Sunday, August 11, 2013

INSIDER TRADING

Buying and selling of securities of any company is a legal activity for everybody. When it comes to insiders such as directors, managers and workers of a company, they can also buy or sell securities of their companies by abiding company’s policy and SEBI’s regulation. Regulation on insider trading clearly says that it will be considered illegal if the insiders of public limited company trade on the basis of price sensitive undisclosed information to make profit or avoid loss. They are expected to trade in securities of their companies for the intention of maintaining the status for long period of time. Trading frequently or entering into reverse transaction at small interval (i.e. less than 6 months) is considered illegal insider trading.

Insider trading is mal practices of those who are directly related to a company or body corporate or has any relation with the company. These persons use their position to get price sensitive information related to value of shares etc. which is unpublished. Insider trading per se is obtaining information from non-public sources, viz. private acquaintances, friends, colleagues and using it for purposes of enhancing one's financial advantage. Sometimes, such a practice can be conducted fraudulently, as when one who has obtained the information has a fiduciary duty to share it with clients but fails to exercises[1].
The SEBI (Prohibition of Insider trading) Regulations 1992 provide mechanism to deal with this problem. But this regulation is not sufficient to tackle insider trading completely so, a separate authority and a separate law is needed to tackle insider trading in India. The Satyam scam is latest example to show the lacunas in law and lack of effective machinery in India to prohibit insider trading. The SEBI (Prevention of Insider Trading) Regulation, 1992 is being inspired from the United States.

WHAT IS INSIDER TRADING:

As per the dictionary meaning insider trading is: “trading to one’s own advantage through having inside knowledge.[2]

Investopedia defines the insider trading, “The buying or selling of a security by someone who has access to material, nonpublic information about the security.”[3]

The term “insider” is defined in clause (e) of regulation[4]as:
Insider means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, by virtue of such connection, to unpublished price sensitive information[5] in respect of securities of the company, or who has received or had access to such unpublished price sensitive information.”[6]

Insider trading is seen as an abuse of an insider’s position of trust and confidence and as harmful to the securities markets because outsiders can be cheated by insiders who are not able to deal on equal terms. As a result, the ordinary investor loses confidence in the market. Essentially, insider trading involves the deliberate exploitation of unpublished price sensitive information obtained through or from a privileged relationship to make profit or avoid loss by dealing in securities of a company when the price of securities would be materially altered if the information was disclosed.

Insider trading is lead to some persons to make extra gains in stock market through use of some information like information on expected dividends, expected decline or rise in profits, any information on merger, acquisition potential threats etc or any other price-sensitive information.[7]

It is the trading of a corporation's stock or other securities (viz. bonds or stock options) by individuals with access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information[8].

“Insider trading” refers to transactions in a company’s securities, such as stocks or options, by corporate insiders or their associates based on information originating within the firm that would, once publicly disclosed, affect the prices of such securities. Corporate insiders are individuals whose employment with the firm (as executives, directors, or sometimes rank-and-file employees) or whose privileged access to the firm’s internal affairs (as large shareholders, consultants, accountants, lawyers, etc.) gives them valuable information. Famous examples of insider trading include transacting on the advance knowledge of a company’s discovery of a rich mineral ore (Securities and Exchange Commission v. Texas Gulf Sulphur Co.[9]), on a forthcoming cut in dividends by the board of directors (Cady, Roberts & Co.), and on an unanticipated increase in corporate expenses (Diamond v. Oreamuno[10]).

In other words, insider dealing covers a situation where a person buys or sells securities when he, but not the other party to the transaction, is in possession of confidential information because of some connection and such information would affect the value of those securities. Furthermore, the confidential information in question will generally be in his possession because of some connection which he has with the company whose securities are being dealt in or are to be dealt in by him (e.g. he may be a director, employee or professional adviser of that company) or because someone in such a position has provided him, directly or indirectly, with the information.

INSIDER LAWS IN VARIOUS COUNTRIES:
The purpose of such a comparison is to point out the international trends and standards in connection with the control of this pernicious practice. The regulation began in the United States at the wake of the twentieth century, when judges in several states became willing to rescind corporate insiders’ transactions with uninformed shareholders. One of the earliest (and unsuccessful) federal attempts to regulate insider trading occurred after the 1912–1913 congressional hearings before the Pujo Committee[11], which concluded that “the scandalous practices of officers and directors in speculating upon inside and advance information as to the action of their corporation may be curtailed, if not stopped.”

IN UNITED KINGDOM:
In UK, insider trading was made a specific criminal offence in 1980 and was incorporated in the Company Securities Insider Dealing Act, 1985 which was re-enacted in 1993 and is contained in Part V of the Criminal Justice Act of 1993 (CJA).
Under the UK regulations “inside information[12]” means information which relates to particular securities or the issuer of particular securities and is specific or precise and has not been made public and if it were made public would have a significant effect on the price of any securities.
Interestingly, under the law[13] as it exists in the UK, only individuals can be held liable. In India, individuals as well as corporations can be guilty of the offence. In this regard the law in India is similar to the law in the US where corporate liability is recognized under certain circumstances.
UK regulations state that information can be said to have been made public if it:[14]
  • is published in accordance with the rules of a regulated market for the purpose of informing investors and their professional advisors;
  • is contained in records which by virtue of any enactment are open to inspection by the public;
  • can be readily acquired by those likely to deal in securities

In UK, insider trading is considered a criminal offence and hence, the standard of proof required for conviction is high. The mens rea therefore assumes significance. Indian laws do not seem to take the ‘intent’ of the offender into account.

