Author name: CBCL

Caught in The Crossfire: IBC’s Unjust Stranglehold on Personal Guarantors

Leave a Comment / Insolvency Law /

[By Bhabesh Satapathy & Vatsala Tyagi] The authors are students of National Law University, Odisha.   Introduction In the intricate web of insolvency jurisprudence, the intersection of personal guarantees and the Insolvency and Bankruptcy Code, 2016 (“Code“) has recently been scrutinized by the Supreme Court (“SC”) in the case of Surendra B. Jiwrajika v. Omkara Assets Reconstruction Private Limited.  A personal guarantee, emblematic of an individual’s commitment to assume liability for a debtor’s obligations, has long been a focal point of legal deliberation. The SC’s verdict, ostensibly settling the fog of uncertainty surrounding personal guarantors’ obligations under the Code, manifests a pivotal development. Notably, it fortifies creditors’ position by extending the reach of the insolvency resolution process to Personal Guarantors (“PG”), effectively creating a twofold safeguard for creditors seeking recourse. However, the ramifications of this pronouncement are profound, as it curtails the protective ambit afforded to personal guarantors, thereby amplifying creditors’ leverage. This shift in legal paradigm engenders multifaceted consequences for PG, leaving them with scant recourse. The judgment, though ostensibly clearing the legal waters, leaves PG caught in a crossfire of diminished protection and heightened creditor empowerment. A Spotlight on the Essential Backdrop The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, and Notification No. S.O. 4126  empowered the initiation of insolvency proceedings against PG independently. In Lalit Kumar Jain v. Union of India, the SC has affirmed the constitutionality of these provisions, clarifying that an “involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability”. PG’s liability under the Code remains co-extensive with the corporate debtor, as per Section 128 (“S.”) of the Indian Contract Act. In the State Bank of India v. Ramakrishnan , the SC determined that S.31 (1) of the Code does not absolve the PG of their responsibilities. Further, Essar Steel India Limited v. Satish Kumar Gupta delineated that approval of a resolution plan is binding upon the PG. Ever since the contours of resolution plan against PGs were defined, its inherent neglect of natural justice has been criticised. In the present case, the constitutional bench addresses a barrage of 384 petitions questioning the constitutional validity of S.95-100. Procedural Fairness: A Hollow Framework without Natural Justice PGs have vehemently called out this blind spot as they are caught in between unfair and unreasonable screws of resolution plan. a. Violation of principles of natural justice Maneka Gandhi v. Union of India constitutionalised natural justice principles into Articles 14, 19, 21, and 22. The impugned provisions violate two principles of natural justice, namely; right to be heard (Audi alterum partem) and the prohibition of self-judgment (Nemo judex in causa sua). Top of Form The court brushed aside these contentions highlighting the following: S.99(2) offers ample representation opportunity for the debtor; S.100 complies with natural justice principles. The role of the Resolution Professional (“RP”) as under S.99 (“u/s”) of the Code, is limited to collection of facts and hence is not adjudicatory in nature. In Madhyamam Broadcasting Ltd. v. Union of India, Justice Chandrachud, observed that such principles of fairness ‘express…that to be a person, rather than a thing, is at least to be consulted about what is done with one’. However, irreversible steps from S.95-S.100 in this case lack due consultation with relevant parties. The interesting aspect of the case is, the judgement was pronounced by Justice D.Y. Chandrachud. Despite having previously integrated this procedural requirement, he conspicuously omitted it in this particular case. (Emphasis supplied) b. Inadequacy of procedural fairness The court balances incorporating constitutional morality in the Code while respecting judicial review constraints. Hence, it upholds validity of opportunity of representation u/s 99(2), it ignoring its rudimentary nature in view of the instantaneous moratorium. Interpreting S.99(10) literally, the RP must share the report with the applicant u/s 94 or 95. The  IBBI’s discussion paper dated 27th September, 2023, highlights that the current scheme of the Code, does not mandate sharing of the Report with both the parties. In the Madhyamam Broadcasting case, Justice Chandrachud emphasizes the right to know about inquiries, stating that “it is sufficient if the non-disclosure would lead to a possibility of bias and prejudice”.  The Code is ignorant towards such inchoate principles of legal justice. (Emphasis supplied) The Court tilts towards legal positivism overlooking discussion on aforementioned grounds. While it evaluates the presence of procedural provisions, it somehow failed to realise their inadequacy, leaving natural justice impotent and hence unrealised. Putting Section 96 on Trial: Examining Legal Consequences of Interim Moratorium Application under S.94 or S.95 triggers immediate interim moratorium under S.96, facing constitutional challenges for violating Articles 14 and 21. a. Fundamental Rights Under Siege Part II and II of the Code face criticism for alleged arbitrary dissimilarity, violating Article 14. The court justifies distinct stages for the AA’s involvement, citing S.96‘s debt-focused moratorium. However, the court, engrossed in doctrinal intricacies, neglects broader impacts. The debtors can exploit an automatic interim-moratorium to undermine the rights of other creditors by merely filing an application u/s 95 of Code. Further, Subramanian Swamy v. Union of India, acknowledged right to reputation as a fundamental right under Article 21. Insolvency harms reputation and strains commercial relationships. The Court overlooks the psychic consequences of interim moratorium. Breathing natural justice into the process is essential to avoid Article 21 violation.Top of Form b. Adjudication of jurisdictional facts delayed is adjudication denied Before insolvency, a “debtor-creditor relationship” is essential. Initiating resolution plan u/s 95-100 necessitates early adjudication of jurisdictional facts, which is postponed until after moratorium and RP’s report submission.Top of Form This indicates a prima facie assumption of substantial merit in the application. The Code contemplates a presumption of civil guilt over the preferred presumption of civil innocence. The scheme of the Code presents a rare anomaly wherein the merits of the claim are decided prior to the maintainability of the claim. Introducing an adjudicatory stage before S.100 might seem to compromise the Code’s time-bound nature, but it’s a myopic view. The Bombay High Court

Caught in The Crossfire: IBC’s Unjust Stranglehold on Personal Guarantors Read More »

SEBI’s Strategic Shift and the Role of Mutual Funds in Navigating Risk and Boosting Quality

Leave a Comment / Banking Law /

[By Yuvraj Sharma & Vandana Kaniya] The authors are students of School of Law, Narsee Monjee Institute of Management & Studies, Hyderabad.   Introduction In the recent SEBI circular dated June 8th, 2023, a significant change has taken place with SEBI permitting mutual funds to take part in repo transactions involving Commercial Papers (“hereinafter referred to as CPS”) and Certificates Of Deposits (“hereinafter referred to as CDs”). The regulatory authority has explicitly stated that these transactions are limited to corporate debt securities with a credit rating of AA and higher. This circular represents an expansion of the scope of repo transactions by mutual funds in the corporate debt market, signaling a significant shift in regulatory policies. In this Blog, the author(s) aims to provide a comprehensive understanding of the circular. It likely delves into the implications of this regulatory change, exploring how it may impact the behaviour of mutual funds in the corporate debt market. In addition to this, the blog may discuss the potential benefits and risks associated with allowing mutual Funds to engage in repo transactions involving CPS and CDs. Overall, this SEBI circular introduced a crucial regulatory shift that warrants careful analysis and understanding, and the blog aims to provide a comprehensive exploration of its nuances. Navigating Risk: Role of Retail Investors in Mitigating Corporate Risk Through Mutual Funds Engagement This section of the article delves into critical aspect of how the inclusion of retail investor in the corporate bonds market, triggered by increase mutual fund involvement, has the potential to not only drive market growth but also play a crucial role in. mitigating excessive corporate risk. During a repo transaction, mutual funds obtain short-term money by using corporate debt instruments as collateral. Essentially, this is borrowing money with the promise to repay it later at the going rate of interest against the value of corporate debt instruments. The purpose of such repo transactions is twofold. Firstly, it allows mutual funds to raise short-term capital addressing immediate liquidity requirements. Secondly, it provides A mechanism to manage redemption demands, offering flexibility in meeting investor redemptions. This financial tool is crucial for maintaining the liquidity and operational efficiency of mutual funds. The significance of the latest development lies in expanding the scope of rapport transactions to include CPs and CDs. CPs are defined as unsecured short-term debt regulations that companies issue to satisfy their immediate financial obligations. Conversely, certificates of deposit (CDs) are marketed as dematerialized fixed-income securities with a set maturity period that are issued by banks and other financial organizations. This development offers mutual funds more diverse options for collateral in repo transactions, potentially broadening their ability to raise short-term capital. It also reflects the adaptability of financial instruments to meet the evolving needs of market participants. Over the last decade, the corporate bonds market has exhibited consistent expansion growing by 29 trillion rupees from 2012 to 2022. Despite this growth, the absence of engagement from retail investors is impeding the market’s potential for further development. Industry experts perceive the corporate bonds market as being at a crucial turning point, where the inclusion of retail investors could trigger exponential growth. This growth has the potential to substantially alleviate the excessive corporate risk currently borne by the banking system. Increased involvement by mutual funds could incentivize retail investor participation it means if mutual funds become more involved in a particular market or investment activity, it could encourage individual retail investors to participate more actively in that market. Mutual funds actively participate in the corporate markets holding substantial share (ranking third among all categories) as of the end of the Financial Year, 2022. Recent data shows a growing trend in repo transactions within the corporate bond market. The latest SEBI circular signals a pivotal juncture for the expansion of the corporate bond market. The circular focus on increasing repo transactions for mutual funds in this market indicates a strategic move by the securities regulator to harness this potential growth. A comprehensive analysis of the circular’s modifications is essential to fully comprehend its impact. The 2023 SEBI’s Circular a. Credit Rating Revolution The latest SEBI circular introduces a significant change by broadening the investment opportunities accessible to mutual funds. This expansion of feasible investments within the corporate bond market through repo transactions is not unprecedented. In November 2012, the SEBI circular permitted mutual funds to engage in repo transactions involving corporate debt Securities rated AA or higher deviating from the prior requirement of AAA-rated securities. This relaxation of credit rating standards enlarges the pool of securities that mutual funds could involve in repo transactions. This underscores SEBI’s history of taking proactive measures to stimulate the growth of the corporate bonds market. b. SEBI’s Evolving Guidelines: A deep dive into credit rating parameters The recent SEBI circular introduces additional to provide auxiliary support for mutual funds participating in repo transactions involving corporate bonds. As well as CPs and CDs. This report introduces a constructive tradition through guidelines aimed at assessing the credit rating of exposure objections. The revised exposure emphasis a comprehensive approach in evaluating elements like the Potential Risk Class (RPC) Metrix, liquidity ratios, risk meter, and other pertinent parameters, related to underlying securities. In essence it encourage a thorough analysis of various factors to examine creditworthiness.  This enhancement supplements the original November 2011 circular, which lacked specific criteria for evaluating the credit rating exposure in corporate bond repo transactions, by introducing constructive guidelines to assess elements such as RPC metrics, and liquidity ratios. c. Amplifying Market Appeal: Impact of Circular on Bosting Confidence in Unsecured CP’s The guidelines enhance confidence in short-term debt instruments particularly relevant for unsecured CPs issued by private firms. Despite CPs being vital for short-term debt raising, their secondary market remains small. The recent circular enabling mutual fund participation in CP repo transactions alongside structured risk assessment aims to amplify the secondary markets’ attractiveness for institutional investors. Another significant change in the circular pertains to the accounting of repo transaction exposure in corporate bonds if backed

SEBI’s Strategic Shift and the Role of Mutual Funds in Navigating Risk and Boosting Quality Read More »

Correspondent Banking and Currency Internationalisation: India’s Experience

Leave a Comment / Banking Law /

[By Gurumurthy Cherukuthota] The author is a student of Symbiosis Law School, Pune.   Introduction On July 11, 2022, India’s Central Bank, the Reserve Bank of India (RBI), issued a circular announcing its decision to introduce an international trade settlement mechanism for invoicing, payment, and settlement of exports and imports in Indian Rupees (INR). The RBI’s strategic move illustrates India’s commitment to promoting cross-border transactions and fostering international trade in INR, with the visionary ambition being to establish the INR as a truly global, international currency. In pursuit of this goal, India has outlined a comprehensive plan involving several measures, including promoting the use of the rupee in international trade, relaxing restrictions, and improving accessibility to Indian markets for foreign investors by liberalising foreign exchange regulations (such as the Foreign Exchange Management (Deposit) Regulations, 2016). Two critical instruments pivotal in achieving these goals are the Special Rupee Vostro Accounts (SRVAs) and Correspondent Banking. By promoting the adoption of SRVAs and Correspondent Banking, India aims not only to boost the visibility and acceptance of the INR as an international currency but also to solidify its position as a burgeoning global economic superpower. Notably, India has already demonstrated its commitment by engaging in bilateral trade with Russia in INR. While financial liberalisation does not inevitably guarantee currency internationalisation, correspondent banking emerges as a crucial factor in facilitating cross-border transactions. The general decline in correspondent banking, influenced by factors such as anti-money laundering regulations, risk perceptions, and uncertainties, underscores the need for a workable and efficient framework. Recognizing the limited role of the Indian Rupee in trade invoicing and settlements due to convertibility and risk management issues, India’s strategic move towards trade settlement in INR with Russia, amid global uncertainties, stands out. This not only safeguards bilateral trade but also positions India strategically to leverage the vulnerabilities in global monetary supply chains, opening up avenues for trade with BRICS and other Asian nations. In essence, the trajectory set by India, as guided by the RBI’s Circular, demonstrates a determined effort to elevate the INR’s status on the international stage. This move aligns with the evolving landscape of the global financial infrastructure, emphasising the role of correspondent banking and innovative approaches in shaping the future of international economic and financial activities. In this context, the article examines the role of correspondent banking in the process of currency internationalisation, conducting a comprehensive analysis of the potential challenges and solutions for establishing the INR as an international currency, drawing insights from India’s experience with Russia. Correspondent Banking and Internationalising INR Correspondent Banking is vital to India’s efforts to globalize the INR. It encompasses a financial relationship between two institutions, where one bank (correspondent bank) offers banking services to another (respondent bank). In India’s case, the RBI has been encouraging the use of Correspondent Banking as a means to promote the international use of the INR. The RBI has introduced the concept of SRVAs, which are rupee-denominated accounts held by foreign banks in India. Regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016 empowers Authorised Dealer (AD) banks to open Rupee Vostro Accounts. These accounts allow foreign banks to hold INR balances and facilitate cross border and international trade settlement in INR with India, thereby eliminating the need for using other currencies like the USD and the Euros, among others. India’s Experience with Russia: Challenges to Overcome In pursuit of internationalising the INR, India has been actively promoting trade settlements with other countries in INR, such as Russia and several other Asian and neighbouring countries. In 2022, India and Russia entered into an agreement to settle bilateral trade in INR to reduce dependency on the USD and avoid currency exchange risk/volatility. In furtherance of the same, several Russian banks have already opened Vostro accounts in India. This move is expected to reduce transaction costs, increase the volume of trade between the two countries and encourage other countries also to adopt this model. A critical appraisal of India’s experience with Russia would be incomplete without examining the inherent challenges associated with this model. One of the foremost challenges lies in the limited acceptance and liquidity of the INR in the global markets. The INR has not yet attained widespread recognition as an international currency, consequently restricting its liquidity in global markets. Russia’s willingness to transact with India in INR is not rooted in the strength and global standing of the currency but rather emerges from the global economic sanctions imposed on Russia, along with being banned from using the SWIFT gateway, as a result of the Russia-Ukraine war. Therefore, the real test would be to assess Russia’s commitment to this model once the sanctions are lifted. Another significant challenge surfaces in the form of India’s substantial oil imports from Russia, which have considerably augmented India’s current account trade deficit with Russia. Settling all imports in INR would potentially lead to excessive accumulation of INR for Russia, limiting its utility as a medium of exchange with nations that accept INR for trade. This predicament has already forced India to partially compensate Russia in UAE’s Dirhams, underscoring the necessity for wider acceptability of the currency to ensure the success of this model. The inadequate development of India’s financial infrastructure emerges as an additional obstacle. To facilitate international trade transactions in INR, substantial investments in technology and human resources are imperative, highlighting the need for a robust and comprehensive financial infrastructure and framework. Moreover, regulatory and operational challenges must also be addressed to support international trade settlements, necessitating the establishment of Correspondent Banking (CB) relationships through modifications to existing frameworks in India and the participating nations. Key areas demanding adaptation include further amendments to regulations under the Foreign Exchange Management Act, 1999 (FEMA) for accommodating INR settlements, the formulation of specific guidelines for cross-border transactions in INR, and the development of a structured regulatory framework for CB relationships addressing anti-money laundering (AML) and counter-terrorist financing (CTF) compliance. Harmonising regulatory standards among participating countries is also crucial. Additionally, addressing inadequacies

Correspondent Banking and Currency Internationalisation: India’s Experience Read More »

Dark Patterns and Antitrust Laws: Shedding the Light on the Artificial Barriers

Leave a Comment / Competition Law /

[By Madhav Tripathi] The author is a student of RMLNLU, Lucknow.   Introduction Recently, a piece of news that made headlines in the antitrust arena of the world is that the Federal Trade Commission (hereinafter FTC) accused the e-commerce giant Amazon of duping millions of Americans by getting them to do recurring subscriptions of Amazon Prime by taking their consent illegally and also making hard for them to cancel it. According to FTC, Amazon has used ‘dark patterns’ to trick consumers into enrolling in automatically renewing Prime subscriptions, seeking civil penalties and a permanent injunction to prevent future violations. Nowadays, digital businesses are snowballing, especially in the post-Covid era, where the digital economy is the new normal. One of the many tactics these giants have used successfully to proliferate and crush their competitors is the “Dark Patterns”. Dark Patterns have many sub-types. One of them  is tricking users with different manipulative schemes influencing the choice of users on the internet. The article will try to analyze this aspect of the dark patterns and how the tech giants use them for their benefit. It will try to shed light on the latent harm  of the “Dark Patterns” on the market, and how this practice violates the antitrust law of the country. . The article will further delve into the current anti-trust framework of the country and analyse the extent to which the present Indian anti-trust regime is equipped to tackle this particular challenge. Demystifying Dark Patterns: Uncovering Manipulative User Interface Techniques In the words of  Harry Brignull, a user experience researcher in the U.K., Dark Pattern is a design or user interface technique intentionally crafted to manipulate or deceive users into making certain choices or taking specific actions that may not be in their best interest, such as buying overpriced insurance with their purchase or signing up for recurring bills. A few common examples of ‘dark patterns’ are spam mailing, confirm shaming, nudging, roach motel, etc. Dark patterns are numerous and exploit myriad biases in individuals. Amazon, for example, displays information on the number of stocks left for the product that one is currently viewing on its website. It is known as ‘scarcity bias’. It tends to emotionally nudge the customer into buying a product he would not have bought otherwise. In another instance, Spotify indulges in dark patterns through the ‘roach motel’ technique, which makes opting out of a subscription hard and cumbersome, thus increasing the chance of a continued subscription. Now, after understanding the modus operandi of these tech -giants, our focus must be to understand  the rationale behind such activity? If we see from a perspective, these big techs are referred to as giants because of the range of services they offer, catering to billions of customers across the globe. They have entered into every market and want to make every customer as their customer because they are presenting themselves as a “one-stop shop” for every product, which when done illicitly on the e-market, gives rise to the phenomenon called the “Walled Garden Approach”. Explaining the Phenomenon of Walled Garden Approach The definition explains the phenomenon as- On the internet, a walled garden is an environment that controls the user’s access to network-based content and services. It directs the user’s navigation within particular areas to enable access to a selection of materials or prevent access to other materials. It does not always prevent users from navigating outside the walls, but often makes it more difficult than staying within the environment. Apple’s App Store is a prime example of the use of a walled garden.Now, looking our current examples of Amazon or Spotify through the lens of the aforementioned definition, we can   undertand rrthe rationale of their modus operandi. In today ‘s internet universe, these giant firms are “world of themselves”. Amazon caters to every kind of customer when he/she takes its Prime membership. A Prime member to binge-watch uses “Amazon Prime”, to buy something, uses “Amazon e-commerce”, and, when paying for that, uses “Amazon Pay”. To listen to music, there is “Amazon -music”, which connects by using “The Amazon Eco-dot device”. This means in the world of Amazon; prime membership is a ticket. Once you enter it, Amazon will try all methods to compel the customer not to leave “Amazon’s Platform for another alternative platform” which throws light on the anti-trust angle. One such method is “Scarcity Bias”. As we saw in the example above, Amazon Compels the user by manipulation; after understanding that the user has spent considerable time on one product and likes the product, Amazon will trick the customer by showing “few left in the stock”. The user gets manipulated, does not check the same product on the other alternative and buys from Amazon. From this whole chain of actions, the rationale that we can understand is that –Amazon uses a “dark pattern” to “Wall Garden “its customer manipulating them not to leave its platform to avail the same service from other platforms. The recent accusation by FTC of forcing the customer to buy the prime or continue it or making it hard for them to cancel is also because of the same rationale of keeping the customer in its “Walled Garden.” Explaining the Anti-trust Angle in the Walled Garden Approach To understand the anti-trust angle in the Walled Garden Approach , we first need to understand the genesis of competition law beyond anti-competitive agreements or Abuse of Dominance. Competition means “In the commercial world, a striving for the customer and business of people in the marketplace making profits by the business strategies endeavor rather than any other illicit, unscrupulous or under-hand tactic and the prices of commodities is being dictated by the law of demand and supply. Now, when we talk about the market, is an open market where every entity can be seen, and no other entity can act as a barrier to the presence of other competitors. As when an entity becomes a barrier, this act can cause non-price injury to

Dark Patterns and Antitrust Laws: Shedding the Light on the Artificial Barriers Read More »

Applicability of Equitable Doctrines in Withdrawal of Tax Exemption Benefits: A Judicial Analysis Pre- and Post-GST Regime

Leave a Comment / Taxation Law /

[By Vaisiya Ramya B.] The author is a student of Tamil Nadu National Law University (TNNLU). Introduction: In the pre-GST regime, the government to promote the investment and manufacturing sector rolled out various area-based excise and Value Added Tax (VAT) exemption schemes through the power conferred under section 5A (1) of the Central Excise Act, 1944, and the state-specific acts. However, with the implementation of GST, the Central Government withdrew these area-based exemptions, causing concern for taxpayers who had heavily invested in those regions based on the government’s promises. This resulted in an outcry from the trade sector, advocating for the continuation of these exemptions under the GST regime. Consequently, a budgetary scheme was introduced by the government but its effectiveness seemed cumbersome,  amidst existing unresolved judicial trends on the applicability of the equitable doctrines of promissory estoppel and legitimate expectation in cases of withdrawal of tax exemption benefits, which ensures consistency in the public authority decision-making, and fairness in tax administration. Thus, this article examines the rules of interpretation of tax exemption provisions and the judicial trend concerning the applicability of the equitable doctrines to the withdrawal of tax exemption benefits pre- and post-GST regimes. Rules of Interpretation and Construction of Tax Exemptions: Tax statutes are generally interpreted strictly based on their literal and direct grammatical meaning, without considering their consequences. In such cases, equity and presumptions cannot be relied upon, and the legislative intent cannot be read into the law. However, it is important to distinguish between the interpretation of a charging provision and an exemption clause or notification. The issue of ambiguity in the interpretation of tax exemption clauses or notifications, which can lead to two possible outcomes, has sparked a debate as to whether a strict or liberal interpretation should be adopted in such cases. This matter has been the subject of contention in several cases, leading to the establishment of new interpretative standards. In 1997, the Supreme court in  Sun Export Corporation v. Collector of Customs[i] dealt with the question of interpreting the term “animal feed” to include a blend of vitamin AD-3 animal feed supplements for the purpose of claiming a tax exemption benefit. The Court here held that in matters of taxation, when there are two possible interpretations, the one favourable to the assessee should be preferred, reflecting a leaning towards the liberal interpretation. In 2012 asimilar, stance was adopted by the court in the case of Commr. of Customs (Import) v. Konkan Synthetic Fibres. However, in contrast, in 2018 the constitutional bench of the Supreme Court in the Commr. of Customs (Import) v. Dilip Kumar  overturned the ratio established in the Sun Export case and other judgments that adopted a similar stand. And held that when there is ambiguity in an exemption notification, it is subject to strict interpretation and it must be interpreted in favour of the revenue rather than the assesee. Also in 2022,  the court in the State of Gujarat v. Arcelor Mittal Nippon Steel (India) Ltd, determined that the exemption notifications or clauses should be strictly interpreted, only resorting to purposive interpretation in cases where a statutory provision is unclear or leads to irrational outcomes. Following that interestingly in 2021, the apex court revisited the issue of interpretation of tax exemption in the case of  Govt. of Kerala v. Mother Superior Adoration Convent but this time it agreed with earlier rulings on a strict interpretation of the tax statute and introduced a new line of precedent regarding beneficial exemption, establishing that even in tax exemptions, a liberal interpretation may be sought to provide an incentive for “fostering economic growth or other beneficial purposes.” Accordingly, it can be comprehended that the general rule states that the ambiguous provisions imposing liability should be strictly interpreted in favour of the assessee, while exemption clauses should be construed in favour of the revenue. However, this rule is not rigid and has undergone changes over time, particularly in cases involving economic growth or beneficial purposes, where a more liberal interpretation of exemption provisions has been adopted. This is done for the purpose of advancing the objective of the exemption clause and promote the ease of doing business. Incentive provisions deserve such treatment as the purpose of encouraging industrial activity will otherwise get frustrated and also would affect the domestic and foreign investment on local businesses. Judicial Trend in applicability of Equitable doctrines in Withdrawal of Tax exemptions: Pre- and Post-GST Regime: Position Pre-GST Regime: In MRF Ltd. Kottayam v. Assistant Commissioner Sales Tax & Ors. the court while examining the question of whether processing raw rubber with chemicals qualifies as “manufacture” to claim tax exemption citing Section 38A(c) of the Central Excise Act, 1944 noted that tax exemption notifications apply prospectively unless there are overriding public interests, thereby the state is not permitted to make retrospective changes that impair rights that have already accrued. Thus, ruling in favour of the assessee concluded that the tax exemption notification is not revocable. Similarly, in Bannari Amman Sugars Ltd. vs. Commercial Tax Officer & Ors, the court observed that if a decision maker denies a person’s legitimate expectation by demonstrating some superseding public interest, then the rejection of that expectation is justified. Further in State of Bihar v. