwar, has announced that the EPFO
would provide 8.5% rate of interest on deposits for the financial year 2019-20. The EFPO
had declared an interest of 8.65% last year.
The new rate of interest is the lowest in the past 7 years. However, it is being reported that
the move was necessitated to ensure that EPFO has adequate surplus to tide over the
deficit.
Punjab notifies Punjab Right to Business Act 2020
On 6 February 2020, the government of Punjab notified the Punjab Right to Business Act
2020 (Business Act), which came into force on the same day. The Business Act is intended
to promote the ease of doing business for newly incorporated small and medium
enterprises (Enterprises). Some of the salient features of the Business Act are set out
below:
a) The state government will set up a District Bureau of Enterprise (District Nodal
Agency) in all districts which inter alia will facilitate the process of issuance of
certificate granting in-principle approval to an Enterprise.
b) A new Enterprise would be able to avail the certificate of in-principle approval in
respect of the following regulatory approvals, among others:
i. factory building plan and factory license under the Punjab Factory Rules 1952;
and
ii. registration of shops and establishments under the Punjab Shops and
Commercial Establishments Act 1958.
c) A new Enterprise intending to avail the certificate of in-principle approval shall furnish
to the District Nodal Agency a declaration of intent in such format and manner as
may be prescribed by the state government. However, Enterprises will have the
option of availing regular approvals from the concerned state departments.
3VOL 2 | ISSUE 3 | MAR 2020
d) The certificate of in-principle approval must be granted by the District Nodal Agency
within 15 working days. Where the Enterprise is proposed to be set up in an approved
industrial park, the certificate must be granted within 3 working days. In the event
the decision on the application is not taken within the prescribed period, the
Enterprise shall be deemed to have been granted an in-principle approval.
Draft Maharashtra Factories Amendment Rules: Mandatory medical
examination and maintenance of Form 7A
The Government of Maharashtra has, by notification dated 10 February 2020, placed the
draft Maharashtra Factories (Amendment) Rules 2020 for public comments for a period of
45 days. The draft amendment rules clarify that medical examination would be required for
every worker engaged in factories other than the factories engaged in dangerous /
hazardous operations and processes. The qualifications to be possessed by the medical
practitioner have also been specified.
In addition to the above, factories would, once the amendment comes into effect, be
required to maintain records of such medical examination in the form of Form 7A which
shall be:
a) furnished to the Inspector of Factories, and
b) uploaded by the occupier online on department website,
within 7 days of receipt of the form from the registered medical practitioner.
CASE UPDATES
Complaint of sexual harassment against ‘employer’, lack of detailed
complaint and allegations of intemperate language: Madras High Court
decides
In a recent judgment (Union of India v Rema Srinivasan [Writ Petition Numbers 10689,
24290 and 4339 of 2019]), the Madras High Court dealt with a situation wherein a woman
filed 2 complaints of sexual harassment against the petitioner before the internal committee
constituted under the Sexual Harassment of Women at Workplace (Prevention, Prohibition
and Redressal) Act (PoSH Act). Thereafter, she also wrote a letter to the Tamil Nadu State
Commission for Women stating that she was not confident about the internal committee’s
treatment of her complaint and accordingly wanted her complaint to be dealt with by the
local committee (she also stated that her complaint was against the ‘employer’ himself).
Meanwhile, the internal committee was reconstituted with a new chairperson to allay the
woman’s concerns regarding improper constitution. However, the District Social Welfare
Officer proceeded to conduct an enquiry in parallel and found that prima facie a case of
sexual harassment was established. Accordingly, the local committee recommended an
immediate detailed departmental enquiry against the petitioner by his employer. This
parallel proceeding was challenged by the petitioner before the Central Administrative
Tribunal (Madras).
The Central Administrative Tribunal (Madras) concluded that the local committee had
already conducted a preliminary enquiry. Moreover, the internal committee formed by the
4VOL 2 | ISSUE 3 | MAR 2020
employer was not as per law as the petitioner himself was the head of the department and
a complaint against him could be inquired into only by the local committee.
Before the Madras High Court, several important issues were raised, including:
a) whether the local committee and the internal committee could conduct proceedings
in parallel;
b) whether the complaint was one of sexual harassment; and
c) whether the person charged was an employer as per the PoSH Act.
At the outset, the court held that there was no need for the internal committee to even
take cognizance of the woman’s complaints. This is because of the following:
a) the first complaint only had allegations pertaining to favouritism, bias and
intemperate language. None of these allegations warrants an inquiry by the internal
committee; and
b) the second complaint, although talking about physical advances, lacked details of the
alleged incidents including date and sequence of events.
