Author name: CBCL

Associate or Subsidiary: Revisiting Control Matrix in Corporate Ecosystem

Leave a Comment / Capital Markets and Securities Law /

[By Owais S. Khan] The author is a student of Government Law College, Mumbai. Introduction: On 11 October, 2024 the Securities & Exchange Board of India (SEBI) in the matter of Royal Orchid Hotels Ltd. (ROHL), imposed a monetary penalty upon ROHL, its Directors/ Promoters and the Chief Financial Officer (CFO) of the Ksheer Sagar Developers Pvt. Ltd. (KSDPL) under Section 11 of the SEBI Act, 1992 for violating multiple provisions of SEBI Act, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). The order held that ROHL has misrepresented its consolidated financial statement, by classifying KSDPL as an associate company, despite being its subsidiary. This inflated the consolidated profit of ROHL, thereby enabling the directors/ promoters of ROHL, to offload their holdings and making a considerable gain on the basis of the profit, which was calculated on the basis of a misrepresentation. The scrip price of ROHL, also recorded a jump due to the wrong classification.    The present article inter alia deliberates on firstly, the evolution of control and significant influence in determining the relationship of a company with the holding company, secondly, the relevance and application of the Indian Accounting Standards (IndAS) in determining this relationship and finally attempts to examine the impact of this order in broadening the scope of control and matters concomitant thereto.     Control vs Significant Influence: Section 2(87) of the Companies Act, 2013 (Act) defines that a company shall be deemed to be a subsidiary of the holding company if the holding company exercises or controls over more than one-half of the total voting power of subsidiary OR controls over the composition of the Board of the Directors (BoD). This establishes a holding – subsidiary relationship. Similarly, according to Section 2(6) of the Act, an associate company is the one in which another company has a significant influence, but is not a subsidiary of the company having influence.   In the ROHL matter, as per the Articles of Association (AoA) of KSDPL, the BoD of KSDPL would consist of 5 members, 3 of which would be appointed by ROHL. This dominance over the BOD was construed as a control, and KSDPL was initially declared as a subsidiary of ROHL. However, being a subsidiary of a listed company, KSDPL was under an obligation to appoint independent directors as per Sec. 149 of the Act. Thus, 2 independent directors were appointed on the board of KSDPL, taking the strength to 7. This resulted in ROHL having 3 members on the board out of 7. This change was interpreted to be a loss of its control over the composition of the BoD of KSDPL, classifying it as an associate company in the consolidated financial statement of ROHL.  The term Control has been defined in the Act under Section 2(27) which shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. Also, in the Subhkam Ventures, it has been held that to determine control, the person must be on the driver’s seat, wherein he owes a proactive and not a reactive role. It is power by which one can command the company to do, what he desires it to do. Control is a positive power and not a negative power. Similarly, it has been an explicit legal position that the power to control the composition of the BoD is a necessary element of holding-subsidiary relationship in Vodafone International Holdings B.V vs. Union of India.  Despite this limitation of control over the composition, SEBI held KSDPL to be a subsidiary of ROHL, owing to special rights which were conferred in favour of ROHL under the AoA of KSDPL. These were the rights to appoint the chairman of the BoD of KSDPL, and the right of the chairman to exercise a casting vote in case of a tie. SEBI held that this provides a virtual control to ROHL, to influence the decision-making power of the BoD, with the chairman, as a nominee of ROHL, exercising its power in favour of ROHL.   Associate vs Subsidiary in light of Ind AS SEBI held that holding-subsidiary relationship is determined not only by virtue of the definitions in the Act, but also by the accounting standard under Ind AS 110 and shall not be dependent on the number of independent directors.   SEBI, in its order relied on Ind AS 110, in determining the control of ROHL over KSDP, taking the following factors into consideration for determining the control of the investor over the investee.   Relevant activities and ability to direct the relevant activities: As per the Memorandum of Understanding (MoU), ROHL was conferred with the operational authority of KSDPL and all the key personnels managing the operations of KSDPL, including its CFO, were employees of ROHL, satisfying the criteria to control the relevant activities and decision making. Exposure or right to variable returns: ROHL had rights over management fees of KSDPL as a percent of its turnover and also as percent of earning over the gross profit. Thus, it was held that ROHL had exposure to variable returns, thus recognizing its control.  Ability to use the power to affect return: With the control over the BoD and the terms of MoU and AoA, ROHL was held to be a decision maker having the ability to use its power to affect the returns of KSDPL.  The author advocates that the Act providing for control of at least 20% shareholding to exercise significant influence in another entity needs to corroborated with other grounds laid down in  Ind AS 28 relating to investment in associate companies like representation in BoD, participation in policy making, material transactions, etc. to resolve this Associate/ Subsidiary relationship enigma.  Implications for

Associate or Subsidiary: Revisiting Control Matrix in Corporate Ecosystem Read More »

SEBI’s Proposed Insider Trading Amendments: A Comparative and Impact Analysis

Leave a Comment / Capital Markets and Securities Law /

[By Gauravi Talwar] The author is a student of Gujarat National Law University.   INTRODUCTION The Securities and Exchange Board of India (SEBI), in its Consultation Paper dated July 29, 2024, has initiated a pivotal reform in its regulatory approach to insider trading. This proposed amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015, signals a decisive effort to strengthen the regulatory landscape in response to the growing sophistication of financial markets and insider trading practices. By focusing on closing historical loopholes and enhancing market integrity, SEBI aims to create a more comprehensive framework by revising key definitions, such as “connected persons” and “relatives.”   By aligning the definition of “connected persons” with the “related party” concept in the Companies Act, 2013, and expanding the definition of “relative” under Section 56(2) of the Income Tax Act, 1961, these amendments are designed to capture a broader spectrum of individuals and entities with access to Unpublished Price Sensitive Information (UPSI). This article conducts a comparative analysis of the proposed amendments and evaluates their potential impact on insider trading regulations in India.  EXPANDING THE DEFINITION OF “CONNECTED PERSON” The SEBI (Prohibition of Insider Trading) Regulations, 2015, define an “insider” as any individual who either is a connected person or has access to Unpublished Price Sensitive Information (UPSI). However, the current definition of “connected person” is insufficient in covering individuals with indirect access to UPSI through their associations with such persons. SEBI’s proposed amendments seek to remedy this by aligning the term “connected person” with the “related party” concept under Section 2(76) of the Companies Act, 2013. This alignment expands accountability, casting a wider regulatory net to capture those with indirect ties to companies and recognising the complex relationships that can facilitate insider trading. Additionally, amendments to Regulation 2(1)(d)(ii) broaden the scope of “deemed connected persons,” acknowledging that insider trading networks often extend beyond formal company roles.  A pivotal change is the expanded definition of “relatives,” now modelled on Section 56(2) of the Income Tax Act, of 1961. This revision includes a broader array of familial connections—spouses, siblings, and lineal ascendants—closing loopholes that previously enabled insiders to exploit indirect access to UPSI through family members. These amendments reinforce SEBI’s efforts to ensure comprehensive regulatory scrutiny and prevent circumvention of insider trading laws through intermediaries.  COMPARATIVE MODELS: UNITED STATES AND UNITED KINGDOM United States In the United States, insider trading is regulated under a broad legal framework, anchored in the Securities Exchange Act of 1934, the Insider Trading Sanctions Act of 1984, and the Insider Trading and Securities Fraud Enforcement Act of 1988. The U.S. Securities and Exchange Commission (SEC) treats insider trading as securities fraud, focusing on the improper use of non-public, material information rather than the individual’s formal association with the company.  This ideology has been reinforced by the landmark U.S. v. O’Hagan case  which introduced the “misappropriation theory”. The idea behind the theory is to extend liability beyond corporate insiders to include any individual who improperly uses confidential information for personal gain. U.S. regulations also emphasize flexible enforcement through civil penalties, disgorgement of profits, and criminal charges, allowing the SEC to adapt to evolving market practices, such as high-frequency trading.   United Kingdom The United Kingdom’s regulatory framework, governed by the Criminal Justice Act of 2003 and the Financial Services and Markets Act (FSMA), adopts a broad and inclusive definition of insider trading. It focuses on the misuse of non-public information, regardless of the insider’s relationship with the company, and places significant emphasis on the intent behind trading activities. The UK regulators impose both criminal and civil penalties, providing flexibility in enforcement. Notably, the UK’s approach is less focused on fraud and instead prioritizes preventing the unfair exploitation of confidential information. This is exemplified by the R v. McQuoid and Melbourne case, which emphasized possession and misuse of inside information over intent to commit fraud.  This concept of evaluating insider trading has not yet been explored by the Indian regime which only looks at the use of Unpublished price sensitive information from a unidimensional lens that does not evaluate the improper use of UPSI extensively, thereby increasing bureaucracy in the segment as most of the cases get overturned by SAT due to incorrect evaluation of an insider in possession of UPSI in general or lack of conclusive proof of improper use.   IMPACT OF SEBI’S PROPOSED INSIDER TRADING AMENDMENTS SEBI’s proposed amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015, mark a pivotal shift toward aligning India’s insider trading laws with global standards. By broadening the definition of “connected person,” these changes aim to enhance market fairness and investor protection, by encompassing a broader range of individuals with potential access to unpublished price-sensitive information (UPSI).  This will increase accountability, subject more individuals and businesses to regulatory oversight, and reduce opportunities for gaining unfair advantages. Drawing inspiration from U.S. and UK regulatory models, SEBI’s approach strikes a balance by expanding coverage while maintaining a focus on preventing unfair practices. These changes are expected to significantly bolster market integrity, foster greater compliance, and enhance investor trust, ultimately promoting a fairer, more transparent financial market.  LIMITATIONS OF THE PROPOSED AMENDMENTS: SEBI’s proposed amendments to the definition of “relatives” in insider trading regulations may have significant implications, particularly in high-profile cases akin to the Adani-Hindenburg affair. By expanding the scope to include a wider array of familial ties, SEBI acknowledges that insider trading frequently involves not just immediate associates but also extended family members. However, this expanded definition risks regulatory overreach, as seen in the SEBI ruling against Deep Industries. In that case, social media interactions were deemed sufficient to establish insider trading connections, a decision later overturned by the Securities Appellate Tribunal (SAT), highlighting the risk of overreach in interpreting personal relationships. The proposed amendments could significantly increase the number of insider-trading cases, potentially deterring legitimate market activities. Investors, fearful of being wrongfully accused, may curtail their trading activities, thereby dampening market liquidity and impeding growth. Additionally, the inclusion of extended familial relationships could pose

SEBI’s Proposed Insider Trading Amendments: A Comparative and Impact Analysis Read More »

