CBCL, Author at NLIU CBCL - Page 13 of 100

Evolving Trends in Interim Distribution under IBC, 2016: Insights from the KSK Mahanadi Judgment

[By Arzoo Kedia] The author is a student of Hidayatullah National Law University. Introduction The insolvency regime in India is governed by the Insolvency and Bankruptcy Code (“IBC”) of 2016 and has been at the forefront of innovation. IBC has spurred several novel ideas, such as specifying only one class of financial creditors voting ignoring the security, and having the operational creditors left out during the vote on the resolution plan, all of them otherwise being protected by their rights pre-insolvency. These provisions are considered to be one of the strongest cross-class cramdown provisions in the world. Apart from this, the other distinctive features of IBC include Section 29A (debar the defaulting promoter), Section 32A (immunity from prosecution for past acts), Section 12A (allowing withdrawal of the Corporate Insolvency Resolution Process [CIRP] upon settlement), and the sale of a company as a going concern in liquidation to ensure that the company is rescued. However, under these new developments, the lengthy time of CIRP has, in most cases, remained a heavy financial drain on the creditors. A recent order by the National Company Law Tribunal (“NCLT”) Hyderabad in the KSK Mahanadi Power Company case, allowing an interim distribution to the creditors before the final resolution plan, is a welcome development in this light. This article examines the evolution of interim distribution in Indian insolvency law, with specific reference to the KSK Mahanadi Judgment, and discusses its broader implications for insolvency proceedings in India. The article is structured as follows: It first gives an overview of the historical context and legal basis of interim distribution in India and elsewhere, which then leads to an analysis of the absolute priority rule with a focus on its flexibility in the Indian context. Finally, it goes deep into the specific implications of the KSK Mahanadi Judgment and the emerging trends in judicial discretion in the absence of legislative clarity. The conclusion will discuss whether there might be a need for legislation to be rewritten and contrast the approach taken within the UK insolvency systems. Historical Context and Legal Basis An interim distribution is a temporary measure that involves distributing a portion of the assets while the case is still ongoing. It can be arranged through mutual agreement between the parties, or either party may request the court to order it. Although quite new in India, interim distribution has its origin in the laws of other jurisdictions, in particular, in the United Kingdom. In the UK, insolvency legislation stipulates that, administrators are allowed to make interim distributions while going through the administration process. This helps manage the cash flow needs of creditors whilst the insolvency process is still on. The legal basis is strained in India and highly underdeveloped, and the IBC does not expressly provide for it, though the NCLT has occasionally allowed this to ensure that the interests of creditors are protected. The principle was first actually laid down by the National Company Law Appellate Tribunal (“NCLAT”) in the resolution of the IL&FS group. This directive, among several others, was passed by the NCLAT in May 2022, which directed IL&FS to release funds towards public funds, even before the final resolution process of the relevant IL&FS entity. The case of KSK Mahanadi Power Company further made the trend of decisions clear, as in long-drawn insolvency processes, financial relief is almost a rarity. Recently, the NCLT’s Hyderabad bench approved an interim distribution in the case of KSK Mahanadi Power Company, a company that had accumulated a cash balance of over ₹9,000 crores while under the Corporate Insolvency Resolution Process (“CIRP”) for an extended period, surpassing the 270-day timeline. Given the extended duration of the process and the need to protect creditor interests, the NCLT sanctioned the distribution of ₹6,400 crores from the surplus cash among the lenders, even before the resolution plan had been approved. This decision was driven by the specific circumstances of the Indian market and the extended CIRP timeline. It marks the first instance in which creditors will recover a portion of their dues before the approval of a resolution plan, setting a precedent for future cases. The legal rationale for this decision lies in the necessity of balancing the creditors’ interests with the ongoing operation of the company, ensuring that creditors are not unfairly disadvantaged by delays in the resolution process. Although the IBC does not explicitly address interim distributions, several provisions implicitly support this practice. Section 53 establishes the order of priority for the distribution of liquidation proceeds, emphasizing that secured and higher-ranking creditors must be paid before unsecured creditors and shareholders. However, this section does not address the treatment of interim distributions, allowing room for judicial interpretation. Section 29A bars delinquent promoters from participating in the resolution process, ensuring that interim distributions are made to credible and eligible parties. Additionally, Section 32A provides immunity to companies and their assets from prosecution for past actions, facilitating smoother interim distributions by removing legal barriers related to the previous management’s conduct. These provisions collectively contribute to a framework where interim distribution can be justified as a means of balancing the interests of all stakeholders, particularly in cases where the insolvency process is expected to be lengthy. The Absolute Priority Rule and Its Application to India’s Law of Insolvency The absolute priority rule is a fundamental concept in insolvency law, particularly in countries like the United States, where it is strictly adhered to. This rule requires that senior creditors must be fully paid before any funds are distributed to junior creditors or equity holders during liquidation. It is designed to ensure fairness in the distribution of a debtor’s assets, guaranteeing that those with higher priority claims are not disadvantaged during the insolvency process. However, this rule is not explicitly included in India’s IBC. The IBC’s method for handling creditor payments, particularly during the resolution process, provides a certain level of flexibility. This is because the doctrine established by courts and tribunals has been to entrust decisions regarding the distribution of resolution

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Royalty Payments Distinguished from Taxes: A Strategic Win or A Race to the Bottom?