IN UNITED STATES OF AMERICA:

The United States has been the most successful in prohibiting insider trading and the first country to tackle insider trading effectively. The market crash due to protracted lack of investor’s confidence in securities market and then the great depression in the US economy led to the enactment of the Securities Act, 1933 in which the provisions relating to prohibition of fraud in the sale of securities were included, which were greatly braced by the subsequent Act viz. Securities Exchange Act, 1934. The Securities and Exchange Act, 1934, enumerates the provisions relating to the protection of interest of investors against Insider Trading.

The laws in United States regarding insider trading mainly depends upon the mental element of the insider, as per the case of Chiarella v. United States[15] it was held that in order to show the violation under the Securities Exchange Act it is necessary to prove that insider breached his fiduciary duty fraudulently.

The laws in USA relating to Insider Trading are primarily contained in section 16(b) of the Securities Exchange Act, 1934 which states as follows in the relevant part:
Section 16(b) of the Securities Exchange Act, 1934 prohibits the purchase and sale of the shares within 6 months period involving the directors, officer, and stock holder owing more that 10% of the shares of the company. The rationale behind the incorporation of this provision is that it is only the substantial shareholder and the person concerned with the decision and management of the company who can have access to the price sensitive information and therefore there should be bar upon them to transact in securities.

In 1984 with the case of Dirks v. Securities Exchange Commission[16] the Supreme Court of United States of America said that the tippers (person who is a receiver of second hand information) will be held liable if they had reason to believe that the tipper had breached fiduciary duty in disclosing confidential information and the tipper has received any personal benefit from the disclosure.

IN CHINA:

Following the regulation of insider trading in the U.S., the notion of insider trading has been widely introduced to many other jurisdictions, including China for two reasons: firstly, the U.S. was the first jurisdiction to enact insider trading regulation and today the U.S. continues to lead the world in the regulation and enforcement[17]. The U.S. experience has been largely viewed as the “gold standard” for many emerging markets. Secondly, the U.S. insider trading regulation has served as a core influence on China’s regulatory framework.

IN NEPAL:

Section 91(1) of Securities Act, 2007 provides that ‘if any person deals in securities or causes any other person to deal in securities on the basis of any insider information or notice that are unpublished or communicates any information or notice known to such a person in the course of the discharge of his or her duties in manner likely to affect the price of securities such a person shall be deemed to have been committed an insider trading in securities, thereby prohibiting dealing in securities, causing any other person to deal in securities and communicating any information or notice in a manner likely to affect the price of securities.
Section 91(2) of Securities Act 2007 provides that ‘notwithstanding anything contained in sub-section (1), any transactions already carried on shall not be deemed to be affected at all merely by the reason that an insider trading has been committed thus making the transaction out of the purview of the Acts on the ground of retrospective effect.

Securities Act 2007 under section 92 provides persons likely to be involved in insider trading are:
a)      a director, employee or a person, who can obtain any information or a notice in the capacity of a shareholder of that body corporate,
b)      a person who can obtain any information or a notice in the capacity of a professional service provider to that body corporate,
c)      a person who can obtain any information or a notice having a direct or indirect contact with the person or source as specified in clauses (a) and (b).

IN AUSTRALIA:

Under the Corporations Act, it is an offence to trade using inside information, or communicate inside information to others, who will or are likely to, trade on the inside information. The prosecution must prove that you:

·         possess information which is likely to have a material effect on the value of a particular financial product;
·         know (or ought reasonably know) that the information is not generally available;
·      trade in that particular financial product; or you tell someone else about the information knowing that the other person will trade in the product.

IN INDIA:
Securities market in India came into existence in 1875 with establishment of Bombay Stock Exchange. The history of Insider Trading in India relates back to the 1940’s with the formulation of government committees such as the Thomas Committee of 1948, which evaluated inter alia, the regulations in the US on short swing profits under Section 16 of the Securities Exchange Act, 1934. Thereafter, provisions relating to Insider Trading were incorporated in the Companies Act, 1956 under Sections 307 and 308, which required shareholding disclosures by the directors and managers of a company.

Due to inadequate provisions of enforcement in the companies Act, 1956, the Sachar Committee in 1979, the Patel Committee in 1986 and the Abid Hussain Committee in 1989 proposed recommendations for a separate statute regulating Insider Trading. In 1979, the Sachar Committee said in its report that directors, auditors, company secretaries etc. may have some price sensitive information that could be used to manipulate stock prices which may cause financial misfortunes to the investing public. The companies recommended amendments to Companies act 1956 to restrict or prohibit the dealings of the employees.
The Patel Committee in 1986 in India defined Insider Trading as, “Insider trading generally means trading in the shares of a company by the persons who are in the management of the company or are close to them on the basis of undisclosed price sensitive information regarding the working of the company, which they possess but which is not available to others.”[18]

