Author name: CBCL

Supplier Secrecy, Buyer Company’s Woes: The Chronicles of Delayed Payments under the MSMED Act

Leave a Comment / Company Law /

[By Rajan Thakkar & Manasvi Verma] The authors are students of Gujarat National Law University, Gandhinagar.   Introduction Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006 imposes a liability on the buyer companies to make the payment to their suppliers within the period mentioned under Section 15[i] of the Act and upon failure of the same, according to Section 16[ii] of the Act, the buyer company is required to pay compound interest with monthly rests on the due amount at three times the bank rate notified by the Reserve Bank of India. However, certain obscurities have surfaced in cases when the buyer company is unaware of the MSME status of the seller and when the supplier fails to raise any claims for the outstanding amount leaving the buyer unaware of the outstanding dues. These ambiguities can leave companies financially drained as a result of supplier oversight. This article analyses the shortcomings of the current regime for delayed payments and presents somewhat of a rough pathway for the companies to safeguard themselves from unforeseen consequences of such situations. Legislative Intent: Ensuring timely Payment to Suppliers To understand the implications of these provisions in such situations, it is important to first examine the intent behind the concerned provisions. The legislative intent at the time of the passing of the act was to make improvements in the Interest Act 1993[iii] and to incorporate its provision in MSMED Act 2006; replacing and improving the then existing 1993 Act. One of the changes that was made was that the maximum period for payment by agreement was reduced (from 120 days to 45 days) in comparison to the Interest Act. It was evident that the legislature wanted to make moves to mandate the buyer companies to make timely payments for goods and services provided by micro and small enterprise suppliers. Such additions were made in Section 15 and the penalty for the default was provided under Section 16. Section 15 mandates that in no case, the agreement for the period of payment can exceed the statutory period. It reads,“…..the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing…..in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days….”. . According to Section 16, the buyer will be liable to pay the compound interest notwithstanding any agreement or any law in force upon a failure to make the payment as mandated under Section 15 of the Act. To simplify this, both the sections are standing glued to each other, and if section 15 falls, so will section 16, and the Hon’ble Supreme Court has also observed in the case of Silpi Industries v. Kerala SRTC[iv] that the MSMED Act is a special legislation and would have an overriding effect over any other statute in force at the time. Therefore, no forces of other statutes or any agreements between the buyer company and the supplier can save the buyer company from this strict liability. This liability often comes as a surprise to the buyer companies due to some lacunas that are left out. No duty of the seller to raise a claim for outstanding dues. There is no default duty of the supplier to raise any claims or send any notices before the right u/s 16 of the actuates. Against this backdrop, the buyers might want to explore avenues to restrict their liability u/s 16 by agreements by requiring the suppliers to raise claims regarding outstanding amounts. However, no such option is left open to the buyer companies under the act since the statutory mandate is to make the payment in the period mentioned under section 15 and upon failure, “notwithstanding any agreement or any other law” in the time being, the interest under section 16 will kick in. No Duty of the seller to Notify the buyer company about the Supplier status. The act doesn’t mandate that the seller is required to notify the buyer companies about their supplier status. Liability can be imposed u/s 15 and 16 merely if the seller company is a supplier under the definition of Section 2(n) of the MSMED Act[v]and therefore, irrespective of the disclosure made by the supplier regarding its status, the liability of the buyer company may arise. To give a practical example of how this problem can materialize, let’s say a buyer company agrees with a vendor at a time when the vendor doesn’t have a supplier status under the MSMED Act and the period for payment for the goods/services exceeds the period described under the section 15. On a later date, the vendor acquires a supplier status under the act and keeps supplying the goods/services to the buyer company under the pre-existing contract without notifying the buyer company about the change in status. Upon default or after the lapse of the statutory period u/s 15, the buyer company might be caught with surprise for having to pay exorbitant statutory dues and finding that the existing contract has been rendered infructuous. Accompanying Liabilities of the Buyer Company upon Non Compliance with the Disclosure Requirements Thus far, we have explored how unforeseen financial burden can be placed on the buyer company in the form of interest rate in cases wherein the buyer company is either aloof of any outstanding dues or the supplier status of the seller. However, the repercussions of this aloofness are far reaching and not confined to the compound interest u/s 16 of the MSMED Act. The buyer company and its executives can have to bear additional penalties upon non disclosure of such unknown/undemanded outstanding payments. The repercussions of such a strict disclosure requirement can be understood by referring to the relevant provisions of the MSMED Act r/w the penalising provision of the Companies Act 2013. Under Section 22 of the MSMED Act[vi], it is mandatory for a buyer company, who engages in the acquisition of goods or procurement of services from a supplier to undergo an

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The Conundrum of the Legal Standing of Nominees of Deceased Shareholders in the Context of Succession: Shakti Yezdani v. Jayanand Jayant Salgaonkar

