Author name: CBCL

Navigating M&A Transactions Amidst the Digital Personal Data Protection Act

Mergers & Acquisitions /

[By Rahil Arora & Vidushi Sehgal] The authors are students of Jindal Global Law School.   Introduction The realm of M&A transactions and investments today is dominated by parties sharing a potpourri of crucial data with one another and their advisors. This collaborative process involves the target company, the sellers, and the potential buyers sharing and disclosing vast amounts of information to undertake a meticulous assessment of the risks associated with a particular transaction. Through the course of this information sharing, Personal Data protection concerns are often overlooked, especially with the weakly enforced SPDI Rules. However, such an approach is unsustainable under the imminent Digital Personal Data Protection Act, 2023 (“DPDP Act” or “the Act”), and its rigorous penalty framework.  A Brief Overview of the Act  The DPDP Act is a comprehensive Personal Data protection legislation that finds its roots in Puttaswamy wherein the Supreme Court not only recognized the right to privacy as a fundamental right under Article 21 but also emphasized the need for such a legislation. Many of the Act’s provisions draw inspiration from the European Union’s General Data Protection Regulation (“GDPR”), albeit with certain modifications tailored to the Indian context. To simplify matters, the DPDP Act does not differentiate between different forms of Personal Data based on sensitivity. Any data in digital form about an individual who is identifiable by or in relation to such data, is classified as Personal Data.  Furthermore, the data ecosystem under the Act encompasses three primary stakeholders. First, the Data Principal or the individual to whom the data relates. Second, the Data Fiduciary, who determines the purpose and means of processing such data and is subject to various compliances, and penalties. Lastly, the Data Processor, upon whom no liability has been placed given that they are agents or service providers to the Fiduciary. “Processing” of Personal Data has been given a very wide definition under the Act and such processing by the Data Fiduciary must be for a lawful purpose and limited to the consent-notice framework or for legitimate uses as laid down under Section 4. Therefore, data processing should not only occur with the consent of the Data Principal and for specified purposes but also be accompanied or preceded by a notice in accordance with the provisions of Section 5. However, an exception may be made from this consent-notice framework when the same is for a legitimate use as specified under Section 7.  Personal Data in an M&A Transaction  Through the course of an M&A transaction, parties and their advisors such as legal representatives and financial auditors, share bucketloads of data concerning the target company. This exchange of information, generally facilitated through virtual data rooms, kickstarts the due diligence process and also involves the sharing of Personal Data such as supplier or vendor contracts, employment contracts, and personal details of employees, customers, directors, etc. All such information shared between the parties to the transaction amounts to “processing” under the scope of the Act.   What Role Does Each Party Play?  Given the processing of Personal Data that takes place through the course of the transaction, the inquiry that emerges pertains to the role assumed by each data processing party in such instances—whether they function as a Data Fiduciary or a Data Processor. Drawing this distinction is crucial as obligations are placed on Data Fiduciaries for their actions, as well as those of the Data Processors.  As the target or the seller furnishes Personal Data to the bidder or acquirer, it unmistakably operates as a Data Fiduciary. Importantly, this action also prompts the acquirer to similarly adopt the role of a Data Fiduciary. This is because it may process the Personal Data according to its purpose and means to ascertain the feasibility of the transaction. Thus, in such a case both the target and the acquirer will be responsible for compliance with the Act in their individual capacity. Nevertheless, this classification is not rigid and is contingent on the actions of the parties involved. Therefore, it is advisable for the parties to explicitly define their individual responsibilities and the purpose of data sharing in their pre-merger documentation. Moreover, advisors of either party reviewing documentation and Personal Data to offer professional opinions would be categorized as Data Processors under the Act.  The Grounds for Processing  Under the GDPR, processing of Personal Data for the “legitimate interests of the data controller” (same as a Data Fiduciary) is permissible. Thus, if parties to an M&A transaction can balance their interests against those of the Data Principal, they may process Personal Data without any external considerations or taking fresh consent. Interestingly, the 2022 Data Protection Bill also permitted processing of Personal Data for mergers, acquisitions, or other corporate restructuring transactions as a legitimate use thus, allowing for an exception to the consent-notice framework.   However, under the current iteration of the Act, Section 17(1)(e) exempts the application of certain provisions of the Act, including the grounds for processing under Section 4, only when the processing is pursuant to court or tribunal approved corporate actions like compromise, arrangement, merger, amalgamation, reconstruction, or transfer of undertaking between companies. Therefore, any other non-court-approved transaction such as a share sale or an asset sale would have to conform with the Act, including the consent and notice requirements prior to sharing Personal Data with a third party.   Actions To Consider  The DPDP Act envisages an extremely high penal regime in case of a Personal Data breach with penalties upon Data Fiduciaries reaching up to INR 250 Crores. Given the same, Data Fiduciaries must meet their obligations under the Act at all stages. The first step would involve determining whether the purpose for which the Personal Data is being processed is within the specified purpose for which consent was earlier obtained from the Data Principal. If beyond the specified purpose, fresh consent must be obtained from the Data Principals along with meeting the notice requirements before processing such data. In cases where fresh or prior consent proves difficult to obtain, the target

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Revisiting CBIRC-II: A Call for a Group Company Insolvency Regime

