Author name: CBCL

To Write One’s Own Mandate: Introducing Self-Regulatory Organisations (SROs) in the FinTech Industry

Leave a Comment / Contemporary Issues /

[By Ansh Chaurasia & Mudrika Jha] The authors are students of Dr. Ram Manohar Lohiya National Law University, Lucknow. INTRODUCTION The Reserve Bank of India (hereinafter, ‘RBI’) has released the final Framework for Self-Regulatory Organisations (SROs) for FinTech Sector (hereinafter, ‘Framework’) on May 30, 2024, after releasing the draft for the same on January 15, 2024. The principle underlying the proposed Framework can be traced back to 2018 when the Report of the Working Group on FinTech and Digital Banking suggested the principles for regulatory intervention in the FinTech industry. These principles were centered on fostering healthy competition, ensuring impartial treatment, systemic stability, and user protection. The Framework issued by the RBI lays down the eligibility and membership criteria, functions, and governance norms for the proposed SRO-FT(s) and their responsibility towards the RBI. A FinTech SRO (hereinafter, ‘SRO-FT’) has been proposed to be an industry-led entity responsible for, inter alia, the establishment and enforcement of regulatory standards within the FinTech sector, dispute resolution, market intelligence and promoting transparency, ethical conduct and accountability among its members.   This blog puts forth an analysis of the idea of establishing an SRO and its desirability in the FinTech industry, a critical evaluation of the proposed framework, and the way ahead.  SROs FOR FINTECH: REGULATING ON THEIR OWN ACCORD A. The FinTech Story Globally, FinTech evolved in the aftermath of the economic crisis of 2008, which challenged the traditional banking system and paved the way for a resilient financial infrastructure. Due to its ubiquitous nature and automation of services, FinTech has lived up to its touted potential. It has been instrumental in expanding and expediting the rendering of financial services, making it an indispensable component of a developing economy. In India, FinTech has played a crucial role in revolutionizing digital payments and lending, making India the house of 22 FinTech unicorns. It has made financial services in India accessible to those who otherwise would have remained deprived of such services. B. Locating Consumer’s Interest As formidable as it may seem, the FinTech paradigm raises regulatory concerns. Processing personal data is a function of rendering services by a FinTech entity, which poses a significant risk to the user. Any uninformed choice made by the users of FinTech platforms exposes them to a potential risk of breach of privacy and data security. Several consequential risks, such as fraud and unethical usage of user data, emanate from the breach of privacy. Risks arising out of services available on FinTech platforms have already been acknowledged by RBI when unethical practices in digital lending came to the fore. The Working Group constituted by RBI reasoned that reliance on third parties by the lending entity created unethical practices such as mis-selling to unsuspecting customers, breach of data, and illegitimate operations. Consequently, RBI had to issue Guidelines to deal with this specific issue.  The ease and fast-paced nature of services provided by FinTech platforms jeopardise the interest of consumers who may fall prey to impulsive purchasing behaviour. Such consumers are likely to be affected by ‘bounded rationality’, a situation where an individual’s rationality for decision-making is constrained by a lack of information, the individual’s cognitive limitation, and the limited time to make the decision. Even the abundance of information about any transaction may not serve well to ensure favourable conditions for the consumer or to eliminate any potential unethical practice on the part of the service provider. India’s abysmal financial and digital literacy rates further aggravate the vulnerability to which a consumer of such platforms is already exposed. With the FinTech industry poised to expand, regulatory concerns are of much more significance than ever.  The rationale behind introducing this Framework is to attempt a balancing act between promoting innovation within the FinTech industry and minimising the risks it poses. The experience and expertise of FinTech companies underlying self-regulation can be a relatively better response to the complexities of this industry than a traditional legislative intervention. Obligations drafted by the subject of the regulation ensure a greater degree of compliance. Further, the cost of information, supervision, and enforcement gets lowered in a self-regulatory framework.  In its pursuit of increasing profits, the industry’s adherence to norms that further social interest is unlikely. Instead, they have a strong incentive to adhere to socially undesirable norms. Self-regulation is likely more effective when adherence to norms and best business practices are concomitant and when there is a concurrence in public and private interest. Therefore, to wane off the potential shortcomings of the SRO and achieve the desired outcomes, the RBI’s oversight plays an important role.  ANALYSING THE FRAMEWORK The Framework is in line with the ‘Twin Peaks Model’ of financial services regulation. As per this model, two distinct supervisory bodies should be operational in a sector, one for overseeing conduct of business activities, and the other for overseeing financial stability and prudential regulation. This is done to separate market conduct regulation (ethics and consumer protection) and prudential regulation (for management of systemic risks, monitoring capital and liquidity requirements in the sector), the rationale for the same being, risks of varying nature necessitate varying expertise and approaches to regulation. Several jurisdictions, such as Australia, Belgium, France, the Netherlands, and the United Kingdom, have adopted this model. One such example is the distribution of regulatory functions within the financial sector in England. The Bank of England’s Financial Policy Committee (FPC) is the reform regulator of England’s financial system, focused on managing systemic risks, whereas the Financial Conduct Authority (FCA) is the conduct regulator, ensuring healthy competition among market participants and consumer protection. The Framework delineates the scope of SRO’s operations, conforming to the international standard of distinguishing between prudential and conduct-based regulation. Public interest, market conduct and market intelligence, i.e. overall market conduct regulation, are the key responsibilities underpinning the SRO-FT Framework whereas RBI would continue performing prudential regulation of the FinTech sector.   However, the intended self-regulation comes with its peculiar shortcomings. When considering sectoral dynamics within the FinTech sector, the Framework encourages FinTech entities to have membership

To Write One’s Own Mandate: Introducing Self-Regulatory Organisations (SROs) in the FinTech Industry Read More »

Revamping Real Estate Investment: Evaluating SEBI’s Amendments to REIT Regulations