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[By Devanshi Shukla] The author is a student of MNLU Aurangabad.   Introduction  Nomination as a process involves selecting another person as a legal nominee or representative by a person during his lifetime in respect of specific assets or properties. In the recent case of Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors, the Supreme Court offered clarification on the status of nominees as nominated under Section 109A of the erstwhile Companies Act, 1956 (‘Act’) in the context of succession laws. The Court emphasized that nomination under the Act should not be viewed as an alternative method of succession. This blog seeks to delve into a comprehensive analysis of the judgment and explore its current implications.  Facts  Jayant Shivram Salgaonkar (‘testator’) had executed a will for the devolution of his properties upon his legal heirs. In addition to the properties mentioned in the will, he had fixed deposits (‘FDs’) and mutual funds (‘MFs’) for which he had made nominations. Following his demise, the legal heirs filed a suit for the administration of his properties. The nominees contested this arguing that the FDs and MFs absolutely vested in them, citing their nomination under the Act. A single judge of the Bombay High Court rejected the contentions put forth by the nominees stating that the appointed nominee retains ownership of the shares/securities in a fiduciary role and is responsible for addressing any claims within the framework of succession law. On appeal, the Division Bench held that the view taken in Harsha Nitin Kokate v. The Saraswat Co-operative Bank Limited and Others was per incuriam and made it clear that nominees were not entitled to the absolute ownership of the properties. Subsequently, the appellants filed an appeal in the Supreme Court.   Issues at hand  The Supreme Court deliberated on the following issues:  What is the aim behind the introduction of provisions concerning ‘nomination’ into the Act?  What is the understanding of the concept of ‘nomination’ under the Act and in relation to the law of succession?  What are the consequences of the term ‘vest’ and the non-obstante clause as employed in Section 109A of the Act and under Bye-Law 9.11.1 of The Depositories Act, 1996?  Observations made by the Court  Object behind the introduction of Section 109A under the Act  The Court observed that the Companies Act, 1956 was introduced to deal with the “incorporation, regulation and winding up of corporations”. Additionally, the primary intent behind introducing Section 109A and 109B by the Amendment of 1999 was to provide momentum to investment in the corporate sector and not to deal with succession. The provision of nomination was introduced to lessen the burden of legal heirs and also to foster a wholesome environment for corporate investment in the country. The Court held that there was lack of any material to show that the Amendment intended to provide absolute ownership of the property to the nominee.   Concept of ‘nomination’ under the Companies Act, 1956 and its connection to the law of succession  The Court referred to the concept of ‘nomination’ as enumerated by various courts under varied legislations (such as the Government Savings Certificate Act, 1959). It was asserted that due to the lack of a universally accepted definition and interpretation regarding the rights and ownership of a nominee concerning the relevant property, the Court would rely on the commonly understood meanings. The Court acknowledged that the Act does not envision a “statutory testament” that supersedes the laws of succession. It does not concern itself with the laws of succession. Nomination under the Act is not put through the same strict requirements as those applicable to the creation and validity of a will under succession laws.  Implications of the term ‘vest’ and the non-obstante clause as used under Section 109A of the Companies Act, 1956 and Bye-Law 9.11.1 of The Depositories Act, 1996   The Court held that the term ‘vest’ can have multiple meanings according to the context in which the word has been used in a provision or legislation and mere usage of the term does not give absolute entitlement over the subject matter. Similarly, it was acknowledged that the non- obstante clause also is to be understood in the context of the object and scheme of the legislation under consideration. Further, the Court stated that the term ‘vest’ has to be understood in line with Section 211 of the Indian Succession Act, 1925. Under Section 211, ‘vest’ does not entitle the administrator or executor with ownership but only entitles him to hold the property until it is distributed among the legal heirs. Section 109A of the erstwhile Act was said to address the vesting of shares or debentures from a holder to their nominee in the event of the holder’s death.. The non-obstante clause temporarily vests securities unto a nominee, to the exclusion of others to help the company in discharging its liability regarding various claims put forth by the successors of the deceased shareholders until the successors have resolved matters and are ready for the transfer of the securities.  Bye-law 9.11.1 under the Depositories Act, 1996 also provides for nomination by shareholders. Similar to Section 109A, the term ‘vesting’ here is used only in a limited context. The non-obstante clause has only been included here to facilitate the depository to handle the securities in the event of the demise of the shareholder.  Analysis & Conclusion  The judgement plays a crucial role in delineating the rights of the nominees as nominated under Section 109A of the Act. The Supreme Court has effectively negated the view held by it in Aruna Oswal v. Pankaj Oswal & Ors. wherein it was stated that the non-obstante clause employed under Section 72(3) of the Companies Act, 2013 which is pari materia to Section 109A makes the vesting of shares unto the nominee absolute. The legal stance taken by the Apex Court aligns the rights of the nominee with those of the heirs in their respective situations, offering a method to facilitate the seamless

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Illuminating the Shadows in India’s Dark Pattern Guidelines: A Flawed Regulatory Attempt