Insolvency Law /

[By Isha Khurana] The author is a student of Jindal Global Law School.   Introduction   The NCLAT in a January 2023 decision, reiterated the need to lift the corporate veil in matters of group company insolvencies. In doing so, it followed the path laid down in the 2021 CBIRC-II (hereinafter, “CBIRC-II Report”). This subject has been long debated in India and has found itself at the center of various working groups and committee reports. The 2019 working group report was the beginning of India’s recognition of the growing need to incorporate a provision for group company insolvencies, noting the shared control and economic interdependence of corporates. This, at the time, was deemed a win since the only preceding authority was the 2018 report of the insolvency law committee, which placed limitations on the growth of the group insolvency process. The 2018 report limited the scope of group insolvencies in India, by observing that since the insolvency code was only introduced in 2016, it may be “too soon” to introduce such a group company complexity in the statute.    Nevertheless, both the 2019 working group report and the 2021 CBIRC-II report have altered the course for group company insolvencies in India. While previous articles have addressed the nuances of group company insolvency, it is essential to consider the pivotal role played by reports such as the 2019 working group report and the 2021 CBIRC-II report. This article aims to revisit the discussion through the lens of the CBIRC-II decision and the January 2023 decision, to delve into the future of group company insolvencies in India. It attempts to incorporate the family-dominated business environment of India in this discussion, to stress the increased need for a group insolvency procedure. Through this, the article flows into an evaluation of whether the alleged conflict between group insolvencies and the separate legal entity doctrine could hamper the adoption of a group insolvency regime.   Contextualizing Group Companies in India   The 2021 CBIRC-II report fared well in establishing jurisprudence on which corporate groups could be deemed as group companies in India and what factors must exist for the same. A perusal of the committee’s deliberations on the definition of a “group” highlights the importance of shared control, common shareholding, and interdependence among members of a corporate group, for them to be termed as a group company structure. It thus becomes clear that an inclusive definition of “group” must be included in India’s insolvency regime and reliance may be placed on either control or ownership to establish the existence of a group company structure.   It is argued here that the business environment in India will be complemented by this definition. India is known to be home to several family-run businesses, both in the public and private sectors. The existence of such family-run businesses opens the doors for situations wherein holding companies exercise control over their subsidiaries (essentially, a vertical relation) and also for members of the same corporate group (a horizontal or lateral relation) to impact one another, through economic dependence. Thus, the insolvency regime needs to address the same, for promoting equity and fairness, and ensuring the protection of creditors.    The focus on control and ownership factors in the leading elements in establishing group company structures in the Indian context. Owing to the fact that it is commonly observed for common shareholding to be present with corporates exercising control over one another’s activities. Additionally, the deliberations of the working group coupled with the decision in Videocon, also open up the possibility of establishing a group company structure through the presence of common assets, pooling of recourses, interlinked financing, and so on. Thus, judicial decisions and committee reports work well with one another to account for a broad range of scenarios wherein a group company structure may be present.   As India’s corporate environment is dominated by family businesses (arguably, more than any other jurisdiction), it becomes all the more important that an efficient group company insolvency and recovery regime is in place. The same stems from the increased likelihood of corporations exercising control over each other’s operations and decisions. Further, given the operation of businesses in India, where significant control and decision-making power are shared, it becomes easier to pierce the corporate veil, and to allow for the institution of insolvency proceedings against a group of companies that are acting together. However, some may be apprehensive about initiating proceedings against a group of companies, as it may violate the separate legal entity principle, by treating different corporate entities as akin to one another. Thus, an analysis of whether the process of lifting the corporate veil for group insolvencies would contradict the separate legal entity principle must be undertaken, through the lens of judicial decisions.    A Judicial Lens to Piercing the Corporate Veil  Scholars and committee reports have repeatedly noted that insolvency laws are based on the principle of corporations being separate legal entities, following the jurisprudence laid down in Saloman v Saloman. The principle in insolvency law has come to be viewed as one that also distinguishes companies from their subsidiaries or holding companies, advancing from the view that a company is distinct from its members. Thus, binding corporate bodies belonging to the same group of companies was thought of as going against the basic tenets of corporate law.   However, jurisprudence which allows courts to lift/pierce the corporate veil has found its place in insolvency law as well. Practice now allows for the veil to be lifted in situations where associated companies are connected in a manner that they come to be treated as a single concern. The CBIRC-II sheds light on when companies may be treated as a single concern or rather, what links must be present for the same. The most commonly observed would be situations where companies have linked operations or finances when they own shared assets, and engage in related party transactions. In such scenarios, carrying out individual insolvency proceedings for one entity would be fruitless as a creditor would not be able to

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Lifting Or Piercing The Corporate Veil: Clarifying The Two-Step Examination

