Author name: CBCL

From Paper To Pixels: Revolutionizing Private Company Ownership

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?

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

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

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 »

Bridging the Regulatory Gap: Regulatory Oversight on Third Party Algorithm Trading Strategy Providers

Capital Markets and Securities Law /

[By Gagireddy Vyshnavi Reddy] The author is a student of Tamil Nadu National Law University.   Part-1  With the advancement of technology, the incorporation of algorithm strategies into the trading of securities has emerged and has been growing at an exponential rate since then. The provision of algorithm strategies for the purpose of trading securities can be sought in two ways, where one of them is by the provision of such strategies by the stock brokers themselves, however, another way is through the third party algorithm strategy providers, where the stock brokers outsource the services of the third party algorithm strategy providers. SEBI in its Consultation Paper on Algorithm Trading by Retail Investors, 2021 has stated that the services provided by such third party algorithm strategy providers cannot be categorized as either investment advisor or a research analyst and thereby such third party service providers are not recognized. This article focuses on how there is mis-regulation of such third party algorithm strategy providers, and how their services cannot be interpreted as  investment advisors but can be categorized as research analysts henceforth eliminating the unnecessary burden placed on the stock brokers in gaining permission for each and every algorithm strategy employed from the third party algorithm strategy provider by not recognizing the third party algorithm strategy providers under a regulatory framework.   INTRODUCTION Algorithmic Trading has been used very widely in India from the past few years. According to report from the National Institute of Financial Management submitted to the Department of Economic Affairs indicates that over 50% of total orders at both the National Stock Exchange and Bombay Stock Exchange are algorithmic trades on the client side, while over 40% are trades on the prop side. Algorithmic Trading refers to an automated execution of logic that generates a buy or sell order of the securities in the securities market. It enables the investor in trading the securities when there is an appropriate market situation that enables the investor in gaining profits. This would not require the interference by the investor in analyzing and keeping a track on the market conditions in order to trade the securities.  The rise of algorithmic trading in India can be traced back to SEBI’s Circular on Introduction of Direct Market Facility in 2008 (2008 Guidelines) allowing institutional investors to use the direct market access (DMA) facility, which allowed brokers to offer their clients direct access to the exchange trading system without any manual intervention. Later, SEBI released the “The Broad Guidelines on Algorithmic Trading” (2012 Guidelines) and these 2012 Guidelines provide for seeking mandatory approval by the stock brokers from the stock exchanges for providing the service of algorithm trading to the investors. It also provides various other compliance for the stock brokers and the stock exchanges to be followed in order to enable the investors with the facility of algorithm trading by providing algorithm strategies. Further, SEBI has also released the Consultation Paper on Algorithmic Trading by Retail Investors (Consultation Paper) in 2021, wherein, it stated that there would be no recognition given by SEBI to the third-party algorithm strategy providers (ASPs) creating such algorithms and has instead placed multiple reporting requirements on the stock brokers in order to regulate such third party ASPs. It also mentioned in Consultation Paper, how it is unclear as to the categorization of the services provided by these third party ASPs as either investment adviser or research analyst and thereby concluded to not grant a recognition for such third party ASPs.  This article deals with the above mentioned aspect of the Consultation Paper, how the third part of how the third party ASPs are mis-regulated by first establishing that the third party ASPs do not come under the current Investment Advisor Regulations and later establishing that such third party ASPs can be interpreted under the Research Analyst Regulations. It concludes with the suggestion that instead of placing extra burden on the stock brokers for obtaining permission for every algorithm employed from the third party ASPs by eliminating the third party ASPs from the regulatory framework, SEBI can regulate these third party ASPs as under the Research Analyst Regulations, 2014.   REGULATORY OVERSIGHT ON THIRD PARTY ALGORITHM TRADING STRATEGY PROVIDERS   An Algorithm Trading Strategy is a logic employed by the investor to execute orders in the securities market. These include using a defined set of logic and instructions in the form of algos to generate trading signals and placing orders as mentioned in the Para 2.1 of the Consultation Paper. These orders would emanate with minimal human interference by placing them as and when the required criteria of the investor is met. This is done by constant analysis and monitoring of the stock market and employing the provided logic to understand if an order can be placed for such investor.   These algorithm trading strategies are majorly of two types, the first generation algorithm trading strategies and the second generation algorithm trading strategies. First generation strategies are those which consists of human-defined, rules-based strategies that are transformed into computer code and then executed through sophisticated technological infrastructures that connect firms to markets. Whereas, the second generation strategies consists of the machine learning approach wherein machine learning system in itself creates the strategy basing on the objective function of the investor and creates trading rules which are automatically implemented into the market in the form of orders to buy or sell the securities of such investor. This blog deals with only the first generation algorithm trading strategies and does not concern about the second generation algorithm trading strategies.   The usage of the first generation algorithm trading strategy can be predominantly provided in two ways (Algorithm Strategies). While stock brokers offer algorithm strategies to the investors in-house, at the same time, the brokers can outsource the services of the third-party ASPs. These strategies would be thereafter offered to the investors by the stock brokers. In the second scenario, it is important to understand the regulatory framework of such third-party ASPs. As mentioned earlier,