Byju’s Rights Issue Unfolds a Tale of Oppression and Mismanagement

Leave a Comment / Company Law /

[By Manvi Sahni] The author is a student of National Law School of India University, Bangalore.   Introduction On 23 February 2024, MIH Edtech Investments B.V (“MIH”) and other investors filed a petition under Section 241 and Section 242 of the Companies Act, 2013 (“the Act”) against Think and Learn Private Limited (“T&L”) and its directors, alleging oppression and mismanagement. This was claimed on the ground of several corporate governance violations such as unreasonable delay in completion of R1’s statutory audit, regulatory probes by the Ministry of Corporate Affairs and Enforcement Directorate, and serious allegations of siphoning of funds (para 5).  The petition also sought an interim stay on the operation of a Letter of Offer for rights issue of shares, which refers to issue of further shares by a company to its existing equity shareholders in order to increase its subscribed capital. This was done because the petitioners claimed that allotment of shares under rights issue should not occur until an Extraordinary General Meeting is conducted where all the modalities regarding the rights issue, such as purpose behind it and subsequently utilisation of funds raised, are decided. The National Company Law Tribunal (“NCLT”) issued an order preventing any allotment of shares without increasing the authorised share capital (para 11). Despite this, the respondents proceeded with allotment of shares under the first rights issue and proposed a second rights issue. This led to an appeal before the Karnataka High Court, which remanded the matter to the NCLT while temporarily restraining the respondents from further allotting shares (para 6.4).  As the NCLT’s adjudication on the rights issue is pending, this paper argues that the NCLT was justified in staying the second rights issue and maintaining the status quo of shareholding until the case is resolved. To this end, it first, analyses how the first rights issue has violated Section 62 of the Act. This has been illustrated by contesting T&L’s submission stating that preference shares are included within the scope of Section 62(1)(a) and in turn highlighting the non-passing of a special resolution in the present case for issuing of further shares on a preferential basis. Second, it examines how the respondents’ conduct is oppressive to the petitioners as per the standard proposed in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., thereby substantiating their claim of oppression and mismanagement under Section 241.  Violation of Scheme of Section 62 due to Preferential Allotment of Shares This section aims to highlight how the respondents have violated the conditions specified in Section 62 of the Act and thus, the allotment of shares under the first rights issue must be set aside. To this end, this article first, establishes how the respondents are legally incorrect in claiming that preference shareholders are included within the ambit of Section 62(1)(a). Second, it argues that the non-passing of a special resolution in the present case is violative of the scheme outlined in Section 62(1)(c).  Non-inclusion of Preferential Shareholders within Section 62(1)(a) Section 62 of the Act provides for stipulations that are to be followed when a company proposes to increase its subscribed capital through issue of further shares. In this context, the respondents argued that Section 62(1)(a) has not been violated by issuing further shares to preference shareholders as this section does not expressly bar preference shareholders from participating in rights issue (para 11). They relied on Article 43 of the Articles of Association (“AoA”), along with a Shareholders Agreement, to argue that T&L had also permitted its preference shareholders to participate in the rights issue under Section 62(1)(a) (para 11). According to the NCLT Order dated 27.02.2024, no extension was granted with respect to closure date of first rights issue (para 11). The implication of this argument then would be that if the shareholders decline to subscribe to additional shares, directors could use their discretion under Section 62(1)(a)(iii) to allocate unsubscribed shares on a preferential basis, even to preference shareholders.   This argument is not legally sound because, firstly, the language of Section 62(1)(a) expressly provides that further issues of shares shall be offered to all ‘equity shareholders’. This is relevant as Section 43 of the Act creates a distinction between ‘equity capital’ and ‘preference capital’ as preference shareholders are entitled to preferential rights in context of payment of dividend and repayment in cases of winding up. Additionally, Section 62(1)(c) permits the issue of further shares to anyone, whether an equity shareholder or not, only if authorised by a special resolution. Upon comparing this with the language of Section 62(1)(a), the explicit mention of ‘holders of equity shares’, and not ‘shareholders’, in the latter indicates towards the legislative intention to exclude preference shareholders from the scope of Section 62(1)(c) and to provide for issue of shares to preferential shareholders under Section 62(1)(c). Hence, the respondents cannot be permitted to circumvent the requirement of a special resolution in Section 62(1)(c) by including preference shareholders under Section 62(1)(a).   Secondly, Section 6 of the Act states that the provisions of the Act will override the AoA, in case of a conflict. In the present case, Article 43 of the AoA, by including preference shareholders under Section 62(1)(a), contradicts the scheme of Section 62. Hence, since Section 62 will override Article 43 of the AoA, hence in the present case, preference shareholders are not included within Section 62(1)(a).  Therefore, the rights issue in question by T&L is liable to be set aside as preference shareholders are not included in the scope of Section 62(1)(a) of the Act.   Non-passing of Special Resolution Section 62(1)(c) provides that further shares shall be offered to any person, if  authorised by a special resolution. This qualifies as a preferential offer, which refers to issue of shares by a company to select persons or group of persons on a preferential basis, as defined in Rule 13 of the Companies (Share Capital and Debentures) Rules 2014. It specifically excludes scenarios where shares are offered through public issue, rights issue, or employee stock option scheme.  

Byju’s Rights Issue Unfolds a Tale of Oppression and Mismanagement Read More »