Leave a Comment / Capital Markets and Securities Law /

[By Arnav Laroia & Shashank Pandey] The authors are students of West Bengal National University of Juridical Sciences, Kolkata.   Introduction The Securities and Exchange Board of India (‘SEBI’) recently made significant changes to the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (‘Regulations’) by an amendment, signalling a watershed moment in the evolution of the Indian real estate investment landscape. The SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 (‘Amendment’) seek to improve accountability, reliability, and operational efficiency in the Real Estate Investment Trusts (‘REITs’) sector, reflecting SEBI’s commitment to creating a strong and dynamic investment environment. Furthermore, the Amendment aims to make real estate investments more accessible to retail investors, especially through Small and Medium REITs (‘SM REITs’), thereby boosting confidence in investment in commercial real estate. REITs are companies that own, operate, or finance income-generating real estate properties, allowing investors to earn dividends from real estate investments without directly owning property.   It is worth noting that these changes come at a critical time as the Indian real estate market matures and attracts a wide range of domestic and international investors. The updated Regulations, which address key areas such as regulatory compliance, disclosure requirements, and investor rights, are expected to boost the credibility and appeal of REITs in India.   This article delves into the specific changes resulting from the Amendment, their implications for stakeholders, and the overall impact on the Indian real estate investment ecosystem.  Regulatory Initiatives: Enhancing Accessibility The Regulations prior to the amendment simply defined a REIT under Regulation 2(1)(zm)  as a trust registered under the Regulations. The Amendment has expanded the definition of REIT under Explanation 1 of Regulation 2(1)(zm) to include SM REITs, as added under Chapter VIB of the regulations. An SM REIT under Regulation 26H(c) is defined as a REIT that pools investor funds into one or more schemes in accordance with sub-regulation (2) of Regulation 26P. Regulation 26P(2) allows an SM REIT scheme to make an offer of units if the proposed asset size is between Rs. 50 crores and Rs. 500 crores, and the minimum number of unitholders, excluding the investment manager, its related parties, and associates, is at least 200 investors.  The Amendment’s recognition and regulation of Small and Medium Real Estate Investments is a critical step towards protecting investments and increasing investor trust in this specialised investment industry. Furthermore, by establishing asset size requirements and a minimum number of unitholders, this regulatory measure will also stabilise the Small and Medium Real Estate Investment market, which is a high-risk market. The following will encourage investment in smaller and emerging real estate projects that might not meet the thresholds for traditional REITs, which are set at a minimum value of Rs. 500 crores under Regulation 14. This is a significant step towards increasing investment in smaller projects and cities, making it easier to invest in REITs for relatively smaller investors.   Notably, India’s small cities and towns are becoming significant regional job markets due to economic expansion and infrastructure improvements. According to reports, Tier-II and Tier-III locations offer talent and real estate costs at least 30% lower than Tier-I cities. Therefore, enterprises are increasing their presence in regional cities to meet rising consumer demand, contributing to the growth of the real estate market. Additionally, the requirement for a minimum number of 200 unitholders helps spread investment risk across a large group of investors, potentially lowering individual risk and increasing market stability. This could also possibly lead to increased diversity and inclusion of willing investors who were otherwise excluded from such REITs because of a lack of opportunity to invest.  Protection of Assets: Ensuring Accountability The Amendment under Regulation 26R mandates that the investment manager identify and provide information in a draft scheme offer document on the real estate assets or properties it intends to purchase. The document must be filed with SEBI and with the designated stock exchange. The minimum price for each unit of the SM REIT scheme is Rs. 10 lakhs, with each scheme identified by a separate name. As previously mentioned, each scheme’s real estate assets must be worth at least fifty crore rupees.  In addition, the books of accounts, bank accounts, investment or demat accounts, and assets are all required to be ring-fenced and separated by the trustee and investment manager. The trustee must ensure the property papers proving the title to the real estate assets or properties once a year and keep them in safe deposit boxes at a designated commercial bank. Furthermore, the draft scheme offer document shall be hosted on the websites of the SEBI, approved stock exchanges, and merchant bankers involved in the matter for a period of 21 days, therefore becoming publicly accessible.  These are some significant steps towards achieving the goals of the Amendment, as the inclusion of real estate assets in the draft scheme offer document and its 21-day public disclosure period increase confidence and transparency, enabling prospective investors to make well-informed decisions. In addition, including SEBI in the evaluation of the draft scheme offer document and providing feedback guarantees that the schemes comply with regulatory requirements and that any prospective issues are resolved before the scheme’s disclosure to the public. This regulatory monitoring has some resemblance to securities market norms, such as businesses’ publishing of the Draft Red Herring Prospectus, which is essential to maintaining investor confidence and the integrity of the SM REIT market.  Additionally, the minimum unit price of Rs. 10 lakhs ensures that the investments are significant and that the investors are financially capable of understanding and accepting the associated risks, given the high-risk nature of this market. Moreover, asset segregation and safekeeping safeguard investors’ funds and ensure accountable management. The explicit requirement to keep property documents secure, as well as the trustee’s annual inspection, ensures accountability and proper management of real estate assets.  Provision for Distributions: Streamlining Interests The amendment further stipulates under Regulation 26ZK that, in accordance with the Companies Act, 2013, the investment manager must transfer 95% of the Special Purpose

Revamping Real Estate Investment: Evaluating SEBI’s Amendments to REIT Regulations Read More »