Company Law /

[By Arunoday Rai] The author is a student of National Law School of India University.   Introduction The doctrine of lifting or piercing the corporate veil is fundamental to the company law. This doctrine acts as an exception to the concept of a company being a separate juristic entity. It allows the court to treat the rights and liabilities of the corporation as the rights and liabilities of its shareholders. The courts in India have recently tried to expand the horizon of this doctrine to pay regard to the new economic realities behind the evolving corporate structure in the modern era.  This article contends that such an expansion of this doctrine has been on a misplaced understanding of Supreme Court (SC) precedents. The courts in India have failed to provide a sound legal basis to expand the contours of this doctrine and have failed to differentiate between various attitudes with which SC has lifted the veil in different cases. It argues that SC has used this doctrine in two types of situations: the first type involves peeping behind/lifting the veil, whereas the second type of cases involves penetrating/piercing the veil. The author sheds light on the confusion caused by the interpretation of the doctrine by the courts due to their lack of understanding of the above-mentioned two-step examination.  The Two-Prong Test   It is essential to understand what is meant when the courts lift the veil of the company. The doctrine is generally been used to impose liability on the shareholders or alter ego of the company by lifting the veil. However, the two-stage analysis in this post highlights that such a view of the doctrine is incomplete. The act of lifting the veil is not always detrimental to the shareholders/alter ego of the company but can be beneficial at times.   Peeping Behind/Lifting the Veil  The first stage in the analysis involves the least discussed act taken by the court, where it merely lifts the veil of the company. At this stage, the court lifts the veil of the company to gather information such as shareholding patterns, shareholders, control, etc. It pulls down the veil once such information is gathered and the company is treated as per the information gathered during the inquiry done by the court at this stage. For instance, the statutory lifting of the veil provided in Sections 2(46) and 2(87) of the Companies Act, 2013 is a classic example of this stage.   The SC in the case of Renusagar had to adjudicate on the issue whether Renusagar was a power plant owned by Hindalco. If both these entities were considered to have no separate existence, then Hindalco would be entitled to certain exemptions on electricity duty by the State government. The SC lifted the veil to hold that both industries had no independent existence and were inextricably linked up together. The judgment by the SC eventually benefitted the Petitioner’s company as the veil was lifted only to investigate the relationship between both entities involved in this petition.  SC has also provided certain prerequisites that need to be fulfilled before the veil is lifted or peeped into. The apex court in LIC v. Escorts had held that a veil can be lifted in various situations such as fraud or improper conduct, evasion of taxing or a beneficent statute, public interest, effect on parties, etc. It did not provide a straight jacket formula but listed broad illustrative situations where the veil could be lifted. However, it went ahead to say that in the present case, no such lifting of the veil is necessitated beyond the governing statutes involved as it is not necessary to the case.  Therefore, it should be noted that this stage only involves the court lifting the veil and is a condition precedent to the next stage of penetrating the veil where a court after gathering information may make an order against the company imposing liability on them or refrain from imposing any liability.   Penetrating/Piercing the Veil  This stage involves the imposition of liability upon the shareholders for the company’s acts through the piercing of the veil. Such liability can be seen through Section 36 of the Companies Act, 2013 where a person who knowingly or recklessly induces persons to invest money can be held liable for action under Section 447 of the Act. This provision is an example of the statutory piercing of the corporate veil where liability is imposed on a person for committing a prohibitive act.  The standard for piercing the corporate veil has been subject to contradictory judgments in India. While some courts have held that fraud is a sine qua non for piercing the veil, other courts have held to the contrary. This article supports the former view by underscoring the importance of demonstrating impropriety or evasion of legal obligations as a prerequisite for piercing the veil.  It has upheld such a view by recognizing that the law does not allow for imposing liability on mere commonality or interlocking shareholding or common directorships. The requirement of fraud or evasion of a legal obligation is essential to protect the fundamental precept that every company is a distinct legal entity. However, various courts have agreed to the latter view as they have conflated the standards to be used during the two-stage analysis while applying this doctrine.  The Confusion  Several courts in India have held that the contours of this doctrine cannot be restricted to the requirement of fraud/sham/façade and could be extended to situations where justice, equity, public interest, and convenience so required. The courts that have taken this view have tended to rely on judgments of the SC in LIC v. Escorts and Renusagar which has been interpreted to enlarge the standard of piercing the corporate veil.   For instance, the Bombay High Court in Bhatia International has held that the doctrine is no longer restricted to the cases of tax evasion but also pertains to cases that are opposed to justice and convenience. It goes ahead to state that once the court

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Municipal Bankruptcy: India’s Chapter 9 Moment?

Insolvency Law /

[By Bhaskar Vishwajeet] The author is a student of Jindal Global Law School.   Introduction  Municipal bonds have gathered steam in India. As of when this piece was written, the country has 29 active municipal bonds on the NSE’s IBMX index for municipal bonds. Municipal debt instruments are a great alternative to raising capital for public infrastructure/service works. That said, assuming that the debt obligation is watertight may not be prudent because the issuer is a sovereign. There may be issues with revenue generation and projects being delayed. However, a far more significant threat is the municipal corporation’s bankruptcy.  This article aims to contextualize municipal bonds within India’s bankruptcy regime and assess whether these debt instruments and investors are secured through regulation in case of possible bankruptcy. We shall also refer to the United States to see how the sovereign’s promise of “faith and credit” to back the bond’s health is not always guaranteed.  What are Municipal Bonds?  Municipal bonds are government debt instruments financing public projects and utilities. They attract investors by allowing them to lend money to local government institutions in return for regular interest payments and the return of their principal when the bond matures. The potential tax benefits, such as income tax exemptions on interest income, make municipal bonds appealing, especially to investors in higher tax brackets.  Municipal bonds are of two types: General Obligation (GO) bonds, supporting general development works through revenue from property tax and revenue cess, and Revenue Bonds, funding specific projects like schools and water filtration plants through project-generated revenue. Backed by the respective government’s reliability in repaying debts, municipal bonds receive ‘investment-grade’ ratings from agencies, exemplified by AA+ ratings for New Delhi Municipal Council and Navi Mumbai bonds.  Municipal Bond Health  Municipal Bonds are generally considered safer than other investments in the market for two primary reasons. First, municipal corporations are state instrumentalities. A sovereign pledge supports the bond’s health, and there is a sense of assurance that the state will make good on the interest income and any default whatsoever.  Second, to reinforce investor confidence in the value and health of the bonds, regulators require  municipal issuers to meet certain eligibility requirements. The SEBI (Issue and Listing of Municipal Debt Securities) Regulations 2015 stipulates eligibility requirements in regulation 4 and requires the issuing local government authority or ULB to, inter alia, not have a history of defaulting on debt repayments in the past 365 days of the issuance of a municipal bond and to have at least an investment grade credit rating (BBB- or above) by a SEBI-registered credit rating agency.  The Detroit Case Study and Chapter 9 Protections  Despite their perceived safety, municipal bonds face financial distress, as evidenced by the City of Detroit’s bankruptcy in 2013. Detroit’s case illustrates how legislative protections, such as Chapter 9 of the U.S. Bankruptcy Code (Adjustment of Debts of Municipalities), facilitated a resolution.  Detroit had issued various bonds before its bankruptcy, including GO bonds backed by taxing power and Revenue bonds secured by specific project revenues. Financial problems, stemming from issues like population decline and rising pension costs, led to a severe budget deficit, prompting the city to file for Chapter 9 bankruptcy protection in July 2013. Chapter 9 allows municipalities to restructure debts without asset liquidation, enabling negotiations with creditors under court supervision. This ensures a fair repayment plan while maintaining essential services. Detroit emerged from bankruptcy in 2014 after a federal judge approved a financial restructuring plan.  Does India’s Bankruptcy Regime Protect Municipal Issues?  India’s Insolvency and Bankruptcy Code (IBC) lacks provisions akin to Chapter 9 in the U.S., raising concerns about the protection of municipal bondholders during bankruptcy. Even SEBI offers no guidance on municipal bankruptcies or defaults. Regulators seem to have complete faith in the sovereign pledge of these municipalities and the principle of not interfering with the state’s powers. This logic is akin to the history behind Chapter 9 in the United States, wherein the original municipal bankruptcy legislation from 1934 was held unconstitutional for violating the sovereignty of states. The United States Congress later revised the Act in 1937, which was constitutionally affirmed in United States v. Bekins, and subsequently retained as Chapter 9 through the 1978 Bankruptcy Reform Act.  Chapter 9 is unique because it is tailored for municipal bankruptcies. It includes an automatic stay on any associated claims or litigation against the debtor. The provisions include restrictions on the court’s interference with the municipal debtor’s powers, such as not interfering with the municipality’s borrowing powers and converting the proceeding into a liquidation proceeding. These restrictions are necessary to preserve the constitutional status of Chapter 9 (as the borrower is a sovereign). As a corollary, the municipal debtor must propose a plan to adjust its debt since creditors cannot file plans under Chapter 9. The entire process provides space to negotiate and restructure a debt repayment plan for municipal debt. Indian law does not guarantee such a position.  The problem worsens with the incompatibility of general bankruptcy laws as List I (Central) subjects with List II municipalities. As local governments, municipalities are state subjects in Entry 5 of List II. Multiple states have statutory municipal corporation acts (“Acts”), enabling municipal corporations to raise money by issuing debentures or other instruments (see Section 114A of the Uttar Pradesh Municipalities Act 1916). Almost every Act stipulates the security interests that may be created in a bondholder’s name. These range from municipal taxes, borrowed funds from public financial institutions and even, rarely, immovable property vested in the Corporation. Most municipal corporations/councils must maintain a municipal/sinking fund to ensure an adequate corpus to return the borrowings on debentures/loans. However, many Acts are unclear on whether the sinking fund can be used for other forms of issues, i.e., if the municipality chooses to issue, say – non-debt securities.  There is some guidance concerning the order of payments. Section 151 of the erstwhile Municipal Corporation Act 2000 (Jammu and Kashmir) stated that interest income and loan repayments will be paramount. However, this instance is too remote for broad application. In isolation, these provisions

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Retail Investors in the Spotlight: SEBI’s Consultation Paper on Bonds

Capital Markets and Securities Law /

[By Ansh Chaurasia] The author is a student of Dr Ram Manohar Lohiya National Law University.   Introduction  The Securities and Exchange Board of India (“SEBI”) has actively endeavoured to ease and promote access for the general public in pursuance of an announcement made as part of the FY 2023-24 budget. On 9 December 2023, SEBI introduced a consultation paper (“paper”) aiming to make sweeping changes in the bond market. The proposed amendments have the potential to bring unprecedented levels of non-institutional investors’ participation in the bond market. Retail investors played an essential role in the recent sustained rally in the stock market indices, making a case for their inclusion within the bond market.  Bonds are fixed-income securities, i.e., debt securities that pay fixed interest, called coupon rates at regular intervals. They are an essential financial instrument for governments and corporations to raise funds without giving up a share in the equity. The value of the bond decided by the issuer is called ‘face value’. It is the amount promised to the bondholder upon the bond’s maturity, and the coupon value is evaluated from the face value. SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS”) enables the issuance of debt securities or non-convertible securities to raise funds (Reg 2(1)(k) and Reg 2(1)(x)). The listing and issuance of bonds are governed by a circular of SEBI that lays down procedural requirements, listing obligations, and disclosures to be made by the issuer of such instruments. These time-bound disclosures and procedural requirements provide an opportunity for informed investment decisions. Crucial disclosures regarding financial results and defaults on repayment of loans mandated under the circular have a significant bearing on investment   Bonds play an important role in diversifying an investor’s portfolio. Although stocks offer greater returns, they are proportionately riskier. However, bonds, specifically as suggested in the paper, reduce the risk by ensuring a lower yet stable coupon rate and predetermined maturity date. The opportunity to invest in the bond market for retail investors that primarily invest in the stock market would provide their investment with a cushion from frequent stock market shocks. However, the success of this proposal is concomitant with multiple factors that are discussed hereafter. The paper includes multiple proposals concerning the bond market; however, the analysis in this blog focuses primarily on issues regarding the entry and participation of retail investors into the bond market.    Recent Changes in the framework of the bond market  The gradual change within the bond market began in 2022 through a decision in a board meeting to decrease the face value of privately placed debt securities and subsequent amendment to the circular. The board considered the high face value’s deterrent effect that withheld non-institutional investors from the bond market. Consequently, face value was reduced from Rs ten lakh to Rs one lakh. The next significant change was the introduction of the regulatory framework for the online bond platforms to ensure transparency, disclosure and availability of redressal mechanisms on platforms that facilitate buying and selling on such platforms. These changes aimed to attract and benefit the participants and facilitate a secure transaction. However, during June-September 2023, the share of non-institutional investors in funds raised through bonds was four per cent compared to the general average of less than one per cent. Institutional investors dominate the corporate debt market in India because a large portion of bonds are issued to selected investors or institutional investors through private placement. The paper reveals a worrisome figure of ninety-five per cent of the issuers resorting to the private placement account for ninety-eight per cent of the funds. The participation of non-institutional investors remains abysmally low at just 2 per cent. The average participation by non-institutional investors for FY 2021-22 and FY 2022-23 remained below two per cent (Annexure III).  There are strong economic reasons to push for retail investor participation; not only do they help to diversify the portfolio for the retail investor, but they also allow the issuer (government or corporation) to diversify and distribute their risk. The burden distribution from the central bank or the conventional investors becomes crucial during economic hardships when overreliance on a particular set of mainstream investors can further aggravate the situation.    The proposed impetus to retail investors by SEBI  SEBI has proposed to further reduce the face value from Rs one lakh to Rs ten thousand to do away with the barrier of face value. It has specified such bonds to be ‘plain vanilla’ bonds. Plain vanilla instruments have simple interest rates and predetermined maturity dates thereby containing the risk. After the 2008 financial crisis, economies across the globe are more inclined to issue plain vanilla debt instruments. The US introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act that promoted the issuance of plain vanilla debt instruments and raised the burden of disclosures and compliance for non-vanilla debt instrument issuers.   The securitised debt instruments, i.e., bonds backed by assets such as loans or leases that generate cash flow, are also being increasingly issued with corporate bonds as the underlying asset. Given the prevalence of securitised debt instruments, all proposals concerning bonds have been made applicable to such instruments as well. These recommendations to safeguard potential retail investors are crucial, but they only deal with seemingly overt threats.   Risks intrinsic to the retail investors  Multiple factors have a bearing on bonds, and most of which are not apparent on the face of it. There lies the problem. The significant factors for consideration in the case of stocks are market risk and company-specific risk, information about both of which is readily available and easily comprehensible.   In the case of bonds, the major factors are interest rate and credit rating. The interplay of interest rate (the repo rate decided by RBI in India) on the one hand and bond price and yield to maturity, on the other hand, is difficult to comprehend for a retail investor. However, the interplay can be summarised as an inverse relation between the market rate and the value of the bond. Since bonds are long-term investments, an informed decision on bond investment and a deeper understanding of interplay are required,