The concept of Insider Trading in India started fermenting in the 80’s and 90’s and came to be known and observed extensively in the Indian Securities market. The rapidly advancing Indian Securities market needed a more comprehensive legislation to regulate the practice of Insider Trading, thus resulting in the formulation of the SEBI (Insider Trading) Regulations in the year 1992, which were amended in the year 2002 after the discrepancies observed in the 1992 regulations in the cases like Hindustan Levers Ltd. vs. SEBI[19], Rakesh Agarwal vs. SEBI[20] etc. to remove the lacunae existing in the Regulations of 1992. The amendment in 2002 came to be known as the SEBI ([Prohibition of] Insider Trading) Regulations, 1992.
Insider trading is considered as commiting the offence. The SEBI has the full authority to investigate the malpractice on the basis of complaints from the investors or intermediaries or suo-motu. The SEBI can carry on the inspection of books of account, other records and documents of a suspected person. It has the power to issue directions to the suspected person not to involve in the securities in any specific manner. According to Section 24 of the SEBI Act, it has the power to initiate criminal prosecution against the responcible person.[21]

The regulations of 1992 seemed to be more punitive in nature. The 2002 amendment regulations on the other hand are preventive in nature. The amendment requires all the listed companies, market intermediaries and advisers to follow the new regulations and also take steps in advance to prevent the practice of insider trading. The new regulations include mandatory disclosures by the Directors and other officers of listed companies and also by the persons holding more than 5% of the company’s shares[22]. Insider trading practice is also required to be curbed during vital announcements of the company. These preventive measures ensure the reduction of the cases involving the practice of Insider Trading and also informing the persons who indulge in such practices, of the laws relating to Insider Trading.

The new regulations particularly emphasize on the delegation of powers on the entities themselves to conduct internal investigations before they present their case before the SEBI in relation to insider trading. The guidelines provide for a definite set of procedures and code of conduct for the entities whose employees, directors and owners are most expected to be in a position to take an undue advantage of confidential inside information for their personal profits.

CASE LAW:

Galleon Hedge Fund Case[23]
The most well-known of all the cases of insider trading at the global level is the Galleon Hedge Fund Case. The Galleon Group manages a series of funds that specialize in the technology and healthcare industries. The founder of the Galleon Group, Raj Rajaratnam, is the 559th richest person in the world with a net worth of USD 1.3 billion, as per Forbes magazine. However he has been charged along with some others in a case related to the USD 20 million hedge fund insider trading scam, the largest insider trading case in the history of the United States. About 20 persons, including four Indians, were charged. Rajaratnam was arrested and charged with using inside information to trade shares including those of Google Inc, Polycom Inc, Hilton Hotels Corp. and Advanced micro Devices Inc, according to complaints. A complaint was filed before the U.S. Supreme Court asking the Court to pass orders to disgorge the alleged gains earned by way of insider trading, to restrain the accused from acting as officers or directors of any issuer of securities and to pay a civil monetary penalties under U.S. Securities Laws. He was alleged to have made more than USD 20 million by using inside information form tipsters at companies ranging from  chip-maker Intel to rating agency Moody’s and consultancy firm McKinsey.[24]


Hindustan lever Ltd. v. SEBI[25]
This is the case that studies insider trading by Hindustan Liver Limited (HLL), when the company wanted a merger with its sister concern Brooke Bond Lipton India Limited (BBLIL). This was the first ever case of insider trading in India which was taken up by SEBI to scrutinize the manner of the involvement of a big company, HLL. SEBI tried to establish an insider trading case against HLL management observed that it could be conclusively stated that while entering into the transaction for the purchase of 800,000 shares of BBLIL from the Unit Trust of India, HLL was acting on the basis of privileged information in its possession, regarding the impending merger of BBLIL with HLL.

On 4 August 1997, SEBI issued a show cause notice to HLL claiming that there was prima facie evidence of the company indulging in insider trading, through the use of ‘unpublished price sensitive information’ prior to its merger with Brooke Bond Lipton India Limited (BBLIL). SEBI found HLL guilty of insider trading because it bought the shares of BBLIL form Unit Trust of India with the full knowledge that two sister concerns were going to merge. Since it bought the shares before the merger was formally announced. SEBI held that HLL was using unpublished price sensitive information to trade, and was therefore, guilty of insider trading. SEBI directed HLL to pay Unit Trust of India Rs 34 million in compensation, and also initiated criminal proceedings against the five common directors of HLL and BBLIL.[26]

Rakesh Agrawal v. SEBI[27]
Another interesting case is that of ABS Industries. The promoter and MD, Rakesh Agrawal, was charged in 2001 with insider trading for allegedly purchasing his own company’s shares from the market prior to takeover deal between ABS and Bayer of Germany. SEBI directed Agrawal to deposit INR 3.4 million to compensate ABS’ investors, besides initiating adjudication proceeding. Agrawal challenged the SEBI order before SAT, which partially turned down the SEBI’s ruling of imposing the penalty on Agrawal and declined to issue any order related adjudication. SEBI later contested the SAT order in the Supreme Court, which settled the case through a consent order, with Agarwal paying a monetary penalty.[28]