Plugging Leaks: SEBI’s New Frontrunning Guidelines for AMCs

Leave a Comment / Capital Markets and Securities Law /

[By Avantika Sud & Suhani Sanghvi] The authors are students of National Law University Odisha.   Introduction In July 2022, SEBI released a Consultation Paper that MFs would be covered under the ambit of the SEBI (Prohibition of Insider Trading) Regulations 2015 (PIT Regs). In August 2024, SEBI circular announced that all Asset Management Companies (AMC) were directed to establish frameworks to curb front-running and fraudulent security transactions. India’s Mutual Fund Association (AMFI) has plans to step up surveillance by enacting institutional mechanisms and strict actionables for identifying and preventing front-running by AMCs. This article sketches some high-profile cases of frontrunning at mutual funds (MFs), how the new SEBI directions may curb further episodes, and its shortfalls in taking preventative action.   The Current Position on Frontrunning The Hon’ble Supreme Court (SC) in N Narayana v. Adjudicating Officer, SEBI, discussed the raison d’être of securities law being the protection of the integrity of the market and to prevent abuse and protect investors, and businessmen, and ensuring market growth is regulated. These goals assigned to the securities regulator hinge upon free and open access to information– and how and when this information is provided. Any action antithetical to this principle results in market manipulation and the creation of an artificiality.   While frontrunning has not been defined by the Securities and Exchange Board of India (SEBI) in any legislation, rule, regulation, it has been done in the 2012 circular CIR/EFD/1/2012 as usage of non-public information to either directly or indirectly trade in securities prior to an impending substantial transaction where a change in prices of the securities is to be expected when the information about the occurrence of the transaction becomes public. The abovementioned is prohibited under Regulation 4(2)(q) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003 (PFUTR). Frontrunning may be of three kinds: either someone with knowledge of an impending transaction trades for their own profit, or tips a third party who conducts the trade (‘tippee trading’), and where an individual takes trading decisions based on the knowledge of their own impending transaction (for example, an individual shorting a stock that they own before selling substantial portions of it to profit off of the drop in price.) This is known as self-front-running.   The SC in SEBI vs. Shri Kanaiyalal Baldevbhai Patel (Kanaiyalal) acknowledged interpretations where frontrunning was the usage of non-public information that would affect share prices in a predictable way by brokers and analysts. Regulation 4(2)(q) also provided that intermediaries were prohibited from engaging in such trades. However, the court finally ruled that the provision was applicable to anyone, including individual traders who traded on the basis of tips given by people privy to non-public information. The court laid importance on public interest and legislative intent of the PFUTR over the letter of the law.   The second ingredient of frontrunning per the circular is the existence of a substantial transaction. In this aspect the SEBI in the Final Order in the matter of Front Running Trading activity of Dealers of Reliance Securities Ltd. and other connected entities has taken a holistic approach and has not assigned a particular value to what would count as a substantial value – it would depend on a host of factors, one of them being the general economic condition of the country.   SEBI, like the SC, has interpreted the regulations such that it would not be pigeonholed by its own set limitations – as discussed in Kanaiyalal and Reliance Securities – to prevent the formation of any creative loopholes by the disingenuous.   Frontrunning in Mutual Funds In June, SEBI conducted raids on suspicion of frontrunning at Quant Mutual Funds, a fund with more than ₹90,000 crores of Assets Under its Management (AUM). There has been a detrimental impact on its portfolio presumably due to investor panic already.  Viresh Joshi, the chief dealer at Axis Mutual Fund (at the time the seventh largest asset manager), created a network of broking houses in the country and in Dubai to conduct his frontrunning activities. All dealers at Axis were provided with Bloomberg terminals to allow dealers to work from home during the pandemic, and on one instance, it was using this terminal that Joshi negotiated a trade on behalf of both Axis and one of his noticees. Motilal Oswal Securities, the other party, was under the impression that the entire order was for Axis Mutual Fund. Despite two years having passed since the market manipulations came to light, aftershocks are still observable in Axis’s consistently underperforming equity schemes.   Fund houses on their own, lack data to be able to accurately detect frontrunning activities. SEBI, with its omniscient possession of raw data, uses algorithms to track abnormal trading patterns, for example, a spike in trades before a substantial transaction by a big client that would belabour an investor’s common sense would be flagged. The algorithm has been adapted to evolving ways of committing fraudulent transactions, and in recent months has also utilised artificial intelligence. It was using this method of flagging suspicious trades that the HDFC mutual fund frontrunning was uncovered. However, Joshi used Covid-19 work from home policies as well as social distancing protocols to his advantage since there was no supervision, and was able to communicate with noticees using his undeclared mobile number. His frontrunning was not detected by an algorithm, but by Axis Mutual Fund after a routine audit of all fund managers and the subsequent finding of a suspicious email.  Surveillance on Asset Management Companies AMFI’s new directives will be implemented in a phased manner starting November 2024 on equity MFs with total AUM higher than ₹ 10,000 crores, and equity MFs with AUM less than ₹ 10,000 crores in February 2025. For all trades in schemes, the implementation would begin from May 2025 and for debt securities, August 2025.    The new directive says that CEO/MD of AMCs must immediately establish and ensure compliance with comprehensive Standard Operating Procedures (SOP) to monitor and address suspicious activities. This

Plugging Leaks: SEBI’s New Frontrunning Guidelines for AMCs Read More »

