Author name: CBCL

Rule 86A of the CGST Act: Safeguarding ITC or Overstepping Boundaries?

Leave a Comment / Taxation Law /

[By Runit Rathore & Amal Shukla] The authors are students of Hidayatullah National Law University, Raipur.   INTRODUCTION  “Rule 86A of the Central Goods and Services Tax Rules (CGST Rules), 2017 is not a machinery provision for recovery of tax or dues under the Central Goods and Services Tax Act” (CGST Act). Rule 86A of the CGST Rules grants the Commissioner or any other officer authorized by him, not below the rank of Assistant Commissioner, to block utilization of Input Tax Credit (ITC) upon the satisfaction of specific conditions stipulated under the said rule. It was inserted through the Central Goods and Services Tax (Ninth Amendment) Rules, 2019.   Rule 86A of the CGST Rules was inserted with the aim to curb the increasing fake invoicing incidents to avail ITC. Section 74 of the CGST Act also deals with the problem of counterfeit invoicing and it aims to address and deter efforts by taxpayers to evade taxes, claim excessive input tax credits, or secure unwarranted tax refunds through fraudulent actions, intentional misrepresentation, or suppression of facts. Under Rule 86A of the CGST Rules, a taxpayer’s ledger can be blocked even prior to the conclusion of proceedings under Section 74 of the CGST Act.   The provision of Rule 86A was added to give powers to the authorities to curb the menace of fake invoicing and abuse of ITC. However, the provision with benevolent aims ended up giving excessive and arbitrary powers to the authorities. This article critically examines the potential for abuse of the power conferred by Rule 86A of the CGST Rules and how it violates the principles of natural justice. It further delves into the concept of borrowed satisfaction and addresses the issue of negative blocking. Finally, it evaluates the wider implications of Rule 86A on the interests of the Assessee.  ABUSE OF AUTHORITY: DARK SIDE OF RULE 86A   Rule 86A of the CGST Rules gives overreaching powers to the authorities as it allows them to block Electronic Credit Ledger (ECL) on the basis of their subjective discretion or voluntary satisfaction, without requiring objective evidence or prior notice to the assessee. Further, the text of Rule 86A does not provide for any checks and balances against the use of this power. Unlike Section 73 and 74 of CGST Act, the text of Rule 86A does not provide an opportunity for the assessee to present his case against the blocking of electronic ledger. The text of Rule 86A is such that it remains subject to discretionary abuse by the authorities. It is a sound rule of interpretation that a statute should be so construed as to prevent mischief and to advance the remedy according to the true intention of the makers. Since its inception, Rule 86A of the CGST Rules has been susceptible to misuse in several ways, including blocking input tax credit based on borrowed satisfaction, freezing the ECL without affording the assessee an opportunity to be heard, and imposing negative blocking.  JUDGEMENT ON BORROWED SATISFACTION:  The issue of borrowed satisfaction arises when an officer, as provided under Rule 86A of the CGST Rules, blocks the electronic ledger of an assessee who is relying on the satisfaction of another officer or an officer having command over him. For the application of Rule 86A, the officer must have reason to believe which must be formed based on his own inquiry and satisfaction and not on satisfaction borrowed from any other officer. In this context, it is necessary to refer to Circular No. CBEC-20/16/05/2021-GST/1552 (hereafter Circular) dated 02.11.2021, wherein it has been stated that for blocking of ledger under Rule 86A the CGST Rules the concerned officer has to apply his mind and consider all necessary facts including the nature of fraud. Nevertheless, tax  officers have acted arbitrarily and blocked accounts either being compelled by superior officers or relating to the satisfaction of another officer. The Karnataka High Court, addressing the issue of borrowed satisfaction in the case of K-9 Enterprises v. The State of Karnataka has stated that it is incumbent upon the officer (as referred in Rule 86A) to arrive at his own satisfaction by proper application of mind. Again, the Rajasthan High Court in a Sumetco Alloys v. Deputy Commissioner (Sumetco Alloys), held that the blocking of the ITC ledger should be kept in abeyance as it was based on borrowed satisfaction.  BLOCKING WITHOUT DUE PROCESS: A BREACH OF JUSTICE  Rule 86A of the CGST Rules also departs from the natural law principle of Audi Alteram Partem (let the other side be heard) and does not provide any opportunity for the assessee to present his case against blocking of his ITC ledger. Although the text of Rule 86A does not explicitly provide for a chance to be heard before blocking the ITC ledger, nevertheless it shall remain subject to principles of natural justice. Furthermore, as provided in the Circular, blocking as contemplated under Rule 86A cannot be arbitrary and has to be based on reason to believe formed by application of mind. Nevertheless, the income tax authorities have violated  the principles of natural justice and have blocked the assessee’s ITC ledgers without granting them an opportunity to be heard. Further in Sumetco Alloys, where the ECL was blocked under Rule 86A without hearing the assessee, the court  observed that blocking of electronic ledger without giving notice to the assessee and hearing was in violation of principles of natural justice. Further it was held that, even though the rule does not expressly incorporate the principles of natural justice, competent authority is obliged to hear the affected person.  EXCEEDING LIMITS BY NEGATIVE BLOCKING   Rule 86A of the CGST Rules has two aspects i.e. Positive Blocking and Negative Blocking. Positive Blocking refers to the restriction imposed by tax authorities on the ECL of a taxpayer, preventing the utilization of a specific amount of ITC suspected to be fraudulently availed. On the other hand, Negative blocking under Rule 86A refers to a situation where the authorities block an amount in the taxpayer’s