Bridging the Regulatory Gap: Regulatory Oversight on Third Party Algorithm Trading Strategy Providers Read More »

Sony-Zee Merger: Leadership Struggles and Legal Battles Unfolded Story

Mergers & Acquisitions /

[By Lakshita Bhatt] The author is a student of Kes Shri Jayantilal H. Patel Law College.   Introduction  The much-anticipated merger between Sony Entertainment, herein referred to as “Sony,” and Zee Entertainment, herein referred to as “Zee,” faced numerous challenges that ultimately led to its unravelling fate. Although the merger had the potential to transform the Indian media and entertainment sector, internal conflicts and regulatory challenges stalled its progress. In this article, the author delves into the intricacies surrounding the unsuccessful merger between Sony and Zee Entertainment. Following that, the author clarifies how this merger, aimed at establishing dominance in the Indian market, encountered obstacles due to internal disputes, regulatory probes, and legal entanglements. In the end, the author elucidates the aftermath of this merger, highlighting broader concerns regarding corporate governance and financial resilience within the Indian Media sector.   Overview of Sony-Zee Merger  Initially valued at $10 billion in 2021, the merger aimed to create the dominant force in the Indian market by combining a wide range of channels and streaming platforms, with Sony holding the majority of the stake, adding up to 52.93%, and Zee holding 47.07% of the stake. However, tensions arose between Punit Goenka, the Managing Director (MD) and Chief Executive Officer (CEO) of Zee, and Sony Executives over the directorial position of the future merged entity. These internal disputes became a significant obstacle to the merger’s success. Investigations into alleged financial improprieties cast a shadow over the merger, adding to the challenges faced by both companies and eventually leading to the cancellation of the merger. As negotiations faltered, legal disputes emerged, with Sony demanding a $90 million termination fee for what they perceived as breaches of merger agreements. What could have been a billion-dollar revenue-generating merger has now become a legal dispute. Furthermore, it has broader implications for the media and entertainment industry in India. As Zee faced ongoing scrutiny and financial challenges, this left the company vulnerable in India’s booming streaming market, which is highly competitive and offers significant profit potential.  Legal Disputes and Regulatory Scrutiny   The merger between Zee Entertainment and Sony Entertainment India in September 2021 marked a pivotal moment, combining the strengths of Sony, a prominent Japanese media company, with Zee Entertainment to create a formidable entity in the media landscape. However, the trajectory of events took a tragic turn with the National Company Law Tribunal (NCLT) accepting the insolvency proceedings against Zee on 22 February 2023, followed by a petition by IndusInd Bank citing a substantial default of Rs. 83.08 crore attributed to Subhash Chandra, Zee’s founder. This decision came after a series of prior events, including the approval of the merger with Bangla Entertainment by Zee’s Board of Directors in December 2021 and the subsequent filing for insolvency proceedings in February 2022, which was contested with an application for dismissal. Despite gaining approval from the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), and the Competition Commission of India (CCI) in 2022, challenges persisted, notably with the IDBI bank initiating insolvency proceedings against Zee in December 2022, seeking to recover dues of Rs. 149.60 crores. The NCLT’s directive in May 2023, led to a re-evaluation of initial merger approval by the Stock Exchanges. Despite objections from creditors, the NCLT eventually approved the merger in August 2023, dismissing objections from entities like Axis Finance and JC Flower Asset Reconstruction Co.   