Navigating the Regulatory Void: Addressing Gaps in Regulation of Finfluencers

Leave a Comment / Capital Markets and Securities Law /

[By Aashi Goyal] The author is a student of National Law School of India (NLSIU), Bengaluru.   Introduction On 27 June 2024, SEBI published a press release regarding its 206th Board Meeting. As per the press release, SEBI has approved the recommendations regarding restricting the association of SEBI-regulated entities with persons who directly or indirectly provide advice or recommendations without being registered with SEBI or make any implicit or explicit claim of return or performance in respect of or related to security. Moreover, the ASCI, on 17 August 2023, published “Guidelines for influencer advertising in Digital Media” wherein it has directed that any influencer providing information and advice on BFSI must be registered with SEBI.   In this context, this paper argues that the current regulatory framework is inadequate to deal with the unique challenges finfluencers pose and therefore there is a need for the development of a distinct regulatory framework tailored to these unique challenges. Firstly, the paper establishes the current regulatory framework seeking to regulate finfluencers. Secondly, it argues that the current ex-ante approach limits finfluencers to existing regulatory categories that do not fully encompass their activities. Thirdly, it argues that the ex-post approach requires proving intention and knowledge of dissemination of misleading or false information, which is a difficult standard to meet.   Current Regulatory Framework The Advertising Standards Council of India (“ASCI”) defines influencer as a person who has access to an audience and the power to affect their audience’s purchasing decisions or opinions because of the influencer’s knowledge and relationship with their audience. Therefore, a finfluencer refers to an influencer that provides advice or comments on merits/demerits on aspects related to commercial goods and services, in the field of banking, financial services and insurance (“BFSI”).  Currently, a specific legal regime does not exist that regulates finfluencers. However, a finfluencer may be implicated under section 12A of the Securities and Exchange Board of India Act (“SEBI Act”) and Rule 4(2)(k) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”). This is the existing ex-post approach in the regulation of finfluencers. In an effort to take an ex-ante approach, the SEBI Board in its 206th meeting approved the recommendations in the Consultation Paper titled “Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)”. As per the consultation paper, a SEBI registered intermediary shall not have any association or relationship in any form, for promotion or advertisement of their products and services with any unregistered entities including finfluencers. Echoing similar sentiment, ASCI published “Guidelines for influencer advertising in Digital Media” wherein it has directed that any influencer providing information and advice on BFSI must be registered with SEBI.  It is pertinent to note that the requirement of registration of finfluencers with SEBI has essentially restricted them to the category of Research Analysts (“RA”) and Investment Advisers (“IA”). The class of finfluencers has not been notified as a separate category of intermediaries as per Rule 1(2) of SEBI (Intermediaries) Regulations, 2008. Therefore, the only category they may be registered under is that of an RA or an IA. This is further indicated by the Consultation Paper’s conflation of the issue of unauthorised and unregistered IAs and RAs and the issue of regulation of finfluencers.  Gaps in the Ex Ante Approach SEBI and ASCI have erred in confining the finfluencers to the category of RAs and IAs. In the current framework, SEBI and ASCI are essentially regulating RAs and IAs that are utilising social media platforms and not the category of finfluencers as a whole. The SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) excludes from its scope, the investment advice that is disseminated through any electronic or broadcasting medium, which is widely available to the public.i Therefore, by definition, a finfluencer providing investment advice on social media platforms such as YouTube, Instagram, Facebook, etc. does not come under the purview of IA regulations.    Although the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”) do not bar from its purview, communication through public media, it does exclude comments on general market trends, economic and political conditions, technical analysis, etc.ii This implies that a finfluencer that does not provide advice on which particular shares to sell, buy, hold or makes claims as to the future performance of specific sharesiii is not regulated by RA regulations. A finfluencer may create hype around a particular industry such as the psychedelics industry by analysing  the general market trends surrounding the industry. As a result, the followers of the finfluencer may start buying shares of psychedelic companies leading to an increase in the price of the shares. At this stage, the finfluencer might sell his or her shares at a significant profit. Further, there is a possibility of the creation of price bubbles in this scenario. However, the same cannot be regulated under RA regulations as mere speculation as to general market trends and market conditions are not within its purview.   Gaps in the Ex-Post Approach Rule 4(2)(k) of PFUTP Regulations states “Disseminating  information  or  advice  through  any  media,  whether  physical  or  digital,  which  the  disseminator  knows  to  be  false  or  misleading  in  a  reckless  or careless  manner  and  which  is  designed  to,  or  likely  to  influence  the  decision  of  investors dealing in securities.” From the bare reading of the provision it is evident that for one to be liable, there has to be knowledge as to the falsity or the misleading nature of the information. This belief is further backed by the Report of the Committee on Fair Market Conduct (“Report”), on the basis of which amendment to the PFUTP regulations was passed in 2019.  Prior to the 2019 amendment, Rule 4(2)(k) considered the publication of misleading advertisements or advertisements containing distorted information as manipulative, fraudulent and/or an unfair trade practice. The action of publication of misleading advertisement was not qualified by any requirement of intention or knowledge. This meant inadvertent mistakes could be penalised. Subsequently, the Report recommended that the action of “knowingly” influencing the decision to invest in

Navigating the Regulatory Void: Addressing Gaps in Regulation of Finfluencers Read More »

Advocating for Cross-Border Insolvency in the IFSC: A Comparative Perspective

Leave a Comment / Insolvency Law /

[By Aashka Zaveri & Aditya Panuganti] The authors are students of Symbiosis Law School, Pune and National Law School of India University (NLSIU) respectively.   Introduction India’s first International Financial Services Centre (“IFSC”) was set up in 2015, in Gandhinagar, Gujarat, and christened Gujarat International Financial Tec-City (“GIFT City”). The IFSC was established to transform India into a global financial services hub. While the Union has taken steps to ensure that GIFT City enjoys a predictable and simple regulatory framework, the lack of a robust cross-border insolvency regime in India is a striking lacuna in empowering India’s IFSC.  In this piece, the authors will analyse the current insolvency regime in GIFT-City and highlight the shortcomings inherent in the same. Subsequently, the authors compare the regulatory regimes in Dubai and Hong Kong before arguing for the adoption of a more robust framework in India.   Current Regulatory Regime Section 31 of the International Financial Services Centre Authority Act (“IFSCA”) gives the Union government the power to exempt financial products, financial services or financial institutions in an IFSC from the application of any other Act, Rules or Regulations passed by the Union. Since the IFSCA has not notified any special provisions relating to insolvency or the bankruptcy process, the Insolvency Bankruptcy Code, 2016 (“IBC”) will apply in IFSCs until specified otherwise.   The IBC is not fully capable of addressing the needs of entities situated within the IFSC. Unlike other jurisdictions, the Indian IFSC neither enjoys a designated insolvency court or tribunal that has exclusive jurisdiction over the Centre, nor a robust cross-border insolvency regime, but continues to rely on the IBC process. Sections 234 and 235 of the IBC provide for bilateral or multilateral arrangements with other countries to bring transnational assets belonging to the corporate debtor within the Code’s purview. This is a far cry from the UNCITRAL Model Law on Cross Border Insolvency framework that was recommended by the Insolvency Law Committee. Uncertainty surrounding the treatment of foreign creditors and the discretion-based system of cross-border insolvency that prevails in India may potentially deter cross-border investment, defeating the IFSC’s stated purpose of being a business-friendly regulatory zone.  There has been a consistent call for adopting the UNCITRAL Model since it is a credible framework that has been widely adopted globally. The UNCITRAL Model Law is founded upon the doctrine of modified universalism– a belief that a court should cooperate in the distribution of a debtor’s assets on a worldwide basis in a single judicial proceeding, subject to such proceedings being consistent with territorial law and public policy   The Model Law would bring about a sense of predictability and certainty for both foreign and domestic creditors. A consolidated Insolvency regime that incorporates the UNCITRAL Model law is essential to bring GIFT City on par with other global financial hubs, and perhaps even surpass them.   A Comparative Perspective Dubai The Dubai International Financial Centre (“DIFC”) enacted the DIFC Insolvency Law, Law No. 1 of 2019 to bring about a comprehensive and singular insolvency regime for the DIFC. The new legislation was adopted in the wake of Abraaj Capital’s collapse. The Venture Capital firm, based in Dubai and registered in the DIFC, entered into liquidation in 2019. The firm once managed $14 billion in assets in many emerging markets around the world. After it entered into liquidation in the Cayman Islands, cross-border cooperation allowed the firm to consolidate its assets and preserve their value, ensuring the maximum payout to its creditors.   Dubai adopted the UNCITRAL Model Law in Part 7 of the Insolvency Law in 2019, a year after the Abraaj scandal. It is, however, interesting to note the 2023 Bankruptcy Law applicable to the United Arab Emirates at large, does not include these provisions. This amounts to a situation where the UAE’s onshore insolvency law and its offshore DIFC insolvency regime are different. Such a situation allowed foreign investors and businesses to shed the stigma attached to failed businesses and the insolvency process in the onshore insolvency regime. This allows the UAE to hold off on recognising the principle of comity inherent in the Model Law for onshore insolvency proceedings but ensures that the DIFC enjoys a regulatory regime that improves the ease of doing business and is considered to be a global best practice.   Hong Kong The Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUMPO”) is the applicable Insolvency statute in Hong Kong. The region has not adopted the UNCITRAL Model Law and creditors must rely on the courts’ discretion to apply common law principles to give effect to foreign insolvency proceedings. In Re CEFC Shanghai International Group Ltd, the Court laid down the test for recognising cross-border insolvency proceedings, and Hong Kong courts have also recognized cross-border restructuring proceedings, thus adopting the common law doctrine of universalism in liquidation proceedings.  However, courts can aid foreign insolvency proceedings only to the extent that Hong Kong law allows them to do so. In Joint Administrators of African Minerals Ltd v Madison Pacific Trust Ltd, the administrators of a company sought the recognition of English insolvency proceedings and a stay on the enforcement of securities held by a Hong Kong security trustee. The court affirmed the principles of modified universalism and indicated the courts’ ‘generous’ attitude in recognizing and assisting foreign liquidation proceedings. However, it noted that the relief sought by the UK-based administrators could not be granted. The Court held that since no Hong Kong legislation or common law principle provides an equivalent to ‘administration’, the relief could not be granted. The administrators had not argued their case on the principles of equity but rather sought the court’s recognition and assistance under the principles of modified universalism.   Article 21 read with Article 25 of the UNCITRAL framework provides courts with the power to order a stay on the execution of a debtor’s assets upon a request by a foreign representative. Had Hong Kong adopted the Model Law, Madison could have been decided differently- an outcome that would have given effect to the principle