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Decoding SEBI’s Path to Enhancing Ease of Doing Business

Capital Markets and Securities Law /

[By Shreya Saswati & Sruti Patra] The authors are students of National Law University Odisha.   Introduction The Securities and Exchange Board of India (SEBI) recently published a comprehensive consultation paper with a view of promoting ease of doing business by relaxing regulations followed in the securities market. The paper also introduces the concept of Fast Track public issuance and listing of debt securities while proposing norms for the same.  Proposed Relaxations to SEBI Regulations   SEBI’s regulations play a crucial role in regulating financial markets and listed entities, impacting the ease of doing business in India. They outline stringent compliance standards for listed entities, ensuring transparency, disclosure, and investor protection. However, excessive requirements pose challenges for businesses, especially smaller entities, impacting the ease of operations. Hence, striking a balance between robust regulations and reducing unnecessary administrative burdens is crucial to foster a conducive business environment in the country.  Reducing the face value of securities  SEBI had recently updated the minimum face value of debt securities such as Non-Convertible Securities (NCS) and Non-Convertible Redeemable Preference Shares (NCRPS) to Rs.1 Lakh as opposed to Rs.10 lakhs earlier. This reduction works as a means for greater involvement from non-institutional investors. In fact, SEBI observed an increase in their participation during July-September 2023 after this reduction. Even public feedback increasingly held high face value to be a barrier for such investors for market participation.   Hence, the consultation paper proposes two things. Firstly, issuance of NCDs or NCRPS with a reduced face value of Rs.10,000. Secondly, issuance of Securitized Debt Instruments (SDI) via private placement with face value of either Rs.1 lakh or Rs.10,000. The catch is, the issuer must appoint a merchant banker who shall conduct due diligence before issuing them. Furthermore, NCDs and NCRPS shall adhere to a straightforward structure without complex credit enhancement features or structured obligations.  Reshaping the NCS Regulations  The consultation paper also proposes changes to Schedule-I of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, which deals with disclosures for audited financials. The current inclusion of audited standalone and consolidated financial statements for the last three financial years, along with stub period financials, in the Offer Document has caused challenges due to technical complexities. To address these concerns, the paper suggests reducing file size by including links rather than inserting financial statements directly into the document. Additionally, leveraging QR codes has been proposed to redirect users to Stock Exchange’s website hosting relevant financial data and simplifying access to this information for potential investors.  When it comes to disclosures, firstly, the paper proposes issuers to provide certain relevant information required under the Schedule1 till the latest quarter of the current financial year instead of until date of issuance in order to ease this process. Secondly, to bring uniformity, the paper proposes standardizing the record dates, i.e., the date when an investor gains ownership of debt securities  to 15 days before the interest payment or redemption due date.   Lastly, the consultation paper proposes the use of a standard format for due diligence certificate. The NCS Regulations require the issuer to obtain a due diligence certificate from the debenture trustee at the time of filing draft offer document or while listing securities. But SEBI’s Master Circular for Debenture Trustees consists of two different formats depending on their purpose. A standard format ensures clarity, consistency and easier evaluation.   Publication standards vis-a-vis LODR regulations  The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) outlines that a listed entity is required to publish its financial results within two working days after the board of directors’ meeting. This publication needs to occur in at least one English national daily newspaper that circulates across the nation or a significant portion of India.2 But LODR Regulations already necessitate submission of financial results to stock exchanges within thirty minutes of the board meeting and immediate online publication which is accessible to debenture holders. Publishing results again in newspapers after two days is superfluous, hence, the paper proposes publication on newspaper to be optional within the designated time frame, which would help reduce unnecessary costs. Given the current digital age and the immediate accessibility of financial data online, this proposal seems pragmatic to reduce redundant costs. Balancing cost-efficiency with transparency and stakeholder communication remains pivotal in making informed decisions regarding this proposed amendment to the LODR.  Fast Track Public Issuance and Listing of Debt Securities  NCS are generally utilized by companies to secure long-term funds through public issuance of shares at a higher rate of return to the lender. The NCS Regulations govern the issuance and listing of debt securities through both public issuance of securities and private placement. Recently, Indian companies have mostly resorted to issuance and utilization of shares through private placement and that being the case, the corporate debt market raises these funds not through single placement rather multiple issuances all through the year. The decline in IPO filings can be attributed to many reasons like market volatility due to recession or hike in interest rates etc. Therefore, a need arises to increase the scope for the corporate debt market to revitalize public issue of debt securities and that too in the primary market so as to broaden the investor base and bond market in less time and cost. SEBI, through this consultation paper, tries to address the issue by suggesting a Fast Track Public Issue Process.   Technicalities & Modalities  This fast track public issue shall be kept open for a maximum of 10 working days, with a minimum one working day, with no minimum subscription for financing entities. With respect to the retention limit in case of over subscription, the same has been fixed at five times of base issue size, the same is the maximum limit.  On July 3, 2023, SEBI came up with the 2nd Amendment to the NCS Rules where it introduced the concepts of General Information Document (GID) and Key Information Document (KID) in order to serve the purpose of avoiding repetition in filings of documents by the

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Comparing The Deterrence Effects of Leniency Programs Between India & USA

Competition Law /

[By Anshula Sinha & Aashish Gupta] The authors are students of NLU Jodhpur.   Introduction Leniency programmes [“LP”] incentivise companies/firms to report collusion leading to anti-trust violations through reduced sanctions or even immunity from fines and legal penalties. LP aims to uncover and dismantle cartels by providing incentives for cartel participants to self-report their involvement in cartel activities. There are two types of scenarios that may arise when an adjudicating authority [“AA”] adopts an LP. Firstly, collusion and do not reveal when investigated, which is referred to as Collusion and No Reporting [“CNR”] second situation is when there is a collusion and reveal when investigated, which is Collusion and Reveal [“CR”].  The former is such that firms do not reveal collusive information to the AA even if the investigation takes place. The latter is that firms reveal collusive information to the AA once the investigation is opened.[i] Leniency programs are designed to encourage companies to reveal collusion and cooperate with authorities, which can help uncover and dismantle cartels more effectively.. This approach aims to create a stronger deterrent against collusion and promote fair competition in the market. The Competition Commission of India has inconsistently granted reductions and maintained anonymity. These concerns have hampered the leniency program’s goals. The article compares the leniency programs targeting anticompetitive behavior in India and the US, focusing on cartel activities. It separately reviews the cartel leniency programs in both countries and conducts a comparative analysis. Additionally, it explores how India can enhance its framework by adopting specific elements from the US program. Overview of Cartel LP in the USA The notion of leniency first emerged in the United States as a means to address the challenges encountered by law enforcement agencies in detecting cartels and subsequently gathering compelling evidence to construct a legal argument against them.The US Department of Justice [“DOJ”] Antitrust Division’s leniency programme is not governed by statute. The programme is run by the Antitrust Division at the prosecutor’s discretion. The programme includes the Antitrust Division’s Corporate Leniency Policy as well as its Individual Leniency Policy [“US LP”].[ii] Corporations that do not qualify for full immunity under the US Leniency Programme but cooperate with the Antitrust Division can profit during the charge or sentence stages of criminal antitrust prosecution. Furthermore, a separate federal statute, the Antitrust Criminal Penalty Enhancement and Reform Act [“ACPERA”], which was re-enacted in October 2020, provides measures to reduce an applicant’s civil responsibility in subsequent private antitrust actions.[iii] Thereby providing immunity from both criminal and civil actions. The Corporate Leniency Policy encompasses two distinct categories of leniency, namely Type A and Type B. Leniency of Type A is exclusively accessible in cases when the Antitrust Division has not obtained any information regarding the reported action from any other source. Leniency under Type B might be sought even subsequent to the initiation of an inquiry by the Division. Both forms of corporate leniency necessitate comparable levels of cooperation and corporate acknowledgements.[iv] However, it is important to note that only Type A leniency ensures immunity for all directors, officers, and employees of the corporation who confess their participation in the violation and actively assist the Antitrust Division in its investigation.[v] The US Leniency Programme only applies to criminal antitrust violations, which, per Antitrust Division policy, include only agreements between competitors to fix prices, rig bidding, restrict output, or allocate markets and customers.The Antitrust Division is devoted to not prosecuting leniency recipients for criminal offences integral to the antitrust violation (such as mail or wire fraud offences in conjunction with the antitrust violation). However, the US Leniency Programme will only safeguard a leniency applicant from criminal prosecution by the Antitrust Division and not from any other divisions or agencies within the DOJ.[vi] Overview of Cartel Leniency in India Cartel formation is a pernicious offence under the Act. The Commission can inquire into any cartel and impose penalties as per Section 4 of the Competition Act, 2002 [“the Act”].[vii] Further, the Commission has the power, under Section 27 of the Act to pass orders for discontinuation, modification of the agreement, direction to abide by the order, etc.[viii]Section 46 of the relevant legislation confers authority upon the Competition Commission of India [“CCI”] to impose reduced fines and establishes specific criteria for disclosure that must be satisfied by the party seeking leniency.[ix] Previously, under Regulation 4, the reduction was determined by a marker system in which only the first three applicants for leniency received its benefits. With the 2017 Amendment, this restriction on the number of markers has been removed: the ‘first-in’ company/applicant is eligible for immunity, i.e., a reduction of 100%, the second applicant can receive a reduction of up to 50%, and subsequent applicants can receive a reduction of up to 30%.[x] Section 64 authorises the Commission to design regulations for matters covered by regulations to implement the Act’s leniency provisions. In August 2009, the Competition Commission of India (Lesser Penalty) Regulations, 2009[xi] [“Regulations, 2009”] were issued under such powers. [xii] These Regulations allow the Commission to reduce cartel punishments below statute. Under the Regulations,2009, there is no complete anonymity or confidentiality that is accorded to the applicant and it is contingent only upon the three conditions specified wherein the identity of the applicant, as well as information obtained from it, shall be treated as confidential and it shall not be disclosed.[xiii] Analysis of the major leniency orders passed by the CCI highlights various aspects of the leniency regime. In the Brushless DC Fans case[xiv], the CCI issued its first leniency order in January 2017. Initiated suo motu, the investigation revealed potential cartelization between manufacturers and suppliers of brushless fans. The CCI granted only a 75% penalty reduction to the first applicant who filed a leniency application and did not grant complete immunity.[xv] In the case involving the Zinc-carbon dry cell manufacturers cartel, Panasonic India received a 100% penalty reduction after disclosing collusion with Eveready Industries and Indo National to fix zinc-carbon dry cell battery prices. Immunity was granted to Panasonic as it exposed