Dilip Pendse v. SEBI[29]:
This was perhaps the simplest case of Insider Trading which was handled by SEBI and it had no difficulties in punishing the offenders. The facts were that Nishkalpa was a wholly owned subsidiary of TATA Finance Ltd (TFL), which was a listed company. D. P. was the MD of TFL. On 31/03/2001, Nishkalpa had incurred a huge loss of Rs. 79.37 crore and this was bound to affect the profits of TFL. This was basically the unpublished price sensitive information of which Pendse was aware. This information was disclosed to the public only on 30/04/2001. Thus any transaction by an Insider between the period 31/03/2001 to 30/04/2001 was bound to fall within the scope of Insider Trading; ‘D.P.’ passed on this information to his wife who sold 2, 90,000 shares of TFL held in her own name as well as in the name of companies controlled by her and her father-in-law. It was very easy for SEBI to prove Insider Trading in this cake walk or vanilla case.

PENALTIES FOR INSIDER TRADING UNDER SEBI ACT:
The SEBI Act has basically given two options to the board:
1.      The first being to refer the complaint for adjudication and the adjudicator may impose a penalty not exceeding 5 lakhs rupees. The aggrieved party may prefer an appeal to a Securities Appellate Tribunal and if necessary to the High Court. The Act makes it clear that no civil court has jurisdiction over the adjudication proceedings.
2.      The second option for the SEBI is to file a criminal suit against the alleged offender before the court not inferior to the Metropolitan magistrate or judicial magistrate. The court can impose a fine not less than 2000 rupees and an imprisonment that shall not be less than one month but no exceeding 3 years or with both.

SHORTCOMINGS OF SEBI REGULATIONS FOR INSIDER TRADING:
There have been many lacunae in the SEBI Insider Trading Regulations that have been observed over the years, eventually making it tough for the investors to repose their confidence in the laws designed to safeguard their rights and interests against the practice of insider trading. SEBI has time and again encountered difficulties in establishing and proving a case (beyond reasonable doubts in case of criminal proceedings) to convict the person/s accused of insider trading, substantially owing to the lack of evidence.
One of the most famous cases highlighting the vulnerability of the SEBI’s 1992 regulations in this regard is Rakesh Agarwal v. SEBI[30]. In this famous case, Rakesh Agarwal, the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G (a company registered in Germany), regarding their intentions to takeover ABS. Therefore, he had access to this unpublished price sensitive information. It was alleged by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit. The investigations of SEBI affirmed these allegations. Bayer AG subsequently acquired ABS. Further he was also an insider as far as ABS is concerned. By dealing in the shares of ABS through his brother-in-law while the information regarding the acquisition of 51% stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations. Rakesh Agarwal contended that he did this in the interests of the company. He desperately wanted this deal to click and pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he tried his best at his personal level to supply them with the requisite number of shares, thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them to Bayer.

The SEBI directed Rakesh Agarwal to “deposit Rs. 34,00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17,00,000 in each exchange) to compensate any investor which may make any claim subsequently.” along with a direction to “(i) initiate prosecution under section 24 of the SEBI Act and (ii) adjudication proceedings under section 15I read with section 15 G of the SEBI Act against the Appellant.”

On an appeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal held that the part of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34,00,000 couldn’t be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS), as is mentioned in the facts above.
Similarly, in the case of Samir C. Arora v. SEBI[31], Mr. Arora was prohibited by the SEBI in its order not to buy, sell or deal in securities, in any manner, directly or indirectly, for a period of five years. Also, if Mr. Arora desired to sell the securities held by him, he required a prior permission of SEBI.

Mr. Arora in the Securities Appellate Tribunal contested this order of SEBI. SAT set aside the order of SEBI on grounds of insufficient evidence to prove the charges of insider trading and professional misconduct against Mr. Arora.

The above mentioned cases throw light on the inability of SEBI in proving its cases so as to prove the allegations of Insider Trading. Most of this can be accounted to the lack of evidence in cases relating to Insider Trading in India which make it difficult for the prosecution to prove the criminal liabilities that may be imposed on the person accused of Insider trading. Unlike the balance of probabilities that is required in proving a civil liability, a case involving criminal liability requires the allegations to be proved beyond reasonable doubts.

CONCLUSION:
Insider trading is one of the menaces, which is difficult to tackle, and the manipulators try to find one way or other that we can see by the HLL instance. Even after the formation of SEBI (Insider Trading) Regulations 1992, insider trading is still rampant in the stock markets, and clearly therefore the SEBI regulations need to be made more comprehensive. Though SEBI has introduced the Regulations in 2002 to control these kinds of activities which cause harm to the general investors. And we have also seen that these SEBI regulations doesn’t have transnational jurisdiction so it is suggested that the SEBI should come up with amendment on the line or better than that of Securities Exchange Commission. So in future there will be no problem. There is required greater investor education as to the intricacies of insider trading and its ills to make an investor aware of his rights. And the SEBI should also incorporate civil remedies against the insiders so that it would be not difficult as in case of criminal liability.

