Author name: CBCL

Charting New Waters: SEBI’s Revised Approach to Short Selling

Capital Markets and Securities Law /

[By Vikas Saran & Pritha Lahiri] The authors are students of Institute of Law, Nirma University.   Overview:   In the dynamic landscape of securities trading, the contentious practice of short selling has emerged as a focal point of regulatory scrutiny. In response to the Adani Hindenburg fiasco and in alignment with the Supreme Court directive in the matter of Vishal Tiwari v. Union of India,  the Securities and Exchange Board of India (SEBI) has introduced new regulations to address the risks associated with short selling.  The regulatory intervention reflects SEBI’s strategic approach of preventing, detecting and deterring, and underscores the importance of a balanced regulatory framework.   This article presents a detailed analysis of the recent framework introduced by SEBI. It provides insights from both domestic and international perspectives, offering a comprehensive examination of the regulatory landscape. Additionally, the authors offer innovative strategies for future improvements within this framework.  Revisiting SEBI Guidelines:   Regulation of short selling is not new in India; in 2007, SEBI introduced the first set of regulations on short selling, titled, “Circular on Short Selling & Securities Lending and Borrowing” wherein it defined short selling as the “practice of selling a stock which the seller does not own at the time of trade”. All classes of investors were permitted to short-sell with certain disclosure requirements put in place to ensure transparency. Pertinently, naked short selling, involving selling shares that have not been borrowed or even confirmed to exist at the time of the trade was not allowed by SEBI.   Fast forward to 2024, SEBI has overhauled its 2007 circular, integrating it into the “Master Circular on Short Selling and Securities Lending and Borrowing Scheme”. The new framework provides for:   Inclusivity in Market Participation: The framework democratises the short-selling arena, extending the privilege to both retail and institutional investors alike.  Prohibition of Uncovered Short Selling: In a bid to ensure the integrity of market transactions, the framework categorically proscribes the practice of naked short selling.  Restrictions on Day Trading for Institutional Investors: Institutional entities are enjoined from day trading while engaging in short selling, with an imperative to satisfy their delivery commitments.  Transparency as the Bedrock: The framework institutes rigorous disclosure mandates, requiring institutional investors to declare their short selling positions at the juncture of order placement, while retail investors are accorded a grace period extending to the trading day’s end.  Dissemination of Short Interest Data: Brokers are tasked with the daily aggregation of short-sell positions, which are subsequently reported to the stock exchanges. This data is synthesised and released on a weekly basis, enhancing the market’s transparency quotient.  In its recent circular, SEBI has synchronised the framework for short selling, detailed in ‘Annexure 3’ of Chapter 1 of the Master Circular, with provisions from the rescinded SEBI 2007 circular. Notably, this has not yielded any material changes because the recent framework essentially replicates the structure and guidelines established by the earlier framework. Therefore, while the regulatory process was updated and streamlined, the substantive rules governing short selling remained largely unchanged.  