Balancing Fairness or Encouraging Delays? SC’s take on Recall Application

Leave a Comment / Insolvency Law /

[By Anwesha Nanda & Ankit Raj] The authors are students of National Law University Odisha.   Introduction The essence of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as per its Preamble is to guarantee timely resolution and revival of the Corporate Debtor (“CD”). By adhering to its core principle, it helps build confidence in creditors and minimise undue delay in the process of resolution. However, a recent ruling of the Supreme Court (“SC”) by a three-judge bench led by the Chief Justice of India in Greater Noida Industrial Development Authority v. Prabhjit Singh Soni & Others (“GNIDA”) seemingly deviates from this objective.  The IBC has a well-defined structure for corporate insolvency resolution, which is led by resolution professionals (“RP”), a committee of creditors (“CoC”), and finally an adjudicating authority for approval of the insolvency resolution plan. Given this context, a critical point to ponder is whether any creditor or person whose interest has not been considered, with due care by the CoC, can approach the adjudicating authority to revisit the approved resolution plan?  The answer to this question was dealt with in the case of GNIDA. The SC framed the issue of whether the adjudicating authority, notably the National Company Law Tribunal (“NCLT”) has the power to revisit their judgement by recalling it. The SC ruled that the NCLT has inherent power to recall the judgement under certain circumstances. While acknowledging the potential advantage of the judgement in certain circumstances where the interests of creditors are hampered, at the same time some loopholes can be misused by unscrupulous parties to re-hear matters or cause deliberate delays. In this article, the authors undertake a critical analysis of the SC’s decision, contending that the verdict diverges from the overarching objectives and preamble of the parent statute, i.e., the IBC.  Factual Matrix In this case, GNIDA filed an appeal against an order issued by the NCLT, which was subsequently upheld by the National Company Law Appellate Tribunal (“NCLAT”), approving the resolution plan for M/s. JNC Construction Pvt. Ltd. (Corporate Debtor). GNIDA had given land on lease for 90 years for the residential project to the CD in consideration of some premium payable by it. The lease agreement was subject to payment of premium at due time which was breached by the CD. In the meantime, through a company petition, the CD was taken into insolvency under the IBC.  Following the initiation of the Corporate Insolvency Resolution Process (“CIRP”), GNIDA submitted its claim as a secured financial creditor. However, the RP classified the claim as that of an operational creditor and admitted only a portion of it. To further clarify its position, the RP sought a claim in Form B to designate it as an Operational creditor of CD. Subsequently, there was no further communication from the side of GNIDA because of which a part of the claim was acknowledged and incorporated into the resolution plan. GNIDA’s primary argument arose from the incorrect handling of its claim within the resolution plan and concerns regarding the principles of natural justice.  Understanding Recall of an Order or Judgement. The recall of an order or judgement necessitates “reversal” or “revocation” of the order or judgement owing to the defects during the procedure. In the cases of Agarwal Coal Corporation Private Limited v. Sun Paper Mill Limited and Rajendra Mulchand Varma v. K.L.J. Resources Ltd. The NCLAT held that the NCLT or NCLAT lacks the authority to review or recall its judgments due to the absence of specific provisions in IBC. However, this issue was referred to a five-member bench of the NCLAT in Union Bank of India v. Dinakar T. Vekatasubramanian. (Dinakar T. Vekatasubramanian). The bench concluded that while the NCLAT cannot review its own judgments due to the lack of statutory backing, it does possess the power to recall judgments under Rule 11 of the NCLAT Rules, 2016, which grants inherent powers to the tribunal to ensure justice. Additionally, it stated that the power to recall a judgement can be exercised only when any procedural error is committed in delivering the earlier judgement. This interpretation was later upheld by a two-judge bench of the Supreme Court in Union Bank of India v. Financial Creditors of M/s Amtek Auto Ltd. & Ors.  Furthermore, it is well established in Budhia Swain & Ors. v. Gopinath Deb & Ors. (Budhia Swain) that the criteria for recalling an order are: firstly, the proceedings leading to the order are fundamentally flawed due to a clear lack of jurisdiction; secondly, the judgement was obtained through fraud or collusion; thirdly, there was also a mistake by the court that caused prejudice to a party, and the judgement was delivered without including a necessary party; Additionally, the court clarified that the power to recall a judgement couldn’t be exercised when the pleader had an option available to reopen the proceeding in the original action or where proper remedy by way of appeal or revision was available as an alternative and was not taken into consideration.  Critical analysis The IBC was enacted to assist debt-ridden companies promptly, emphasizing the importance of time in the resolution process. In the GNIDA, it was allowed to recall the order approving the resolution plan even after more than 3 years of the commencement of the resolution process. This effectively gives a second life to the insolvent company. By recalling an order that approved the resolution plan, the SC essentially examined the plan itself and explicitly delegated similar power to the NCLT. This is evident from the SC’s scrutiny of compliance standards and deficiencies outlined in Section 30(2) of the IBC.   The SC allowed the recall application because the resolution plan did not comply with Section 30(2) of the IBC. The grounds laid down in the case of Budhia Swain, do not apply in this situation. By making this decision, the SC has effectively added non-compliance as a valid reason to file a recall application. This could enable dishonest promoters or creditors with ulterior motives to delay the resolution process

Balancing Fairness or Encouraging Delays? SC’s take on Recall Application Read More »