After doing this project work, I have come to the conclusion that whatever laws or the mechanisms be devised by the regulatory bodies, for the preservation of price-sensitive information and for the prevention of insider trading, the situation can never be made foolproof. This is because for the efficient conduct of the affairs of a company or a firm, it is essential that certain people be in possession of the price sensitive information and other trade details which are not disclosed. And, it becomes the duty as well as the responsibility of these people to ensure that this information is not leaked or are not used for making undue profits. The Indian law i.e. the SEBI Act seems to be totally inadequate. There is no mention in the regulations about the enforcement of criminal sanction against the directors of the foreign company, listed in domestic exchange, which has indulged in insider trading, as the SEBI Act shall not be applicable to the territory outside India and it shall be an extraterritorial application of this Act.

So, according to me, in order to curb the menace of insider trading and for the preservation of price sensitive information, the people holding the concerned positions i.e. the directors, officers and other members of the company should themselves take voluntary steps and should set high standards of ethical behavior, because this is something which can’t be imposed in any manner or the compliance of which be made mandatory.





Thursday, May 2, 2013

PRECAUTIONARY PRINCIPLE OF ENVIRONMENTAL LAW

Environmental law regularly operates in areas complicated by high levels of scientific uncertainty. In the case of many activities that entail some change to the environment, it is impossible to determine precisely what effects the activity will have on the quality of the environment or on human health. Often available scientific evidence provides us cause for concern but does not give conclusive information. In such scenarios risk assessment compels us to strike a balance between the need to protect health and environment on one hand, and the foregone advantages of strict restrictions that may turn out to be unwarranted. It is in this context the role for Precautionary Principle emerges. While deciding the need and timing of the application of the Precautionary Principle, it is important to clearly understand the principle and its consequences.

The Precautionary Principle is one of the most contentious principles in contemporary International legal developments. The very fact that is, a principle of international environmental law has been questioned by many legal scholars. However, this does not take away the fact that the Precautionary Principle continues to be applied widely across sectors both internationally and nationally. The nature and scope of its application has varied widely according to the context and sector within which it has been applied.

Precautionary Principle’ plays a significant role in determining whether developmental process is sustainable or not. ‘Precautionary Principle’ underlies sustainable development which requires that the developmental activity must be stopped and prevented if it causes serious and irreversible environmental damage. The emergence of Precautionary Principle marks a shift in the international environmental jurisprudence- a shift from assimilative capacity principle to Precautionary Principle.

MEANING AND CONCEPT OF PRECAUTIONARY PRINCIPLE:

The Precautionary Principle is a tool for making better health and environmental decisions. It aims to prevent harm from the outset rather than manage it after the fact. In common language, this means “better safe than sorry.” The Precautionary Principle denotes a duty to prevent harm, when it is within our power to do so, even when all the evidence is not in.[1] In short, the “precautionary principle” is a notion which supports taking protective action before there is complete scientific proof of a risk; that is, action should not be delayed simply because full scientific information is lacking.[2]

In simple terms, the Precautionary Principle conveys the common-sense based advice to err on the side of caution. The principle intends to prevent harm to humans, environment, and eco-system at large. Before looking at some of the widely used definitions of the Precautionary Principle, it would be helpful to understand the context and rationale. When the impacts of a particular activity – such as emission of hazardous substances – are not completely clear, the general presumption is to let the activities go ahead until the uncertainty is resolved completely. The Precautionary Principle counters such general presumptions. When there is uncertainty regarding the impacts of an activity, the Precautionary Principle advocates action to anticipate and avert environmental harm. Thus, the Precautionary Principle favors monitoring, preventing and/or mitigating uncertain potential threats.

There are two widely referred definitions of the Precautionary Principle. One of the most important expressions of the Precautionary Principle internationally is in the Rio Declaration from the 1992 United Nations Conference on Environment and Development, also known as Agenda 21. The declaration stated: ‘In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost effective measures to prevent environmental degradation’.

The second definition is based on 1998 Wingspread Statement on the Precautionary Principle and it states: “...When an activity raises threats of harm to human health or the environment, precautionary measures should be taken even if some cause and effect relationships are not fully established scientifically. The process of applying the precautionary principle must be open, informed and democratic and must include potentially affected parties. It must also involve an examination of the full range of alternatives, including no action. In this context the proponent of an activity, rather than the public, should bear the burden of proof.

Precautionary Principle’ plays a significant role in determining whether developmental process is sustainable or not. ‘Precautionary principle’ underlies sustainable development which requires that the developmental activity must be stopped and prevented if it causes serious and irreversible environmental damage. The emergence of Precautionary Principle marks a shift in the international environmental jurisprudence- a shift from assimilative capacity principle to Precautionary Principle.

Assimilative Capacity Principle: Assimilative capacity principle underlies earlier legal measures to protect the environment. Before the Stockholm Conference 1972, the concept of ‘Assimilative Capacity’ was recognized at the international level. As per this concept the natural environment has the capacity to absorb the ill-effects of the pollution but beyond a certain limit the pollution may cause damage to the environment requiring efforts to repair it. Principles 6 of the Stockholm Declaration contains assimilative capacity principle which assumes that science could provide the policy makers with the necessary information and means to avoid encroaching upon the capacity of the environment to assimilate impacts and it presumes that relevant technical expertise would be available when environmental harm is predicted and there would be sufficient time to act in order to avoid such harm.