Taxation Law / CBCL

[By Adwitiya Gupta & Suprava Sahu] The authors are students of Gujarat National Law University. Introduction The Supreme Court in Mineral Area Development Authority v M/s Steel Authority of India, by an 8:1 majority, overturned the 1989 decision, which decreed that royalties paid by miners on minerals are a tax. This decision gives states the power to tax mining activities, through which the states can now collect more revenue through taxes in addition to the existing royalties.  One of the central questions put before the bench was whether or not royalty under Section 9 of the Mines and Mineral (Development and Regulation) Act,1957 (MMDR Act) is in the nature of tax.  Before 1990, most precedents held that royalty was not in the nature of a tax. Later, India Cement Ltd v. State of Tamil Nadu & Ors overturned the trajectory of judicial precedents by holding that ‘royalty is a tax.’ Various courts have relied on the decision taken in the case of India Cement Ltd v. State of Tamil Nadu & Ors. until 2004 when the SC pointed out a typographical error in the India Cements Case as a “constitutional, legal, and moral” obligation to correct the mistake, the court held that royalty was not a tax. An inconsistency arose regarding the India Cements case being decided by a nine-judge bench, whereas Kesoram being decided by a five-judge bench. Since a smaller bench does not have the power to overturn the decision, this resulted in a conflict between both judgments. Leaping into 2011 and the present case, the court observed the evident inconsistency between the two cases and opted to refer the matter before a nine-judge bench for a conclusive ruling on the legal stance.  Understanding Royalty and Taxes Royalty can generally be understood as a payment made by a lessee to the lessor based on the quantity of minerals extracted from the land. The concept of royalty on minerals dates back to ancient times when kings would impose a tax on those extracting minerals from their lands. According to the ancient law, mineral wealth was not vested in the king, but the king was entitled to receive revenue from his subjects. Post-independence, the Mines and Minerals Act of 1948 was passed with the objective of regulating mines and, oil fields and mineral development. Later, the MMDR Act of 1957 was enacted to centralize the regulation of mines and oil fields under the Union Government, replacing the earlier 1948 Act.  Section 9 of MMDR Act 1957 provides for royalty in respect to mining leases. The essential elements of royalty are:  It is a consideration or payment made to the proprietor of the minerals; It flows from a statutory agreement (a mining lease) between the lessor and the lessee; It represents compensation to the lessor for granting the lessee the privilege to extract minerals.  It is usually based on the quantity of minerals extracted.  Whereas Taxes, in general, are monetary charges imposed by the government on individuals or property to generate revenue needed for its functions. In the case of Commissioner, Hindu Religious Endowment, Madras v. Sri Lakshmindra Thirta Swamiar of Sri Shirur Mutt, the court enumerated essential characteristics of taxes as the following:  Tax is a mandatory exaction of money by a public authority; It is imposed under statutory power irrespective of the consent of the taxpayer; Demand to pay tax is enforceable by law; It is imposed for public purposes to cover state expenses without providing specific benefits to the taxpayer; It is a part of the common burden.  The Inconsistency Explained: Tax v/s Royalty. One of the key questions analyzed in the Mineral Area Development Authority v M/s Steel Authority of India was whether a royalty is a tax. In order to arrive at a conclusion regarding this crucial question, the court analyzed various judgments dealing with this question. In the case of Laddu Mal v. State of Bihar, the division bench held that a royalty is a levy in nature of tax owing to its compulsory nature of exaction. Further, in  Laxminarayana Mining Co. v. Taluk Development Board highlighted that the provisions of the MMDR Act pertaining to levy, fixation, and collection of royalty and recovery as arrears of land revenue provides that the expression ‘royalty’ under section 9 connotes the levy of a tax.  However, several High Courts observed a contrary view. In Dr. Shanti Swaroop Sharma v. State of Punjab, the court disagreed with the decision of Laddu Mal and upheld royalty cannot be said to be a ‘compulsory exaction’ based on the rationale that compulsion to pay royalty arises out of the contractual conditions of the mining lease and not through the force of law. It relied on the fact that the State Government can collect royalty in a similar manner as unpaid land revenue, but that does not qualify it as tax. The India Cement case marked a significant change by defining royalty as a tax. Over the next decade, this influenced numerous high court and Supreme Court decisions, altering the judicial perspective on whether royalty and tax are the same or different.  In the case of State of MP v. Mahalaxmi Fabric Mills, the court deliberated on the possibility of a typographical error in the India Cements judgment.  However, the bench held that the arguments in the India Cements case concluded that royalty was in the nature of a tax, so there was no possibility of typographical error. In State of WB v. Kesoram Industries Ltd, the court again considered the possibility of an error in the India Cements case. Justice Lahoti felt duty-bound to correct the typographical error and held that the India cement judgment mistakenly conveyed that ‘royalty is a tax’ instead of conveying that ‘cess on royalty is a tax.’ Justice clarified that the intention of India Cement was to hold that “royalty” itself was not considered a tax, but the intended meaning was that “cess on royalty,” which is an additional charge, is viewed as a

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The Tempest of GAAR-SAAR: A Symphony or Cross Road for Tax Avoidance?

