Author name: CBCL

Electoral Bonds Judgment: Implications for Corporate Financing & Information Disclosure

Leave a Comment / Company Law /

[By Vaibhav Mishra] The author is a student of Hidayatullah National Law University.   INTRODUCTION In the Union Budget session of 2017-18, Parliament passed the Finance Act 2017 [Act] to lay down the legal framework for the ‘Electoral Bonds Scheme (EBS)’. The scheme sought to create a new model of electoral financing in the country.  The Act carried out inter-related amendments to company law, income-tax law, and electoral laws to legally operationalize this scheme. The most crucial characteristics of the scheme were brought through amendments in Section 182 of the Company Act 2013 (Section 182). The implications of the amendment were two-fold, viz, first, removal of the upper-cap limit on the corporate funding, second, information disclosure requirement. The scheme raised various concerns like voters’ right to information, transparency, corporate influence on elections, etc. Therefore, amidst such concerns, the scheme was challenged in the Supreme Court as being violative of the Constitution.   Recently, the Supreme Court in its judgment has declared the EBS scheme as violative of the constitution. The Supreme Court invoked two principles – the principle of manifest arbitrariness to test the vires of unlimited corporate funding and the principle of double proportionality for the removal of information disclosure requirements in the context of voter’s right to information.  In light of the above, the article analyses the judgment with a focus on the two most crucial aspects of this financing model viz, unlimited corporate funding and removal of disclosure requirements along with their implications. It also highlights the importance of addressing both issues for creating any viable electoral financing model in the future. Furthermore, it also delves into the UK’s model to suggest possible changes in the Indian model of electoral financing.   ANALYSING SECTION 182: EXAMINING EFFECTS POST-2017 AMENDMENT Section 154 of the Act amended Section 182 which regulated corporate funding to political parties. In the pre-amendment position, Section 182 gave a three-fold requirement to regulate corporate funding – 1) upper-cap of 7.5% of the average net profit of three preceding financial years; 2) authorization of the board of directors; and 3) information disclosure requirements. In this framework, the upper limit on corporate donations was supposed to keep a check on any undue influence of big corporations on elections. Furthermore, transparency and accountability were promoted through obligations of information disclosure and consent of the board of directors.    However, the 2017 amendment to Section 182 for laying the legal framework of EBS, removed the upper limit on corporate funding and disclosure mandates. Therefore, as a result of amendment, EBS  was characterized by two key elements viz, 1) anonymity of the donor company & recipient 2) unlimited corporate funding.   Therefore, the new electoral financing model created by EBS as noted above, was now plagued with a lack of transparency & accountability having several implications, as discussed below.   VIRES OF UNLIMITED CORPORATE FUNDING & POTENTIAL IMPLICATIONS   In this case, Section 154 of the Act which amended Section 182, was challenged as violative of Article 14. There was uncertainty concerning the applicability of the principle of manifest arbitrariness under Article 14 in deciding the constitutionality of unlimited corporate funding. The court analysed the complex jurisprudence that evolved over this principle to decide its applicability in the present context. The majority opinion of Justice Faiz Nariman in Shayara Bano v Union of India proved to be a deciding factor [Para 187]. He had opined that vires of legislation could be challenged solely on the grounds of the principle of manifest arbitrariness as it is a constitutional infirmity in itself. Therefore, the court invoking this principle, held the scheme as violative of Article 14.    The unlimited corporate funding in elections strikes at the heart of the democratic process by violating the principle of free & fair elections. Therefore, its presence in the electoral financing model could have several implications. The wording of the provision in clause (1) of Section 182 after the 2017 amendment, i.e., the deletion of the proviso stipulating donation limits based on net profits, suggests that the provision fails to create a distinction between profit and loss-making companies. If we consider the possibility of a loss-making company giving donations, the purpose could not be other than having quid-pro-quo arrangements with the government which could unduly influence the electoral process. Furthermore, this structure creates the possibility of the creation of a shell company solely to make donations.   Therefore, the potential consequences of omitting an upper cap for corporate donations in any future model can’t be ignored. An analysis of recent data released by ADR, an electoral watchdog in India, suggests that corporate donations in India have increased by 974% between FY 2012-13 and FY 2018-19. A similar trend had been observed in the US after the Supreme Court’s decision in Citizens United v FEC in 2010. The judgment held the upper cap limit on independent corporate expenditure as violative of the First Amendment – which protects free speech. However, the judgment failed to anticipate the potential influence of big corporations in elections as a consequence. The data suggests a 900 % increase in corporate donations in American elections between 2008-2016. Therefore, any future financing model in the Indian scenario should address the issue of unlimited corporate funding.   IMPLICATIONS OF SECTION 182(3): REMOVAL OF INFORMATION DISCLOSURE REQUIREMENT  The presence of information disclosure mandates from donors is crucial in a democratic electoral financing model. However, EBS eliminated such disclosure mandates for companies and political parties. Therefore, EBS was challenged as being violative of Article 19(1) (a) of the Indian Constitution, i.e., voter’s right to information. In this context, Section 182(3) of the Company Act, 2013 was also challenged as it changed the pre-amendment position that mandated a donor company to reveal particulars of its donation in a P&L account. The information disclosure was instrumental in identifying any potential quid pro quo arrangements or corruption in the transactions [Para 172]. The removal of such a mandate impeded a citizen’s right to exercise an informed vote. Furthermore, the amendment also altered the original purpose of the

Electoral Bonds Judgment: Implications for Corporate Financing & Information Disclosure Read More »

Locus Standi Dilemma: Interpreting “Person Aggrieved” u/s 53B in Competition Act Appeals