However, the Securities and Exchange Board of India (SEBI) confirmatory order in August 2023 barred Punit Goenka, and Subash Chandra, founders of Zee, from holding any key positions within Zee. Amidst ongoing legal battles, a one-time settlement with JC Flower allowed Chandra to regain ownership of family assets in October 2023, while the Securities Appellate Tribunal (SAT) overturned SEBI’s order restraining Goenka from holding a directorial position in the company. Legal disputes continued with appeals lodged against NCLT’s approval by IDBI Trusteeship and others, culminating in notices issued by the NCALT in December 2023, though no staying on the merger process was granted during the proceeding. Additionally, a SEBI probe unveiled allegations of Rs. 1000 crore being signed from the Sony-Zee deal post-merger cancellation.  The aftermath of the merger’s incompletion   Transitioning from the legal disputes to the aftermath of the merger’s incompletion, the leadership struggles between Sony and Zee came to the forefront. Sony expressed a clear intention to bolster its reputation and leadership role within the amalgamated entity. Concurrently, Sony conveyed dissatisfaction with the alternative proposals preferred by Zee. Sony’s resolve for a stronger presence and leadership position in the merger enterprise was unmistakable, as evidenced by its proposal to designate NP Singh, Sony’s India head, as the CEO of the amalgamated entity. However, discord arose when Zee expressed disapproval of this arrangement. Subsequently, Sony announced the cessation of negotiations through an official statement, citing unmet merger conditions and a failure to meet the stipulated deadline. Legal action ensued, with Sony initiating litigation against Zee, seeking damages, amounting to approximately $ 90 million. Sony contends that Zee violated the merger agreement terms as the period for completion of the merger ended in January 2024 and still the merger was not completed, whereas Zee maintains its adherence to the agreement in good faith. Simultaneously, Zee has initiated legal action in both India’s and Singapore’s jurisdictions to enforce the merger terms and prompt Sony to fulfill its obligations. The matter now rests with the court to decide the fate of the proposed merger. Additionally, Zee is facing regulatory scrutiny, particularly from the Enforcement Directorate (ED), a government agency combating economic crime, concerning allegations of financial impropriety involving its founders. Sony’s departure precipitated a decline in Zee’s shares, following the merger’s dissolution, resulting in a significant sell-off. Zee’s shares depreciated by 30%, reportedly marking the largest decline in Sony stock values within the market over five years. Institutional investors, entities managing substantial capital on the client’s behalf, seek clarifications. Reports indicate ongoing deliberation, contemplating avenues such as an extraordinary general meeting, potentially determining Punit Goenka’s tenure. The Zee founders are under

Sony-Zee Merger: Leadership Struggles and Legal Battles Unfolded Story Read More »

Deemed Resolution Professionals: A Judicial Step-Back?