Assimilative Capacity to Precautionary Principle – A Shift: The uncertainty of scientific proof and its changing frontiers from time to time have led to great changes in the environmental concepts during the period between the Stockholm Conference of 1972 and the Rio Conference of 1992. A basic shift to the approach to environmental protection occurred initially between 1972 and 1982. Earlier the concept was based on the assimilative capacity rule as revealed from principle 6 of the Stockholm Declaration. So, Precautionary Principle is a principle which ensures that a substance or activity posing a threat to the environment is prevented from adversely affecting it, even if there is no conclusive scientific proof lining that particular substance or activity to the environmental damage. The words ‘substance’ and ‘activity’ imply substance or activity introduced as a result of human intervention.

ORIGIN AND HISTORY OF THE PRECAUTIONARY PRINCIPLE:

The Precautionary Principle is a narrower concept than merely looking for safety. Precautionary ‘thinking’ has a much longer history. The Late Lessons from Early Warnings report (2001) mentions the example of Dr. John Snow who in 1854 recommended removing the handle of a London water pump in order to stop a cholera epidemic. The evidence for the causal link between the spread of cholera and contact with the water pump was weak and not a proof beyond reasonable doubt. The report then mentions a series of other examples, such as asbestos, where a precautionary approach could have saved many lives if early warnings of potential at the time unproven but still reducible harm had been taken more seriously.[3]

The Precautionary Principle, however, dates from the 1970s. Some scholars mention a Swedish and some a German origin of the Precautionary Principle. The term ‘Precautionary Principle’ had its origin in the German word Vorsorgeprinzip[4]. In Germany the Precautionary Principle (‘Vorsorgeprinzip’) may be traced back to the first draft of a bill (1970) aimed at securing clean air. The law was passed in 1974 and covered all potential sources of air pollution, noise, vibrations and similar processes. The most unambiguous elaboration of the Precautionary Principle in German environmental policy is from a later date and reads: ‘Responsibility towards future generations commands that the natural foundations of life are preserved and that irreversible types of damage, such as the decline of forests, must be avoided.’ Thus the principle of precaution commands that the damages done to the natural world (which surrounds us all) should be avoided in advance and in accordance with opportunity and possibility.

BASIC FEATURES OF PRECAUTIONARY PRINCIPLE:

Five Key Elements of the Precautionary Principle:
The Precautionary Principle represents a paradigm shift in decision-making. It allows for five
key elements that can prevent irreversible damage to people and nature[5]:
  1. Anticipatory Action: There is a duty to take anticipatory action to prevent harm. Government, business, and community groups, as well as the general public, share this responsibility.
  2. Right to Know: The community has a right to know complete and accurate information on potential human health and environmental impacts associated with the selection of products, services, operations, or plans. The burden to supply this information lies with the proponent, not with the general public.
  3. Alternatives Assessment: An obligation exists to examine a full range of alternatives and select the alternative with the least potential impact on human health and the environment, including the alternative of doing nothing.
  4. Full Cost Accounting: When evaluating potential alternatives, there is a duty to consider all the reasonably foreseeable costs, including raw materials, manufacturing, transportation, use, cleanup, eventual disposal, and health costs even if such costs are not reflected in the initial price. Short and long-term benefits and time thresholds should be considered when making decisions.
  5. Participatory Decision Process: Decisions applying the Precautionary Principle must be transparent, participatory, and informed by the best available science and other relevant information.


WHY DO WE NEED PRECAUTIONARY PRINCIPLE:

The effects of careless and harmful activities have accumulated over the years. Humans and the rest of the natural world have a limited capacity to absorb and overcome this harm. There are plenty of warning signs:
·         Chronic diseases and conditions affect more than 100 million men, women, and children in the World—more than a third of the population. Cancer, asthma, Alzheimer's disease, autism, birth defects, developmental disabilities, diabetes, endometriosis, infertility, multiple sclerosis, and Parkinson's disease are becoming increasingly common.
·    In laboratory animals, wildlife, and humans, considerable evidence documents a link between levels of environmental contamination and malignancies, birth defects, reproductive problems, impaired behavior, and impaired immune system function. Scientists' growing understanding of how biological systems develop and function leads to similar conclusions.
·        Other warning signs are the dying off of plant and animal species, the destruction of ecosystems, the depletion of stratospheric ozone, and the likelihood of global warming.
Serious, evident effects such as endocrine disruption, climate change, cancer, and the disappearance of species can seldom be linked decisively to a single cause. Scientific standards of certainty may be impossible to attain when causes and outcomes are multiple; latent periods are long; timing of exposure is crucial; unexposed, “control” populations do not exist; or confounding factors are unidentified.

PRECAUTIONARY PRINCIPLE IN PRACTICE:

Several multilateral environmental agreements refer to precautionary principle in some form, but rarely provide elaboration into specific guidance. Similarly, several national level environmental initiatives invoke the precautionary principle. Here, a brief overview of some such initiatives is provided.