Leave a Comment / Competition Law /

[By Gurman Narula & Sharad Khemka] The authors are students of National Law Institute University, Bhopal.   Introduction  Section 53B of the Competition Act states that any enterprise, government or “any person aggrieved” can file an appeal challenging the order of the Competition Commission of India. The term “Person aggrieved” is not defined anywhere in the whole act, the courts and tribunals have tried to delineate the definition of person aggrieved in the context of the Competition Act but there is no fixed definition of the term and the court has followed different approaches while assessing the Locus Standi of Appellants who have filed an application u/s 53B of the Act. Although individuals who are parties to the case can file an appeal, the law is unclear on persons who are not parties to the case.   The discussion will begin by exploring the judicial evolution surrounding the term “person aggrieved.” Following this, the latest position on this matter will be elaborated. The terms will be analysed within different contexts to ensure a thorough comprehension. Lastly, an evaluation of the legal standpoint will be conducted, along with a discussion of suggested solutions.  Judicial evolution of the term ‘Person Aggrieved’   There is no definition of ‘person aggrieved’ in the competition act. The competition act states that ‘any person aggrieved can file an appeal’. The act provides that a person has to be aggrieved in order to file an appeal challenging the order, there is no part of the act which seeks to define the term.   The courts while delineating the term has relied on judgements which provide a general overview of the term ‘person aggrieved’. The court in the case of Adi Pherozshah Gandhi v HM Seervai observed that, “Disappointment with a case’s outcome doesn’t grant a ‘person aggrieved’ status. There must be a loss of expected benefits due to the order, leading to a legal grievance. Mere disagreement with the order or belief in someone’s guilt isn’t sufficient for legal standing”.  Further, in the case of A. Subash Babu v State of Andhra Pradesh it was observed by the Hon’ble Supreme Court that, “The term ‘aggrieved person’ is flexible and abstract, defying rigid definition. Its interpretation depends on various factors, including the statute in question, specific case circumstances, the complainant’s interests, and the extent of prejudice or injury suffered.”  While discussing the Locus Standi u/s 53B, the circumstances of each case shall be discussed and the intent of the Competition Act needs to be taken into consideration. The intent behind the Competition Act can be inferred from the Preamble of the Act which is;   An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto.  The term can be given different meanings in different circumstances which will be discussed in the later stage.   The court in the case of Ayaaubkhan Noorkhan Pathan v State of Maharasthra observed that, “It is legally established that outsiders cannot interfere in proceedings unless they prove they are aggrieved. Only those who have suffered legal harm can challenge actions in court. The court can enforce a public body’s duty if the petitioner proves a legal right, essential for invoking the court’s jurisdiction. Relief sought must enforce a legal right, usually belonging to the petitioner.”  These judgments did not delineate the term ‘person aggrieved’ in the context of Competition Act or in the specific circumstances of that of an appeal related to the Competition Act.   Person Aggrieved in the context of the Competition Act  The NCLAT in the case of Jitendra Bhargav v CCI delineated person aggrieved in the context of Competition Act by taking into account various judgements, some of which has been provided in the earlier section.   The NCLAT noted that Locus standi needs to be proved before proceeding with analyzing the merits of the case. In the case, Jitendra Bhargav filed an appeal challenging the order of CCI approving the merger between Jet and Etihad.  Jitendra Bhargav contended that there is a likelihood of Appreciable Adverse Effect on Competition (AAEC).   NCLAT held that likelihood of AAEC cannot pose as a sufficient ground to allow the appeal of Jitendra Bhargav and it needs to be proved first that the person appealing the order is an aggrieved person and the order of CCI cannot be discussed on merits until the Locus standi of the appellant is proved.   The Supreme court in the case of Samir Aggrawal v Union of India held that, “The expression ‘any person’ in section 53B needs to be construed liberally. The court held that appeals which are in the nature of public interest should be allowed and since the CCI performs an inquisitorial function, the doors of CCI and the appellate body NCLAT must be kept wide open.  This case brought a shift in the approach adopted by the courts and the tribunals while delineating who will constitute as a person aggrieved within the meaning of Section 53B. It led the courts and tribunals to take a liberal and expansive approach rather than strict interpretation of the section.   The latest case involving appeal u/s 53B is that of UP glass manufactures v CCI. NCLAT in the present case allowed the appeal filed by UP glass manufactures while adopting the approach taken in the case of Samir Aggrawal.   Analysis  Although the approach established in the Samir Aggrawal case is in line with the intent and objective of Competition act as it seeks to allow appeals that aim to ensure a level playing field and prevent firms from indulging in anti-competitive practices, it leads to perplexity and inefficiency as this approach cannot be used uniformly in all the cases.   In the case of UP glass manufactures, the appeal was allowed,

Locus Standi Dilemma: Interpreting “Person Aggrieved” u/s 53B in Competition Act Appeals Read More »