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Fair Play or Foul Play: An Analysis of the TT Friendly Super League Case

Leave a Comment / Competition Law /

[By Anushka Ajay] The author is a student of National Law Institute University, Bhopal.   INTRODUCTION Competition law has increasingly addressed healthy competition in sports, where various organizations train athletes and regulate sports. The recent Competition Commission of India (hereinafter ‘CCI’) order in In Re: TT Friendly Super League Association v. Table Tennis Federation of India (TTFI) reflects a growing trend of sports federations engaging in monopolistic and anti-competitive practices, including disputes over player participation in tournaments, raising concerns about the balance of power. ANALYSIS Sports organisations as ‘Enterprise’ The first step in applying competition law is determining if the subject is an “enterprise”, a concept explored in Surinder Singh Barmi v. BCCI. In this case, the informant filed a complaint against the BCCI over its handling of IPL franchise, media, and sponsorship rights. During investigation by the CCI, BCCI argued it was not an enterprise, thus outside CCI’s jurisdiction. The CCI ruled that the BCCI qualified as an enterprise under the Competition Act, 2002 due to its commercial activities like media rights sales and ticketing, despite being a non-profit entity. The CCI’s ruling followed European case laws, such as MOTOE v. Elliniko and Meca-Medina, which recognized sports as economic activities subject to competition laws. This was reaffirmed in Dhanraj Pillay v. HI and applied in Hemant Sharma v. AICF, where the AICF was also deemed an enterprise due to its involvement in commercial activities beyond its regulatory functions. Carving out the Relevant Market Relevant market is defined under Section 2(r). The CCI agreed with the Director General’s (hereinafter referred to as DG) market definition, considering table tennis’ unique characteristics, event and player restrictions, and the national oversight by TTFI, with rules enforced by state and district associations, reflecting the competitive pressures faced by the enterprise. It was defined as: ‘Market for organization of table tennis leagues/events/ tournaments in India’- Upstream Market ‘Market for provision of services by the players for table tennis leagues/events/ tournaments in India’- Downstream Market. Dominant Position The Commission recognized the dominance of organizations in India’s table tennis ecosystem, including district associations, state associations, and the national federation- TTFI. TTFI, the apex body, oversees player selection, organizes events, and has authority at all levels, thereby monopoly in regulating the sport. This domination extends to player participation and unsanctioned events. The Commission referenced the European Commission’s 2007 White Paper on sport, noting that sports organizations, structured as pyramids, require autonomy to enforce regulations like integrity standards and broadcasting rights, which can limit economic freedom. Abuse of Dominanace Violation of Section 4(2)(a)(i), 4(2)(b)(i) and 4(2)(c) of the Act- Abuse of dominant position. The Informant claimed that The Suburban Table Tennis Association (TSTTA) General Secretary posted a WhatsApp message restricting players, coaches, clubs, and academies from joining non-affiliated organizations, with penalties for non-compliance. Despite receiving a petition and legal notice, TSTTA continued these practices. The Commission upheld the DG’s findings that TSTTA violated Section 4(2)(c). The DG found Clauses 22(d) and 22(e) of the MSTTA Constitution anti-competitive. Clause 