Leave a Comment / Contemporary Issues /

[By Akhil Raj & Ekta Gupta] The authors are students of National Law University Odisha.   INTRODUCTION  If a person frequently purchases airline tickets online, they have probably encountered websites that use the phrase “I will stay unsecured” in the event that the buyer declines insurance coverage. This is a classic example of how dark patterns function to nudge people into making forced choices thereby generating commercial gains for the sellers, advertisers, or any such platform.   According to data revealed by the Advertising Standards Council of India (ASCI), 29% of the advertisements they processed between 2021 and 2022 were influencers’ covert advertisements, indicating a kind of dark pattern. Hence, in a virtuous endeavor to regulate the e-marketplace and to rein in the use of dark patterns, the Central Consumer Protection Authority (CCPA) introduced the ‘Guidelines for Prevention and Regulation of Dark Patterns, 2023’ (The Dark Patterns Guidelines). The Dark Patterns Guidelines pique interest owing to its admirable aims and purpose but this blog strives to go beyond the fine print and unveil the limitations in terms of its applicability, stringency, and obscure provisions.   NOTABLE ASPECTS OF THE GUIDELINES  The Dark Patterns Guidelines representing an important attempt to regulate deceptive interfaces and protect ‘users’, define dark patterns as manipulative digital design practices that are used to deceive users to influence their decisions and choices. Such devious practices shall amount to misleading advertisement, unfair trade practice, or violation of consumer rights. In other words, it states that engaging in any dark pattern practice for commercial gain that impairs user choice amounts to an unfair trade practice or misleading ad under consumer protection law. The applicability of the Dark Patterns Guidelines extends to all platforms, advertisers, and sellers and it unequivocally forbids any person from indulging in the practice of dark patterns.  The Dark Patterns Guidelines provides illustrations of specific dark pattern practices. For instance, online travel sites may use ‘false urgency’ tactics like claiming “only 1 room left!” to pressure users to make quick purchases. Food delivery apps can engage in ‘basket sneaking’ by automatically adding a small donation amount during checkout without consent. Platforms can use ‘confirm shaming’ by displaying messages like “No thanks, I want to stay uninformed” when users try to reject newsletter signups, guilting them into accepting. ‘Nagging’ tactics can be seen when education sites relentlessly prompt users to share emails or accept cookies to access services, persistently disrupting the experience. These demonstrate how various dark pattern techniques exploit users through deceptive design elements on online platforms.  Although, these specific dark patterns have been recognized but the definitions and the interpretation of their functionality as mentioned in the Guidelines are not legally binding and may change from case-to-case basis  RECONCILING INCONSISTENCIES AND GAPS WITH EXISTING LAWS:  E-market platforms and consumer data are the prime focus of the Guidelines and these aspects also fall within the scope of other statutes including the Information Technology Act, 2000 (IT Act), the Digital Personal Data Protection Act, 2023 (DPDP Act), and the Guidelines for Prevention of Misleading Advertisements and Endorsements for Misleading Advertisement, 2022 (Advertisement Guidelines).  To begin with, the wide definition provided for ‘platforms’ in the Dark Patterns Guidelines brings within its ambit, all sorts of platforms which are an online interface in the form of any software, making such platforms liable for any dark patterns that they indulge in. This implies that even intermediaries which can also be an online-market place fall within the scope of the definition. However, the inconsistency is that Section 79 of the IT Act extends safeguard to an intermediary from any information or data from third parties, presented in any way, that they provide access to or store on their platforms.   Further, the Dark Patterns Guidelines prohibits the practices where the user is forced to enter some personal details (for example, email Id and contact information) in order to avail of the services offered by the platform. However, it overlaps with the DPDP Act which is quite particular about the requirement of explicit consent of the person to whom such data relates.   Before the Dark Patterns Guidelines, the Advertisement Guidelines defined non-misleading and valid ads, banning false and dishonest ads. This intent and objective intersects with the Dark Patterns Guidelines.   The CCPA did not consider the prospect of amendments in the existing Advertisement Guidelines or the existence of other coinciding legislations before the release of the Dark Patterns Guidelines leading to an ambiguity in its implementation. The Dark Patterns Guidelines specify that the provisions under the guideline should not be interpreted to be in derogation of any other law which has been regulating dark patterns. But, even the existence of coinciding legislations would amount to confusion. In this case, the regulatory authorities could issue clarifications in the form of FAQs or notifications and should adopt a phased implementation in order to avoid market disruption.   SUBSTANTIAL SHORTCOMINGS  Despite having noble intentions behind the introduction of the Dark Patterns Guidelines, the dearth of appropriate provisions in its substantive part makes its effective execution challenging. For instance, in case of violation of the Dark Pattern Guidelines, it does not allude to the forum to be approached in that case. Albeit, when the draft was released, it stated that in case of any violation, the provisions of the Consumer Protection Act, 2019 (CPA), shall apply.  By removing this provision, the CCPA left the Dark Patterns Guidelines toothless.   Additionally, the absence of specific penalties for the contravention of the Dark Patterns Guidelines strips away the enforcement authority. Since, in a general scenario, corporate entities in the form of e-commerce platforms indulge in such practices, thereby demanding the existence of penal provisions. Although, the exact amount of the compensation to be awarded would depend on the facts and circumstances of each case, levying a specific penalty can be the way forward. For instance, penalizing the alleged entity to disgorge a certain percentage of its average turnover in the last preceding years and increasing it for the repeat offenders. The non-existence

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Affirmative or Negative: Evaluating Resolution Professional’s role as a Public Servant