Navigating the Pitfalls: Assessing the Sep Model for Digital Taxation

Leave a Comment / Taxation Law /

[By Isha Janwa] The author is a student of O.P. Jindal Global University, Sonipat.   INTRODUCTION: In today’s interconnected world, the ‘digital economy’ has emerged as a powerhouse, the rise of which can be attributed to advancements in information and communication technology (ICT). Multinational Enterprises (MNEs) now conduct cross-border business seamlessly, without the need for physical presence in foreign territories. This paradigm shift allows digital corporations to establish connections with consumers and operate virtually, transcending geographical boundaries via internet.  However, this newfound flexibility in the digital landscape has sparked significant concerns in taxation. Traditional tax frameworks, designed for ‘brick-and-mortar’ economy, struggle to accommodate the borderless nature of the digital economy. The reliance on physical presence as a basis for taxation becomes increasingly inadequate in this dynamic environment.  Recognizing these challenges, the Organisation for Economic Co-operation and Development (OECD) introduced Base Erosion and Profit Shifting (BEPS) Action Plan 1. This initiative characterizes the digital economy as data-driven, reliant on intangibles, and complex in determining value creation jurisdiction due to minimal physical presence requirements.  OECD’s action plan identifies three key taxation challenges in the digital economy: the need for nexus, navigating data usage and value attribution, and characterizing payments for digital goods and services. To address these challenges, OECD proposes a two-pillar approach. Pillar one focuses on broader taxation issues, including profit allocation and nexus, while pillar two targets remaining BEPS concerns such as establishing a global minimum tax rate.  The action plan presents three solutions for digital taxation: establishing a nexus based on Significant Economic Presence (SEP), implementing withholding tax on digital transactions, and introducing an equalization levy. However, it has not recommended any specific measure, therefore, countries can adopt either of these measures.  One such measure, Significant Economic Presence, has been adopted by countries like India. This paper examines the importance of nexus in taxation and assesses the effectiveness of implementing Significant Economic Presence to address nexus challenges, with a focus on India’s tax framework.  NEXUS REQUIREMENT FOR DIGITAL TAXATION AND SPECIAL ECONOMIC PRESENCE:  In the intricate landscape of taxation, the principle of nexus plays a pivotal role. Essentially, nexus refers to the connection between an entity’s income and the jurisdiction seeking to tax it. However, in the realm of ‘digital economy’, this connection becomes notably elusive.  Digital companies, operating primarily in the virtual realm, often lack physical presence in the countries where their services are consumed. This absence of a tangible footprint makes it challenging for tax authorities to establish a direct link between the company’s income and the country, unless a permanent establishment exists.  The absence of a permanent establishment often leads to the taxation of digital companies’ profits in the jurisdiction of their incorporation. This loophole enables digital entities to strategically establish themselves in low-tax jurisdictions while profiting from a global customer base online.  Since the entity would be taxed in the place where it is incorporated, the countries try to have lower tax rates so that the profits are shifted but this competition puts the developing countries at a disadvantage because the corporate tax is one of the main sources of income for such countries. Therefore, one of the key objectives of BEPS project is to prevent ‘shifting of profits’ and ensure that companies pay taxes where their economic activities generate profits, irrespective of their physical presence.  However, the absence of a clear nexus between digital companies and the countries where they operate presents a substantial hurdle. It can be avoided by establishing a taxable presence in the jurisdictions where the entities are performing economic activities even without being physically present. The concept of Significant Economic Presence was brought forth to address this issue. It means that non-resident entities can be taxed in a jurisdiction if they engage in significant economic activities there, even without a permanent establishment. This ensures taxation of substantial economic value derived from the jurisdiction, regardless of physical presence. It is based on three factors. Firstly, the generation of revenue. Secondly, digital factors like IP. Thirdly, user-based factors.  India adopted this measure of Significant Economic Presence (SEP) in 2018 but the applicability got deferred to 2021-22. India introduced the concept of Significant Economic Presence (SEP) in 2018, but its implementation was delayed until 2021-22. According to Section 9 of the Income Tax Act, 1961, any income earned by non-residents from a business connection in India is deemed to have accrued or arisen in India, making it taxable in the country. Explanation 2 to section 9(1)(i) defines “business connection” and now includes a new way to tax foreign companies’ profits known as “significant economic presence.” This means that if a non-resident has a significant economic presence in India, it will be considered as having a business connection in India, leading to the income being taxed in India, regardless of having a physical presence or providing services in India, or where the agreement for the transactions is made. This occurs if either of two specific conditions are met. One is revenue-based SEP, which considers taxation based on generated income, while the other is user-based SEP, which considers taxable presence on the basis of a substantial user base or customer activity within the jurisdiction. The former addresses revenue, while the latter addresses user activity.. Central Board of Direct Tax has issued notification defining thresholds for establishing SEP. The threshold for Revenue is 20 million Indian Rupees. The threshold for users is 300,000 users.   In the traditional framework of taxation laws, the ‘source taxation’ was not established sufficiently for digital economy. However, the concept of Significant Economic Presence has enabled ‘source countries’ to tax the income which is generated from their jurisdictions.   EFFECTIVENESS OF SIGNIFICANT ECONOMIC PRESENCE MEASURE:  The provision of SEP seeks to bring non-residents within the ambit of domestic laws of taxation in India. Since this measure is adopted only in domestic law of India, it can’t override the tax treaty provisions of ‘Double Tax Avoidance Agreement’ (hereinafter ‘DTAA’)  which are primarily based on the concept of permanent establishment. Without revisions to these

Navigating the Pitfalls: Assessing the Sep Model for Digital Taxation Read More »