Taxation Law / CBCL

[By Vibhor Maloo & Shubhanshu Dubey] The authors are students of HNLU, Raipur. Introduction As tax evasion tactics become more sophisticated, India’s legal framework is changing significantly. The recent Telangana High Court (HC) ruling has initiated a debate on whether General Anti-Avoidance Rules’ (GAAR) pervasive powers, which empower tax authorities to scrutinize and invalidate transactions primarily aimed at avoiding taxes, even if they comply with the letter of the law which preempt the more targeted approach of Specific Anti-Avoidance Rules (SAAR). SAAR targets particular types of transactions known to lead to tax evasion, such as bonus stripping of shares or dividend stripping. The interaction between GAAR and SAAR is crucial as it balances broad authority with specific rules. GAAR’s broader scope can override SAAR’s targeted approach, as seen in the Telangana High Court ruling, impacting how tax authorities enforce anti-avoidance measures and how taxpayers structure transactions. While SAAR has been amended to include bonus stripping of shares, this judgment underscores GAAR’s precedence and raises questions about its broader implications. Prior to the introduction of GAAR in Chapter XA of the Income Tax Act, 1961, tax evasion in India was mainly addressed through judicial decisions, often referred to as Judicial Anti-Avoidance Rules (JAAR). Simultaneously, the presence of SAAR in Chapter X of the IT Act aided in regulating certain specific transactions that led to tax evasion. While the SAAR has been amended to encompass bonus stripping of shares, the judgment affirms GAAR’s broader application and precedence. However, it also highlights concerns about the lack of objectivity in GAAR provisions, the discrepancy with specific provisions under SAAR, and the risk of deterring legitimate transactions due to GAAR’s broad interpretation. In the post-assessment year 2018-19, GAAR was introduced to regulate complex tax avoidance outside SAAR’s scope. Over the years, strife has arisen between SAAR and GAAR, though the CBIT has clarified that both can co-exist. Unraveling Tax Complexity: Role and Evolution of Anti-Avoidance Jurisprudence The Indian legislative landscape aims to negate Impermissible Avoidance Arrangements (IAA) under Section 96 of the IT Act, targeting arrangements designed to avoid taxes rather than serve a legitimate business purpose. These arrangements are primarily aimed at avoiding taxes rather than serving a legitimate business purpose and are based on the ‘purpose test’. The test involves analyzing the commercial intent behind the arrangement to determine its legitimacy under GAAR where it considers the business intent, the element which prompts detailed analysis of the arrangement, and the abuse of tax provisions. GAAR and SAAR, help to avoid these transactions that aim at preventing tax payments through illegitimate complex processes.  The Vodafone Case demonstrated flaws in the system of transactions outside the scope of SAAR. This case highlighted the limits of SAAR, which deals only with specific tax avoidance practices. Since the transaction did not fall under predefined categories, SAAR could not be applied. The case demonstrated the need for broader rules like GAAR to tackle complex tax avoidance schemes that go beyond the scope of SAAR. This eventually led to the introduction of GAAR in the Indian tax system. In the Common Law Jurisprudence, the case of  WT Ramsay v. Inland Revenue Commissioners, the purposive interpretation approach was considered, and it was held that the evaluation should be based on the impact in the entirety of the complete series of transactions, rather than the tax implications of each step. This concept applies only when the relevant legislation requires it, and each step severally does not have to be considered artificial for the principle to apply. This highlights the necessity of assessing transactions on their aggregate economic content rather than individual stages. In Craven v. White explained the limitations of the Ramsay Principle which is a statutory interpretation principle to counter tax mitigation. The Ramsay principle seeks to contest tax avoidance strategies by scrutinizing pre-ordained transactions, which are are pre-planned steps solely aimed at achieving tax benefits, lacking genuine economic or business purpose, that lack actual economic substance and are not justified by moral grounds, the same will lead to destructive commercial effects. In UK v. Duke of Westminster, it was held that every individual has the right to legally organise their affairs to reduce the tax burden, and if they succeed, they cannot be forced to pay more. The verdict reflects that a laissez-faire economy has to be considered where every person has the right to manage his tax affairs. In contrast, the Duke of Westminster case emphasises the distinction between lawful tax avoidance and evasion, directing both GAAR and SAAR in India to ensure transactions are genuine rather than just tax-driven. In Mc Dowell & Company Limited v Commercial Tax Officer, it was clearly stated that controversial methods should not be used in tax planning, as they could lead to significant economic harm. Therefore, the consideration of IAA flows from a detailed jurisprudential debate considering primarily the business intent and the commercial substance; however the same has been disputed to date considering the complexity of the transactions involved. Labyrinth of Anti-Avoidance: Interpreting Telangana HC’s Verdict Mr Ayodhya Rami was investigated by the Income Tax Authorities (ITA) for discrepancies in the taxable income assessment, including issues of bonus stripping with shares of REFL, a limited company. Bonus Stripping of shares involves buying shares before a bonus issue, selling them at a loss after the bonus issue, and using the loss to offset capital gains. He disclosed the capital loss from the sale of REFL shares, subsequently, the ITA initiated proceedings against him. Mr Ayodhya argued that SAAR should apply instead of GAAR, claiming GAAR shouldn’t apply to transactions covered by SAAR. The court found Ayodhya’s argument contradictory and noted that SAAR’s interpretation did not cover bonus stripping. The issue was whether the transactions including the issuing and transferring bonus shares were legitimate commercial transactions or merely a tax avoidance strategy. The Court determined that the transactions concerning the bonus shares and their sale lacked genuine business substance and were fundamentally deemed artificial arrangements intended to avoid tax requirements. Additionally,

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Expanding Horizons: Payment Banks and Strategic Partnerships