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Inside IBBI’s Discussion Paper: The Real-Estate Insolvency Panacea?

Insolvency Law /

[By Kaustubh R Kulkarni & Harsh Pandey] The authors are students of National Law University Odisha.   Introduction  The Insolvency and Bankruptcy Code 2016 (Code) was enacted to bring about a framework which would bring down the complexity which was associated with the Insolvency framework for creditors. Be it, the multiplicity of applicable laws or the multiple fora which one had to deal with. With the introduction of the Code this was set to radically change.  However, the real estate sector was not well received by the Code, there were multiple complexities associated with homebuyers and resolution of their problems under the Code. For instance, the conundrum around whether a homebuyer could be considered a Financial Creditor (FC), and issues surrounding whether there has to be a project-wise insolvency resolution process. The Code in this regard has been witness to continuous change by way of amendments or by way of making and amending regulations. The Insolvency and Bankruptcy Board of India (IBBI) to this extent notified a discussion paper on 6 November 2023 proposing several amendments to the existing Corporate Insolvency Resolution Process (CIRP) and Liquidation regulations in the light of real estate-related proposals. The authors argue that the discussion paper proposes a much-needed Project-Wise insolvency regime, but simultaneously dispenses with effectively resolving the convoluted Liquidation Estate tussle.  Project-Wise CIRP: A Judicial Experiment  Homebuyers or allottees have been granted the status of FC in relation to real-estate insolvency through the Insolvency and Bankruptcy (Second Amendment) Act 2018 by amending sub-Section (8) of Section 5, which defines “financial debt”. Further, the validity of the amendment was upheld by the Supreme Court (SC) in Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors. Nonetheless, disputes continue to arise between the beneficiaries and other creditors (banks, etc.). It is significant to highlight that there are differences between the types of insolvencies that occur in real estate and other sectors.  It is observed that allottees are usually more interested in obtaining their homes, apartments, or flats back during the insolvency processes than they are in recovering the money they invested in the project. Nonetheless, banks and other lending organizations are more likely to take a cut when they get their invested money back. Furthermore, if one of the Corporate Debtor’s (CD) projects defaulted, the CD’s other projects would also be roped in, leading to unnecessary hassles for the homebuyer.  Introduced in Flat Buyers Associations v. Umang Realtech, project-wise CIRP was deemed to be a potential solution to maximize the value of the assets to balance the rights of different creditors. In this light the Ministry of Corporate Affairs also published a Consultation Paper on 18 January 2023 which specifically highlighted that the Adjudicating Authority shall have the authority to apply CIRP provisions project-wise to only such projects, which have defaulted. Buttressing the same, the SC in IndiaBulls Asset Reconstruction Company Limited v. Ram Kishore Arora and Ors upheld the validity of the NCLAT, New Delhi order allowing project-wise CIRP. Project-wise CIRP is a solution to the substantial problems of both the homebuyers and developers, in as much as it allows them an opportunity to settle their woes quickly and more so for the developers as it prevents stalling the construction of other real-estate projects.  The Proposed Changes  The discussion paper proposes several measures in order to ensure that Homebuyer does not face the brunt of the procedure of the Code. First of them being that the Interim Resolution Professional/Resolution Professional has to ensure that the real estate project be registered with Real Estate Regulatory Authority as a matter of mandate in terms of Section 17(2)(e) of the Code. This will ensure that there is transparency and accountability for a successful resolution. Establishing a separate bank account for each project during the CIRP ensures efficient repayment to homebuyers, thereby heralding project based insolvency as solution to real-estate insolvency disputes.  Secondly, the paper puts forward the execution of registration/sublease deeds with approval of Committee of Creditors (CoC) during the CIRP. This allows the allottees to get their apartments in the case where they have fulfilled all their obligations as against the instrument of transfer. It empowers the homebuyer to obtain the units of the apartment in a “as is where is” basis alongside on the payment of balance amount, if the same is due.  Third and most prominent change, the RP now shall have the power to propose to the CoC to examine and invite separate plans for each project. An amendment hence has been suggested of the CIRP Regulations to insert a clarification right under Regulation 36A(4). This is set to give succor to homebuyers who are usually concerned with a specific project and on the other hand would benefit the developer by ensuring that his other projects are not stalled due to the moratorium if an Insolvency petition is admitted for a single project.   Lastly, the paper proposes exclusion of property in possession of homebuyers from the Liquidation Estate (Estate). This ensures and affords an opportunity to the homebuyer to occupy the units “as is where is” in order for it to not form part of the Estate, which would otherwise entitle the creditors to make a claim and sell the same in order to realize the liquidation value.  Implications and Challenges  The implementation of the discussion paper’s proposals would have far-reaching ramifications and implications for homebuyers and developers. It will affect not only those homebuyers who have their units pending in a particular project (P1) which itself has defaulted but also those homebuyers whose units are pending in other projects, who will be affected by the cascading effects caused by default in P1. By making a provision of taking the possession of the units from the developer in “as is where is”, it gives discretion to either receive a payment with a haircut or to obtain the units even if the construction is incomplete.   The proposed amendment under Section 36 of the Code provides to exclude those