Cross-Border Mergers vis-à-vis Investment in the Indian Steel Industry

Leave a Comment / Foreign Direct Investment Regulations /

[By Karan Anand] The author is a student of OP Jindal University.   Introduction The recent announcement by ArcelorMittal Nippon Steel (AMNS) India regarding itsambitious expansion plans at the Hazira steel plant presents a compelling juncture to explore the strategic dynamics within India’s steel industry.[1] In a landscape characterized by heightened industrial growth and governmental emphasis on self-reliance, the trajectory of investments in steel production assumes paramount significance. With AMNS India’s noteworthy investment of approximately Rs 60,000 crore towards capacity enhancement and technological modernization, the industry witnesses a confluence of global expertise and indigenous potential. This piece aims to delineate the viability and implications of cross-border mergers in contrast to greenfield investments within India’s steel industry. By leveraging the recent developments at Hazira as a transition point, we delve into the strategic imperatives driving investment decisions and their ramifications on industrial sustainability and national economic objectives. Greenfield and brownfield investment In the case of Greenfield investment, various ancillary regulations become pertinent and applicable because an entity is being created from scratch. Firstly, there exists a multitude of licensesand registrations that are required. These include MSME/SSI registration which is a mandatory registration for a business to start functioning in India, as per the Supreme Court’s judgmentin the case of Silpi Industries v Kerala State Road Transport Corporation.[2]This registration divides industries into Micro, Small and Medium Enterprises based on the amount invested. In addition, GST registration is compulsory for all businesses involved in the sale and purchase of goods in India. The tax slab for the steel industry stands at 18%.[3] Entities entering the Steel industry also need to meet certain environmental regulations, which are set in place by the Ministry of Environmental, Forest and Climate Change (MoEF&CC), EAC (Expert Appraisal Committee) and State PCB (Pollution Control Board).[4] The firm entering the Indian market is also required to identify land parcels and fulfill the requirements that are laid down by the Ministry of Steel. In the event that such land is forested, clearance is also required from the State Forest Department. The governing regulationsfor the same are the Forest (Conservation) Act, 1980[5] and Forest Conservation Rules, 2003.[6] The process of securing necessary clearances thus becomes extremely burdensome for firms, extending over 3-5 years, considering the interests of numerous stakeholders involved in the same. Firms entering the Indian market are also required to comply with the provisions that regulate labour and employment conditions. The Factories Act, 1948,[7] was introduced to regulate the working conditions for labour in factories and workspaces.Any entity setting up a plant must comply with the safety and welfare provisions mentioned in the Act. Such entities must also create a provident fund for employees, for their welfare, medical, maternity and disability benefits and maintain balances in accordance with the State Insurance Act, 1948[8] the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.[9]The case of Hindustan Lever Ltd v Regional Provident Fund Commissioner,[10] laid down that it is the responsibility of the Employer to create a provident fund for employees, and that such compliance is mandatory. In the case of Brownfield investments, while there may not be compliance with regulations for starting a business, there are still authorities that monitor and regulate the effects and mode of such investment. The Indian regime for Merger control, is governed by the Competition Act 2002, the CCI and notifications from the Ministry of Corporate Affairs.[11] The Competition Act mandates the reporting of all combinations that would breach the prescribed asset and turnover threshold, set by the Commission. These thresholds vary based on the value of the assets and turnover of the parties to the combination and are put for review bi-annually as per Section 20(3) of the Act.[12] The motive of the Competition Act is to ensure that such brownfield investments are not anti-competitive. Moreover, the Competition Act also ensures that there is no abuse of dominant position in the market. If the combination pertains to a company that is publicly listed, i.e., listed on a stock exchange, then such a combination may also be subject to Securities Exchange Board of India (SEBI) regulations. One such regulation is the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, more commonly referred to as the Takeover Code.[13]As such the regulations pertaining to acquisitions under the code, being Regulation 3 and 4 must be complied with, and announcements must be made upon the meeting of the trigger requirements in the code as per Regulation 3(2). Comparison from a regulatory standpoint While the mode of investment that a company opts to use, is extremely subjective, it is also possible to deduce an ideal mode of investment based solely on the regulatory framework. This is especially true for the Steel industry; wherein regulatory compliances are not only capital intensive but time intensive as well.[14]One of the major challenges in this regard is the development and identification of land, fit for the construction and development of a plant. The same can be seen in the case of POSCO, a South Korean firm, which was the world’s fourth largest producer of steelthat sought to enter the Indian Steel market in 2005, by setting up a plant in Odisha. The investment, had it gone through would have been the largest Foreign Direct Investment into India at that time. After 12 years of trying, the deal eventually fell through, due to the unavailability of land that met the various regulations set in place.[15]Thus, greenfield investments aredaunting and often take longer to generate returns thancompanies may expect, due to its lengthy regulatory requirements. Conversely, Brownfield investments require fewer regulatory requirements, as the foreign entity buys into or redevelops an existing setup, which has already fulfilled the procedural regulations.4This can be seen in the case of the acquisition of Essar Steel which took place in 2017. ArcelorMittal Nippon Steel India (AM/NS India) has purchased infrastructural assets that provide “strategic advantages” to the joint venture in the steel business. The duo has entered into agreement with Essar Steel to purchase 3 ports, 2 power plants

Cross-Border Mergers vis-à-vis Investment in the Indian Steel Industry Read More »

Cryptocurrency Conundrum: India’s Quest for Regulatory Certainty

Leave a Comment / Banking Law /

[By Dewansh Raj] The author is a student of National Law University, Odisha.   Introduction   The evolving landscape of cryptocurrency has left India’s legal landscape behind and places it at a critical juncture. Despite global advancements, India’s stance remains uncertain. With millions of Indians involved, regulatory clarities is crucial. The 2022 crypto crash and subsequent resurgence highlight the urgency for a structured approach. As debates on regulatory oversight intensify, the government’s delayed response raises concerns about investor confidence and the future of India’s crypto market.  Recent developments   In December last year Mr. Jayant Sinha, Chair of the standing committee on Finance stated that it would take another 18 months for any regulation relating to cryptocurrency. This could be a huge setback for the crypto market in India. With a new wave of cryptos, the investors and stakeholders would be forced to operate in the shadows and uncertainty.  The 2023 was a year when cryptocurrency slowly started to come back and in a one of a kind move, the Security and Exchange Commission (SEC) recently gave a go-ahead to the listing of spot bitcoin ETP, which is expected to bring a new wave of crypto products that saw a decline after the FTX crash. This step could mark a recurrence in cryptocurrency which was slowly fading away. The resurgence highlights the need for a mechanism to regulate cryptocurrency in India. The blog tries and analyse the current and future regulatory landscape of the crypto sphere.  The Crypto Comeback   The markets have recovered substantially following the 2022 implosion, and the market sentiments too reflect a positive outlook. The crash was so throbbing that it slashed nearly two-thirds of the value of all major cryptocurrencies by the time the FTX drama was over.   However, the growth showed that, even after the 2022 crash and the idea of cryptocurrency being questioned, the investors remain optimistic and confident. Its popularity in India is also evident from the fact that Indian investors contribute nearly 19 million investors, despite constant fear of its prohibition. Further, the fact that the majority of these investors lie in the age group of 18 to 35 reflects its popularity among the younger generation which could further be a point of concern, as these people usually don’t have a proper financial understanding and such a large on of these people investing in such a volatile investment can negatively impact the economy.  Who Should Regulate   Before delving into the current regulatory landscape and the future of these currencies, a fundamental question is, who should regulate cryptocurrency?   One would ordinarily believe that since cryptocurrencies are believed to be the substitute for currency, the Reserve Bank of India (RBI) should monitor them. The draft bill reiterated this idea and provides for the Central Board of the Reserve Bank of India to regulate cryptocurrencies.  But when it comes to cryptocurrencies which unlike traditional currencies don’t have government banking and can be much more volatile, could be trickier to handle. Hence, if cryptocurrencies continue to be legitimate then it might be best suited for the government to create a specialised agency that oversees the crypto market.  Another approach that the government can take is decentralising its regulation to various agencies. This approach finds support in the U.S. where several agencies oversee different aspects of cryptocurrency. While the reserve bank could handle regulations for exchange among consumers, SEBI and the investigating agencies could work towards its listing and preventing misuse for criminal activities.  Regulations till now   The world of cryptocurrency came to the spotlight during COVID-19 when the value of cryptocurrency grew leaps and bounds, every new currency that promised to transform the world was welcomed with open arms. But the response to these currencies was never unanimous.  India’s position on cryptocurrency has been ambiguous and lacks clarity, which creates uncertainty among the public and stakeholders. the government although doesn’t endorse the idea of an unregulated currency but on the flip side embraces blockchain technology. The Indian government even plans to introduce its very own government-backed cryptocurrency.  The Reserve Bank of India from inception has been thwarting virtual currencies from being recognised as legal tender. The Reserve Bank of India also tried to constantly dissuade investors from investing in cryptocurrencies. The breaking point came when the monetary authority in a notification dated dated 6th April 2018 directed all financial institutions to stop providing any services concerning cryptocurrencies. This move acted as an indirect ban on cryptocurrencies and was justified by labelling cryptocurrencies as dangerous for the economy.  The Supreme Court later lifted the ban on the grounds that the move infringed the right to trade under Article 19(1)(g). The court in its judgement stated that RBI failed to consider other less intrusive measures, thereby pointing towards the abruptness and severity of the step. Even after the upliftment of the ban, it seems that RBI hasn’t changed its stance.  Initially, the government too hinted towards a blanket ban, with a report suggesting a complete ban on virtual currency being discussed in an Inter-ministerial committee in 2019. Nevertheless, this step never saw the daylight and with the Supreme Court judgement, the murmur around also started to die down.  When a bill titled Cryptocurrency and Regulation of Official Digital Currency Bill 2021 was listed for the 2021 winter session, the buzz around cryptocurrency was reignited but the bill too was never introduced and has been deferred indefinitely citing the complexities involved.   The government later announced in the Union Budget of 2022 a 30% tax on all transactions involving virtual currency. The measure could serve as a temporary means to dissuade the citizens from engaging in cryptocurrency and in process benefit the exchequer. Since the budget, the government remained silent. The silence has left the crypto community on the edge, eagerly waiting to see what the government decides.  Why is it important to clear the doubt over cryptocurrencies   The need to regulate cryptocurrency is one whose need has been felt from the very beginning. The excuse is that a very small number of people are invested and the complexities involved don’t hold good. Even after the FTX crash,