Banking Law / CBCL

[By Dhawni Sharda & Anshika Agarwal] The authors are students of National Law University Odisha. INTRODUCTION  Through Budget 2024, the Government of India has pioneered an ambitious objective to set up over a hundred Payment banks as a significant step towards financial inclusion and security. These banks have been a modicum between the formal banking institutions and the unbanked population. This fosters greater financial literacy, encouraging savings and ensuring economic security amongst the economically weaker sections of society. However, whether an increase in the number of these payment banks would provide the solution for the problems plaguing them is a question to be addressed. The authors, through this article, aim to highlight the strategic importance of partnerships between payment banks and institutions like Micro Finance Institutions (MFIs) and Business Correspondents (BCs) . While BCs enable access to unbanked areas, MFIs provide financial services like microcredit, micro-insurance, and savings, etc. This is done.to overcome the inherent barriers in their performance. Starting with the rationale behind setting up such banks to analysing the recent actions faced by such banks for the failure of compliances, the authors adopt such an approach concerning how the lacuna of these banks can be resolved through strategic partnerships and tie-ups which can further broaden the understanding of such payment banks as beyond the digital wallets and can lead to being a host of variety of services.  TRACING THE ORIGIN AND AFTERMATH  Given the significant risks associated with Prepaid Payment Instrument(PPI) model such as concerns around KYC compliance, and the need for quick access to payment services at the grassroots level, a recommendation was made to establish the payment banks. These banks provide their essential payment services and function such as a digital wallet wherein the customers like MSME’s and low-income individuals can maintain their bank balance and use it to serve their needs.  With all this in process, payment banks started functioning as a miniature model of scheduled commercial banks. These banks were required to follow certain mandates as prescribed by RBI in the same way as Scheduled Commercial Banks do. Alongside, these banks were granted rights and privileges which came with the grant of the license.  Their performance was further enhanced by their strategy of branchless banking wherein the network of such banks was spilled over semi-urban, and rural areas. This phenomenon got fillip when these banks started entering into strategic partnerships. STRATEGIC TIE-UPS In recent years, the financial infrastructure of the underbanked areas has been boosted by the various deals between traditional banks, fintech companies, and payment banks. Doing so would ultimately broaden the horizon of the payment banks and help them to overcome their limitations which they would otherwise encounter if they would operate solely. Microfinance institutions have already an established customer base in the low-income regions. Payments banks can use these channels to venture into new markets thereby leading to reduced cost, financial inclusion, and efficiency in operations. In a deal, Multilink announces tie-up with NSDL payments bank. This move would contribute to financial services to all societal sections. To elaborate it further Multilink has around 3000 distributors, 200 mass distributors, and 60 API distributors. They even have strong associations with renowned platforms like IRCTC, Yes Bank, TATA AIG, Kotak Life, and so on. This NSDL-Multilink partnership would help customers perform all banking facilities around the clock through BC agent points. Such partnerships are entered not only to avail the benefits of a well-established clientele base created by the MFIs/BCs, but also to avail the advantage of merging resources leading to efficiency in operations. Additionally, established monitoring and audit regulations are available to the payment bank. SPOT ON ANALYSIS Going Beyond the Conventional Perspective. Going beyond the brick-and-mortar aspect of payment banks wherein they function as digital wallets, such collaborations with BCs or MFIs would become a good source of lending, thus fulfilling the debt gaps or the cash crunch requirements in the lower segment areas. If these two entities join hands, the issue of such operational needs of the banks would also be fulfilled. Improved Market Offerings The host of activities undertaken by the BCs can prove to be catalysts in the performance of the payment banks through their aid and assistance considering the low-cost model of BCs in branchless banking. So, these BCs can act as nodes to the branchless banking model of the payment banks, thereby amplifying the scope of financial activities. Additionally, Payments banks can use MFIs’ strategic partners which have an established base in providing cross-banking marketing services to their clients, besides their experience in providing financial services to the low-income segment. This can work as a win-win situation for both the parties. Plugging the Internal Problems The abovementioned problems relate to the external issues which can be resolved through such alliances. However, certain internal issues are barriers to their expansion. Payment banks in their initial years of set-up need to meet the high fixed costs leading to elevated break-even points. This further leads to the higher need for significant transactional volumes and substantial scale. In the process of doing the same, payment banks spend a considerable amount of time and resources in increasing profitability. Consequently, they miss on their sole purpose of creating better market offerings and attaining RBI’s objective of financial inclusion. Need for Diversification These payment banks fulfill the dire needs of the micro-finance institutions wherein these institutions plan to makeover their negative image of being involved in the unethical practices used in lending activities. In the wake of this situation, the state government came up with laws that completely put a halt to their operations. Given such a payment bank with a strong government and institutional support at the backend, the MFIs would get a relaxation in terms of regulatory oversight permitting their free and fair operations. WAY FORWARD Strategic partnerships are not an easy path to tread since these payment banks can’t enter such strategic alliances as independent entities because they are subsidiaries implying that they are controlled and influenced by their

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From Green Bonds to ESG debt: SEBI’s new blueprint for sustainable finance