MULTILATERAL ENVIRONMENTAL AGREEMENTS[6]:

a)   Montreal Protocol on Substances that Deplete the Ozone Layer, 1987 – ‘Parties to this Protocol, determined to protect the ozone layer by taking precautionary measures to control equitably total global emissions of substances that deplete it..’

b)    The Rio Declaration on Environment and Development, 1992 – ‘In order to protect the environment the precautionary approach shall be widely applied by states according to their capabilities.’

c)  UN Framework Convention on Climate Change, 1992 – Article 3.3 says, “The Parties should take precautionary measures to anticipate, prevent or minimize the causes of climate change and mitigate its adverse effects.”

d)     Convention on Biological Diversity, 1992 – This Convention does not directly use the term ‘precaution’ but interprets the ‘serious and irreversible’ harm referred in the Rio Declaration in the context of biodiversity. It states,  “where there is a threat of significant reduction or loss of biological diversity, lack of full scientific certainty should not be used as a reason for postponing measures to avoid or minimize such a threat.”

e)      The Maastricht Treaty of European Union, 1992 – “Community policy on the environment must aim at a high level of protection and be based on the precautionary principle, as well as on the principle that preventive action should be taken, that environmental damage should be rectified at source and that the polluter should pay.

f)      Cartagena Protocol on Bio-safety, 2000 – “In accordance with the precautionary approach the objective of this Protocol is to contribute to ensuring an adequate level of protection in the field of the safe transfer, handling and use of living modified organisms resulting from modern biotechnology that may have adverse effects on the conservation and sustainable use of biological diversity, taking into account risks to human health, and specifically focusing on trans-boundary movements.”

g)     Stockholm Convention on Persistent Organic Pollutants (POPs), 2001 – The objective states, “Mindful of the precautionary approach as set forth in Principle 15 of the Rio Declaration on Environment and Development, the objective of this Convention is to protect human health and environment from persistent organic pollutants.” This treaty operationalizes precaution with explicit reference to it in the preamble, provisions for adding POPs, and determination of best available technologies.

NATIONAL EXPERIENCES:

a)    Asia – Even though several countries have adopted well drafted environmental and biodiversity laws, reference to ‘precautionary principle’ is missing. For instance, Malaysia’s National Biodiversity Policy makes explicit reference to the Convention on Biological Diversity (1992) but refrains from using the term ‘precautionary principle’. Similarly other countries in the region, Vietnam, Indonesia and Lao PDR also do not directly invoke precautionary principle in their laws. On the other hand, in several countries (e.g., India and Pakistan) the highest judicial authority has cited ‘precautionary principle’ in its judgments.

b)    Africa – Several countries have made explicit reference to ‘precautionary principle’ in their laws. Examples include the 1997 Mozambique Environment Legislation, the 1996 General Environmental Law of Cameroon, and South Africa’s National Environmental Management Act.

c)  Latin America – Many countries in this region have incorporated precaution as guiding principle in their national environmental laws. Examples include general and biodiversity related environmental laws in Argentina, Peru, Costa Rica and Ecuador.

d)   Australia – The precautionary principle is deeply rooted in Australia’s environmental policy, as reflected in the Inter-Governmental Agreement on Environment of 1992, and the Commonwealth Environment Protection and Biodiversity Conservation Act of 1999.

As mentioned above, precaution is deeply entrenched in the environmental legislations of several European countries. On the other hand, in the United States of America precaution is rarely stated explicitly in any of its laws. However, the precautionary the principles are well entrenched in several protection acts such as Endangered Species Act of 1973, and the Wild Bird Conservation Act of 1992.

PRECAUTIONARY PRINCIPLE IN INDIAN CONTEXT:

In India, there are lots of environmental regulations but environmental regulations as Water (Prevention and Control of Pollution) Act, 1974, the Air (Prevention and Control of Pollution) Act, 1981, and the Environment (Protection) Act, 1986 are aimed at cleaning up pollution and controlling the amount of it released into the environment. They regulate the harmful substances as they are emitted rather than limiting their use or production in the first place. These laws are based on the assumption that humans and ecosystem can absorb a certain amount of contamination without being harmed. But the past experience shows that it is very difficult to know what levels of contamination, if any, are safe and therefore, it is better to err on the side of caution while dealing with the environment.[7]

The Precautionary Principle has not been explicitly mentioned in any environmental laws in India. However, the Supreme Court of India has invoked this principle while passing judgments.
Building on some of the near-precautionary approaches we saw in Indian legislation, in Punjab v. Modern Cultivators, Ladwa[8], and Rajkot Municipal Corporation v. Manjulben Jayantilal Nakum[9], expectations for precaution are used as measures of tort liability. The Oleum Gas Leak Case[10] extends the principle of strict and absolute liability for those engaged in hazardous activities, thus providing the necessary impetus for precautionary action when dealing with toxic materials and allowing punishment for a failure to err on the side of caution.

Precautionary Principle does not find any place in judicial decisions in India before Vellore Citizens Welfare Forum v. Union of India[11], where Supreme Court referred the Brundtland Report and other international documents in addition to Articles 21, 48A and 51A(g) of the Constitution of India. And also taken into account the legislative mandate “to protect and improve the environment” as found in enactments like the Water (Prevention and Control of Pollution) Act, 1974, the Air (Prevention and Control of Pollution) Act, 1981, and the Environment (Protection) Act, 1986.