Quantum Voting: The Vanguard of Corporate Democracy in the Quantum Era

Leave a Comment / Technology Law /

[By Tridha Gosain] The author is a student of DNLU Jabalpur.   Introduction As the world of business continues to grow and adapt over the years, maintaining governance and ensuring the transparency, security, and fairness of decision-making has remained an issue. As fundamental as conventional voting methods are to corporate democracy, they are becoming increasingly prone to vulnerabilities that include tampering, fraud, vote coercion, and voter anonymity. However, the emergence of quantum computation, and its somewhat mysterious foundations, has opened the door for the creation – quantum vote – a new kind of solution that can dramatically revolutionalize the very foundations of business voting, bringing in a new level of shareholder confidence and solidity.  In this article, the author looks at the possibilities of quantum voting in corporate governance and highlights aspects of transparency, security and fairness, which have remained a concern in most organizations. Incorporation of quantum mechanics principles such as superposition, entanglement, and no-cloning theorem will enable quantum voting to transform the authenticity and accuracy of the corporate voting systems.   This article examines how quantum voting offers robust encryption methods to protect against quantum-based hacking attempts, thereby safeguarding the integrity of corporate decision-making as quantum computing continues to evolve. Furthermore, the article also analyses how quantum voting has flexibility in guaranteeing the voters’ identity to prevent vote bribery and coercion while at the same time maintaining anonymity in the voting process.  Quantum Principles in Corporate Voting Quantum voting relies heavily on the principles of quantum mechanics, including superposition or Schrodinger’s cat and entanglement along with no-cloning. These quantum phenomena, previously confined to theoretical physics, now offer powerful tools for securing and verifying corporate voting processes.  Another benefit of this solution is that the act of quantum voting is inherently immune to hacking or attempts at tampering. Existing electronic voting technologies based on classical cryptography are at risk due to the emergence of quantum computing which can break even the most secure encryption schemes. Quantum voting, in contrast, builds its encryption scheme based on quantum mechanics, thus making it impossible for anyone to tamper with the integrity of corporate voting in the future.  Preserving Anonymity, Preventing Coercion Another significant characteristic of quantum voting stems from the need to protect voter anonymity while preventing vote-buying and coercion. The conventional approaches to voting fail to balance the two objectives of anonymity and prevention of coercion in the voting process because measures that ensure anonymity encourage coercion whereas measures that discourage coercion interfere with the voters’ anonymity.  Quantum voting then follows this process and conveniently sidesteps the aforementioned paradox by employing quantum entanglement and the no-cloning theorem. Quantum entanglement is a procedure wherein two or more particles become correlated in such a way that the quantum state cannot be expressed in terms of individual particle quantum states, even when large distances separate these particles. This property allows for secure communication channels. On the other hand, the no-cloning theorem shows that it is impossible to make an identical copy of an unknown quantum state. It ensures that quantum information cannot be copied or stolen perfectly and thus provides a foundation for secure voting protocols. These principles combined provide a system where the votes can be securely transmitted and verified without any breach of the privacy of the voter or manipulation of the votes. Due to the features of preventing the opening of citizens’ votes or transferring them to other voters, quantum voting protocols are incorruptible and guarantee anonymity since votes are encoded into quantum states that cannot be copied or deciphered.  Transparency and Verifiability Moreover, quantum voting protocols offer unparalleled transparency and verifiability, two crucial tenets of corporate governance. In contrast to classical voting systems, where the voter has no ability to assure the trustworthiness of the voting process besides relying on the trusted third party or a central authority, quantum voting systems utilize quantum mechanics principles for decentralized verification and consensus.  Using quantum entanglement and quantum key distribution, the stakeholders can confirm the accuracy of votes and the authenticity of the voting process without violating the anonymity of the votes or disclosing any other information. This kind of decentralization reduces the chances of central control or manipulation while at the same time promoting more trust and transparency in the corporate world.  Quantum Voting Rights: A Departure from Traditional Models In its basic form, Quantum Voting Rights (QVR) are defined as a set up in which some shareholders or some classes of shares have special rights in voting that are disproportionate to their actual economic rights. This divergence from the usual ‘one share, one vote’ principle is practiced by tech titans such as Google and Facebook. This has not only sparked controversy over the balance of power on who should control the companies where shares are traded but also over the rightful owner of those shares.  The rationale for QVR can, therefore, be traced back to conventional counterintuitive theories, which inform quantum mechanics – a sphere of physics where particles can occupy several states at once but do not conform to logical reasoning. The quantum phenomenon researchers have used these to come up with a new voting system that is more secure, verifiable and anonymous as compared to the other voting systems.  Navigating Regulatory and Legal Challenges in India The two most important forms of corporate governance regulations in India are the concept of shareholder democracy and inclusiveness of stakeholders. The adoption of Quantum Voting Rights (QVR) faces regulatory and legal hurdles due to the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations, which prioritize equal voting rights and shareholder protection. But with the burgeoning startup environment in India and more foreign investors coming in, there is pressure to embrace advanced governance structures. While QVR represents a departure from traditional voting methods, it can be implemented in ways that uphold the core principles of corporate law. By integrating QVR systems with existing governance structures, maintaining transparency through robust disclosure requirements, and incorporating safeguards for minority shareholder protection,

Quantum Voting: The Vanguard of Corporate Democracy in the Quantum Era Read More »