Capital Markets and Securities Law / CBCL

[By Tejas Venkatesh] The author is a student of Jindal Global Law School. Introduction On 16th August 2024, the Securities and Exchange Board of India (“SEBI”) released a consultation paper on Expanding the Scope of Sustainable Finance Framework in the Indian Securities Market. The purpose of the paper is to solicit public comments on the appropriateness and adequacy of the proposed new framework for ESG debt securities and sustainable securitized debt instruments. The new framework incentivizes sustainable debt financing and also provides much-needed flexibility to issuers who aim to pursue projects that align with their ESG objectives. Yet, the proposal raises certain vital concerns. SEBI’s Existing regime on Sustainable financing in India SEBI’s approach to encouraging sustainable finance has mainly focused on the Indian debt markets. The focus on the debt market seems to stem from the need for a large pool of potential investments in various sustainable projects. An estimate by the Reserve Bank of India (“RBI”), indicates that a green finance pool of up to 2.5% of the GDP is necessary to meet the infrastructure gaps resulting from disastrous climate events in India. In 2023, in an effort to boost investments in the sustainable debt financing market, SEBI introduced the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) (Amendment) Regulations, 2023, wherein it allowed for the issuance of “Green Debt Securities” as a debt security instrument to raise funds for sustainable projects like renewable energy plants, clean transportation, pollution prevention and biodiversity conservation projects. Although the issuance of “Green Debt Securities” was allowed under the SEBI (Non-Convertible Securities) Regulation, 2021, the scope and ambit of activities that could be financed through the instrument remained vague and ambiguous until an illustrative list of activities was provided in the amended regulations in 2023. Further, the board continuously revised and expanded the scope of activities to include blue, yellow, and transition bonds as other sub-forms of green debt securities under the regulations. In order to align the framework for the issuance of green debt securities with globally accepted standards like the Green Bond Principles (GBP), issued by the International Capital Markets Association (ICMA), SEBI introduced additional disclosures for green debt securities. The focus of the revised disclosure requirements was on ex-ante disclosures regarding the utilization of proceeds, the process for evaluation and selection of a project, management of proceeds, and improved reporting mechanisms. Impact reporting and involvement of third-party reviewers or certifiers were sought to be strengthened to ensure transparency and reliability in the utilization of bond monies by issuers. However, the growing need to adopt an intersectional approach for tackling economic, social, and environmental aspects of sustainable development has been felt. Further, the tremendous lag in funding for the attainment of Sustainable Development Goals (SDG) has prompted SEBI to propose the introduction of Social Bonds, Sustainable Bonds, and Sustainability Linked Bonds (which together with Green Debt Securities would be termed ESG debt securities). Additionally, to leverage the underlying sustainable finance credit facilities for the benefit of potential investors, SEBI also seeks to introduce ‘Sustainable Securitised Debt Instruments’ as a form of finance that has the backing of the underlying sustainable credit. Proposed framework for ESG debt securities The introduction of Social Bonds and Sustainable Bonds marks an addition to the theme of Use of Proceeds (UoP) Bonds, wherein the proceeds are earmarked for specific projects designed to achieve the intended impact. Whereas, Sustainability-Linked Bonds (SLB) are categorized as Key Performance Indicator (KPI) bonds wherein the proceeds are not tied to a specific project but are intended for the issuer to achieve self-imposed sustainability targets in the course of their operation. Although SEBI has not specified the scope of projects falling within the ambit of Social Bonds, the Social Bond Principles (SBP) given by the ICMA provide valuable direction. The SBP includes a wide ambit of activities including projects that aim to provide affordable basic infrastructure like water, sanitation, health, housing, and food security. However, Sustainable Bonds are an effort to acknowledge the intersectional co-benefits that a combination of Green and Social projects present. The extant framework for the regulation of Use of Proceeds Bonds (i.e. Green, social, and Sustainable Bonds) remains uniform with a special focus on core components such as the mechanism for categorization of projects, criteria for project evaluation and selection, managing proceeds, and reporting. However, the focus on transparency and accountability is diluted due to the voluntary nature of the guidelines given by the ICMA. The framework provides no liability mechanism in instances of greenwashing or failure to meet intended targets. Unlike UoP Bonds, Sustainability-linked bonds are debt instruments that are catered to finance the incorporation and achievement of forward-looking ESG outcomes by the issuer. The core components of the bonds include the selection of Key Performance Indicators (KPIs) and calibration of Sustainability Performance Targets (SPTs) by the issuers. The focus is on the declaration of bond characteristics, reporting on the attainment of targets, and third-party verification of bond targets achieved. Critical Analysis The new debt instruments raise several concerns as regards their ambit and effectiveness. First, the qualifying factor for the utilization of bond proceeds of a Social Bond is that the monies have to be committed to generating a ‘social impact.’ Although the ICMA Social Bond Principles (SBP) provide guidance on projects that can be pursued by the issuance of Social Bonds, pertinent questions regarding the quantification of the term “impact” arise. For instance, it is unclear whether a social project can avoid generating a negative environmental impact. Therefore, in instances such as affordable housing projects wherein the social impact contrasts with the environmental impact, there is no direction on what interest will prevail. Further, the Social Bonds framework fails to differentiate between challenges posed by varied timelines for achieving the desired impact For instance, a loan-based social bond will achieve its social impact merely by financing the beneficiary using the proceeds received whereas other forms of social bonds require active collaboration between the beneficiary and the issuer. The

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Eliminating Broker Pool Accounts: SEBI’s Strategy for Enhanced Investor Protection

Capital Markets and Securities Law / CBCL

[By Sahil Sachin Salve] The author is a student of Maharashtra National Law Univeristy, Mumbai. Introduction: On June 5, 2024, SEBI issued a circular mandating that Clearing Corporations (CCs) directly credit securities to client demat accounts, effective October 14, 2024. Previously, SEBI had taken a significant step by discontinuing the use of pool accounts for mutual fund transactions from July 1, 2022. Initially, the direct payout into clients’ demat accounts was a voluntary practice but as per above circular from October 14, 2024 it will be mandatory for CCs to directly credit securities to client’s demat accounts. This move aims to enhance transparency and protect investors by ensuring that their securities are directly credited to their accounts, by passing intermediaries and reducing potential risks. Such a new mechanism will replace the current practice where securities pass through broker pool accounts, which pose risks of misuse and lack transparency. The new mechanism aims to enhance investor protection, reduce misuse risks, and improve transparency. While it offers significant benefits like increased security and investor confidence, it also introduces challenges such as higher operational burdens, increased costs, and potential initial delays. Effective preparation and adaptation by stakeholders are crucial for a smooth transition. Current Practice & Issues with current practice: Currently, the payout process involves transferring securities from the seller to depositories, then from the depositories to the Clearing Corporation (CC), and finally, the CC credits the securities into the broker’s pool account. This pool account, however, poses significant risks. It contains the securities of all the broker’s clients, making it challenging to distinguish between client-owned and broker-owned securities. If brokers face financial difficulties or insolvency, the pooled securities could be jeopardized, leaving clients uncertain about the status of their investments and weakening their trust in the brokerage system. This practice has led to severe issues in the past, one example of such misuse is the Karvy Demat Scam of 2019. In this case, brokers misused approximately Rs. 2300 crore of investor funds by pledging them to banks for their use, affecting over 95,000 clients. To prevent such scams and enhance investor protection, SEBI has mandated a new regime. This new mechanism requires Stock Exchanges, CCs, and Depositories to establish the necessary procedures and regulations to ensure compliance. By doing so, SEBI aims to safeguard client securities and restore confidence in the financial markets. New Mechanism: SEBI has mandated that Trading Members (TMs) and Clearing Members (CMs) must now ensure the direct payout of securities to clients’ demat accounts via clearing corporations. This new rule effectively removes the broker’s pool account from the payout process, aiming to safeguard client securities and enhance transparency. However, in some processes, the broker will still take part, for instance, “Funded stocks held by the TM/CM under the margin trading facility” must be handled differently. As per the amendment in the circular dated May 22, 2024, these funded stocks must be held by the TM/CM only through a pledge. These funded stocks, which are purchased with the financial assistance provided by the broker, must now be managed exclusively through a pledge system. This means that brokers are not allowed to retain full control over these securities; instead, they must be pledged as collateral to secure the loan provided for the purchase. To ensure transparency and safeguard client assets, TMs and CMs are required to open a separate demat account named ‘Client Securities under Margin Funding Account’. This account is used solely for the purpose of margin funding, and no other transactions can take place within it. The separation of these securities from other accounts ensures that the client’s margin-funded stocks are clearly distinguished and protected from being mixed with other broker activities. Once a client purchases stocks using the margin trading facility, the securities are first transferred to the client’s demat account. From there, an auto-pledge is triggered, which means the stocks are automatically pledged in favour of the broker’s ‘Client Securities under Margin Funding Account’ without requiring specific instructions from the client. This pledge serves as collateral for the margin loan, ensuring the broker’s financial interest in the funded stocks while keeping the process seamless for the client. This new system enhances both operational efficiency and investor protection by keeping the broker’s involvement limited to secured pledges and reducing the risk of asset misuse. Similarly, for unpaid securities (where the client has not paid in full), the procedure outlined in paragraph 45 of the May 22, 2024, circular will apply. The securities will be moved to the client’s demat account and will be automatically pledged under the reason “unpaid” to a distinct account named ‘Client Unpaid Securities Pledgee Account,’ which the TM/CM is required to establish. The objective of these changes is to enhance operational efficiency and drastically reduce the risk of client securities being misused, which was a major concern in the old system where client and broker securities were pooled together. In the previous practice, brokers had control over pooled securities, creating risks of misuse, as seen in cases like the Karvy Demat Scam of 2019. SEBI’s new regime, by eliminating the need for broker pool accounts and directly crediting securities to client demat accounts, significantly strengthens investor protection. This mechanism not only prevents misappropriation of client assets but also restores and reinforces confidence in the financial markets. Analysis of the New Securities Credit Mechanism: Benefits of New Mechanism: The new mechanism promises numerous benefits and enhanced protection for investors. By enabling the direct credit of securities to clients’ demat accounts, the risk of brokers misusing client securities is significantly reduced. Clients will have full control and visibility over their holdings, allowing them to track their investments accurately and reducing the likelihood of discrepancies. Separating client securities from broker-owned securities is crucial. This segregation prevents the mixing of assets and reduces the risk of brokers using client assets for unauthorized purposes such as leveraging or trading. This clear distinction between client and broker assets also aids in better risk management, ensuring that client assets are