Advocating for Cross-Border Insolvency in the IFSC: A Comparative Perspective Read More »

Insolvency of IP Startups: India’s IP Quandary

Leave a Comment / Insolvency Law /

[By Yash Raj] The author is a student of Dr. Ram Manohar Lohiya National Law University.   Introduction India has witnessed an unprecedented surge in startup activity, with the ecosystem booming across the country. The exponential growth of startups in India can be attributed to various governmental schemes and initiatives like the Startup India Action Plan (SIAP) and the National Initiative for Developing and Harnessing Innovations (NIDHI) launched by the Government of India. Today, India has the world’s third-largest startup ecosystem after China and the US.  The Vulnerability of IP-Driven Startups In the rapidly changing business environment, startups nowadays often rely on intellectual property (IP) as their key asset, with trademarks, copyrights, patents, and other forms etc. forming the foundation of their business model. Every business, no matter how ambitious, is vulnerable to financial instability. A significant number of startups are now IP-driven startups dealing with proprietary tech, software, and various other forms of intellectual property to gain a competitive advantage in the market. Take, for example, an ed-tech company that may rely on its copyrighted content, while biotech firms could hold patents on drugs or medical devices. When such startups face insolvency, how their intellectual property is to be treated becomes a crucial issue and raises various questions regarding valuation, protection, and broader applications for the innovation ecosystem in India. The value of these companies is tied intrinsically to their intellectual property, making it a critical asset for the startup in any financial assessment done to the firm. Reports emphasize that a growing number of DeepTech startups in India rely on IP, especially patents, with over 900 patents filed by DeepTech startups since 2008. The focus on technology-driven sectors like artificial intelligence, healthcare, and blockchain has fueled this surge in patent activity, underlining the importance of IP in fostering innovation   Insolvency of companies in India is governed by the Indian Bankruptcy Code (IBC) 2016, which is applicable all over India with some exceptions relating to J&K. However, the Indian Bankruptcy Code does not have any specific provisions that deal exclusively with intellectual property (IP) rights during insolvency. It treats intellectual property as any other asset, forming part of the insolvency estate. In a significant case, Enercon (India) Ltd. v. Enercon GmbH, the importance of protecting IP rights during insolvency proceedings was highlighted. The dispute was between a German wind turbine manufacturer and its Indian subsidiary regarding the ownership and use of trademarks during Enercon India’s insolvency proceedings. This case highlights the importance of having clearly defined and well-drafted IP agreements to avoid potential disputes and protect the interests of the IP owner during insolvency.  The Problem in IP Valuation Unlike physical assets, IP assets are intangible, making their value difficult to estimate often leading to undervaluation. Undervaluation reduces creditor recovery, leading to losses and making them less likely to invest in similar startups. The ASSOCHAM and PwC reports on the Insolvency and Bankruptcy Code (IBC) highlight the poor recovery rates generally in India’s insolvency cases, attributing much of this to the absence of timely resolutions and specialized handling of intangible assets like intellectual property.  The absence of clear guidelines for valuing IP assets can result in undervaluation during insolvency, undervaluation can result in lower recovery for creditors, diminished returns for founders, and a loss of long-term growth potential, affecting the broader innovation ecosystem. When a business goes into liquidation and its assets are sold, the IP could drastically lose its value if it is not managed correctly. This is a critical issue for startups, whose most crucial value often lies in their intellectual property. New startups usually fail to acknowledge this value due to a lack of awareness and proper guidelines, leading to significant economic setbacks.   Countries like the U.S. and U.K. have specific rules in their bankruptcy laws that treat intellectual property (IP) as a unique asset. For example, the U.S. Bankruptcy Code allows licensors to maintain their licensing rights during bankruptcy (under Section 365(n)), protecting the value for startups and investors. Japan also has guidelines for valuing IP during insolvency, suggesting different strategies depending on the asset type. These approaches could serve as models for India to develop its own IP valuation frameworks.   Reforms to Address the Insolvency Challenges of IP-Driven Startups A proper approach is necessary to effectively resolve the insolvency challenges faced by IP-driven companies in India. Specific Provisions in the IBC for IP Assets The Indian Bankruptcy Code (IBC) lacks explicit provisions regarding the treatment and valuation of intellectual property during insolvency proceedings. Addressing this issue is critical for protecting the interests of both startups and creditors. A dedicated section in the IBC could bring much-needed clarity by recognizing IP as a distinct asset category with specific valuation and management protocols. The reforms should focus on:  IP as a Separate Class of Asset: Including provisions that treat IP as separate assets rather than grouping them with physical and other assets. This will allow for more tailored handling during liquidation and insolvency proceedings. Jurisdictions like Japan treat IP as a distinct asset, allowing for specialized handling separate from physical assets. Countries like the U.S and the U.K. also provide some special considerations for IP, but Japan’s approach emphasizes preserving the value and operational integrity of IP throughout the insolvency process.  Expert valuation: Mandating that intellectual property be valued by qualified IP experts during insolvency cases. This will prevent the undervaluation of these assets and ensure that creditors receive fair compensation.  Safeguarding Ownership Rights: The IBC should incorporate provisions that protect the ownership rights of intellectual property holders during insolvency. This will ensure that critical IP assets are not lost or diluted in insolvency, particularly in patent or trademark licensing cases.   Establish an IP Valuation and Insolvency Oversight Committee: This committee will guide courts and insolvency professionals on managing and valuing IP assets. Modeled after the U.S. Patent and Trademark Office (USPTO), this committee would standardize valuation practices, reduce undervaluation risks, and improve creditor recovery outcomes during insolvency. Development of Standardized Valuation Frameworks A significant