Closing the Loopholes: Strengthening SEBI’s Approach to Market Rumours

Leave a Comment / Capital Markets and Securities Law /

[By Priya Sharma & Archisman Chaterjee] The authors are students of National Law University Odisha   Introduction  To facilitate a uniform approach for verifying market rumours by listed entities, the Securities and Exchange Board of India (SEBI) recently notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024 (the Amendments). These amendments were accompanied by a Circular on ‘Industry Standards on verification of market rumours’ (the Circular).  Effective from 17 May 2024, the Amendments provide criteria for verification of market rumours in terms of material price movement instead of materiality of event or information and the mechanism to consider unaffected price with respect to transactions related to securities. The Circular requires the Industry Standards Forum (comprising representatives from ASSOCHAM, CII and FICCI) to formulate industry standards applicable to the implementation of the requirement to verify market rumours under Regulation 30(11) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). Accordingly, the requirement to verify market rumours shall apply to the top 100 listed companies, effective June 1, and to the next 150 listed companies, effective 1 December 2024.  While the amendments are a welcome step in promoting uniformity and revamping the regulatory framework for market rumours, SEBI may have missed the opportunity to close regulatory gaps. Specifically, there is inadequate oversight on social media platforms and potential for false denial or confirmation of rumours.  ​​​The latest Amendments and accompanying developments In pursuance of the Amendments, the Industry Standards Forum has published ‘Industry Standards Note on verification of market rumours under Regulation 30(11) of LODR Regulations’ (“Guidance Note”). The Guidance Note defines ‘Mainstream Media’ and the news sources that will be included within its ambit. It shall be the responsibility of the listed entity to put in place proper technology solutions and engage social media agencies to track the news reported in Mainstream Media. The requirement under Regulation 30(11) will only be applicable to the market rumours reported in this Mainstream Media.   Criteria for Verification In order to activate the applicability of Regulation 30(11), the market rumour in question must not be vague or general in nature. Instead, it must provide specifically identifiable details of a matter/event or provide quotes or be attributed to those who are reasonably expected to be knowledgeable about the matter. Another prerequisite is that there must be ‘material price movement’ in the scrip of the listed entity, as opposed to the previous ‘materiality of event or information’ criteria. The listed entities usually avail services from agents or develop in-house teams to track such movement in their scrip. The obligation is placed on the promoters, directors, KMP and senior management of the entity to provide adequate and accurate responses to the queries raised to them. However, there are significant gaps in regulation that warrant attention.  ​​​Exclusion of Social Media: a missed opportunity The rumour verification requirement was originally introduced to avoid false narratives that may impact the price of the securities of a listed entity. Notably, the definition of Mainstream Media excludes social media, which means that social media channels/accounts, such as those run by finfluencers having lakhs of followers, fall outside its scope.   Finfluencers are known to influence their audience by providing financial education and offering investment recommendations. In many cases, these finfluencers are unregistered, and may not adhere to any disclosure requirements. Apart from advice, finfluencer channels may also contribute or give rise to market rumours, which may in turn affect the scrip of a listed entity. Such market investment scams are on the rise. SEBI, in the recent past, has been cracking down on such activities, but these actions will largely remain ineffective in dealing with the menace of finfluencers in the long run. Currently, there is no specific legal framework dealing with finfluencers who are not registered as either Investment Advisors or Research Analysts. Therefore, considering the current regulatory gap, it is crucial for SEBI to tighten its regulatory grip on social media channels as well. The regulatory mechanism could incorporate an oversight mechanism to verify compliance by social media intermediaries and finfluencers.   In the present case, Mainstream Media must also include social media within its ambit, considering the fact that investment channels run by finfluencers have become one of the most important sources of investment information and financial literacy in recent times. Such inclusion may increase compliance costs, but will ultimately further SEBI’s overarching objective of protecting interests of investors.  While broadening the scope to include social media will be a step forward, there are other notable issues that need addressing.  Regulatory Gaps As per the Guidance Note, the listed entity is required to either confirm or deny the rumour in case of material price movement. According to the price framework post confirmation of the rumour (price framework), the price would be frozen only if the said rumour is accepted to be true. In case the entity opts to deny the rumour, the price would be left to pan out in the usual course of business. Upon verification of the rumour, the price framework comes into effect. It envisages the mechanism for calculating the volume weighted average price (‘VWAP’), which dictates the price of a transaction. It is computed by deducting the variation in weighted average price (‘WAP’) from the daily WAP during the period between the date of material price movement and the trading day after rumour verification. However, there is uncertainty as to what would happen if an entity opts to deny the rumour, but later proceeds with the said rumoured transaction which specifically identifies the said entity. The present regulations which encompass both the LODR regulations as well as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) do not explicitly dictate the recourse in such a scenario.  To understand how such a situation may be dealt with, it is necessary to look at the ‘Put up or Shut up’ rule (outlined in the UK’s Takeover Code) implemented in the UK. The

Closing the Loopholes: Strengthening SEBI’s Approach to Market Rumours Read More »

Reflecting on the Madras High Court Judgment: Transparency and the Clean Slate Theory in IBC

Leave a Comment / Insolvency Law /

[By Soniya Raghuwanshi] The author is a student of Institute of Law, Nirma University.   Introduction The Insolvency and Bankruptcy Code (IBC) of 2016 marked a significant shift from the previous rigid legal frameworks, focusing on a more holistic approach to insolvency. Unlike earlier statutes that concentrated on recovering loans, the IBC emphasizes loan restructuring, aiming to strike a balance between the interests of creditors and corporate debtors. This ensures the survival of the company while also satisfying the creditors’ claims.  The Clean Slate Theory (CST) posits that once Resolution Plan is approved by Committee of Creditors and subsequently by the approval of Adjudicating Authority then, all claims, whether resolved or unresolved, are extinguished. This doctrine ensures that successful resolution applicant can take over the business without any lingering liabilities. The Committee of Creditors (CoC) play crucial roles in enhancing the effectiveness and integrity of the insolvency process. A recent ruling by Justice N. Seshasayee of the Madras High Court in the case of “The National Sewing Thread Company Limited vs. TANGEDCO” highlighted the importance of transparency and full disclosure in the IBC proceedings. The judgment reaffirmed the CST’s application, the CoC’s commercial discretion, fair treatment of creditors, and the need for judicial supervision, ensuring that the principles of the IBC are upheld in practice.   This article therefore, delves into the implication of Clean Slate Theory and examines substantial questions regarding the validity of claims post-approval of a resolution plan, the equitable treatment of operational creditors, and the extent of judicial oversight in insolvency proceedings for ensuring transparency and fairness This case also underscores critical aspects of the Insolvency and Bankruptcy Code (IBC) in India thus brings to light the critical balance between the CoC’s commercial wisdom and the need for transparent and fair resolution processes under the IBC.  Analyzing the Implications of IBC Resolution Plans on Creditor Claims and Judicial Oversight The recent case involving TANGEDCO’s claim for unpaid electricity charges against The National Sewing Thread Co. Ltd. brings to the forefront several critical aspects of the Insolvency and Bankruptcy Code (IBC) and its application. Wherein to determine “TANGEDCO’s Post-Plan Claim Validity under IBC, “The heart of the dispute lies in whether TANGEDCO’s claim for unpaid dues can survive the approval of a resolution plan under the IBC. The petitioner’s stance is that the resolution plan nullifies the claim, while TANGEDCO insists that the resolution plan failed to address its statutory dues. The resolution plan’s binding effect, as per Section 31 of the IBC, suggests that once approved, it should extinguish all prior claims, including those of statutory creditors.  Furthermore, the question pertaining to the compliance with IBC’s Section 30(2) which mandates fair treatment of operational creditors, ensuring they receive no less than the liquidation value of their claims. The resolution plan’s compliance with this section is pivotal, as it guarantees the minimum entitlement due to operational creditors and prevents their disenfranchisement. The need for the judicial review of Coc’s Commercial Decisions is crucial in determining the fairness.   The scope of judicial review over the CoC’s decisions is limited. Courts generally defer to the commercial wisdom of the CoC unless there is a glaring non-compliance with the IBC’s statutory requirements. The judiciary’s role is not to reassess the CoC’s business decisions but to ensure that the resolution plan meets the IBC’s provisions. However, the applicability of The Clean Slate Theory(CST) under the IBC posits that an approved resolution plan should wipe the slate clean for the corporate debtor, negating all previous claims and liabilities This principle is crucial for the resolution applicant to commence operations without the burden of past debts, providing a fresh start.  Therefore, the IBC strives for equitable treatment of all creditors, though it recognizes the distinct roles of financial and operational creditors. The resolution plan must not discriminate unjustly among different classes of creditors, ensuring that each class is treated fairly and equitably within the framework of the IBC  The Judicial Microscope The judgment delves into the M.K. Rajagopalan case, drawing parallels to emphasize the supremacy of the Committee of Creditors’ (CoC) commercial wisdom, contingent on the complete disclosure of information. The omission of electricity dues raised eyebrows, suggesting a deliberate act rather than an oversight.  In M.K. Rajagopalan v. Dr. Periasamy Palani Gounder, the Supreme Court emphasized that the CoC’s commercial decisions must be based on complete and transparent information and must ensure equitable treatment of operational creditors. The ruling highlighted that commercial wisdom of the CoC means a considered decision taken with reference to the commercial interests and the interest of revival of the corporate debtor and maximization of the value of its assets. This decision has introduced a much-needed responsibility to the thought process of the CoC, ensuring that their decisions are made with all relevant information.  The core Principle of Clean Slate Theory is to provide the Corporate Debtor with a fresh start, free from all the past liabilities and claims which ensures the debtor to be released from obligations and transgressions before the approval of resolution plan. The court emphasized that without complete disclosure of information, the core principle of the Clean Slate Theory is compromised. In the realm of insolvency proceedings, the Supreme Court has reaffirmed the critical importance of the Committee of Creditors’ (CoC) commercial wisdom in the evaluation and approval of resolution plans. This acknowledgment is predicated on the condition that such decisions are in strict alignment with the provisions of Section 30(2) of the Insolvency and Bankruptcy Code (IBC). The CoC, primarily composed of financial creditors, is entrusted with the responsibility to judiciously assess the practicality and sustainability of the proposed resolution plans.   Simultaneously, the Court has delineated the limited yet pivotal oversight role of the Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT). Their function is to ensure that the resolution plan not only meets the statutory mandates but also dispenses equitable treatment to all classes of creditors, thereby upholding the integrity of the insolvency resolution process.   Moreover, the principle of equitable treatment of creditors, particularly operational creditors