Drawing support from various Articles of the Constitution of India and arguing that the Precautionary Principle is part of customary international laws (and hence part of domestic laws), the Court has strongly supported the application of precautionary principle. In fact, the Court has also applied the reversal of burden of proof and demanded that the proponents of the activity must demonstrate that the activity is environmentally benign. In this case the Court explained the meaning of ‘Precautionary Principle’ in the context of municipal law as under[12]:
        i.         Environmental measures by the State Government and the Statutory Authorities – must anticipate, prevent and attack the causes of environmental degradation.
      ii.            Where there are threats of serious and irreversible damage, lack of scientific certainty should not be used as a reason for postponing measures to prevent environmental degradation.
    iii.        The onus of proof is on the actor or the developer/industrialist to show that his action is environmentally benign.

In Taj Trapezium Case[13] the Supreme Court was dealing with the problem of protecting the ‘Taj Mahal’ from the pollution of nearby industries. The Court applied the ‘Precautionary Principle’ as explained by it in Vellore case and observed – The environmental measures must anticipate, prevent and attack the causes of environmental degradation. The ‘onus of proof’ is on an industry to show that its operation with the aid of coke/coal is environmentally benign. It is rather, proved beyond doubt that the emissions generated by the use of coke/coal by the industries in Taj Trapezium are the main polluters of the ambient air.
The court ordered the industries to change over to the natural gas as an industrial-fuel or stop functioning with the aid of coke/coal in the Taj trapezium and relocate themselves as per the directions of the Court.

In Calcutta Tanneries Case[14] applying the Precautionary Principle Court ordered the polluting tanneries operating in the city of Calcutta (about 550 in numbers) to relocate themselves from their present location and shift to the new leather complex set-up by the West Bengal Government.

In Badkhal & Surajkund Lakes Case[15] the Supreme Court held that the ‘Precautionary Principle’ made it mandatory for the State Government to anticipate, prevent and attack the causes of environmental degradation. The Court has no hesitation in holding that in order to protect the two lakes from environmental degradation it was necessary to limit the construction activity in the close vicinity of the lakes.

Even though the Vellore judgment was followed in the subsequent decisions of the Supreme Court, the Court felt the need to explain the meaning of the ‘Precautionary Principle’ in more detail and lucid manner so that Courts & Tribunals or Environmental Authorities can properly apply the said principle in the matters which might come before them. In A P Pollution Control Board v. Prof. M. V. Nayudu[16] the Supreme Court has reiterated its earlier stand on the precautionary principle and demanded that the burden of proof should rest with the person/entity proposing the activities (which may have harmful effects on the environment and/or human beings).

In Narmada Bachao Andolan v. Union of India[17], precautionary principle came to be considered by the majority of judges. The Court also took the view that the doctrine is to be employed only in cases of pollution when its impact is uncertain and non-negligible.

In S. Jagannath v. Union of India[18], the Supreme Court held that sea beaches and sea coasts are gifts of nature and any activity polluting the same cannot be permitted. The intensified shrimp (prawn) farming culture industry by modern method in coastal areas was causing degradation of mangrove ecosystem, depletion of plantation discharge of highly polluting effluents and pollution of potable as well as ground water.

In KM Chinnappa, TN Godavarman Thirumalpad v. Union of India[19], the Court recognized the importance of India’s treaty obligations, placing the precautionary principle in this case in the context of the Convention on Biological Diversity. Despite India’s dualist legal tendencies and a lack of implementing legislation at the time, the government was held responsible for adhering to its treaty responsibilities that did not conflict with domestic statutes. In this case, mining in the Kudremukh National Park was deemed to be inconsistent with the precautionary nature of India’s treaty requirements.

Despite these newly strengthened precautionary statements, the principle has not achieved complete success in the Indian legal system. In particular, precaution has been waived in cases of dam building proposals. In 1992, the Tehri dam case suggested that a standard of “quite safe” was sufficient despite the tremendous potential damage likely if the dam broke. The Court seems to have moved on very little since then, declining to apply precaution because the case is not about a “polluting industry.” The Court suggests that the precautionary principle is only applicable where the science is uncertain and damages cannot be calculated. Somehow, it determines that the future impacts of dam construction on the Narmada River are clear, requiring mitigation to balance the harm rather than advance precaution. In addition to these judicial limitations on the precautionary principle, some commentators suggest that the courts’ environmentalism is somewhat irrelevant in light of enforcement difficulties.[20]

CONCLUSION

The Precautionary Principle is relatable to risk assessment and environmental impact assessment. Broadly, it postulates that decisions that may have an impact on the environment need to allow for and recognize conditions of uncertainty, particularly with respect to the possible environmental consequences of those decisions. Under the circumstances, it is essential to take preventive action or avoid effects, which may be damaging even if this cannot be proven. In short, the “Precautionary Principle” is a notion which supports taking protective action before there is complete scientific proof of a risk; that is, action should not be delayed simply because full scientific information is lacking.

The precautionary principle has been viewed as an important element of environmental policy since the Rio Declaration of 1992 and is widely believed to be favorable to the conservation of existing natural environments and the current stock of biodiversity including measures to avoid deterioration in these. Previously Precautionary Principle is being used only on the matter of the Environmental pollution but today this is being used to deal with the wild life protection, Biodiversity Conservation, matters related to climate change, protection of shrimps etc.