Insolvency of IP Startups: India’s IP Quandary Read More »

The Nun Tax: A Case Study in Tax Law and Religious Exemptions

Leave a Comment / Taxation Law /

[By Tanmay Doneria & Varsha Tanwar] The authors are students of Rajiv Gandhi National University of Law, Punjab.   Introduction The intersection of taxation and religion is a multifarious and contentious matter. It is vital to navigate this delicate landscape having far-reaching implications. The Hon’ble Supreme Court of India is set to adjudicate a significant legal question in the Institute of Franciscan Missionary of Mary v. UOI (SLP No. 10456 of 2019). The current SLP inter-alia has been filed to review the judgement rendered by the Hon’ble Madras High Court in Union of India v. The Society of Mary Immaculate. The case hinges on the issue of whether State governments are obligated to deduct Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act, 1961 (“Act”) while making grant-in-aid payments captioned as salary directly to the individual members of religious congregations, such as nuns, who render their services in educational institutions.  The present case presents a unique situation as the nuns and missionaries live in a state of civil death, they take a vow of poverty due to which they do not have any proprietary rights and their income is surrendered in entirety to the congregation. This has been argued before the Madras High Court stating that in accordance with the same, they should not be subject to TDS. However, rejecting this argument the Court held that Section 192 of the Act is a-religious and apolitical thus, the payments made to the nuns will be subject to TDS.  This article analyses the fundamental question, which was overlooked by the Hon’ble Madras High Court, of whether the payments made by the State government to nuns will qualify as “salary” under the Act thereby triggering the requirement of TDS under Section 192 of the Act. Furthermore, it will delve into the nuanced concept of ‘diversion of income,’ positing that the congregation’s overriding title to the nuns’ income, as dictated by their religious tenets, renders the payments made to them as diverted income.  The Payments made by the State Government does not fall within the ambit of ‘Salary’ under the Act No payment can be considered within the ambit of salary as defined under Section 15 of the Act unless there exists an employer-employee relationship between the payer and the payee. Furthermore, as Section 192 of the Act only applies to payments made under the head of salary, it can be stated that in order to attract the provisions of Section 192 of the Act, it is imperative that the payments must arise out of an employer-employee relationship. Therefore, in specific circumstances of the case at hand, there must be an employer-employee relationship between the State Government and the missionaries/nuns.   It is important to note that the Madras High Court did not adequately discuss the preliminary issue of whether these payments arise out of an employer-employee relationship. The Court had remarked that “Section 15, read with Section 192, obligates the State Government or the employer, be it educational institution or the State to deduct income tax at source.” This blanket statement is erroneous as it merely creates an assumption that the State Government can be considered as an employer of individual missionaries.   To shed light on this matter, we should examine the recent ruling of the Hon’ble Tripura High Court in Aparna Chowdhury Reang v. State of Tripura. Wherein, the court unequivocally established that an employee of a grant-in-aid school cannot be considered to be a government employee. On applying this precedent to the case under consideration, it can be argued that even though the nuns (payee) were receiving payments directly from the State Government (payer) as grant-in-aid through the Electronic Clearing Scheme (ECS), there exists no employer-employee relationship between the State Government and the individual missionaries. Consequently, in the absence of any employer-employee relationship, the TDS provisions under Section 192 of the Act would not be applicable in this scenario. Therefore, failing to qualify the preliminary requirement of an employer-employee relationship, the provisions under Section 192 of the Act cannot be attracted at all.   Surrender of Remuneration to the Congregation Constitutes Diversion of Income The concept of diversion of income, as outlined in Section 4 of the Income Tax Act, 1961, involves the diversion of income at its source before it reaches the assessee. This refers to instances where the income is re-directed to another entity having an overriding title, thereby preventing it from being subjected to tax under the Act. The test to determine the diversion of income was recently laid down in the case of National Co-operative Development Corporation v. Commissioner of Income Tax, wherein the Apex Court held that if a “portion of income arising out of a corpus held by the assessee consumed for the purposes of meeting some recurring expenditure arising out of an obligation imposed on the assessee by a contract or by statute or by own volition or by the law of the land and if the income before it reaches the hands of the assessee is already diverted away by a superior title the portion passed or liable to be passed on is not the income of the assessee.” Essentially, to apply the doctrine of diversion of income, there must be, firstly, an obligation on the Assessee by a contract, statute, law of the land or by own violation resulting in a recurring expenditure and secondly, income must be passed on or liable to be passed on by a superior or overriding title.   In the present case, the nuns are under an obligation to surrender their entire income to the congregation, this obligation is imposed on them by their own violation i.e., by taking their vow of poverty in accordance with the canonical law. Furthermore, their vow of poverty creates an overriding title of the congregation over any income earned by the Nuns/missionaries and thus, any income credited to the individual account of the nuns is liable to be passed to the congregation by virtue of this overriding title. It is evident that all the