However, the Expert Committee established by the Supreme Court, after the Adani Hindenburg episode, had suggested a proactive regulatory intervention. It had emphasised using market events for enhancements, inviting SEBI and the Indian government to engage in proactive improvements aligned with market dynamics.  This suggests that while SEBI’s recent circular revision reflects a commitment to regulatory stability, there is still scope for refinement and enhancement in certain aspects of the framework.  A Global Perspective:   To gain a comprehensive understanding of SEBI’s regulatory approach, it is essential to explore international practices and their potential impact on India’s securities market landscape.   United States  The US has a long history of regulating short selling, overseen by the Securities and Exchange Commission (SEC). Regulation SHO, implemented by the SEC in 2010, includes measures to limit manipulative short selling. Rule 201 mandates trading centres to enforce price limits on short sales during significant price drops.  Furthermore, Regulation SHO Rules 203(b)(1) and (2) establish ‘locate requirements’. These rules require broker-dealers to confirm that a security can be borrowed, guaranteeing its delivery on the settlement date of the short sale.   Recently, Rule 13f-2 was approved under the Securities Exchange Act of 1934, requiring managers with significant short-sale positions to report certain information to the SEC through Form SHO.  United Kingdom  In the UK, short selling is governed by the Short Selling Regulation (SSR) of 2012 which applies to financial instruments and sovereign debt traded in the UK. Key provisions include:  Notification Requirement: Holders of significant net short positions in shares or sovereign debt have to notify the Financial Conduct Authority (FCA) upon reaching specified thresholds.  Public Disclosure: Investors who hold significant net short positions in shares are mandated to publicly disclose these positions once they cross certain predefined thresholds.  Restrictions on Uncovered Short Positions: The SSR outlines restrictions on investors entering into uncovered short positions in shares or sovereign debt.  Exemptions: Stabilisation activities and market makers meeting specific criteria may apply to the FCA for exemptions from uncovered short-selling restrictions and notification requirements.  FCA Powers: The FCA has the authority to restrict short selling in specific situations to prevent disorderly price declines and threats to financial stability.   The SSR exempts sovereign debt and CDS from uncovered short-selling restrictions and notification requirements, aligning with the government’s stance. Once implemented, there will be no such restrictions or notification obligations for these instruments.  Singapore  In Singapore, the Monetary Authority of Singapore (MAS) regulates short selling through its Guidelines on Short Selling Disclosure under Section 321 of the Securities and Futures Act, 2001. The Central Depository (Pte) Limited (CDP) addresses settlement disruptions via buying-in processes, with costs and penalties for sellers failing to deliver securities. The SGX-ST conducts surveillance to prevent market abuse.  The SGX-ST’s rules mandate disclosure for sell orders: Rule 8A.3.1 requires market participants to indicate if an order is a short sell. Rule 8A.5.1 necessitates reporting short sell order volumes before each market day. Additionally, Rule 8A.6.1 allows for the correction of erroneously marked sell

Charting New Waters: SEBI’s Revised Approach to Short Selling Read More »

Unveiling MCA’s Game-Changer Navigating Transparency and Inclusivity Through Unified Regulatory Policies

Contemporary Issues /

[By Ananta Chopra] The author is a student of University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University.   Introduction  With effect from 1 January 2024, Ministry of Corporate Affairs (MCA) and other regulatory bodies under it, such as, the Competition Commission of India(CCI) and the Insolvency and Bankruptcy Board of India are following a uniform policy of seeking public comments before finalising any regulation or legislation. Public consultations are intended to be conducted as a part of the policy during both the original rule-making and review phases.  Need for Uniform Policy  Currently, different regulators (SEBI, IBBI, CCI, etc.) have different procedures when it comes to public engagement before establishing regulations. Therefore, in order to increase openness and stakeholder involvement, it has been observed that a policy for public consultation in rule-making exercises is essential. By adopting a unified approach, this change enhances openness, fosters stakeholder engagement, and ensures a standardised framework for public comments. This not only promotes fairness but also facilitates more inclusive and informed decision-making, aligning regulatory practices and promoting a cohesive and accountable regulatory environment.  Pre-Legislative Consultation for New Rules and Regulations  The policy’s Part A highlights the Ministry’s methodology, which involves drafting primary regulations and revisions, while also emphasizing transparency and public engagement in the regulatory process. An explanation note is required to accompany these regulations and revisions, outlining the problem addressed, current regulations, tactics for implementation, and the procedure for gathering public input. These versions will be made available for public review and feedback for at least thirty days on the Ministry’s website, ensuring that stakeholders have ample opportunity to provide input and suggestions. The Ministry’s divisions may decide to abbreviate this period in urgent situations or skip it altogether. In addition, the policy requires public feedback to follow a systematic framework, which encourages thorough, clause-by-clause responses. The broader public is not the only audience for this inclusive strategy; it provides a thorough consultation process by involving field offices, outside specialists, and certain stakeholder groups.  Additionally, unless the circulars are merely clarifications or informative, the Ministry intends to include the public in discussions about fee relaxations or compliance. Remarkably, the policy suggests disclosing answers to public feedback to guarantee openness in the process by which public opinion influences final regulations.  Including Regulators in the Process of Consultation  Pre-legislative consultations are a requirement for regulators operating under the Ministry’s purview. This entails making major rules and revisions available to the public for at least 30 days, unless there is an urgent need to do otherwise. According to the policy, prospective regulations must be accompanied by an explanatory note that addresses comparable topics to those of rules. Regulators are urged to ask the public for input on any changes they make, no matter how little, or on interim measures like fee reductions. Additionally, they might release their answers to queries from the public, reflecting the Ministry’s dedication to openness.  Comprehensive Review of Existing Rules and Regulations  Part B outlines a policy for thorough review of existing rules and regulations. This is critical for ensuring that laws remain relevant and effective in a rapidly changing economic environment. The Ministry and the regulators are tasked with evaluating each rule and regulation against a set of criteria, including their objectives, implementation experiences, current relevance, and overall regulatory practices. Public consultation, as detailed in Part A, plays a vital role in this review process. Feedback from stakeholders, experts, and field officers will be integral. Even forms attached to the rules and regulations are subject to review, aiming to reduce compliance burdens.  Timeline and Execution  The goal of this thorough review process is, to start on 1 January 2024and finish it in time for the 2024–2025 fiscal year. The effort taken by the Ministry is a positive step in the direction of democratising the rule-making and regulating process. The policy guarantees that the legal framework is fashioned not only by a top-down approach but also by the experiences, needs, and insights of people who will be most affected by it by actively involving the public and other stakeholders. Including a variety of stakeholders guarantees that a wide range of viewpoints are taken into account, including that of subject matter specialists and specialised interest groups. By addressing any blind spots that might not be apparent in a more closed regulatory process, this diversity of opinion can result in more thorough and balanced regulations.  Furthermore, the dedication to re-examining and even revising current laws and guidelines guarantees that the legal system remains  relevant and efficient in the face of changing social, technological, and economic environments. In a world that is changing quickly, this dynamic approach to policy-making is crucial.  Impact of Policy on Stakeholders  Increased Inclusivity and Transparency: By giving stakeholders a uniform framework for participation, a unified approach guarantees transparency. This encourages inclusivity by allowing a range of viewpoints to be taken into account during the decision-making process, which advances a more democratic and equitable regulatory environment.  Streamlined Compliance and Lessened Burdens: Outdated or onerous requirements are found by thoroughly reviewing all current rules and regulations, along with any paperwork that may be attached. Stakeholders gain from this as it streamlines compliance procedures and lessens needless regulatory obligations.  Openness and Accountability: Encouraging public comment and requiring regulators to publish their answers to it improves transparency and accountability. The policy emphasises a dedication to transparency in the regulatory process, making sure interested parties understand how their feedback affects the final regulations. The development of trust between stakeholders and regulators is facilitated by this accountability.  Compliance Difficulties: Despite the thorough examination of current regulations being meant to guarantee their applicability and efficacy, stakeholders could find it difficult to adjust to any modifications. The neutral effect results from the possibility that the review process will require modifications to compliance protocols, resulting in a transitional time for impacted parties.  Time and Resource Allocation: The policy stipulates a 30-day public review process. Although this length of time is meant to allow for in-depth