22(d) restricts unauthorized tournaments, and Clause 22(e) allows preventing harmful actions. A WhatsApp message advising against participating in an “unofficial” tournament violated Sections 4(2)(c), 4(2)(a)(i), and 4(2)(b)(i) of the Act. The Commission agreed, but excluded Clause 22(e) stating that it is necessary to uphold sports integrity. The CCI found that clauses in TTFI’s MoA are restrictive, unfair, and anti-competitive. They prevent the organization of unauthorized tournaments and prohibit player participation in unaffiliated events. This limits player opportunities, creates barriers for independent organizers, and stifles competition, violating Sections 4(2)(a)(i), 4(2)(b)(i), and 4(2)(c) of the Competition Act. The CCI partially agreed with the argument that TTFI issued a notice to clarify misrepresentation. However, TTFI went beyond clarification, actively discouraging participation and restricting affiliated state associations from organizing the GSL event without prior approval. The CCI concluded that TTFI’s actions violated violate Sections 4(2)(a)(i), 4(2)(b)(i), and 4(2)(c) of the Competition Act. Violation of Section 3(1) read with Section 3(4) of the Act- Anti- competitive agreements. The DG found a vertical relationship between TSTTA and its players, similar to the AICF-chess player relationship in the Hemant Sharma case. CCI in Hemant Sharma case observed that there exists a vertical relationship between AICF and chess players as AICF buys their services for organisation of chess events AICF is the consumer of services of chess players for the organisation of any chess event. This tantamount to a vertical relationship as AICF and the chess players are at different stages of the supply chain. Similarly, The WhatsApp advisory by TTFI created barriers to market entry and hindered competition, violating Section 3(4) of the Competition Act. CCI agreed with the DG’s conclusion about the vertical relationship between TTSTA and players. It found the advisory restrictive, creating entry barriers and foreclosing competition, thus violating Sections 3(4)(c) and 3(4)(d) of the Act. The Order The Commission found that the OPs violated competition law, including anti-competitive agreements and abuse of dominance. While violations were established, the Commission opted against a monetary penalty due to the OPs’ corrective actions, such as withdrawing anti-competitive clauses and issuing clarifications. However, a cease-and-desist order was issued with a stern warning of aggravated penalties for future violations. DIFFRENTIATING BETWEEN REGULATORY AND ECONOMIC ROLES The CCI has frequently examined the distinction between regulatory and economic roles of sports organizations, starting with the Dhanraj Pillai v. HI. It highlighted the variety of relationships in the sports sector, such as federations selling media, sponsorship, and franchise rights. It also emphasized that viewers and sports federations themselves are key consumers, shaping the relevant market. Competition concerns often arise in sports due to the clash between federations’ regulatory and economic functions. While a hierarchical structure is common in sports, overly restrictive rules governing players and events can hinder economic activity. These restrictions, though potentially justifiable for development of integrity, violates competition law if unwarranted. Moreover, the dual role of sports bodies as both regulators and organizers can create conflicts of interest, potentially leading them to suppress competition to safeguard their own

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Liability of Independent Directors: Addressing the Forgotten Diligence Test