Cryptocurrency Conundrum: India’s Quest for Regulatory Certainty Read More »

From Paper To Pixels: Revolutionizing Private Company Ownership

Leave a Comment / Company Law /

[By Anubhav Patidar & Sarthika Singhal] The authors are students of Narsee Monjee Insititute of Management Studies.   INTRODUCTION  The Indian financial market has witnessed tremendous growth anchored on the principles of transparency and ease of doing business promoted by the Government of India. Historical inefficiencies in the physical aspect of the trading system of the securities market have come to light. Securities and Exchange Board of India (“SEBI”) in its 2004 report titled ‘Report of the Group on Reduction of Demat Charges’1 highlighted the risks associated in dealing with physical shares, i.e., theft, forgery, loss and damage.   Pursuant to the threats posed by physical certificate trading in private, regulators mandated compulsory dematerialization for private companies. In accordance with the powers granted by Section 292 read with Section 469 of the Companies Act, 20133 (“Act”), the Ministry of Corporate Affairs (“MCA”) introduced this amendment to the to the Companies [Prospectus and Allotment of Securities (“PAS Amendment”)] Rules, 2014 on October 27, 2023.   Dematerialization refers to the process through which tangible share certificates of an investor are converted into an equivalent number of securities in electronic format.   This article deals with the intricacies of the PAS Amendment Rules 2023, analyze the background and the rationale behind the amendment, understand its impact on market players and then highlighting certain concerns associated with it.  MCA Notification  Under the amended rules, every private company must compulsorily dematerialize all its securities with immediate effect. The companies are granted an 18 month-timeline from the closure of the financial year in which they cease to be a non-small private company to adhere to this amendment.4 For instance, if a company seizes to be a small company at any time during the financial year 23–24, 18 month-timeline triggers from 31 March 2024, and be complied is required by 30 September 2025.  Two specific categories are exempted from this mandate. First, the amendment does not apply to small companies5, defined as private companies with a paid-up share capital of INR 4 crores or below and a turnover of INR 40 crores or below. Additionally, government companies are excluded6, acknowledging the distinct regulatory framework applicable to these entities.  RATIONALE BEHIND MANDATORY DEMATERIALIZATION  The rationale to implement dematerialization for private companies is to unveil the opaque realms of asset ownership in the private sector. This initiative aims to enhance efficiency, transparency, and security within the private sector, ultimately benefiting both companies and investors.  Private companies, characterized by a restricted shareholder base and minimal regulatory scrutiny owing to their absence from public markets, have long operated under a shroud of secrecy. This opacity has provided fertile grounds for various illicit practices, spanning from tax evasions to financial deceit, often facilitated by the presence of shell companies – with no significant assets or operations.   Transitioning to dematerialization requires a private company to register with one of India’s two depositories and be allocated a securities identification number (“ISIN”) that will be used to track shares and other securities issued by the company. Shareholders will need to open a ‘demat account’ showing identification proof. Demat accounts would have to be compulsorily linked to permanent account numbers (“PAN”), and bank account.7 Any sale or purchase of shares of a private company will reflect in the demat account records. With shares held and exchanged through depository accounts, ownership rights become unequivocally clear, rendering it significantly challenging to engage in fraudulent activities such as clandestine ownership or fabricated transfers.  Further, private company ownership information will come handy to market regulators like SEBI. Regulators can effectively track and scrutinize transactions, facilitating prompt detection and prevention of non-compliance. This heightened level of regulatory scrutiny will act as a deterrent to illicit activities, fostering a more compliant and transparent securities market environment.  Impact on Companies  The financial burdens on the private companies are expected to get fortified since there is a fee component associated with demat accounts. Moreover, Private companies have to hire additional people to look after the compliance of dematerlialization process. Opening these accounts is merely the tip of the iceberg; ongoing expenses like annual maintenance fees add to the burden. Additionally, complying with regulatory requirements, such as upgrading technology and infrastructure, for dematerialization entails additional costs. This requires companies to allocate significant resources to ensure seamless compliance and effectively manage the financial implications of dematerialization.  While the wholly-owned subsidiaries (WoS) of unlisted public companies received exemptions from dematerialization requirements in the 2018 Amendment Rules exempted, the same leniency doesn’t extend to WoS of private companies under the Amended PAS Rules. If a private company subsidiary falls under the umbrella of another private entity, it must adhere to dematerialization regulations. However, if the subsidiary operates under a public company, thereby retaining its status as a deemed public company, it remains exempt from the 2018 amendment to the Rules.  Impact on Foreign Investors  The impact of dematerialization on foreign investors in Indian private companies presents both short-term challenges and long-term benefits. This documentation and procedural requirements may lengthen investment timelines and incur additional costs, posing a potential deterrent to foreign investment. Moreover, shareholders must furnish extensive details regarding their constitution, ownership, and stakeholder agreements, which could raise concerns for foreign funds. Once the demat account is established, the administrative burdens associated with traditional paper-based transactions are eliminated. Dematerialization ensures smoother, safer, and faster transactions for foreign investors, enhancing the efficiency and attractiveness of investing in Indian private companies. Therefore, while the initial setup may pose challenges, the transition to dematerialization ultimately enhances the investment landscape for foreign investors in the Indian market.  AFTERMATH OF AMENDEMENT: CHALLENGES AND WAY FORWARD  Navigating the transition towards mandatory dematerialization in private limited companies presents considerable hurdles, requiring strategic solutions for effective implementation.  Firstly, the technical complexities encountered by shareholders, often acts as a deterrent to the adoption of dematerialization. However, by providing intuitive interfaces and dedicated technical assistance, companies can empower shareholders to navigate the process with enhanced ease and assurance, thereby facilitating a smoother transition.  Moreover, the cybersecurity concerns presents yet another