Unveiling MCA’s Game-Changer Navigating Transparency and Inclusivity Through Unified Regulatory Policies Read More »

Fast Track Evolution: SEBI’s Consultation Paper on the Fast-track Issuance of  Debt  Securities

Capital Markets and Securities Law /

[By Tirth Purani & Ananya Sinha] The authors are students of Institute of Law, Nirma University and KIIT School of Law, Bhubaneswar, Odisha respectively.   Introduction   To make India’s debt securities market robust, the Securities and Exchange Board of India (SEBI) introduced a consultation paper on 9 December 2023, prescribing amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (LODR Regulations) and the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, (NCS Regulations). Along with the amendments in the regulations, SEBI has also introduced fast-track public issuance and listing of debt securities. These amendments were driven by the Union Budget (2023-24) which settled its primary focus to ease the existing regulations and simplify and reduce the cost of compliance. To elevate ease of doing of business Over 3,000 law provisions were decriminalized, and more than 39,000 compliances were decreased. To put this into effect, SEBI constituted a specialized Corporate Bonds and Securitization Advisory Committee, to propose strategies for enhancing ease of doing business for debt issuers listed on the stock exchange and assess the LODR and NCS Regulations.   The authors of this post attempt to showcase the consequences of the consultation paper on India’s debt securities market and the facilitation of business operations through its proposals and recommendations. The piece aims to elaborate on the recommendations concerning the reduction of the minimum face value for non-convertible securities, need for an efficient regulatory procedure, and abolishing the requirement of minimum subscription for banks and financial institutions.   Lacunas in the existing framework and Underlying Reasoning   Debt securities such as bonds and debentures are pertinent for a company’s growth and benefit as they are efficient and cost friendly. India’s debt securities market has grown considerably, as the market of corporate bonds took a leap from Rs 16.49 lakh crore in 2014 to Rs 44.16 lakh crore in 2023. Annual issuances of listed bonds increased from Rs 3 lakh crore in 2013 to Rs 6 lakh crore in 2022. With this growth, however, there exist multiple lacunas, which are impeding the sophisticated growth of debt market. The share of retail investors in debt market is very small as bulk of the debt is raised through private placement. It lacks transparency due to potential flaws in the credit rating process such as influencing ratings by borrowers thus making the process highly unreliable. There is also lack of liquidity due to thin market as it makes it difficult to buy and sell debt instruments quickly and efficiently. Additionally, the existing regulatory framework of the debt market is not designed in a manner to accomplish minimum cost and less time in the issuance and listing procedures. Stringent regulations have discouraged investors from investing, and to say the least, market-making has been difficult to implement.  To resolve the above stated lacunas and boost the debt securities market, SEBI has been striving to raise the monetary threshold, which requires large corporations to raise at least 25% of their incremental borrowings through corporate bonds during a consecutive three-year period. Further, it has introduced settlement through delivery versus payment method that guarantees transfer of securities only after payment has been made. To improve transparency, it was mandated that all trades in the securities debt instruments shall be reported on the trade reporting platform of the stock exchanges. To make the process of issuing securities smooth SEBI introduced electronic book platform through which investors can place multiple bids in a private placement on debt basis. A novel idea for fast-track public debt securities issuance has been put out in the consultation paper, allowing regular issuers to issue debt securities publicly in less time, money, and effort.  Proposals of the Consultation paper and its implications   One of the major proposals of the consultation paper is reducing the minimum face value for non-convertible securities (NCS) and non-convertible redeemable preference shares (NCRPS) to Rs 10,000 as opposed to Rs 1 lakh earlier. However, it is mandatory for the issuer to appoint a merchant banker for carrying out due diligence of such securities. Such a step would promote investments by non-institutional investors and make the debt securities market more accessible for them. In pursuant to this, SEBI witnessed an increase in the participation of non-institutional investors.  To make the regulatory procedure more efficient and cost-friendly, the proposal provides that the financial statements should be accessible through a QR code, which will directly lead to the audited financial statements on the stock exchange’s website. As the LODR Regulations requires financial results to be submitted to stock exchanges within 30 minutes of the board meeting and immediate online publication is accessible, discretion has also been given to publish the financial results in the newspaper, which was earlier necessary. The timeline for listing fast-track issue of debt securities has been proposed to be T+3 instead of T+6 for a regular public issue. This step to a larger extent will reduce the time for raising funds. To inculcate more consistency and harmonization, the format of the due diligence certificate has been modified with formats of the certificate for equity issuances.   The consultation paper has also proposed to abolish the requirement of minimum subscription for banks and financial institutions, which will help them to generate more funds for their functioning. In the year 2023, SEBI introduced the concepts of General Information Document (GID) and Key Information Document (KID) for filing only necessary and required information. In the event of a subsequent NCS issuance, KID will take the place of the shelf placement memorandum, whereas GID will replace it during the original NCS issuance. These concepts were, however, first limited to the private placement issuance of NCS. At present, they have also been extended to public issuance of securities. These documents containing disclosures in the NCS regulations, information on key developments, and details of debt securities will aid the fast-track issuance of securities. They will reduce the complexity in disclosure requirements and only material information conveyed to the investors through them.   The above-mentioned changes are likely to reduce the time and

Fast Track Evolution: SEBI’s Consultation Paper on the Fast-track Issuance of  Debt  Securities Read More »

Navigating Jurisdictional Boundaries: A Legal Analysis of NCLT’s Authority and Civil Court’s Restrictions.