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Competitive Concerns in the Jio-Disney Merger in the New Era of Digital Competition in India

Competition Law / CBCL

[By Siddharth Sengupta & Ansruta Debnath] The authors are students of National Law University Odisha. Introduction On February 28, Reliance Industries Limited (“RIL”) and The Walt Disney Company announced that they would be merging their Indian television and internet streaming businesses to create an organization with a valuation of more than $8.5 billion. The two former competitors, who were until recently engaged in a fierce legal dispute over Indian Premier League (“IPL”) rights, have decided to establish a joint venture (“JV”) in order to strengthen RIL’s position in the Indian Media and Entertainment industry and lessen Disney’s presence there, in the face of intense competition. The plan of a slow, steady exit of Disney from India due to the steady decline it has faced over the last few years is one of the key reasons for this deal taking place. The loss of streaming rights over IPL matches to Reliance Jio followed by the loss of HBO content to Viacom18, which is also a Reliance subsidiary, did the most damage to its subscriber base. In February 2024, Hotstar in fact reported a decline of 39% in the number of subscribers from the previous fiscal year. This article attempts to analyze the competition concerns in various relevant markets, that this JV between such close competitors may cause, by analyzing Indian and foreign precedents. The article, naturally, also compares these concerns raised through the authors’ analysis and the relevant markets identified to the CCI’s recent order granting conditional approval to the JV. Abuse of Dominance in Cable TV and Broadcasting Market The Indian Cable and Broadcasting Market has been valued at USD 13.61 billion in 2023 and is expected to grow by 7.85% through 2029. In this robust industry, Zee Entertainment Enterprises dominates the market followed closely by the Star Network, which is owned by Disney. Disney’s Star India and Viacom 18, which in itself is a lesser player, together have a 750 million plus viewership. The CCI, in the Zee-Sony Merger approval order, found Disney to have around 35-40% market share (varying) across various types of wholesale supply of TV Channel markets while Viacom had a maximum of 15%. Thus, for some of these markets, like Hindi and Bengali General Entertainment Channels, the JV will have almost 50% market share. In general, the data presented indicates that the JV will hold almost 35-40% of the market with competition from Sony, Zee, Sun TV and other smaller entities, each with a market share of maximum 15% or less. The combined JV, broadcasting more than 120 channels across regional languages and English and Hindi is expected to be a massive entity capable of holding a dominant position in the market. Thus, the JV will have the ability to abuse its position of dominance with its concentrated market share and hence, power. The market structure is also such that it is not easy for new entrants to establish themselves, thus, such a strong entity is highly likely to create entry barriers. Oligopoly and Collective Dominance in the OTT Market In 2023, the Indian OTT market achieved a valuation of US$ 3.7 Billion. The revenue of the market is dominated by players such as Amazon Prime Video, Netflix and Hotstar and the same is set to double from US$ 1.8 billion in 2022 to US$ 3.5 billion by 2027. In this highly lucrative market, there are few key players. JioTV and Hotstar together hold a big portion of the market i.e., almost 43%. Although, Disney’s market share has reduced to an extent since 2022, it is primarily attributed to their loss of rights over HBO Max Original content and IPL broadcasting rights, both of which now reside with Reliance, whose subscriber base has increased exponentially since. In January 2024, nearly 243.5 million users — a 46.5% market share — visited three streaming platforms, Disney’s Hotstar and Reliance’s JioCinema and JioTV. In the European Commission’s 10th Report on Competition Policy, it was stated that a dominant position would generally be said to exist once a market share to the order of 40% to 45% is reached. This position of dominance is reinforced by Reliance’s economic power and resources. Further, in online platforms, network effects play a big factor in increasing an entity’s power i.e., the value of a platform increases as more users join it. This creates entry barriers in the market, especially when deep discounts (extremely low pricing to pursue growth-over-profit) are offered to increase network effects, which in turn makes it unsustainable for new entities to enter or survive in the market. Hence, Disney’s Hotstar and Reliance’s JioCinema, when combined, create doubts as to whether Amazon Prime, Netflix and Zee5 will be able to remain competitive enough against the JV. The OTT industry is slowly converting into an oligopoly, with the presence of a few strong market players who have the maximum consumer support. This situation might translate into collective dominance, as substantiated in Gencor v. Commission by the General Court of EU, but is something that the Indian competition statute does not prosecute. This was exhibited in Meru Travel Solutions Pvt. Ltd. v. M/s ANI Technologies Pvt. Ltd. where they found Uber to be enough of a competitor to Ola instead of finding Ola and Uber collectively dominant, or in Sanjeev Rao v. Andhra Pradesh Hire Purchase Association where no abuse of dominance was made out against the Respondent-Association and its 162 members. Monopoly in the Specific Sports Broadcasting Market The Indian sports industry is the largest in the world vis-a-vis consumers and revenue. The JV involves more than 120 channels and two OTT platforms, within which a big portion of the channels is devoted to sports, necessitating competition analysis in the sports broadcasting market of India. As it stands today, among OTTs, the JV will have exclusive streaming rights over the IPL, ICC Cricket, Wimbledon, Premier League and Pro Kabaddi, which will comprise 80 percent of the total market of sports. The CCI has observed that cricket is non-substitutable to other