Leave a Comment / Insolvency Law /

[By Rahul Pandey] The author is a student of West Bengal National University of Juridical Sciences.   Introduction Based on a plain reading of provisions of the IBC, 2016, it would not be wrong to assume that the Resolution Professional (“RP”) is supposed to act as the backbone of the entire insolvency resolution process. He is envisaged as an impartial party that acts in the best interest of all involved and upholds the highest standards of professional and moral integrity. However, in the unfortunate situation wherein he is alleged to indulge in mala-fide practices that threaten the whole regime of trust-building the code is supposed to stand for, his position remains unclear. Should he be treated as a “Public Servant” performing a duty that is public in nature under the Prevention of Corruption Act, 1988 (“PC Act”)? Or would it be a better fit to exclude him from the purview of the strict standards of prosecution of said public servants to ensure that the constant threat of being faced with these provisions does not act as a barrier for him in the performance of his duties? This piece shall aim to address this concern and provide a balanced view in light of conflicting judgments delivered in recent months by the Hon’ble High Courts of Jharkhand and Delhi as the matter lies pending before the Hon’ble Supreme Court of India.   The PC Act and its expanded Horizon of Public Servants  Aimed at curbing the evil of corruption across all levels of society, the PC Act provided a wide-ranging definition of the term ‘public servant’ in light of the changing economic order to ensure that its provisions not only apply to those working for the government directly but also those that perform any duty that may be ‘public’ in nature.  A common misconception that arises is that RPs are covered under the term ‘liquidator’ as given by Section 2 (c)(v) of the PC Act and Section 21 of the IPC that define Public Servants. However, the same would be a fallacious conclusion as the liquidators mentioned in these provisions refer to those appointed under S.502 of the old Companies Act, 1956, who were directly appointed by the High Court and drew their pay directly from the government. On the contrary, RPs under the IBC are appointed by the Committee of Creditors (CoC) in coordination with the NCLT under S.22 of the IBC and draw their fee on the basis of assets realised or as deemed appropriate CoC based on their commercial wisdom.   Nature of Appointment   In regard to the nature of appointment of the RP as to bring him within the fold of Section 2 (c)(viii) of the PC Act, conflicting opinions have emerged. The Delhi High Court in its judgement in Arun Mohan v. CBI, 2023 SCC OnLine Del 8080 has emphasised that while only the Interim RP initially is appointed directly by the NCLT, the final Resolution Professional who oversees the CIRP till its conclusion is appointed by the CoC and not the NCLT.   The Jharkhand High Court, on the other hand, in its judgement in Sanjay Kumar Agarwal v. CBI, 2023 SCC OnLine Jhar 394, has held that while the direct role of the NCLT is limited to the appointment of the Interim RP under S.16, IBC, the appointment of the final RP under S.22, IBC, the decision of the CoC has to be communicated to the NCLT. Even in the case of replacement of the RP by the CoC under S.27 (3) and (4), IBC, the committee of creditors shall forward the name of the insolvency professional proposed by them to the adjudicating authority which will forward it to the Board for its confirmation. In light of all these factors, the court has opined that it would be incorrect to conclude that the adjudicating body doesn’t play an active role in the appointment of the RP.  The position taken by the Jharkhand HC is in line with previous decisions of the NCLAT wherein the position of the RPs has been held to be equivalent to that of an officer of the court for the purpose of contempt and thus the nature of the appointment of the RP can be said to be completely within the scope of public nature.   Involvement of Public Duty in role of RP  As has been held by the Supreme Court, the character of “public duty” as performed is the prime factor in determining if the said office was that of a “Public Servant” for the purpose of the operation of the PC Act. The words “Public Duty” can have a very wide range of interpretation. This is somewhat in line with the vision of the introduction of the PC Act which sought to leave open the scope of bringing within its fold offices that gain public function as the dynamics and the functioning of the state machinery changes.   In holding that the RP is not a public servant, the Delhi HC has placed reliance on a paragraph in the SC’s judgement in Ramesh Gelli V. CBI where it has been observed that when an office may hold elements of public duty, without the element of ‘public character’, it may not be considered as that of a public servant. To justify this view, the court has gone on to hold that –  “IP metamorphosizes from an IRP to an RP and thereafter as a Liquidator (as the case may be), and due to such metamorphosis, it would be prudent not to characterize the duties, even if assumed to be “public”, as in the nature of “public character”.”  However, it is respectfully submitted that the change in nature of duties from IRP to RP and to liquidator is not enough to justify that the office of the RP as a whole does not hold an essential public nature. While it may be true that the judgments in Swiss Ribbons and Arcelor Mittal describe the role of the RP as a mere facilitator, his neutrality,

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Limitation under Section 61 of the IBC: End of the Interpretation Saga?

Leave a Comment / Insolvency Law /

[By Himanshu Gupta & Nandika Seth] The authors are students of NMIMS School of Law, Mumbai.   INTRODUCTION  The concept of limitation provides a timely framework within which an aggrieved can file a suit, appeal or an application in court. It also empowers courts to dismiss any suit, appeal or application filed after the stipulated period has expired. Therefore, limitation plays a vital role in any proceedings as it can serve as a ground for rejecting a suit even if the plaintiff has a cause of action.  However, a conundrum arises as to which date triggers limitation to commence when the matter is conclusively heard on one day and the order is directly uploaded on the website. The Apex Court for the very first time in Sanjay Pandurang Kalate vs Vistra ITCL India Pvt. Ltd.  (“Vistra ITCL”) answered the aforesaid question.  It held that the period to compute limitation to file an appeal under Section 61 of the Insolvency and Bankruptcy Code (“IBC”) from an order of the National Company Law Tribunal (“NCLT”) commences from the date of upload of the order by the Registry. This ruling ensures that the clock of limitation starts clicking once both parties are aware of the content of the order and therefore, they can act accordingly.  FACTUAL MATRIX  The appeal before the Apex Court arose out of an application filed under Section 62 of the IBC against the judgement of the National Company Law Appellate Tribunal (“NCLAT”). The previous appeal was dismissed by NCLAT on the grounds of limitation. Vistra ITCL applied to initiate a Corporate Insolvency Resolution Process under Section 7 of the IBC against the Corporate Debtor.  NCLT heard the application filed by Vistra ITCL on 17th May 2023, however, no order was pronounced on that day. Though the said order bore the date of 17th May 2023, it was uploaded by the Registry on 30th May 2023.    The Tribunal in the present case dismissed the application of Vistra on the ground that the application was frivolous and lacked authorisation of Board of Directors of the Debtor. The appeal was filed before the NCLAT on 10th July 2023. Through the application for condonation of delay filed by Vistra, they contended to have received the certified copy of the order on June 1, 2023 for which the application was made on May 30, 2023 and therefore, time for computation of limitation should start from the 30th May 2023 since it was on that day, they became aware of the content of the order. The NCLAT held that the appeal was barred by limitation as it was instituted beyond the 45 days limitation period as stipulated under Section 61 of the IBC. It opined that the period of limitation was to be computed from the date the order was pronounced. Therefore, an appeal was filed before the Apex Court challenging the order passed by the NCLAT.  OBSERVATIONS OF THE APEX COURT  The Apex Court set aside the impugned order of the NCLAT which dismissed the application for condonation of delay filed by Vistra. It held that no substantive order was pronounced on 17th May 2023. Besides, the cause list stipulated that the case was listed for admission and not for pronouncement.   Further, the Court held that the period of limitation should trigger from May 30, 2023, the date when the order was uploaded. The 30 days’ limitation period in accordance to IBC would end on June 29, 2023, hence the appeal was within the condonable period of 15 days. The Court ruled that the limitation for filing an appeal would trigger from the date when the order was uploaded and not the date on which the Bench heard the matter.  ANALYSIS  The decision in the present case came at the ripe time resolving yet another conundrum in Pandora’s Box of interpreting Section 61 of the IBC wherein the Court clarified the position of law in cases where the matter is conclusively heard but an order is not pronounced.  It has been previously settled in the cases of Prowess International Pvt. Ltd vs Action Ispat & Power Pvt. Ltd and V. Nagarajan v. SKS Ispat and Power Limited & Ors. that the period of limitation begins to run from the date of pronouncement of the order. However, there remained a lacuna as to the situations where the Court decides not to pronounce an order on a given date before the parties but makes it available directly on the Court’s website on a different date.  Previously, in the case of Pr. Director-General of Income Tax v. Spartek Ceramics India Ltd. it was categorically held that the period of limitation runs from the date when the aggrieved party becomes aware of the order. Contrary to this, in the case of Raiyan Hotels and Resorts Pvt. Ltd. Vs. Unrivalled Projects Pvt. Ltd., NCLAT clarified that the period of limitation under Section 61 of the IBC for filing of an appeal does not commence on the date when the appellant became aware of the content, but it shall commence when the order was pronounced.  A harmonious interpretation of these rulings concludes that the only essential to contemplate the period of limitation is the date of pronouncement of the order. In the present case of Vistra ITCL, the NCLT though heard the interlocutory application on 17th May 2023, did not pronounce any order. Vistra became aware of the contents of the order only when it was uploaded on the website, i.e., on 30th May 2023. Hence, the limitation ought to be computed from the latter date which the Supreme Court rightly did.  Furthermore, in Embee Software Pvt. Ltd. v. Solicon Pvt. Ltd., a matter similar to the present case at hand, the aggrieved party was unable to file an appeal owing to the late uploading of the order by the Court, summer vacation of the Court and demise of a family member. The NCLAT taking a lenient, liberal, meaningful and purposeful view satisfied with the reasons ascribed for the delay