Insolvency Law /

[By Kanha Shrivastava] The author is a student of University of Petroleum and Energy Studies.   Introduction  The NCLT in SBI v. Teena Saraswat Pandey, IRP of Indison Agro Foods Ltd. effectively appointed the Interim Resolution Professional (hereinafter “IRP”) as the Deemed Resolution Professional by directing the IRP to continue performing the functions of a Resolution Professional (hereinafter “RP”) as a “Deemed RP” and barring any further applications for replacement. This has come against a backdrop of precedents by the NCLAT that provide for directly appointing the IRP as the RP. This case comment aims to critique the aforementioned judgment regarding its legislative backing, the applicability of judicial precedents, and its procedural irregularities, analyzing its applicability as a precedent. This also attempts to answer the question, “Whether deemed RPs can end prolonged corporate insolvency resolution processes due to the non-appointment of Resolution Professionals?”  Judicial Pronouncement  Since the enforcement of the Insolvency and Bankruptcy Code, in 2016, several cases have arisen where the financial creditors in a Committee of Creditors (hereinafter “CoC”) have been unable to reach a consensus in multiple meetings and achieve the required majority. A primary reason for such a deadlock is that66% of the voting shares are required to either appoint the IRP as the RP or replace the IRP with another RP under Section 22 of the IBC. Another reason behind this deadlock is that the IBC does not envision replacement of an IRP with another IRP.replacement.  In SBI v. Teena Saraswat Pandey, SBI had 61.87% of the voting shares in the first meeting of the CoC and proposed the replacement of the IRP, to which the rest of the two creditors objected. In the revised list of claims submitted in the second meeting, the voting shares of SBI were brought down to 51.43%. Therefore, SBI again proposed the replacement, which failed, resulting in a situation of deadlock. Consequently, an application was moved before the NCLT, whose judgment effectively appointed the IRP as the deemed RP by directing the IRP to continue as deemed RP and stating that it shall not entertain any application for replacement.  Background  There are a few precedents of the NCLAT which seem to not have been followed in the instant case, making its validity questionable. Specifically, Indiabulls Housing Finance Ltd. v. Sandeep Chandna (hereinafter “Sandeep Chandna”), wherein the NCLAT held that if a proposal has been rejected by a majority of members of the CoC, no member is empowered to approach the tribunal for replacement of the IRP under Section 22, imposing an additional condition apart from the voting share requirement, i.e., the consent of the financial creditors in the CoC. Accordingly, the application should have been outrightly rejected for lack of locus standi. It also did not utilise Anil Kumar v. Allahabad Bank (hereinafter “Anil Kumar”) wherein the NCLAT held that in case of a deadlock between the financial creditors, the appointment of an RP to break the stalemate is expedient. Therefore, under Rule 11 of the NCLT Rules (inherent powers), the RP was appointed, who was different from the IRP. Thus, in the instant case, even if the application was not rejected, a different person, ought to have been appointed as the RP.  Analysis   While the instant case did not follow the aforementioned judgments, it cannot be declared bad in law due to the principle of per incuriam which provides exceptions to the binding nature of judgments passed by superior authorities. Specifically, when a judgment provides a mere direction without laying down any principle of law, it is not a precedent as per the case of State of U.P. & Ors v Jeet S. Bisht & Anr. The Anil Kumar case merely stated the appointing of an RP as expedient, thereby making expediency the basis for passing the judgment. This reasoning was followed in the instant case as well because the IRP had acted in a bona fide manner and had already made the resolution plan.   It is also not against the principle laid down in the Sandeep Chandna case because of dual reasons. Firstly, the facts of the case are different, as SBI did not propose any name when it submitted the application and simply prayed for the NCLT to appoint any other person as the RP, rather than a specific person. Hence, a distinguishing interpretation of the Sandeep Chandna case can be seen here, such that it now disempowers only those applications which seek replacement with a specific person whose name has been rejected. Secondly, multiple provisions of the NCLT Rules, 2016 and the Companies Act, 2013 have stated that the NCLT shall be bound by the principles of natural justice, which includes Audi Alteram Partem. Hence, merely hearing and deciding a case on merits and then dismissing the application in any way does not go against the essence laid therein.  This case has also interpreted various provisions, namely, Regulations 17(3) and 16(3) of the CIRP Regulations, along with Section 16(3) of the IBC which state that the IRP shall perform the functions of the RP from the 40th day of the commencement of insolvency until an RP is appointed, tacitly providing for the existence of a deemed RP.   Regarding these provisions, on the one hand, it can be argued that the existence of the deemed RP  is conditional on the ultimate appointment of the RP. On the other hand, it can be argued that a mandate has been placed on the IRP to perform the functions of the RP after 40 days of non-appointment of the RP. Thus, the provision itself contemplates a situation where the RP may never be appointed and reiterates the importance of the underlying principle of the IBC i.e., completing the CIRP within a time-bound manner under 180 days. Following the latter interpretation, the judgment noted that discretion had been provided to it regarding the replacement of the IRP by appointing any other insolvency professional through precedents, but it was not expedient to do so as the IRP had already placed the resolution plan for the consideration of the CoC, and doing so at that stage would have no rational foundation.  In answering whether the appointment of a deemed RP can assist

Deemed Resolution Professionals: A Judicial Step-Back? Read More »

RBI’s Forex Mechanism: Bold Leap into Financial Evolution

Banking Law /

[By Runjhun Sharma] The author is a student of Dr. Ram Manohar Lohiya National Law University.   Introduction  Indian commercial landscape has encountered a wide array of variations throughout the entire course of this decade. Regulatory authorities face the challenge of ensuring smooth transitions and efficient transactions amidst increased accessibility to financial services and digitization of the economy To underpin this assertion, the author highlights the shift in the approach of market regulators over the decade.  The Securities and Exchange Board of India (SEBI) has permitted the Association of Mutual Funds to govern the functioning of Mutual Fund Distributors since the early 2000s. Insurance Regulatory and Development Authority of India introduced a set of guidelines to govern ‘Bima Vahaks, which is an insurance distribution channel. The Reserve Bank of India (RBI) rationalized the licensing framework by introducing multiple licenses for entities engaging in foreign exchange (Forex) services, back in 2006. In a fashion similar to other market regulators, the RBI, very recently, introduced a Draft Licensing Framework for Authorised Persons (APs) to rehaul the existing forex framework. In the said framework, it intends to delegate the task of governing a novel entity, Forex Correspondent (FxC), to Authorised-Dealer Category I (AD-Cat I) and Authorised-Dealer Category II (AD-Cat II) entities. AD-Cat entities are authorized dealers licensed by the RBI under Section 10(1) of the Foreign Exchange and Management Act, 1999 (FEMA) to deal with foreign exchange transactions. The said framework will be discussed in detail in this piece. Hence, it is well-established by the aforesaid instances that regulatory authorities are switching to a self-regulatory approach from a direct regulatory one.  Need of the Draft Licensing Framework  The recent framework introduced by the RBI was a much-warranted move, in light of the de-concentration of financial services, which has led to inclusivity in the access to such services. The increased usage of these services has resulted in a regulatory burden for the RBI and posed hindrances to efficient governance. With regard to the aforesaid, the financial regulator is compelled to look for additional modes of governance to streamline the provision of financial licensing services. The Draft Framework by RBI intends to expand the scope of services provided by AD-Cat entities and ease the eligibility criteria to engage in forex services. This move goes a long way to instill inclusivity for forex service providers and mitigate the load of governance of forex transactions.  Comparative Review of the Draft Framework with the Existing Mechanism  The major highlight of the Draft Framework is the introduction of  FxCs. FxCs are a category of money changer entities that are in an agency arrangement with AD-Cat entities. The transactions undertaken by them will be reflected in the books of the AD-Cat banks. The rationale behind the introduction of this novel entity seems to facilitate the accessibility of forex to general masses, businesses and tourists while ensuring checks and balances. Another motivation for this move may be that the majority of forex transactions do not necessitate the involvement of the RBI and take place at the level of APs. Under Section 10(1) of FEMA, AD-Cat banks are required to secure a license from the RBI to engage in forex transactions. However, in light of the agent-principal relationship between FxCs and AD-Cat banks, FxCs will not be required to secure separate licensing from the RBI and they will be able to deal in forex transactions. Before the introduction of the said Draft Framework, the licensing framework of the RBI sought to authorize entities that may deal in forex as: APs and Full-Fledged Money Changers (FFMCs). The authorization granted was exclusive to the aforesaid entities allowed to deal in forex transactions.   In the extant framework, an AD-Cat II license is initially granted for a period of one year, followed by subsequent renewal of license for one to five years. However, the Draft Framework does away with the specified timelines and introduces renewal of AD-Cat II licenses on a perpetual basis, conditional upon fulfillment of the revised eligibility criteria. This move comes in the face of promoting ease of doing business in transactions involving forex.   The Draft Framework is also seen as relatively liberal, which is evidenced from the expansive definition of ‘annual forex turnover’. It has outlined a comprehensive interpretation of “annual forex turnover,” encompassing the total sum of foreign currency notes, coins, and travelers’ checks acquired from or dispensed to the public, including transactions conducted through agents or franchisees, as well as the total value of remittances facilitated throughout the fiscal year. The criteria for annual forex turnover in the Draft Framework is most suitable as it excludes the turnover of Financial Year 2020-21 and 2021-22 to compute the ‘annual forex turnover’. This is so because the aforesaid years saw a striking decline in revenue generation and turnover in light of the impact of the pandemic. The concept of ‘annual forex turnover’ is of relevance as it provides a basis for determining whether a money changer entity should be deemed an FxC or AD-Cat entity.  Coming to the disclosure requirements and compliances for an FxC in the novel Draft, it is noteworthy that the financial regulator has proposed stringent disclosure requirements to make the mechanism watertight. The rationale behind this seems to be the complex nature of forex transactions which poses multiple apprehensions, including Anti-Money Laundering concerns. The disclosure requirements for an FxC are more or less similar to that of a Business Correspondent, with additional requirements of a Banker’s Report and a No Objection Certificate (NOC) from the Enforcement Directorate. Furthermore, since the permission to engage in forex dealings to all the outlets of FxCs is to be granted by the principal Authorised Dealer (AD) under the FxC Agreement, the said AD will be liable for the actions of the FxC. This is also underpinned by the relationship of agency between the principal AD and the FxC. Hence, the aforesaid provisions sufficiently highlight the fact that the RBI has opted to assuage the regulatory burden upon itself and strengthen the

RBI’s Forex Mechanism: Bold Leap into Financial Evolution Read More »

Apple’s Walled Garden: The Battle over Closed Ecosystem

Competition Law /

[By Soujanya Boxy & Shourya Mitra] The authors are students of National Law University, Odisha and Jindal Global Law School, Sonipat, Haryana respectively.   Introduction  The new-age digital world is increasingly embroiled in a complex interplay between tech giants and market fairness regulators. Striking a balance between effective regulation and fostering innovation has become more crucial than ever. Apple, designated as a “gatekeeper” under the European Union’s (‘EU’) Digital Markets Act (‘DMA’), faces scrutiny for its closed mobile ecosystem. Critics and competitors argue that this closed ecosystem stifles their ability to reach users, limiting user choice and stifling competition.   However, the burning question is whether proponents of reforms can solely justify their demands for an open mobile ecosystem by highlighting its tangible benefits, without acknowledging the advantages of closed ecosystems to users and competition. In this post, the authors explore the multifaceted impact of Apple’s closed ecosystem on competition and consumers.   Biting the Apple: A Look at Antitrust Issues  Apple, a leading tech company, has cemented its footing in the market for personal devices through its unique walled garden-like ecosystem, which remains a source of contention within the mobile ecosystem for being restrictive and anti-competitive. A mobile ecosystem is the interconnected world of a mobile device company’s products and services, including hardware, software, apps, and user accounts.  While many antitrust lawsuits are already pushing Apple to revamp its model or ecosystem, new laws like the much-discussed the EU’s DMA and South Korea’s recent amendment to its Telecommunication Business Act are adding pressure to open up Apple’s ecosystem, aiming to restore fairness and competitiveness in the market. In response to the EU’s DMA designating Apple as a gatekeeper, the company has announced changes to its operating system (iOS), App Store, and web browser (Safari). These changes loosen restrictions on its devices, particularly regarding payment processing and app distribution. Apple is opening its previously walled garden-like ecosystem to rival app developers and marketplaces, and introducing new terms for using alternative payment methods and distributing apps. While the changes have their criticisms, they represent a major shift for Apple and an attempt to comply with the DMA.  A common thread runs through antitrust debates on Apple’s practices as several jurisdictions including the EU, United States (‘US’), Russia, and China share concerns about similar anti-competitive practices. App developers argue that Apple’s high fees and control over the App Store are causing them substantial financial losses. Countries, such as Japan and South Korea, have already taken action by requiring Apple to modify its App Store practices. Similarly, the US Justice Department is in the final stages of a probe examining Apple’s practices related to its hardware and software integration, specifically how these practices may limit competition and discourage users from switching to alternative platforms. Specifically, the investigation is looking into how Apple’s practices, such as restrictions on iMessage and the enhanced functionality of Apple Watch when paired with iPhones, may stifle competition in the mobile device market.  As global antitrust regulators tighten their scrutiny and enact stricter laws to control Apple’s alleged monopolistic practices, concerns are mounting that these regulatory measures may go beyond achieving fairness and could inadvertently hinder the company’s ability to generate profits.  Further, antitrust legislative reforms are aimed at controlling the platforms’ ability to offer and integrate their own apps and services alongside of their competitors, which could unfairly incentivise their own offerings. Competing app developers express concerns over Apple’s excessive app fees and its practice of integrating its own services, like the music-streaming service, with its features like SharePlay and Photos. Additionally, Apple exempts its own services from the app fees payment, enabling them to undercut their competitors on price.   The European Commission (‘EC’) ruled that Apple is in preliminary violation of antitrust laws, citing antitrust concerns in the mobile wallet market. Apple was found abusing its dominant position by restricting mobile wallet app developers’ access to necessary software and hardware on iOS devices, thereby reducing competition in the mobile payments space. As a response to these concerns raised in the European Economic Area (‘EEA’), Apple came up with the proposal, allowing third-party developers to provide the option to their users to make Near-Field Communication (‘NFC’) contactless payments on their iOS apps, without relying on Apple Wallet and Apple Pay.  Walled Garden or Secure Oasis?  Apple is worried about the negative impact on its user privacy and security as some regulations have begun to mandate the inclusion of third-party App Stores and apps on its devices. Currently, all apps distributed through its own App Store go through a standard vetting process. On top of that, the company maintains a closed ecosystem, wherein apps are downloaded only through its App Store to ensure user privacy and security. Despite this, it faces increasing pressure to open up its ecosystem, allowing alternative App Stores and “side-loading”, which could pose challenges for upholding the existing user privacy and security standards.  While Apple’s robust vetting process and closed ecosystem build a perception of enhanced-level user privacy and security, vulnerabilities do still exist. Yet, Apple’s comprehensive approach, including close scrutiny of apps and ongoing security improvements, helps to safeguard its devices from malware intrusion. The Apple devices are built in such a way that the users even accidently can’t fall prey to any malicious sites or apps.   While critics of Apple’s ecosystem focus on its drawbacks, they should also consider the possible security risks that Apple has consistently highlighted for its users. Privacy and security concerns remain paramount in today’s digital landscape. It is not only unethical but eventually unsustainable to sacrifice users’ trust for the sake of perceived competitive fairness.  The Fight for an Ecosystem  A growing trend of building a closed ecosystem among tech giants like Apple, raises concerns about locking users into using a range of their products and services and potential self-preferencing. Self-preferencing is a practice by large digital platforms of favouring their own products or services over those offered by competitors operating on their platforms. The DMA currently cracks

Apple’s Walled Garden: The Battle over Closed Ecosystem Read More »

Scroll to Top