From Paper To Pixels: Revolutionizing Private Company Ownership Read More »

Should Reinstatement with Back Wages be an Automatic Right?

Leave a Comment / Employment Law /

[By Rangin Halder] The author is a student of West Bengal National University of Juridical Sciences.   INTRODUCTION  One of the fundamental principles governing labour jurisprudence has been that of social justice, which aims at creating a fair and equitable working environment for workers in the country. In this regard, the Labour Courts and Industrial Tribunals have been given the discretion to use principles of “justice, equity and good conscience” to protect the interests of the workers in the market. Keeping this principle as the fundamental bedrock of the arguments furthered, this paper normatively proposes that reinstatement with back wages should be made an automatic right.  DEFINING THE SCOPE OF THE PAPER.   The order of reinstatement of services is usually perceived as the common rule in cases of wrongful dismissals. It is, however, pertinent here to flesh out the constituting elements of wrongful dismissals. For the purpose of this paper, “wrongful dismissal” is to be construed as when the dismissal is either directly contravening a statute, is tainted with malice and illegality or is violating the principles of natural justice and is used as a tool for the victimisation of the worker. It is, however, necessary to point out that such a term will not encompass situations where the underlying cause has been upheld and the court adjudicates that only the punishment meted out is unduly harsh. This has two significance, the first one being that only after determining that it is indeed a wrongful dismissal the automatic right of reinstatement with back wages will accrue and secondly, given that the paper primarily furthers a principled reasoning for such a right to exist, it will not be logically consistent to argue for this in cases where the employee or the worker has been found guilty of the charges of wrongdoings and the only difference has arisen pertaining to the degree of punishment meted.   WHY REINSTATEMENT WITH BACK WAGES SHOULD BE CONSIDERED AN AUTOMATIC RIGHT  The right of reinstatement brings two remedies: first, that the dismissed worker is reinstated back to his/her previously held position and second, they are reinstated with wages and benefits from the time of dismissal.  The fundamental basis for the existence of this right resides in the idea of “equity”. Essentially, it was to bring the employee back to the same position as if he had never been dismissed. This is, in essence, aiming to remedy the harm that was caused directly as a result of the wrongful dismissal. It is as if the employee had never been dismissed. Argued that reinstating the worker with back wages seems like the only logical choice.  NECESSITY OF AN AUTOMATIC RIGHT  The most important question here is, however, not the need for reinstatement with back wages. It is about asking why this remedy needs to be given the status of an automatic right. The primary reason for this is the “burden of proof”.  Many courts have held that after the charge of wrongful dismissal has been upheld, it is upon the worker to prove that he/she had attempted to get work but could not get gainfully employed. Without such proof, the worker is not entitled to receive back wages. The author believes that this additional burden being imposed on the worker after his/her dismissal has been proved to be wrongful and is, in essence, proving a premium to the employer. It is thus going against the principle of fairness.  But even taking in practical considerations and realities of the Justice system in India, it adds an additional burden on the worker when he/she is already dealing with undue long delays in court hearings, legal fees and an additional burden of unemployment. It is also much easier to prove the existence of employment than to prove a period of unemployment or no gainful employment.  The elevation of reinstatement with back wages as an automatic right makes it an inherent right of the worker, similar to the one which exists with copyright holders. The burden to prove that such a right should not accrue, thus, will naturally fall on the employer.   It is, however, necessary to clarify that the author agrees with the Supreme Court in claiming that before the accrual of the right of back wages, a declaration of a lack of gainful employment post-dismissal should be given by the employee.  REBUTTING COMMON ARGUMENTS AGAINST SUCH A RIGHT  Argument 1: The duration of the work   A common argument against the right of reinstatement with back wages is that such a remedy should be accorded subjectively based on the period of tenure of the dismissed employee and that back wages should only accorded to those workers who had been permanent or had been working for a long time. The flaw, however, is that this right exists independent of the duration of the employee’s tenure. The right is only remedying a wrongful dismissal, which, if it did not happen, the worker would have still presumably been employed. Thus, the right to reinstatement with back wages should not selectively accrue to employees based on their tenure as the nature of wrong suffered is similar for all dismissed employees independent of their tenure.  Argument 2: No work, No Pay.  Another common principle used to deny wages is “No work- No Pay”. It is essentially the idea that since the worker did not work for the duration of his dismissal, he is not entitled to receive wages for the same. However, such reasoning is giving an unfair premium to the employer when his act of dismissal is deemed illegal and the direct consequences of which have been unfairly borne by the worker. Also, it is pertinent to note that the idea of “no work, no pay” only kicks in when the worker chooses not to work and thereby forgoes his wages. However, in the present case the employee is forced to leave as a direct consequence of an illegal dismissal and not, in fact, choosing not to work.  Argument 3: The Need for Judicial Discretion 