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SEBI’s New Amendment: Delisting methods at Crossroads?

Capital Markets and Securities Law / CBCL

[By Zoya Farah Hussain & Digvijay Khatai] The authors are students of National Law University Odisha. Introduction The term “delisting” of securities means the removal of securities of a listed company from a stock exchange, providing an exit route for public shareholders from the company. Delisting can be either compulsory or voluntary. In the former case, a public company would delist itself following non-compliance with listing guidelines promulgated by the market regulator, unlike in the latter where the corporation voluntarily delists its securities after due approval of the board of directors and the consensus of major shareholders. Delisting facilitates companies to avoid regulatory compliances associated with being publicly traded in light of strategic shifts in the decisions of the company either due to mergers, acquisitions or other corporate reasons. Internationally, it is a crucial financial structuring instrument that controlling investors employ to increase the value of their investment. Recently, the Securities and Exchange Board of India (‘SEBI’) has approved certain amendments based on proposals of a consultation paper released on August 2023, to ease up the delisting procedure in Indian stock markets by introducing ‘fixed price’ as an alternative to the ‘reverse book-building method’ (‘RBB’) to determine the exit price of the delisting offer. The Board has approved the amendment to make doing business easier, safeguard investors’ interests, and offer flexibility in the Voluntary Delisting framework. While the Fixed Price Offer aims to simplify the delisting process and mitigate issues like speculative premiums, it may introduce a whole new set of challenges for minority shareholders and the price discovery process. The article compares both methods, highlighting their respective advantages and drawbacks, and suggests potential improvements, such as incorporating longer-term market price averages, to create a more balanced and transparent delisting framework. Reverse Book-building method In India, the procedure of delisting is governed under the SEBI (Delisting of Equity Shares) Regulations, 2021. (‘Delisting rules’) Under the regulations, an ‘acquirer’ is a person who is willing to offer a ‘minimum price’ to the equity shareholders of a company, to which the latter agrees to transfer the shares in favour of the former. The floor price will have to be determined in terms of Regulation 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”). This regulation precisely embodies within itself, what we call the ‘reverse book-building method’. The public shareholders upon being offered the floor price by the acquirer, determine the final price (‘discovered price’) using the RBB method, at which they are willing to sell their shares. The discovered price of the shares has to be such, that upon acquisition, the acquirer’s shareholding reaches up to ninety per cent of the total shareholding of the company. The acquirer is generally bound by the discovered price, provided it is equal to the floor price or an indicative price, if any, put up by the acquirer. As per regulation 22 of the delisting rules, if the acquirer finds the discovered price unacceptable, the same has an option of producing a ‘counter offer’. This counteroffer price by the acquirer further cannot be less than the ‘book value’ of the company, certified by a merchant bank registered under SEBI appointed by the acquirer. The price discovery mechanism of the existing delisting provisions simply prescribes a floor price of the shares, but not a maximum price. Public shareholders, especially major position holders, can influence the delisting price through the reverse book-building price discovery process. Further, a company’s announcement of delisting its equity shares may cause a rise in volatility and an increase in speculative activity in the company’s shares. The reverse book-building price discovery process provides the ability to public shareholders (especially entities with large positions) to have a say in determining the delisting price. These loopholes are the primary reasons that an alternative has been sought by SEBI. Fixed Price Offer SEBI in its board meeting dated June 27, 2024, has approved a ‘fixed price offer’ (‘FPO’) mechanism as an alternative to the RBB method for the purposes of delisting of ‘frequently traded’ public companies. Under the new mechanism, the fixed price will be set at a 15% premium over the floor price that is determined by the delisting rules. The introduction of this method is primarily in furtherance of an aim to simplify the delisting process in light of the ease of Doing Business by not subjecting the acquirer to the hassles of a reverse mechanism and the delays caused by it. Further, ‘adjusted book value’ has been added as an additional parameter to calculate the floor price of infrequently traded shares of companies under the delisting rules. Certified by an independent registered valuer, this is a key metric, to determine the fair market value of a listed company by subtracting liabilities from assets and adjusting for any intangible assets or liabilities. Under the new amendments, the threshold for a counter offer by the acquirer has been relaxed to ‘seventy-five per cent’ of the total shareholding as opposed to the ninety per cent margin, provided that fifty per cent of the public shareholding has been tendered. Is FPO a suitable alternative? While the recent SEBI discussions have put RBB in an auxiliary position, there needs to be a neutral evaluation of both the contesting methods before promoting either of them. The loopholes cited in the meeting regarding the method of RBB were, firstly, that the Delisting Price often included an exorbitant premium (at times, more than 100%) over the Floor Price attributable majorly to the speculators who in anticipation of delisting start cornering shares to accumulate a sizeable shareholding to seek an unreasonable premium, thereby making the completion of the process of delisting cumbersome. Secondly, overdependence on public shareholders who are not necessarily equipped with share market information for price discovery leads to promoters being exploited for higher returns. In order to mitigate such loopholes, opinions incline towards the FPO method. While it is expected to provide certainty regarding the pricing of the delisting offer, it introduces new challenges

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Breaking Corporate Monopoly: U.S. Google Ruling And Impact On India

Competition Law / CBCL

[By Yash Kaushik] The author is a student of National Law University Odisha Introduction The U.S. District Court of Columbia, vide its order dated August 5, 2024, ruled that the tech giant Google was a monopolist, meaning it illegally cemented its dominance in the area of ‘general search services’ and ‘general search text ads’. Google was allegedly involved in the transgression of Section 2 of the Sherman Antitrust Act, 1890 based on the court’s findings. This provision makes it unlawful for any person to monopolize or attempt to monopolize any part of the trade or commerce among the several states, or with foreign nations. Google allegedly abused its dominant position to strike exclusive deals by paying billions of dollars to smartphone makers such as Apple and Samsung. In return, these manufacturers did the work of setting Google as the default search engine in their handsets. It was also held that Google being a default search engine operated at such a colossal scale that inherently disincentive other competitors to enter the tech market. This ruling will significantly impact ongoing antitrust cases against Big Tech firms such as Meta, Apple, and Amazon for their alleged involvement in the violation of respective antitrust laws and stifling fair competition. In India also, numerous complaints have been lodged against Google for allegedly violating the provisions of the Competition Act, of 2002. For instance, an Indian startup named Alliance of Digital India Foundation registered a complaint with the Competition Commission of India (CCI) alleging Google for abusing its dominant position in the online advertising marketplace. The complainant reportedly submitted that Google was involved in the act of self-preferencing its own products over others, a case of an anti-competitive practice prohibited under section 4 of the Competition Act, 2002. The article deals with how the U.S. ruling against Google assists in dismantling corporate monopolies and fostering fair competition concerning developing economies like India. The author further highlights the need for big tech regulation through a robust antitrust framework that encourages an equitable and just marketplace that harbours free and fair competition for all. Understanding Corporate Monopoly And its Ramifications A market structure or arrangement dominated by a single seller exercising exclusive control over a commodity with no close substitutes is termed a monopoly. Such an arrangement is marked by limited alternatives of products and inherent restrictions for other competitors to enter the market space. Because of limited or no competition, the producers generally have no incentive to foster the quality of their goods and services, leading to technological stagnation in an economy. Moreover, because of existing obstacles, small and medium sized entities chronically suffer from limited opportunities. This situation results in the accumulation of power in the hands of a few MNCs, which further exacerbates existing economic inequality and leads to unpleasant consequences such as price gouging and deteriorating quality of goods and services. In such an arrangement, sellers generally charge more for their products to attain high profits by ignoring the market forces of demand and supply. Thus, in the long run, monopolistic competition can deform market dynamics leading to lower innovation and diminished economic growth and creating an unhealthy competition that is detrimental to consumer welfare. Implications of the U.S. Ruling for Antitrust Enforcement in India The contemporary globalized world runs on the dictates of powerful multinational corporations (MNCs) that have their footprints in almost every corner of the world. The major driving force for the operation of these MNCs is profit maximization. To fill their treasures, they may try to maintain a dominant and exclusive position in the market and prevent other competitors from succeeding. Thus, maintaining an equitable and sustainable competitive marketplace becomes a quintessential task. The present verdict, though limited to the geographical boundaries of the US, holds great significance for the global tech market as it has paved the way for breaking the monopolies of dominant corporations involved in various anti-competitive practices. The judge ruled that Google’s exclusive distribution deals with corporations such as Apple and Samsung were anti-competitive because they resulted in the majority of users in the U.S. getting Google as the default search engine. This ultimately augmented Google’s dominant position and gave it an undue advantage over its counterparts because most of the users generally stick to default search engines. In developing nations like India, which are already struggling with persistent income inequality, the dominance maintained by these giant firms worsens the situation. These entities exercise unprecedented concentration of power and defeat the purpose of maintaining fair competition, consumer choice and data privacy. The present ruling against Google reflects a valuable opportunity to rein in its uncontrolled dominance exercised throughout the world. Eliminating such practices is advantageous for both the consumers as well as the competitors. It can assist consumers in finding alternative search engines as opposed to getting a default one on their devices. It will further incentivize tech corporations such as Google to build a better product that is more user-friendly and focused on safeguarding consumer’s data and privacy. The Draft Digital Competition Bill, 2024 released by the Ministry of Corporate Affairs, is a much-needed legislation in the direction of preventing anti-competitive tactics. Under this bill, the CCI, after determining a corporation’s digital dominance can designate them as Systemically Significant Digital Enterprises (SSDEs). These enterprises are strictly required to function fairly and transparently. To maintain a just and sustainable competition, these SSDEs are even prohibited from favouring their goods and services and sharing users’ personal information without their consent. A Call for Big Tech Regulation The phenomenon of the rise in consumption of digital goods and services is accompanied by the growing dominance of big tech corporations such as Microsoft, Apple, and Meta among others. Over the decade, these corporations have become the most valuable entities in the world. They exercise exclusive control over the digital services like e-commerce, social media and online search market and provide no space for small and medium competitors to enter this lucrative market. These big tech firms can

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Author name: CBCL