Leave a Comment / Company Law /

[By Bhuwan Sarine] The author is a student of National Law School of India University, Bengaluru.   Introduction On 30 April 2024, the Securities and Exchange Board of India (“SEBI”) held the Independent Directors (“IDs”) of Manpasand Beverages Ltd. (“MBL”) liable for not performing their duties diligently.  To provide a brief background, independent directors of a company are directors other than the managing or whole-time directors. They are not involved in the day-to-day operations of the company, and are there to ensure that the company is run in a way so as to protect the interests of the shareholders. Section 149(6) of the Companies Act, 2013 (“the Act”) defines them as having relevant expertise and not sharing any material relationship with the company. The order in Manpasand was pursuant to allegations of financial mismanagement in MBL wherein the IDs had to be diligent in assessing its financial statements. SEBI noted that while the IDs claimed lack of access to MBL’s documents, they did not furnish evidence to establish that they tried to obtain them. In summary, the SEBI applied the diligence test to impose liability on the IDs. The standard for liability of IDs is provided under s. 149(12) of the Act . While Manpasand decided on the diligence test, the SEBI and SAT have used the knowledge test solely in the recent past. This paper uses those case laws to argue that the same is an incomplete interpretation of s. 149(12) and contradictory to the role IDs are supposed to play in the company. To that end, Part I sheds light on the two prongs of s. 149(12), Part II shows the incomplete reading of s. 149(12) of late, Part III explains why the same is erroneous, and the final part concludes. I. The Two Prongs of Independent Directors’ Liability Under the first part of s. 149(12) of the Act, an ID can be held liable if the acts of the company occurred with his knowledge and consent or connivance. The knowledge should be attributable to Board processes. The latter part of the sub-section imposes liability when the ID has not acted diligently. It is to be noted that the knowledge and diligence requirements are joined by ‘or,’ which means that both are separate standards[1] and IDs can be held liable if they fail to meet the threshold of any of them. While knowledge has to be in relation to the board process, diligence is over and above this requirement. To meet the latter, IDs need to be generally vigilant, apply their mind, and try to get the information from sources other than board meetings. The standard of diligence required depends on the facts in question. In OSPL Infradeal Pvt. Ltd., the SEBI held the ID liable for approving loans to entities with negative net worth. It noted that the ID did not exercise caution while approving the loan, and hence due diligence was not met. Here, acting hastily was the reason diligence requirement was not met, and it could not be argued that since the ID was not part of the board meetings, he is not liable. Again, in Madhav Sapre and Ors., SEBI called the IDs to evaluate the records and documents before them independently, and not just to rely on the face value of the information provided in the meetings.[2] Since this was not done, they failed to discharge their role with the diligence required.[3] From these instances, it is clear that diligence requirements are not dependent on board processes. Even if the IDs show that they had no knowledge of the mismanagement going on, they can still be held liable if the circumstances warranted taking proactive measures. In fact, the Bombay HC touched this aspect precisely in Sunny v. State of Maharashtra.[4]  It was pointed out therein that the IDs can be held liable under two situations (first is having knowledge of the acts of omission/commission by the company, and second is failure to act diligently), and both are joined by ‘or,’ implying that liability is attracted if they fail to satisfy either of them.[5] However, recent interpretations have not been in consonance with the wording of the sub-section. They have been prompted by the assumption that knowledge requirement is a sine qua non, in the absence of which due diligence cannot even be assessed. II. Incomplete Reading of S. 149(12) of Late Having set out the components of s. 149(12), this section will examine the approach followed by the SEBI and SAT in the recent past. It is to be noted that even before the enactment of the Companies Act, 2013, the knowledge requirement was treated on a higher standing than the diligence requirement.  In December 2004, an expert committee on company law (composed of experts drawn from trade and industry associations, professional bodies, institutes, chambers of commerce etc.) under the chairmanship of Dr. J. J. Irani was constituted to advise the government on the proposed revisions to the Companies Act, 1956. While the committee’s report elaborated on the modalities of the knowledge test, it did not mention anything related to due diligence. The following cases will illustrate the erroneous interpretation of s. 149(12) of the Act. In MPS Infotechnics Ltd. v. SEBI, the SAT held that since the ID was not involved in the day-to-day affairs of the company’s management, he was not liable. It was premised on the view that the offence happened without the ID’s knowledge. Here, the SAT completely ignored the second standard, failing which IDs could be held liable. Going ahead, the SEBI, in the matter of M/s Global Infratech and Finance Ltd., applied the knowledge test solely. The case related to approval of allotment of preferential shares in a manipulative scheme. It absolved the IDs of liability because there was no evidence of them being involved in the board processes. While the SEBI required executive directors to be careful and diligent, there was no mention of the same expectation from the IDs. In this case, it appeared

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Chrome Cracked: A Tech Revolution or a Step Backward?