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Fiscal Frontiers: Unveiling India’s Evolving ‘Finfluencer’ Regulatory Framework

Leave a Comment / Capital Markets and Securities Law /

[By Arnav Gulati] The author is a student of Jindal Global Law School.   Introduction:  In the burgeoning digital finance arena, financial influencers, termed as ‘finfluencers’ have emerged as influential arbiters of financial decision-making, however their actions continue to be uncontrolled. The absence of regulatory oversight in this domain has created a vacuum that has been used by such finfluencers, who often lack the requisite credentials, to propagate inaccurate and deceptive financial information. The Securities and Exchange Board of India (SEBI) has acknowledged the significant effect of social media on stock markets, the process of price discovery, and the susceptibility of novice investors who are prone to being swayed by “tips” or suggestions. Through the notorious ‘Telegram Case,’ i the dark underbelly of unregulated financial advice was brought to the fore. In the aforementioned case, titled “Re: Stock Recommendations using Social Media Channel (Telegram)” – the trading activity in a particular stock was momentarily influenced by the quantity of channel members and the number of tips/recommendations shared on Telegram, which gave rise to concerns within the framework of the Prevention of Unfair Trade Practices Regulations (PFUTP). The decision made by SEBI signified a noteworthy advancement in acknowledging the impact of social media on stock markets, while simultaneously ensuring market integrity by combating unregistered operations and unfair activities. This decision of January 2022 served as a strong indication from SEBI that persons without sufficient regulatory control are prohibited from offering financial advice or suggestions, hence imposing challenges on finfluencers seeking to perform their services in an unregulated way. The Telegram case, along with other cases such as Sadhna Broadcast Limitedii and Mansun Consultancyiii have drawn attention to the recognition by SEBI of the potential for stock price manipulation associated with a substantial subscriber base.   SEBI’s new consultation paper and the Advertising Standard Council of India’s (ASCI) revised guidelines mark India’s foray into uncharted regulatory waters. Herein, I critically appraise these emerging regulatory propositions, dissecting their potential efficacy, overreaches, and the nuanced challenges they may inadvertently usher in.  The Double-Edged Sword of Transparency Mandates:  Right off the bat, I firmly believe that SEBI’s insistence on rigorous disclosure norms is a commendable attempt to infuse transparency into the finfluencer ecosystem. However, the mandate’s viability teeters on practical enforcement. The digital sphere’s fluidity, coupled with the sheer volume of finfluencer-generated content, raises significant concerns about the effective monitoring of these disclosures. Moreover, there’s a thin line between ensuring transparency and inundating consumers with excessive information, potentially leading to decision paralysis rather than informed financial choices.  Furthermore, the requirement for finfluencers to disclose all affiliations (Paragraph 4.4 of the consultation paper) could inadvertently create a skewed perception. For instance, a finfluencer with multiple disclosures might either be seen as more trustworthy due to transparency or be perceived as biased due to numerous affiliations, regardless of the actual content quality. This paradox underscores the need for a more nuanced approach to disclosures, perhaps emphasizing the quality and relevance of affiliations over sheer quantity.  The Quagmire of Defining ‘Financial Advice’:  One of the most contentious aspects of the emerging regulations will be to define what constitutes as ‘financial advice.’ SEBI currently defines ‘investment advice’, but not ‘financial advice’.   This legislative uncertainty might place influencers, regulatory agencies, and consumers at risk. Without a defined, legally enforceable definition of ‘financial advice,’ content providers might design their messages to avoid seeming to give explicit investment advice while nevertheless driving audience behaviors. Known as “dog-whistling” in other situations, this phenomenon uses coded language to send specialized signals to those who understand it.  This offers a complicated issue for regulators. First, monitoring the large amount of information on numerous platforms, each with its own language and regulations, is logistically tough. Not only is content volume important, but linguistic complexities demand sophisticated comprehension and interpretation, which is not readily scalable for wide regulatory supervision. Second, regulating this disguised communication without infringing on casual financial talk is very difficult. Regulators must safeguard customers from deceptive information that might harm their finances without intruding on free speech and expression, protected under Article 19 of the Constitution. The framework should define what is and is not ‘financial advice’, giving content providers and customers more clarity and safety. To empower people in this digital era of information overload, authorities should examine ways to spread awareness on how to distinguish expert financial advice from informal comments.  Potential Pitfalls in the Enforcement Mechanism:  As we delve deeper into the regulatory landscape, it becomes clear that good intentions alone may not suffice. The real test lies in how these rules are put into practice. While the emerging regulations are well-intentioned, their success hinges on the robustness of the enforcement mechanism. SEBI has used the current framework comprising of the SEBI PFUTP Regulations, Settlement Proceedings Regulations 2018, and Investment Advisers’ Regulations 2013 to address the activities of social media influencers. To create investment advisors as a separate category of market intermediaries, SEBI enacted the Investment Advisers Regulations. These rules were created to protect investors’ interests and avoid any potential conflicts of interest that could result from advisors also serving as financial product distributors. Additionally, SEBI significantly changed these laws in July 2020 to coincide with the rise in finfluencer activity during the COVID-19 lockdown period. The consequences of non-compliance are not sufficiently addressed by these adjustments, which included revisions to the qualification, certification, and net worth criteria for investment advisers. This strategy is not, however, streamlined. The upcoming regulations run the danger of becoming paper tigers without severe fines and a methodical enforcement strategy. Furthermore, platforms that host finfluencer material will bear the bulk of the responsibility for maintaining compliance. This assumption might result in uneven enforcement as platforms with different competencies will try to implement laws consistently. As a result, there is a growing risk of “regulatory arbitrage,” in which finfluencers move to less restrictive platforms, so evading the same scrutiny that regulations aim to provide.   Overlooking the Consumer’s Role:  The Ministry of Consumer Affairs’ most recent “Endorsements Know-hows” will have