Company Law /

[By Pulkit Rajmohan Agarwal & Anaya Nandish Shah] The authors are students of Gujarat National Law University, Gandhinagar.   Introduction  Recently, in the case of Eastern India Motion Pictures Association & Ors. v. Milan Bhowmik & Anr., the division bench of the Calcutta High Court affirmed a peculiar ruling by the single judge bench, favouring two minority members of a company. The members approached the court challenging the election of the executive committee, which was allegedly conducted in violation of the articles of association and the election rules of the company. The said circumstance falls well within the realm of remedies stipulated under the Companies Act 2013 (the Act), one of them being oppression and mismanagement under Section 241 of the Act. However, the members opted for a recourse through the civil court, a forum that is expressly prohibited under Section 430 of the Act, thereby circumventing the jurisdiction of the National Company Law Tribunal (NCLT).  This blog analyses the question of whether statutory provisions prescribing and prohibiting rules can be bypassed, and whether courts are free to adopt alternative approaches. In the light of Sections 241, 244, and 430 of the Act, it scrutinizes whether the bench appropriately affirmed the ruling of a single judge bench, and explores the scope for interpretation regarding the object, powers, and discretion of the NCLT.  Legal Framework For Oppression And Mismanagement Cases  Eligibility for O&M under the Companies Act.  Section 241 of the Act pertains to applications alleging oppression and mismanagement. If minority shareholders can demonstrate to the tribunal either that: a) the company’s activities are being carried out in a manner prejudicial to its interests or those of its members, or contrary to the public interest; or b) there has been a material change and the company’s operations are being conducted in a manner detrimental to its interests. In furtherance, Section 244 of the Act talks about members who have a right to file a petition for oppression and mismanagement. According to the Section, in companies with share capital, a minimum of one hundred members or one-tenth of the total members, whichever is less, are eligible to submit an application. Conversely, for companies without share capital, as is the case herein, a minimum of one-fifth of the members is mandated. The object behind this restriction is to safeguard the company from frivolous petitions and ensures that only people holding requisite interest in the company can file petition. However, it is pertinent to note that the proviso to Section 244 explicitly mentions that these aforementioned conditions can be waived off upon an application to the NCLT. The underlying rationale is to protect the minority shareholders from dismissal of serious allegations of oppression and mismanagement solely on the grounds of insufficient shareholding.   There have been a plethora of cases illustrating several grounds upon which NCLT has waived off the criterias mentioned under Section 244 of the Act. Some of them include principles of natural justice, when it is in the substantial interest of the company, or when there is a dilution in shareholding because of oppression, etc. Further, NCLAT in Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd., laid down certain principles regarding grant of waiver, along with inclusion of exception circumstances as one of the grounds. On the lines of these principles, NCLAT in one of its orders pertaining to an application under Section 241 of the Act, granted such a waiver to two minority shareholders.  Opting For Civil Remedy Over NCLT’s Jurisdiction   In the present case, an application to declare the election of the committee and the subsequent meetings null and void fall within the purview of oppression and mismanagement, as enumerated under Section 241 of the Act.   As per the mandate of the law, they failed to meet the eligibility requirement of at least 1/5th members. Hence, they should have approached NCLT with a waiver application under Section 244. Contrastingly, they resorted to civil court without initially exhausting the remedies mandated by the Act. The single judge of the High Court remarked “The argument made by the applicants relying on the proviso to Section 241(1)(b) that the plaintiffs are required to exhaust the remedies before NCLT before approaching this Court is not tenable.”, further in the context of waiver application the court opined “That apart and in any event a considerable period will elapse for NCLT to first decide whether to allow an applicant to maintain an application without requisite membership qualification.” Reaffirming the same, the division bench reiterated, “I would like to add that if the plaintiffs approached the tribunal for dispensing with the eligibility criteria, there was no guarantee that the tribunal would allow the application. In the event the tribunal rejected the application the plaintiffs would have to approach the civil court.” The Hon’ble High Court anticipated a probable denial by the NCLT for the waiver petition, along with the prospect of delay, and thus approved bypassing NCLT’s jurisdiction, thus deviating from the established framework.  Evaluating the jurisdictions  Section 430 of the Act restricts the jurisdiction of civil courts for matters designated to be adjudicated by the tribunals established under the Act. The Supreme Court, in context of Section 430 stated that jurisdiction of civil court is completely barred when powers have been explicitly conferred upon NCLT by a statute. Delhi High Court in the case of SAS Hospitality Ltd v. Surya Constructions Ltd. stated that the NCLT has sole jurisdiction over matters falling within the domain of Section 242 of the Act, which provides for the powers of tribunals in case of oppression & mismanagement.   The present case pertains to the operation & mismanagement which is exclusively under NCLT’s jurisdiction. While acknowledging the NCLT as the appropriate forum for adjudication, the division bench noted the contingency in NCLT accepting application, with the possibility of rejection leading to significant time wastage. In light of this, it becomes pertinent to refer to a recent order passed by NCLT Kolkata bench, wherein in similar circumstances where a few members (4 out

Navigating Jurisdictional Boundaries: A Legal Analysis of NCLT’s Authority and Civil Court’s Restrictions. Read More »

Electoral Bonds Judgment: Implications for Corporate Financing & Information Disclosure

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

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

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

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

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 »

Scroll to Top