Leave a Comment / Competition Law /

[By Aditya Kashyap & Arnika Dwivedi] The authors are students of Symbiosis Law School, Pune.   Introduction Recently, there has been a pivotal shift toward anti-competitive behavior globally, specifically concerning large technology firms. On November 20, 2024 U.S. Department of Justice (DOJ) proposed various recommendations to address the perceived monopolistic behavior by recommending the overhaul of Google’s structure and business practices including divesting Chrome in a bid to end its monopoly on internet search. In order to guard against the “possible foreclosure” and “the exclusion of future entrants”, the DoJ requires a forced sale of the Chrome browser and a five-year ban from entering the browser market, query-based AI products or advertising technology and prohibition “from owning or acquiring any investment or interest in any search or search text ad rival, search distributor, or rival query-based AI product”. Additionally, pushing Google to allow publishers and creators the facility to block their data from being used to train its artificial intelligence models and requires it to provide rivals with user-side and ad data for 10 years at no cost, on a non-discriminatory basis. The proposals stem from the U.S.A v. Google LLC wherein the court found that Google has unlawfully maintained a monopoly within the general search services and text advertising market. Google has accomplished this by entering into exclusive default distribution agreements with browser developers like Apple that instantly allow it to reply to search queries initiated from the browser that assist Google in obtaining massive amounts of user data and offer tailored advertising to its users resulting in increased advertising revenue which is $ 146 billion in 2021; almost $100 billion more than its rivals. This created a situation where Google faced no competition for the default position and its partners had no alternatives. This dearth of competition along with Google’s strong market position and control over key inputs in the search advertising market, enabled Google to benefit from super-competitive text advertisement costs. Moreover, Google’s Mobile Application Distribution Agreements (MADA) with Android’s Original Equipment Manufacturer (OEMs) grant OEMs access to Google’s proprietary mobile applications without charging any licensing fees. However, Google imposes strict conditions on OEMs in exchange enabling them to pre-install certain Google apps in functional positions on their devices ensuring Google’s dominant and preferential placement on Android smartphones. GAMMA Companies Leading Technological Advancement U.S. has long supported “permissionless innovation”, which permits tech firms to create game-changing technologies like artificial intelligence and the internet with little hindrance. Its position as the forefront of technology has been solidified by this adaptability, which has fueled significant growth, new industries and well-paying jobs. Particularly, GAMMA companies (Google, Amazon, Microsoft, Meta and Apple) are the ones which continue to encourage new technologies encouraging innovation in a variety of industries. While OpenAI and Google’s DeepMind promote AI integration across various applications, Meta’s substantial investment in the metaverse intends to create immersive social, professional, and leisure areas and is investigating blockchain applications such as NFTs, decentralized finance, digital identification solutions and developing AI-driven voice assistants that are essential for the future digital economy. On the other hand, smaller companies face significant barriers to making the kinds of investments that GAMMA companies can make, benefit from economies of scale and access to vast amounts of capital and data that allow them to invest in cutting-edge technologies while distributing the cost over a massive user base which is not possible for smaller companies. Staggering Demonstration of European Union Antagonistically the EU’s antitrust approach is rigorous in its nature and has the potential to suppress innovation as it focuses on general consumer protection issues rather than specific harm-based regulation with imposition of severe penalties and requiring structural reforms. While these actions are intended to safeguard consumers and ensure fair competition, they reflect a negative offshoot of innovation. EU focuses excessively on market dominance, structural interventions and divestitures & overregulation of data & privacy. For instance, the EU’s investigation into Apple’s App Store policies has led to the implementation of costly and resource-draining regulatory changes that can divert resources away from innovation towards compliance. According to the Wall Street Journal, Europe’s sluggish economy, where the Stoxx 600 index and GDP growth have lagged well behind the U.S. as of 2023, is proof that exorbitant supervision has rarely promoted progress.  Metrics like patent filings, startup rates, and unicorn businesses show how Europe’s share of global innovation output has decreased from 25% 15 years ago to 18% today, as noted by Hungarian Minister Balazs Hanko. Europe’s AI policies are criticized for having dystopian influences. The 2022 EU funding delay for 139 companies due to regulatory disputes is an example of how bureaucratic delays further reduce competitiveness. Regrettably, different understandings of the GDPR hindered Meta’s attempts to train AI models on EU public data, denying European users access to the newest technological developments. Adopting the EU’s regulatory framework risks stifling U.S. innovation Given that technology improvement has historically driven American economic growth, adopting the EU’s regulatory approach runs the risk of hurting American innovation. This governmental intrusion in the USA’s ability to compete globally could be harmed by the DOJ’s approach against Google. Rigid enforcement of Google’s data usage and monetization policies would make it more difficult for the US IT sector to contest internationally specifically in nations with laxer regulations. America’s inventive past can be preserved by using an EU model that addresses specific risks rather than hypothetical ones. Public-private partnerships can promote innovation and guarantee consumer protection. In order for the U.S. to establish itself as a leader in the digital economy, trade policies should be conducive to innovation. However, the DoJ’s current stance on Google, which includes contract limits, structural modifications, and data interoperability requirements impedes the competition that propels technological innovation in the US and runs the risk of fragmenting user experience, impeding user convenience and delaying innovation. This could restrict the originality of the market and affect investments in current and future ad technology. Chrome, which for many users is a gateway to the internet and it is a key means of getting Google

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Parallel Paths or Colliding Tracks? Behavioural Insights into Sectoral Regulatory Dynamics

Leave a Comment / Competition Law /

[By Aastha Singh & Kumari Bhargavi] The authors are students of Symbiosis Law School, Pune.   INTRODUCTION Independent economic or sectoral regulators such as the Telecom Regulatory Authority of India (TRAI), the Securities and Exchange Board of India (SEBI), and the Reserve Bank of India (RBI) were established to oversee specific critical industries in India after economic reforms ushered in a more competitive market structure and a critical departure from government monopolies.  The Competition Commission of India (CCI) is another example of the same. However, it now faces the additional difficulty, brought about by the ever-changing intricacies of an internationalized economy, of negotiating the “turf wars” that occur when the authority of many sectoral regulators overlaps. India’s ever-changing economic landscape, should be examined using a behavioural economics framework, to understand why do “turf wars” happen and further to highlight the necessity for a unified approach to governance. The lens of behavioural economics to answer an antitrust issue is an innovative and emerging one in nature. The use of behavioural economics to the analysis of interactions between sectoral regulators and possible cognitive biases of antitrust authorities has been under-explored, in contrast to its more conventional focus on consumer preferences and welfare implications. This gap presents a unique opportunity to examine how behavioural insights could address conflicts and coordination by shedding light on a probable solution. This article contends to explore how biases, favouritism in practice, and institutional inertia influence the decision-making process in regulatory conflicts. It advocates for a cohesive regulatory strategy and proposes solutions to harmonize the functions of sectoral regulators and the CCI to better manage competition-related issues in India’s dynamic economic environment, by making use of psychological and organisational factors i.e. behavioural economics that cause the regulatory conflicts. TURF WARS AND THE REGULATORY OVERLAPS In India, sectoral laws like the Telecom Regulatory Authority of India Act, the Petroleum and Natural Gas Regulatory Board Act, and the Electricity Act mandate regulators to promote competition but they tend to blur lines between ex-ante regulation and ex-post competition evaluation. This overlap leads to legislative or jurisdictional disputes with the CCI. While the principle of “leges posteriores priores contrarias abrogant” suggests that newer, sector-specific statutes should override older competition laws, the Competition Act’s Section 60 provides for a “non-obstante” clause, giving it precedence, however as per Section 62, the Competition Act and other statues should be harmoniously construed. The CCI has asserted its jurisdiction over all economic aspects, even in cases where sectoral laws might seem to take precedence. Subsequently, Section 21, and Section 21A of the Act, which include an arrangement for discussions between the CCI and other sectoral regulators, aim to partially resolve this issue. Consultations under these provisions are not, however, required or legally obligatory. One of the primary goals of both the competition agencies and other sectoral regulators is economic regulation which is inclusive of controlling market monopoly and protection consumer interests, however jurisdictional conflicts become problematic in the first place because, when two bodies spend time, effort, and resources on the same disagreement, the biggest impact is duplication. Second, CCI penalties can be far higher than regulator penalties, making it unclear for potential investors. Existing gamers can benefit from lack of clarity by forum shopping. Thus, CCI and sector-specific regulator jurisdiction must be clarified. The turf war pertaining to jurisdictional issues was first observed in the case of Star India v. Sea T.V. Network, wherein the apex court held that despite the fact that the case concerns “monopoly and restrictive trade” the MRTP Commission (now CCI) does not have jurisdiction that violates the TRAI Act. In the case of CCI v. Bharti Airtel Ltd., the Supreme Court resolved the long-running competition for dominance between the cross-regulator, CCI, and the sector-specific regulator, TRAI. The court said that the CCI is not a sector-based organisation; rather, its jurisdiction extends beyond sectoral boundaries to encompass all industries. However, a different stance taken by the Delhi High Court held in Telefonaktiebolaget LM Ericsson v. CCI that the Competition Act is an addition to all other Acts and does not supersede them. The Delhi High Court did not uphold the Ericsson ruling in Monsanto Holdings Pvt. Ltd. v. CCI, holding that the CCI has jurisdiction over cases involving the infringement of patent rights. Therefore, the CCI will evaluate how the rights are exercised or behaved, not the content of those rights, which is the purview of the expert body. BEHAVIOURAL ECONOMICS AND THE REGULATORY DECISION-MAKING PROCESS Behavioural Economics is a branch of economics that underpins neoclassical economics with insights from psychology, and in turn, contributes to behavioural sciences by its economics perspective and the abundant experimental practice it has developed. It explores how cognitive biases emerging from heuristics—mental and emotional shortcuts to form opinions, often influence regulatory decision-making, especially in scenarios where sectoral regulators have repeated interactions with incumbent players. This repeated engagement can lead to the development of implicit preferences or institutional inertia, which may manifest as decisions that disproportionately favour established entities. Such biases can hinder the objectives of fostering competition and innovation, thereby conflicting with the broader mandate of competition authorities like the CCI. In the telecom sector, a potential example, TRAI could uphold incumbents’ high prices as essential for financial stability, despite data indicating that these practices impede competition, demonstrating confirmation bias in regulatory conflicts. But CCI, which is supposed to make sure the market is fair, could see the same tariffs as anti-competitive measures used to keep new competitors out. As seen in cases like, this disagreement arises because different regulators are looking for evidence that backs up their own agendas. Reliance Jio and the Incumbent Operators, highlights the need for greater coordination between sector-specific and competition regulators. Favouritism in Practice: Decisions made by TRAI have often been seen as biased in favour of long-standing telecom companies, which has led to criticism of the agency. Regulating mechanisms are frequently skewed in favour of these incumbents because of their vast networks and established relationships. Disparate license terms,

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Associate or Subsidiary: Revisiting Control Matrix in Corporate Ecosystem

Leave a Comment / Capital Markets and Securities Law /

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

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

Leave a Comment / Capital Markets and Securities Law /

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

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

Leave a Comment / Company Law /

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

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Plugging Leaks: SEBI’s New Frontrunning Guidelines for AMCs

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

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