Reflecting on the Madras High Court Judgment: Transparency and the Clean Slate Theory in IBC Read More »

The Paradox of Revival of Unviable Businesses: When Over-Emphasis on Revival Leads to Value Erosion

Leave a Comment / Company Law /

[By Ishita Chandra] The author is a student of Dr. B.R. Ambedkar National Law University, Sonepat.   INTRODUCTION The liquidation of a corporation denotes the cessation of its activities, business endeavours, or existence upon its incapacity to settle its debts or obligations, owed to its creditors. Section 230 of the Companies Act empowers the liquidator, in the event of a company undergoing liquidation under the Insolvency and Bankruptcy Code 2016 (IBC), to propose a Scheme of Compromise and Arrangement. Such a scheme enables companies to reorganize their operations through mergers, demergers, acquisitions, or other forms of restructuring. This may include reorganizing the company’s share capital by consolidating shares of different classes or dividing shares into distinct classes. Nevertheless, this article endeavours to explain why, in a liquidation proceeding under IBC, a Scheme for Compromise and Arrangement should not be permitted particularly while dealing with a company that is entirely unviable and the operations of which are economically unfeasible.  INSOLVENCY PROCEEDING  – A CONSCIOUS STEP THAT IS UNDERGONE AFTER CONSIDERING THE SCOPE OF COMPROMISE AND ARRANGEMENT When a corporate debtor defaults on its debts, a legal process called the Corporate Insolvency Resolution Process (CIRP) gets initiated under IBC, with the objective of addressing the insolvency of corporate entities. It becomes imperative to note that the CIRP gives adequate time for resolution of insolvency. Statutorily, the CIRP should be completed within a period of 180 days from the date of admission of the application seeking to initiate CIRP proceedings. An additional one-time extension of 90 days may be provided by the Adjudicating Authority. The resolution process, including the time taken in legal proceedings, must be completed within a total of 330 days, failing which, liquidation proceedings will be initiated against the corporate debtor as per Section 33 of the Code. The aforementioned provisions uphold the spirit of the IBC expressed through its Preamble which aims to maximize the value of assets, in a time-bound manner. The time allowed by the IBC to conclude the resolution process is more than sufficient to arrive at a viable resolution plan to save a viable company from corporate death. Thus, a Scheme of Compromise and Arrangement essentially leads us to understand that a mere extension provided for the proposal of a scheme of compromise and arrangement adds no value to the resolution process of an unviable business and merely prolongs it incessantly.   Generally, parties resort to insolvency proceedings under the IBC only after exhausting all other potential avenues for resolving disputes between debtors and creditors, leaving no further options for resolution. Hence, it is evident that both the debtor and creditors must have previously considered the possibility of a Scheme of Compromise and Arrangement before resorting to the IBC. Consequently, the initiation of CIRP should be regarded as a deliberate and well-considered action. However, permitting a compromise scheme during the liquidation process of an unviable company undermines the gravity of such a decision.  PROLONGED LITIGATION – A CHALLENGE FOR UNVIABLE BUSINESSES Allowing schemes of arrangement during liquidation proceedings, allows for a never-ending cycle towards resolving an entity as such schemes are time consuming processes, whereas the focus of the Code is to create time-bound processes. For proposing a Scheme of Compromise and Arrangement, Section 230 mandates convening gatherings of both creditors and members, further outlining a comprehensive voting procedure for endorsing a scheme that necessitates agreement from a majority representing three-fourths in value of said creditors, members, or a specific class among them. The convening of a creditors’ meeting as required by Section 230 of the Companies Act can be waived if creditors representing 90% in value provide their approval for the arrangement through affidavits. This underscores that a creditor who refuses to cooperate can disrupt the fair allocation of assets or hinder the adoption of a viable resolution that serves the company’s best interests. Creditors might choose to contest a settlement plan, leading to prolonged legal disputes that impede the ultimate timeline of a liquidation process, causing further setbacks in the form of erosion of the value of the assets. Thus, if the promoters and ex-management of an unviable business are allowed to present schemes in liquidation on the basis of Section 230 of the Companies Act, 2013, this would result in prolonged litigation under the Code.   Furthermore, an entity under the auspices of IBC gets multiple chances of proving its viability. A viable business should ultimately find success through CIRP proceedings. Therefore, pressing for an additional chance through a “scheme” might indeed prove to be ineffective in case a company is completely unviable.   A major obstacle to business restructuring can arise from a system that practically prevents the efficient dissolution of a viable entity. Placing excessive focus on revival while disregarding the reality that, in certain instances, liquidation is the optimal approach for value maximization, could potentially result in the erosion of the value of the assets. Schemes of compromise or arrangement may not always be feasible, or economically viable once a decision to liquidate the corporate debtor has already been made, following the failure of the CIRP. Further, repeatedly attempting revival, through schemes of arrangement or otherwise, even where the business is not economically viable is likely to result in value-destructive delays, and was identified as a key reason for the failure of the regime under the SICA (Sick Industrial Companies Act, 1985), by the BLRC in its Interim Report.  HOW OVER-EMPHASIS ON REVIVAL MAY LEAD TO VALUE EROSION It is crucial to recognize that the value of assets and the duration of insolvency resolution are inversely related. As the delay in insolvency resolution persists, it becomes increasingly probable that the liquidation value will decline over time, given that several assets (especially tangible assets like machinery) suffer from substantial economic depreciation overt ime. Therefore, in cases where companies are entirely unviable and economically unsustainable, excessive emphasis on revival through a Compromise and Arrangement Scheme (which would lead to further delay of approximately 3 months) could lead to unnecessary erosion of value due