The court also refused to accept that the petitioner was an ‘employer’. It noted:
“When the formation of the Internal Committee itself is not decided by the petitioner,
terming him as the employer does not have any logic.”
Lastly, allowing the petition, the court observed:
“Though the Sexual Harassment of Women at Workplace (Prevention, Prohibition and
Redressal) Act 2013 is intended to have an equal standing for women in the workplace and
to have a cordial workplace in which their dignity and self-respect are protected, it cannot
be allowed to be misused by women to harass someone with exaggerated or non-existent
allegations.”
Conviction necessary for forfeiture of gratuity under Section 4(6)(b)(ii) of
the Gratuity Act – Bombay High Court reiterates
Section 4(6) of the Payment of Gratuity Act 1972 (Gratuity Act) provides for the following
circumstances in which gratuity may be forfeited:
a) Section 4(6)(a): when services are terminated for any act causing damage or loss to
the property of the concerned establishment;
b) Section 4(6)(b)(i): when services are terminated on the ground of the employee’s
riotous / disorderly / violent conduct;
c) Section 4(6)(b)(ii): when services are terminated on the ground of any act which
constitutes an offence involving moral turpitude, provided the offence is committed
during the course of the employee’s employment.
In this regard, the Bombay High Court has recently held (Western Coal Fields Limited v
Presiding Officer, Appellate Authority [Writ Petition Number 6006 of 2016]) that, for an
employer to deprive an employee of gratuity under Section 4(6)(b)(ii) of the Gratuity Act,
5VOL 2 | ISSUE 3 | MAR 2020
there must be initiation of criminal proceedings that would culminate in conviction for an
offence involving moral turpitude. This is because the said provision must be “interpreted
strictly as it has the consequence of depriving an employee of gratuity for which he would
otherwise be eligible based on long years of continuous service”.
Imposition of damages on arrears of provident fund contribution: Kerala
High Court sets out guidelines
In the case of Employees Provident Fund Organisation v Sree Chithira Thirunal Public
School [Writ Petition (Civil) Number 15032 of 2014], the respondent company failed to
deposit employees’ provident fund contributions for a certain period of time. A show-cause
notice was issued to the employer, pursuant to which it submitted that it was a charitable
society running on a ‘no profit-no loss’ basis. The competent authority determined that
there was no provision for waiver of damages and, therefore, the employer was required
to pay the damages in full.
The matter reached the appellate tribunal, which noted that the assessing authority ought
to have conducted a proper enquiry to ascertain whether the respondent-company had
willfully defaulted. The appellate tribunal decided to limit the quantum of damages to 10%
per annum on the arrears of contribution.
The Kerala High Court, in the writ petition, opined that imposition of damages is not
required in every case. The relevant authority is required to evaluate all attendant
circumstances such as:
a) the number of defaults on the part of the employer;
b) the period of delay;
c) the frequency of default;
d) the amounts involved; and
e) presence of mens rea.
While disposing off the writ petition, the court noted that, in the instant case, the interest
was already remitted by the respondent and, therefore, the appellate authority was not
wrong in reducing the percentage of damages.
INDUSTRY INSIGHTS
Interest in ESOPs post budget announcement: Economic Times reports
In our previous e-bulletin, we examined the Finance Minister’s budget announcement and
the subsequently tabled Finance Bill 2020, which propose to allow employees working in
eligible startups to defer payment of tax on employees’ stock options (ESOPs) for a
specified period namely:
a) within 14 days after the expiry of 48 months from the end of the assessment year
when the employee exercised the ESOPs;
b) upon sale of the shares which the employee has received upon exercise of the ESOPs;
or
6VOL 2 | ISSUE 3 | MAR 2020
c) upon the assessee ceasing to be employee of the employer who allotted such
specified securities;
whichever is earlier.
As per a recent report of The Economic Times, several startups are now considering
inclusion of ESOPs as part of the compensation package of their employees, as they are of
the view that employees would see the same as an attractive incentive, especially in the
initial years of such companies when they face a liquidity crunch.
At present, ESOPs are taxable at the time of their exercise, even if the employee intends to
hold on to the shares for a considerable time and not sell them.
We hope the E-Bulletin enables you to assess internal practices and procedures in view of recent legal
developments and emerging industry trends in the employment and labour law and practice landscape.
The contributors to this edition of the E-Bulletin are Anshul Prakash (Partner),
Deepak Kumar (Principal Associate) and Deeksha Malik (Associate).
For any queries in relation to the E-Bulletin, please email us at elbebulletin@khaitanco.com
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