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National Infrastructure and Investment Fund: An extension of the Indian Protectionist Economy

Leave a Comment / Investment Law /

[By Hemant Tewari & Apoorva Singh Rathaur] The authors are students of Dharmashastra National Law University, Lucknow.   Introduction  Sovereign wealth funds (SWFs) have rekindled discussions about their role amid contemporary challenges like trade tensions and geopolitical unrest. With trillions of dollars at their disposal, these state-backed investment vehicles not only shape markets but also wield potential as instruments of national ambition and protectionist agendas.  In 2023, the discourse on SWFs has evolved, intertwining previous concerns about hostile takeovers with new issues such as climate change and ethical considerations. India’s National Investment and Infrastructure Fund (NIIF) exemplifies this duality. Despite its portrayal as a champion of clean energy, skepticism exists about whether it serves as a Trojan horse for protectionism. The aftermath of the 2022 Ukraine invasion has heightened worries about the politicization of SWFs, challenging their purported apolitical stance. In the case of India’s NIIF, despite its emphasis on infrastructure development, its investment decisions reflect a prioritization of national interests over global integration, potentially impeding India’s economic progress.  National Infrastructure Investment Fund  Established through the 2015 Finance Bill, NIIF occupies a distinctive position in India’s economic landscape. This unique “quasi-sovereign” fund, born as a strategic, non-commodity entity, straddles the boundary between a purely financial institution and a government instrument, prompting questions about its genuine motives and potential ramifications. While its stated objective is to maximize economic impact through national infrastructure investments, with a focus on revitalizing stalled projects and addressing matters of national significance beyond mere infrastructure, its actual actions suggest a more intricate agenda.  The ownership structure of NIIF adds another layer of complexity. With the Indian government holding nearly half of the stake (49%), and the remaining shares dispersed among influential international and local investors like Abu Dhabi Investment Authority (ADIA), Temasek, and HDFC Group, a delicate balance must be maintained. The question arises whether NIIF can truly harmonize the potentially divergent interests of commercial viability sought by its private partners with the national ambitions embedded in its government ties.  Deeper scrutiny uncovers a potential misalignment between NIIF’s professed objectives and its investment strategies. The pronounced focus on domestic projects, including those considered high-risk by private investors, suggests a prioritization of national interests over pure financial returns. This inward orientation, reflected in India’s broader trade policies marked by escalating tariffs and import restrictions, sparks concern regarding India’s commitment to a globalized economy driven by open markets and competition. NIIF’s expanding capital commitments, now surpassing  5 billion dollars across  four distinct funds, underscores its growing influence, emphasizing the critical need to comprehend its true role.  NIIF’s structure reveals its distinctive role, initially established as a tax-optimized trust featuring a governing council comprising government officials and financial experts, aiming for a balance between state interests and professional acumen. Despite the autonomy sought by its “arm’s length” investment team and CEO, concerns arise about potential government influence on investment decisions due to its presence.  The fund’s inaugural major investment, a collaboration with DP World in ports and logistics, highlights its initial focus on domestic infrastructure. Subsequent ventures, such as partnering with Ather Energy in electric vehicles, demonstrate a broader scope extending to emerging sectors like data centers and airports. However, a recent dip in profitability, with FY-2023 deployment at 43% and profits declining by over 50%, prompts questions about the fund’s financial performance and future direction.  India’s extensive infrastructure needs face challenges in securing long-term funding amid potential banking issues. NIIF’s patient capital and capacity to handle riskier projects emerge as a crucial solution, potentially addressing gaps left by cautious banks grappling with non-performing loans and concerns about delays and cost overruns.  Protectionist Tendencies  India is being positioned as a counterbalance to China in Asia, with the discomfort investors feel towards China’s Maoist ideology and Communist remnants contrasting with India’s pursuit of liberalization and extensive efforts to appease foreign investors. The narrative projected globally emphasizes India as a country welcoming and respecting foreign investors, alleviating concerns about expropriation and undue government interference. However, we assert that India operates fundamentally as a protectionist nation under the guise of liberalization, and the National Infrastructure and Investment Fund (NIIF) is viewed as a recent addition to these deceptive financial strategies.  Several incidents highlight India’s protectionist inclinations, with a discernible increase in trade protectionism shaping its economic strategy under Prime Minister Narendra Modi. Tariffs in India have surged by 25% over the past decade, rising from 8.9% in 2010-11 to 11.1% in 2020-21. Concurrently, the proportion of tariff lines exceeding 15% escalated from 11.9% to a noteworthy 25.4%. This trend in trade barriers aligns with the government’s growing reluctance to engage in new trade agreements. A 2019 report from the Office of the United States Trade Representative noted India’s highest average Most Favoured Nation (MFN) tariff rate among major economies, standing at 13.8 percent. Additionally, India amended Section 11(2)(f) of the Customs Act of 1962 in 2019, granting the government authority to restrict the import or export of any commodity to safeguard the economy, extending beyond its initial application to gold and silver, thus deviating from GATT Article XX(c).  Masquerading under the banners of “self-reliance” and Prime Minister Modi’s “Make in India” initiative, India promotes trade policies that are often unfavourable and occasionally contradictory. Sovereign Wealth Funds (SWFs) are not immune to such partial decisions, with certain SWFs openly acknowledging the impact of non-financial factors on domestic investments. These factors encompass considerations like local economic progress, job opportunities, and economic diversification. Even renowned entities like the Norwegian Government Pension Fund openly align their investments with political agendas, abstaining from funding companies involved in firearms, alcohol, and tobacco production or those not meeting specific labor relations criteria.  The central argument suggesting the protectionist nature of  NIIF revolves around its persistent emphasis on investing in domestic infrastructure projects. While most SWFs prioritize securing higher returns than those offered by central banks, India stands out by prioritizing its domestic infrastructure, a sector fraught with challenges and a source of headaches for both foreign and domestic investors.