The Paradox of Revival of Unviable Businesses: When Over-Emphasis on Revival Leads to Value Erosion Read More »

Cautiously Compliant: Adapting to Data Privacy Laws in M&A Transactions

Leave a Comment / Mergers & Acquisitions /

[By Aditi Kundu & Prithviraj Chatterjee] The authors are students of Hidayatullah National Law University, Raipur.   Introduction Passed on 11th August 2023, the Digital Personal Data Protection Act of 2023 (‘the Act’) envisages to regulate the intricacies of digital personal data processing. Once enforced, through this act the government aims to recognise the rights of individuals regarding their personal data and at the same time ensures personal data processing entities lawfully carry out their operations. Such entities apart from adhering to their obligations under the Act will also have to oversee its compliance during Mergers and Acquisitions (‘M&A’) transactions. While navigating the contours of the Act, the Authors will also analyse multi-fold implications on M&A transactions concerning Buyer Company, Seller Company and Legal Advisors. Finally, a clear picture would be visible by a sectoral study of M&A transactions occurring in the Financial Sector.    Overview of the DPDP Act, 2023 The main focus revolves around the protection of Digital Personal Data which is any piece of information in a digital medium that identifies/relates to an individual. The data stored by an entity is susceptible to mishandling and breach of privacy during various formalities and processes involved in M&A transactions which calls for greater liability on such entities in order to hold them accountable. The enforcement of the DPDP Act would subsume the governance regarding digital personal data while non-digital personal data would still fall under the Information Technology Act, 2000 (‘IT Act’) and Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (‘SPDI Rules’).    Breakdown of the Act The Act has recognised three central stakeholders, i.e. Data Fiduciary, Data Principal and Data Processor. Firstly, the Data Fiduciary determines the purpose for which the personal data will be processed. Secondly, the Data Principal is the individual whose data is in question. Lastly, Data Processors are those who process the data on behalf of the Data Fiduciary.   Obligations of Data Fiduciary The obligations of Data Fiduciary can be categorised into (i) Consent specific obligations; (ii) General obligations.  The data fiduciaries can process personal data only for lawful purposes. And this processing can be justified on two grounds, firstly, informed consent of the data principals and secondly, certain legitimate uses recognised under Section 7 of the Act. Such consent has to be explicit and can be attained via notice which has certain parameters such as it should convey what personal data will be collected and the purpose for the same.   A major respite for the Data fiduciary comes in the form of exemptions of its obligations for certain cases such as scheme of arrangement, merger, amalgamation, demerger and any reconstruction or transfer of undertaking. However such exemption is granted once a court, tribunal or other competent authority gives its approval to the transaction. By providing this the Act naturally creates a distinction in Section 17(1)(e) between those transactions that get approval such as scheme of arrangement or mergers and those that do not need any approval like acquisitions or share purchase transactions. The former transactions therefore are exempted while the latter will still need to comply with the provisions of the Act.   Implications for Various Parties in an M&A Transaction In a M&A transaction, both the seller and buyer companies are obligated as data fiduciary to comply with the Act, since they determine how data will be processed throughout the transaction. While entities like legal advisors are data processors acting on behalf of aforementioned data fiduciaries.  Seller Company The present scenario with most privacy policies follow the trend of using crafty, broad and vague consent requirements such as allowing the sharing of data with an intermediary, vendors or service providers but the Act will require all sellers to overhaul their current privacy policy with specified consent to accommodate any future potential merger or restructuring process. This is a viable precautionary measure for sellers to avoid any messy litigation while they are engaged in a major transaction. Additionally, compliances are enhanced against the selling company regarding serving consent notice which must instil an affirmative and clear action from the data principals which will require the seller company to incorporate an effective consent mechanism. Further Section 8 (6) of the Act compels the data fiduciary to inform the Board and each Data Principal in the event of a personal data breach which would lead to a negative market perception thereby affecting the seller’s valuation during an ongoing transaction. Now in the absence of a minimum threshold, even a minor breach can have huge implications due to the spread of misinformation in the market.   Buyer Company The major obligation for the Buyer Company would be the diversification of its Due Diligence drill. The expanded horizon of due diligence would entail checking the status of the seller company’s compliance with the data privacy laws which would include any sector-specific guidelines as well; ensuring that the seller company’s privacy policies are as per the law; the buyer will also have to run through the contractual obligations of the seller company. For example, where the seller company is a service provider its privacy obligations under the third-party contracts will have to be checked. In an M&A transaction, buyer companies have a level of protection against the seller companies by way of Representation & Warranties (‘R&W’) given by the latter for its legal compliances. Considering the wide ambit of privacy laws, it would be beneficial for the buyer companies to negotiate for a privacy-specific R&W, this would maximise the protection against hefty fines and penalties under the Act in case of any unanticipated breaches.   Legal Advisors Having seen that the sole responsibility for any breach would lie on the data fiduciary, it is very likely that the data fiduciaries would intend to be indemnified by the law firms, who process each transaction, for a breach caused by the latter. Therefore it is pertinent for law firms to negotiate such indemnity clauses while dealing with buyer or seller companies. Moreover, the law firms will