The Nun Tax: A Case Study in Tax Law and Religious Exemptions Read More »

Wide Power U/S242: Revisting Order of Moratorium in IL&FS Scam

Leave a Comment / Company Law /

[By Srinjoy Debnath] The author is a student of National Law School of India University (NLSIU).   INTRODUCTION Corporate Democracy, similar to sovereign democracy works as per the will of the majority. A company is fairly independent as far as decisions are concerned unless they violate a law. However, the Central Government has the power to intervene in the management of a company if the operations of the company are being conducted in a manner prejudicial to the public interest. Such an intervention has to be approved by the National Company Law Tribunal (“NCLT”) which has the power to pass “such order as it thinks fit”. The words like “Public Interest” and similar terms in s241 and s242 provide wide discretion to the Central Government and the NCLT under the provisions. The wide discretion under sections 241 and 242 gives rise to concerns about whether the discretion has any restrictions. In the case of UOI v. IL&FS, the Central Government had approached the NCLT u/s241(2) and asked for the removal of directors.i and the imposition of a moratorium on IL&FS and its 348 group companies.ii The NCLT granted the prayer for the removal of directors but rejected the prayer for the imposition of a Moratorium. However, on appeal, the NCLAT imposed a moratorium on IL&FS and its 348 groups until further orders. At this juncture, the question arises as to whether the NCLAT has the power to impose a moratorium against a company and its group companies u/s242 of the Act. The impugned order is under challenge before the Supreme Court and is pending on the date of writing this paper.iii  The NCLAT while passing the order for a moratorium has noted that there is no explicit provision other than s14 of the IBC that provides NCLT/NCLAT the power to impose a moratorium. However, in the opinion of the NCLAT, the powers u/s242 of the Companies Act are wider than the powers under the IBC. The court did not provide any reasons in support of such a position. In this article, the author shall argue that the order of moratorium is bad in law as, first, an order u/s242 of the Companies Act cannot be contrary to any other legal provision; second, even if the provision of moratorium was borrowed from IBC, other safeguards and procedures under the code were not followed; and, third, a blanket moratorium against a group of companies goes against the principle of Separate Legal Personality.  ABSENCE OF NON-OBSTANTE CLAUSE: S242 HAS OVERRIDING POWERS? A moratorium as was imposed in this case was essentially an injunction on any suit in any court or arbitration in the same terms as is mentioned in section 14(1) of the IBC. An order of this sort is in direct conflict with section 41(b) of the Specific Relief Act which bars anti-suit injunctions for a superior court. The Supreme Court in Cotton Corporation of India had held that a court is barred from granting an injunction that restrains a person from instituting any proceeding in a coordinate or superior court. The Supreme Court had observed that access to courts is an indefeasible right and the principle flows from the Constitution. The only way in which access to justice can be curbed is when a superior court injuncts suit in a subordinate court. This is an exception carved out by the legislature itself. Barring any suit in any court would also cover the Supreme Court which means an anti-suit injunction against a superior court. The rationale of the NCLAT that the powers u/s242 are wider than the powers under the IBC seems untenable as the IBC contains a non-obstante clause while neither the Companies Act nor s242 contains a non-obstante clause. Therefore, an anti-suit injunction can only be passed against a subordinate court or through the provisions of the IBC. This proposition is also supported by the observation of the Supreme Court in Cyrus Mistry where the court had held that a remedy u/s242 cannot be in contravention of any other law.  PROCEDURE UNDER THE IBC OR OF THE UNION OF INDIA? The IBC contains streamlined provisions that take into consideration all creditors and ensure that their rights are adequately protected. However, in this case, even though the moratorium was imposed on the same terms as s14 of the IBC, other procedures under the IBC were not followed. For example, the watershed mechanism u/s53 of IBC was not followed and instead, they went with a pro-rata distribution, as proposed by the Central Government. In the opinion of the court, following the procedure u/s53 IBC, in this case, would be against the public policy as a lot of public money through the investment of LIC, SBI, and other public entities have gone into the shareholding of IL&FS group of companies. Following the watershed mechanism in this case would mean that the shareholders will come much later in priority and will lose out on money.   The appeals filed against this order have also not been taken up by the Supreme Court on time and that has also caused prejudice to multiple creditors of different subsidiaries of IL&FS. Under the IBC, resolution of the corporate debtor is a time-bound process and has to be completed within 180 days. The moratorium passed u/s14 also ceases to have effect with the end of the resolution process. However, in this case, no time limit was attached to the continuation of the moratorium period. The cutoff date for submission of claims was kept as 15th October 2018. However, the effect of the moratorium continued. This has prejudiced the creditors whose claims arose after 15th October 2018 who could not institute any suit or arbitration. The Courts in some cases have noted the difficulties of the creditors whose claims arose after 15th October but refused to interfere with the order of the NCLAT as it has not been stayed by the Supreme Court.iv In effect, what happened in this case was that neither the principles under the IBC nor

Wide Power U/S242: Revisting Order of Moratorium in IL&FS Scam Read More »

Scroll to Top