Should Reinstatement with Back Wages be an Automatic Right? Read More »

Even Roses Have Thorns: Unravelling the Direct Listing Scheme

Leave a Comment / Capital Markets and Securities Law /

[By Vishesh Bhardwaj] The author is a student of National Law University Odisha.   INTRODUCTION  To generate wealth, provide liquidity to investors and raise capital, companies need access to global capital markets. Earlier, Indian firms had been able to raise equity capital from foreign investors either through listing in local stock exchanges or via international listing through depository receipts like American Depository Receipts (“ADR”) and Global Depository Receipts (“GDR”). ADR is used for trading on US stock exchanges while GDR is traded outside the US.  Recently, the Ministry of Corporate Affairs (“MCA”) notified an amendment brought in Companies Act, 2013 (“Act”)  in 2020 regarding the direct listing of shares of public companies on foreign stock exchanges (“Direct listing scheme”). This amendment in Section 23 of the Act, permits companies specified by the MCA to list their shares directly on foreign stock exchanges. Additionally, an amendment was made to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, complemented by the issuance of the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules (“Listing rules”), 2024.  The author through this post aims to highlight the benefits, problems, and gaps in the framework of direct listing scheme.  ADVENT OF THE SCHEME: A HISTORICAL OVERVIEW  The inception of the direct listing scheme in India began with the proposal outlined in the SEBI report in December 2018. This report advocated for changes to facilitate the direct listing scheme. Subsequently, the Companies (Amendment) Act 2020 and further amendments provided the legal framework for the scheme, specifying the eligibility criteria for public companies to list on select foreign stock exchanges.  In July 2021, the introduction of International Financial Services Centres Authority ILS Regulations outlined the regulatory framework for listing companies, including SMEs, startups, and various securities. This laid the groundwork for the direct listing scheme’s implementation. The announcement by the Indian government in July 2023 marked a significant milestone, signalling the direct listing scheme on International Financial Service Centre (“IFSC”) exchanges. A Working Group was formed to oversee the implementation process.  By October 2023, amendments to the Companies Act were notified to allow the direct listing scheme. The Working Group proposed amendments to existing frameworks and regulations in December 2023 to streamline the implementation process. Finally, in January 2024, MCA and Ministry of Finance notified rules allowing the direct listing scheme in GIFT-IFSC. SEBI began working on operational guidelines to facilitate the smooth functioning of the scheme.   The rationale for the regulatory changes stems from the belief that permitting Indian companies to list on foreign stock exchanges bolsters global competitiveness, especially in the technology sector. By opening Indian capital markets, innovation and efficiency are promoted, benefiting the financial ecosystem. Furthermore, nurturing finance as a high-value export sector and enticing prominent technology firms to Indian exchanges have the potential to elevate the nation’s global standing and enhance economic relations.  REAPING THE REWARDS: EXPLORING THE BENEFITS OF THE SCHEME  The move aligns with the government’s vision to position GIFT-IFSC as a global financial hub and attract foreign capital. The direct listing scheme will boost the global capital of Indian companies. The amendment provides flexibility to certain classes of domestic public companies for direct listing scheme, providing them with access to a broader pool of investors. It also reduces the compliance for listing of shares, like issuing prospectus, and disclosure of share capital and beneficial ownership.   Within the IFSC, Indian public companies are permitted to issue shares with differential voting rights, empowering them to customize unique share classes for foreign stakeholders. This flexibility augments the company’s capacity to configure its capital in alignment with its requirements, facilitating the retention of shares that grant greater control while divesting those with reduced voting authority.  From an investor’s standpoint, this classification enables them to select a share class that aligns with their investment objectives and risk tolerance. Additionally, listing shares through an offer for sale on the IFSC involves less stringent norms than listing on recognized stock exchanges in India. This streamlined process reduces compliance burdens, making it easier for promoters and investors to realize liquidity from their holdings. Moreover, it is an additional method to provide an exit to the investors.   The scheme also benefits the investor as investing through the GIFT-IFSC not only eliminates foreign currency concerns for investors because transactions are handled in foreign currency, but it also allows for extended trading hours on international stock markets, which exceed 20 hours per day. Furthermore, the GIFT-IFSC provides substantial tax incentives under the Income Tax Act,1961, including exclusions from capital gains tax on the transfer of shares in Indian enterprises within its jurisdiction.  PROBLEMS AND GAPS: THORNS OF THE SCHEME  The regulatory framework governing investments in the IFSC has a lot of complexities. Despite listing the securities on international stock exchanges, the status of public unlisted companies remains unchanged. As per Section 2(52) of the Act, a listed company is defined as one that has listed its securities on any recognized stock exchange. However, international stock exchanges are not recognized for this purpose under Section 4 of the Securities Contract Regulation Act, 1956. So, despite listing their securities on these exchanges, unlisted companies will be exempted from the obligations and compliances mandated for listed companies under the Act. This gap may result in a lapse in investor protection, as the obligations intended to safeguard investors will not be enforced for these companies.  The SEBI (Substantial Acquisition of Shares and Takeovers) (“SAST”) Regulations, 2011 are only applicable to a listed company. As the status of a public unlisted company will not change, the regulations will not be applicable here. This exposes the public companies to the risk of hostile takeovers, as competitors could potentially acquire securities without the regulatory safeguards provided by the takeover code. The absence of structured protections may pose challenges for permissible holders seeking to exit in the event of a hostile takeover. As international investments through IFSC evolve, there is anticipation that SEBI will address and provide clarity on these aspects to mitigate the associated risks and ensure a