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Understanding Invoice Discounting: Legal Framework, Transaction Dynamics, and Implications under the IBC, 2016

Insolvency Law /

[By Nakshatra Gujrati] The author is a student of National Law University Odisha.   Introduction In the dynamic realm of financial transactions, invoice discounting has emerged as a pivotal tool for businesses seeking to optimize their working capital. Invoice Discounting, also known as Bill Discounting, entails three key participants: the seller, the customer (who is also the debtor to the financier), and the financier, commonly referred to as the factor. The financier provides this short-term relief in exchange for a predetermined commission and discount rate, forming the core dynamics of the transaction.  This article explores the complexities of invoice discounting and its intersection with the Insolvency and Bankruptcy Code, 2016 (“Code”). Governed by the Factoring Regulation Act, 2011, (“Act”) the examination commences by delineating the fundamental process of invoice discounting and elucidating the roles assumed by the seller, customer, and financier. The article examines the dynamics of transactions between the financer and the customer, as well as between the financer and the seller. It scrutinizes the decisions rendered by tribunals, offering insights into the classification of customers as financial debtors and classification of sellers as operational debtors.  What is Invoice Discounting   Invoice Discounting, also known as Bill Discounting in trade circles, is a process where an entity can transfer its invoices (receivables) to a third-party financier, such as a bank or another financial institution. This financial entity, referred to as the “financer”, offers a bank discounting facility, providing short-term assistance in fulfilling the working capital needs of the entity that sold the outstanding bill. In return, the financer levies a designated commission and discount rate for their services.  The Factoring Regulation Act, 2011 (“Act”) regulates the practice of invoice discounting, and businesses engaged in this activity are referred to as “factoring businesses”. This Act aims to validate contracts related to the assignment of receivables. The party to whom the receivable is transferred is known as the assignee, while the entity owning the receivable is termed the assignor.  Invoice discounting typically involves three participants; the seller (sold goods and services to customer), the customer (also debtor of the financer) and the financier (commonly referred to as the factor). In this process the business sells its invoices to the financier, who provides cash. Afterwards when it comes time, for payment the customer pays the amount, to the financier.  Invoice Discounting and Insolvency and Bankruptcy Code, 2016  The section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“Code”) defines financial debt as “debt along with interest, if any, which is disbursed against the consideration for the time value of money”, including “receivables sold or discounted other than any receivables sold on non-recourse basis” as per section 5(8)(e) of the Code.   Nature of transaction between the Financer and the Customer.  The customer enlists the services of a financer to enhance their cash flow, facilitating timely bill payments with reduced risk and increased flexibility, given that such arrangements don’t necessitate collateral. However, a dilemma arises when the customer fails to fulfil payment obligations to the financer. The tribunal is confronted with the inquiry of categorizing the customer as either a financial creditor or an operational creditor of the financer.  In the case of M/s Shree Jaya Laboratories Private Limited,(“Jaya Laboratories”)  it was ruled that “an application under section 7 of the code may be maintained against the customer”.   In the instant case the financer extended its services to the customer on a recourse basis. The Master Direction- Reserve Bank of India (Financial Services provided by Banks) Directions, 2016 classifies the factoring services into three categories. These include (i) non-recourse factoring, where the financer has no recourse against the customer except in cases of fraud, misrepresentation, or failure to fulfill obligations; (ii) recourse factoring, wherein the customer remains liable to the financer; and (iii) limited recourse factoring, allowing the customer and financer to establish conditions for recourse through a contractual agreement. As per section 5(8)(e) of the code, financial debt includes receivables sold or discounted other than non-recourse basis. Hence, the relationship between the financer and customer is of financial creditor and financial debtor and thus an application u/s 7 of the code is maintainable against customer.   Nature of Transaction between the Financer and the Seller  In the recent judgment of NCLAT in Minions Ventures Pvt Ltd vs Tdt Copper Limited (“Minions Ventures”) it was held that “while discounting the invoice of sellers the financers enter into shoes of seller to become operational creditors”. It was observed that in this transaction, no funds were disbursed, let alone for the time value as a financial debt to the seller. Instead, it constituted an operational debt, as the seller provided goods and services to the customer, defining the nature of the debt between the two as operational.   Similarly, this view was taken in Jaya Laboratories while dismissing application of financer against seller under section 7 of the code.  Conclusion  The practice of Invoice Discounting, also known as Bill Discounting, plays a crucial role in facilitating working capital needs for businesses by allowing them to convert their receivables into immediate cash through third-party financiers. The Factoring Regulation Act of 2011 regulates this financial activity, defining the roles of factoring businesses, assignors, and assignees in the process.  Examining the intersection of Invoice Discounting with the Insolvency and Bankruptcy Code of 2016, it becomes evident that the nature of the transaction between the financer and the customer is one of a financial creditor and financial debtor. This is especially true when the services are provided on a recourse basis, as outlined in the Master Direction of the Reserve Bank of India. The application of Section 7 of the Insolvency and Bankruptcy Code against the customer is deemed maintainable under these circumstances.  In the context of the relationship between the financer and the seller, recent judgments, such as the one in Minions Ventures, suggest that when discounting invoices, financers assume the role of operational creditors. In these cases, where no funds are disbursed as financial debt, but rather the transaction revolves

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