Cautiously Compliant: Adapting to Data Privacy Laws in M&A Transactions Read More »

Protecting Innovation: An Analysis of India’s Trade Secret Landscape

Leave a Comment / Contemporary Issues /

[By Siddh Sanghavi] The author is a student of National Law University Odisha.   Introduction  The 22nd Law Commission on 5th March 2024 came out with its 289th report on “Trade Secrets and Economic Espionage”, wherein it suggested the need for special legislation to protect trade secrets and prevent economic espionage. The Law Commissiosn based on the report also came out with a draft bill titled the Protection of Trade Secrets Bill.  A trade secret is a type of intellectual property that is a confidential business secret and is not generally known or easily accessible. Trade Secrets are considered to be economically valuable because of their secrecy.    India is under an international obligation to protect Trade Secrets. Article 39 of the TRIPS agreement (Agreement on trade related aspects of intellectual property rights) mandates the state to protect “undisclosed information”. The risk of protection of trade secrets and economic espionage has affected businesses for a long time. From the 1983 Star Wars Case, wherein an employee tried to steal the script of the upcoming star wars movie, to the attempted breach of the secret Coca- Cola formula.   This blog analyses the current regulations in India to protect trade secrets vis- a- vis the need for specialised legislation, it analyses the provisions of the draft bill, and gives suggestions for the same.   Inadequacy of current Laws to protect trade secrets India does not have a specific statute or act protecting trade secrets. Currently, Trade Secrets in India are protected mainly through Non-Disclosure Agreements between parties and provisions of the IPC and Information Technology Act 2000 (IT Act), which provide for criminal sanctions. These acts do not provide any special procedure to protect the rights of the trade secret holder nor do they provide any comprehensive set of relief that will be available in case of any leak of trade secret. The question also arises as regards to civil remedies to protect trade secrets in the absence of a contract or in cases of breach by a third party.    Civil Remedies Indian courts, in the absence of a contract provide for protection of trade secrets based on equity principles and common law action for breach of confidence. For example in the case of Richard Brady V. Chemical Process Equipment Pvt Ltd the Delhi High Court granted an injunction even in the absence of a contract citing its broader equitable jurisdiction. Granting of injunction has been one of the main remedies used by courts in India to give protection for leak of trade secrets.   Further, in cases of violation of NDA or leak of trade secret, there is currently no special procedure outlined through which remedy can be sought through the court system. Usually if a company wants to claim damages or seek compensation it will have to go through the long and tedious court process, which itself might lead to disclosure of the trade secret and cause more harm than good.   Criminal Remedies With regards to criminal remedies, currently, when cases of Economic Espionage and trade secrets are registered the accused are usually charged with sections of Theft, trespass, dishonestly receiving stolen property and Cheating.   However courts are hesitant to apply IPC to cases of economic espionage. For example in the case of Pramod, Son of Lakshmikant Sisamkar V. Garware Plastics and Polyester {Pramod case}, the Bombay High Court refused to use criminal sanctions against certain engineers who had taken certain documents from their employers and opened a new company. The court held that since the allegedly stolen documents haven’t been used and the new company wasn’t operational criminal sanctions couldn’t be imposed. This leaves the aggrieved with almost no recourse to criminal charges against the accused.   Trade secret protection clauses have also been indirectly incorporated in the IT Act. When economic espionage is carried out through electronic means criminal remedies have been provided under the IT Act. For instance in Mphasis BPO Fraud case in 2005, the IT act was used to give punishment when there trade secrets were stolen due to unauthorised use of computer resources.   Section 43 of the IT Act read with Section 66 prohibit unauthorised use of computer systems and breach of electronic devices without authorisation. The punishment provided under these sections is imprisonment upto 3 years and a maximum fine of Rupees 5 Lakhs.   However, the penalty prescribed is not at all adequate since trade secrets when stolen may cause losses of millions and billions rupees to the aggrieved company who has invested a substantial amount of capital in the research of proprietary technology. This disproportionality between the loss caused to the company and penalty imposed needs to be rectified when cases specific to corporate espionage are involved. Calling for a specialised legislation for protection of trade secrets.   Furthermore, in the absence of a specialised legislation, when cases arise, judges rely on precedents and interpretation of the provisions of the IPC and IT Act in their applicability to protect trade secrets to address the problem. This leads to greater confusion and lack of reliability in the legal framework.   Further clarity regarding the law can only be ensured through a special law dedicated towards outlining the rights, restrictions and remedies for trade secret holders.   Analysis of the Draft bill The draft bill is definitely a step forward in providing a comprehensive framework for the rights and responsibilities of the trade secret holder. The draft bill now provides for an all-inclusive legislation, stating the various rights and duties of the holder, including the right to license and commercialise the trade secret to use it as a stream of revenue. It also provides that any misappropriation of the trade secret will allow the holder to initiate legal action.   While the right to license a trade secret was first governed by general contract law. An express statutory recognition of this right of the holder, along with an attached remedy in case of misuse is definitely more favourable for businesses in India.   Many countries like the UK, USA, and France among

Protecting Innovation: An Analysis of India’s Trade Secret Landscape Read More »

Scroll to Top