Even Roses Have Thorns: Unravelling the Direct Listing Scheme Read More »

RBI’s Master Directions on Bharat Bill Payment System: A Progressive Leap in the Bill Payment Landscape

Leave a Comment / Banking Law /

[By Karthika S. Babu] The author is a student of Gujarat National Law University.   Introduction The Reserve Bank of India (“RBI”) has recently released the  Reserve Bank of India (Bharat Bill Payment System) Directions, 2024, the Master Direction for the regulation of Bharat Bill Payment System (“BBPS”). The Directions are set to supersede RBI’s earlier Implementation of Bharat Bill Payment System (BBPS) – Guidelines in an attempt to further enhance participation and consumer protection by streamlining the bill payment process under the payment system. BBPS, operated by National Payments Corporation of India (“NPCI”), is a dedicated payment system designed specifically for recurring bill payments across various utility services. The BBPS framework was proposedby RBI in 2014 to unify and consolidate the electronic payment system by creating a single brand image for bill payments in the country.   The recent Master Directions are in line with the broader attempt of RBI for the regulation of the payment systems, reflecting a concerted effort to strengthen the interoperability of the payments sector. Through the directions, RBI has shifted its focus to promoting growth and innovation in the payment system by balancing the interests of various stakeholders. The extant regulatory framework aims to encourage a second wave of boom in the bill payment landscape by largely stimulating the participant units. This blog post is aimed at analysing the key features, ambiguities and the potential cocerns that needs to be addressed by the Directions while highlighting the cascading effect the regulations would have on the technological advancements in the sector.    Key features of the Framework  The recent developments in the payments sector demand for a dynamic regulatory regime. The RBI has so far adopted a balanced approach in harmonizing the sectoral growth with the consumer needs through minimal regulatory intervention and self-regulatory mechanisms. The Directions, by regulating the primary players in the payment system, NPCI Bharat Bill Pay Limited (“NBBL”) and Bharat Bill Payment Operating Units (“BBPOUs”), aim to do the same by creating a level playing field in the payment ecosystem by allowing entry of new players while providing for enhanced consumer redressal mechanisms.   NBBL, is the authorized Bharat Bill Pay Central Unit (“BBPCU”) which operates the payment system in addition to setting industry standards and undertaking clearing and settlement functions. Whereas, BBPOUs are the system  participants in BBPS which may function either as a Biller Operating Unit (“BOU”) or a Customer Operating Unit (“COU”) or both. A BOU onboards billers to BBPS while a COU provides customers the digital/physical interface through which the customers can access the billers in the payment system. The primary responsibility of BOUs as per the Directions is to ensure the regulatory compliance of the onboarding merchants in accordance with the guidelines as prescribed by the RBI or NBBL. On the other hand, COUs have to undertake the responsibility of providing for an inbuilt system for raising disputes in addition to ensuring consumer access to the billers. Moreover, the COUs must also take complete responsibility for the actions of agent institutions which are contracted for providing the interface services to the customers in the payment system.   Further, one of the key aspects of the Master Direction is the relaxation of regulatory requirements for the entry of non-bank payment aggregators (“PAs”) into the BBPS framework. Once a non-bank PA is authorized to operate as a PA under The Payment and Settlement Systems Act, 2007 or under the in-principle authorisation, additional licensing requirements for operating in the BBPS framework are done away with. However, an additional mandate is placed on the non-bank PAs to maintain escrow accounts with a Scheduled Commercial Bank exclusively for the purposes of BBPS transactions. The escrow accounts of the BOUs and COUs are to maintain the credit of funds collected from the customers, due to the biller, the credit/debit of disputed payments and the recovery of charges or commissions on the payment. In addition to the provisions provided in the directions, the management of the BBPS escrow account will be governed by the RBI guidelines on payment aggregators and gateways as applicable.   Finally, NBBL is required to establish a centralized dispute resolution framework as per RBI guidelines which will integrate all participating COUs and BOUs, allowing customers and billers to raise and resolve disputes effectively.   Analysis   RBI, through the Master Directions has introduced further regulatory mandates on an otherwise well-regulated payment system. Although the earlier guidelines provided for extant directions on the various aspects on the interoperability of BBPS, the new directions attempt to provide further clarity by simplifying and consolidating  the existing RBI regulations into the BBPS framework.   In contrast to previous guidelines, the Directions have further streamlined the settlement and consumer grievance mechanism by integrating BBPOU and BBPCU into an end-to-end complaint management system. Moreover, BBPOUs functioning as COUs are required to establish an inbuilt system for raising disputes; however, no such mandate is provided for BOUs. This creates ambiguity regarding how the disputes would be resolved internally between billers and biller aggregators within BOUs before it is escalated to the regulator or the relevant authority. This lack of a mandated dispute resolution system for BOUs may result in inconsistencies in the services of the BBPS system, significantly impacting the participants and the costumers.   Moreover, as per the previous guidelines for the purposes of settlement, the transactions were categorized as ON-US and OFF-US transactions. The difference between an ON-US and OFF-US transaction is that, in the former the biller and the payment collection agent belong to the same BBPOU whereas in the latter they belong to different BBPOUs. The settlement in the ON-US transactions is carried out completely by the BBPOUs whereas OFF-US transactions are settled by the BBPCU. It is pertinent to note that there is no mention of this bifurcation or settlement mechanism in the current framework except for the mandate on COUs to take responsibility for the actions of their agent institutions. Though doing away with this bifurcation has simplified the management and settlement process in the payment system,  it is imperative for

RBI’s Master Directions on Bharat Bill Payment System: A Progressive Leap in the Bill Payment Landscape Read More »

Scroll to Top