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SEBI’s Take on Rumour Verification: Micromanagement or a Welcome Move?

Leave a Comment / Capital Markets and Securities Law /

[By Dharani Maddula & Anoushka Das] The authors are students of Symbiosis Law School, Pune.   Introduction On 28 December 2023, the Securities and Exchange Board of India (“SEBI”) published a new Consultation Paper on Amendments to SEBI Regulations with respect to Verification of Market Rumours (“Consultation Paper”). The paper seeks to use material price movement instead of material event as defined under Regulation 30 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (“(LODR) Regulations”) attributable to a rumour to determine when a rumour verification is necessary. The paper also aims to give more clarity on the determination of price change to be considered on stocks, bonds and valuation in buybacks while allowing for relaxation on the 24 hour timeline on the rumour verification. This consultation paper was published after taking into consideration various observations and suggestions put forth by the Industry Standard Forum (“ISF”) composed of representatives from industry bodies such as FICCI, ASSOCHAM, and CII. The need for such a framework can be traced back to the recent case of Reliance Industries Limited v. SEBI dealing with the JIO-Facebook deal where market rumours fuelled price variation.  Proposed Changes   Through this paper, SEBI seeks to suggest the criteria of material price movement based on the price range of securities for determining the need for rumour verification. In order to ascertain a material price change, the price range of such a share needs to be taken into consideration. While accounting for shares falling within the higher price change, any small change in the price will be considered material in terms of absolute price, while a higher price change will be considered material for cheaper shares. The changes in benchmark indices will be a determining factor while accounting for market dynamics influencing such a price change.  It notes that for shares falling under the high price range, a low percentage move would be considered as a material price change, and for shares falling in the lower price range, a higher percentage move in price would be considered as a material price change in order to determine the difference of prices in absolute terms in both price ranges. This shall also be determined by taking into account movement in the benchmark indices such as NIFTY50 and Sensex to factor in market dynamics.   The consultation paper suggests two frameworks for the determination of material price movement. “Framework A” entails considering the price from the day before the company confirmed the rumour while ignoring subsequent market changes to determine the transaction price. On the other hand “Framework B” entails  excluding the price variation in price due to the rumour and its subsequent confirmation from the Volume Weighted Average Price calculation and adjusting the same according to the daily prices. Irrespective of the Framework chosen, SEBI clearly intends to allow for fairness in price determination while acknowledging potential drawbacks in both the frameworks in its consultation paper.    The consultation paper also suggests a minor amendment to the proviso to Regulation 30(11) of the (LODR) Regulations which requires listed entities to verify, deny or clarify any rumours within 24 hours of its report in any mainstream media. This timeline is now suggested to be changed to within 24 hours from the material price movement. This is said to be implemented from 1st February 2024 for the top 100 listed companies and from 1st August 2024 for the top 250 listed companies.   The unaffected price as proposed by the ISF will be applicable from 60 days admeasuring from the date of confirmation of the rumour till the date of public announcement by the company or any other relevant disclosure such as a board approval by the company. In cases of competitive bidding for a potential M&A deal without an unidentified buyer, the applicable time period for unaffected price shall be 180 days from the date of confirmation of the rumour to the relevant date under the applicable regulations.   The rationale behind these implementations on the basis of material price movement is to provide an effective mechanism to combat false market sentiment and nullify any impact of the securities of such listed entities. The metric of material price movement helps in narrowing the pool of rumours of potential rumours that can cause an upheaval in the market. The consultation paper in order to reinforce this sentiment by casting an obligation upon the Key Managerial Personnel (“KMP”) to provide accurate and timely response as required under Regulation 30(11) of the (LODR) Regulations. The consultation paper also imposes a restriction upon the listed companies to not hide under the garb of UPSI when the same news report may be used by an insider as a defence. This initiative aims to establish and uphold industry standards for a more efficient business environment.  Hurdles in practical implication and impact on the market   Regulation 30(11) of the (LODR) Regulations acts as a  general provision for listed entities to verify any market rumour. The consultation paper strengthens this obligation by imposing the same on all top 250 listed companies by 1st August 20024 which ensures that such listed entities give heed to rumours being spread through mainstream media. This is an interesting move as most companies choose not to comment on any such rumours due to internal policies.  SEBI substantiated its resolution for combating misinformation by relying on similar mechanisms under Section-202.03 of the New York Stock Exchange (NYSE) Company Manual on “Dealing with Rumours or Unusual Market Activity” where companies are supposed to confirm, clarify or deny such rumours with appropriate public statements. After comparing the two statutes, it should be noted that there are a few deviations in SEBI’s methodology pertaining to such rumours. SEBI in the paper relies on Regulation 30(11) for the definition of a rumour which mentions that a rumour triggering this provision should not be general but specific in nature and deal with an impending material event. The yardstick on what will be considered “specific” is not spelt in the paper or any

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Analysing Regulatory Overlap Concerns Amidst the Draft Broadcasting Bill’s Attempt to Revive Digital News Content Regulation

Leave a Comment / Technology Law /

[By Anupama Reddy Eleti] The author is a student of Gujarat National Law University.   Introduction  2023 has been a significant year for the Indian Data Privacy Landscape. From the passage of the Digital Personal Data Protection Act, 2023 in April to the recent release of the Draft Telecommunication Bill 2023, MIB and MeitY have rolled out several legislations reshaping India’s personal data use. Amidst these developments, the Broadcasting Services (Regulation) Bill, 2023 (Draft Bill) was released in early November to repeal the Cable Television Networks (Regulation) Act, 1995 (Cable TV Act), and provide a uniform legislation regulating all forms of broadcasting networks. However, like any other legislative effort, the possibilities of the Bill have been scrutinised, with Chapter III gathering the most attention. While the bill tries to retain key aspects of the Cable TV Act and associated Rules, Chapter III comes as a distinct new development.  Titled “Content Standards, Accessibility and Access Control Measures”, a cursory reading of the Chapter reveals clear parallels with Part III of the IT Rules which is presently facing scrutiny at the Apex Court.  Drawing parallels  The similarity in question is essentially Section 20 of the draft bill, which casts an obligation on certain online broadcasters to adhere to a programme code and advertisement code and notes, “Any person who broadcasts news and current affairs programs through an online paper, news portal, website, social media intermediary, or other similar medium but excluding publishers of newspapers and replica e-papers of such newspapers, as part of a systematic business, professional, or commercial activity shall adhere to the Programme Code and Advertisement code referred to in Section 19.” Further, Section 19 gives way for the introduction of a completely new Programme Code and Advertisement Code to be prescribed by the Central Government.   Parallelly, the IT Rules of 2021 showcase a previous attempt of the Ministries at introducing similar obligations. Rule 9(1) of the IT Rules introduced an obligation upon publishers of “news and current affairs” and “online curated content” to follow a code of ethics which consisted of the Norms of Journalistic Conduct of the Press Council of India and the Programme Code under the Cable TV Act.  However, specific provisions of the IT Rules were shortly set aside by the Bombay High Court in the case of Agij Promotion of Nineteenonea Media Pvt. Ltd. & Ors. vs. Union of India & Anr. Firstly, the court contended that they imposed obligations under a statutory framework that was alien to the Information Technology Act, 2000 (IT Act). The court pointed out that the two provisions referred to in the “Code of Ethics” i.e. the Norms of Journalistic Conduct of the Press Council of India and the Programme Code under Section 5 of the Cable Act, belong to independent legislative frameworks. The court questioned how these distinct legislations could be incorporated under the impugned rules of the IT Act and form the basis for substantive action in case of violation. Secondly, the court noted that such rules are contrary to the Rule-making powers conferred to the Central Government under Section 69A, Section 87(2)(z) and (zb) of the IT Act.   Furthermore, the court while commenting upon the obligations imposed by the Programme code noted that it exceeds the reasonable restrictions under the Fundamental right to speech and expression. In this regard, the bench noted, “ If a writer/editor/publisher has to adhere to or observe the Programme Code in toto, he would necessarily be precluded from criticising an individual in respect of his public life [see: Rule 6(1)(i)]. It is, therefore, quite possible that the writer/editor/publisher on contravention of the provisions of clause (1) of Rule 9 of 2021 Rules, but without even transgressing the boundaries set by clause (2) of Article 19 of the Constitution, may expose himself/itself to punishment/sanction under the 2021 Rules.” This reasoning highlights how inappropriately excessive it was to obligate such publishers to adhere to the Programme Code, meant for traditional cable TV network operators. Thereby, the current bill which repeats this obligation for news and current affairs broadcasters raises questions as to the constitutionality of the move. However, this is seemingly resolved by the inclusion of Section 19 in the Draft Bill which prescribes a new and differentiated programme and advertisement code for different broadcasters.   Global Comparision – Digital News Regulation  In a report by Oxford Pro Bono Publico, digital news content regulation was observed across seven different nations. The report indicated that media regulation in most countries struck a balance between press freedom and the delineation of publisher responsibilities. A common pattern of emerging legislation was seen, particularly in South American and European countries, where there was a prioritization of journalistic freedom and human rights in media regulation approaches. For instance, Argentina’s legislation, aligned with the American Convention on Human Rights, protects various forms of expression, especially political discourse, speech concerning public officials, public interest matters, and personal identity. Similarly, the Canadian Government emphasizes balancing its legislation with considerations for freedom of expression, privacy protections, and the open exchange of ideas and debate online.  In contrast, India’s Programme code under the Cable TV Act which was previously attempted to apply to news publishers was severely criticised for imposing excessive constraints. Not only was the code inappropriately applied, but it was also extremely broad in its sweep, including vague terms like ‘good taste’ and ‘decency’ which are inherently subjective. Further, the previously voluntary Journalistic Code of Conduct was exalted to the status of mandatory application under the IT Rules. The new bill retains the mandatory nature by making any violation of the codes subject to severe monetary penalties. This essentially introduces new statutory obligations in this domain. In this regard, it is recommended to align India’s new codes with global practices, with standards that are drafted with clarity and limited to manifestly illegal material.  Conclusion  The overall approach taken by MIB bypasses the reasoning of the Bombay High Court in its stay order. This it does by embedding the obligations within an independent

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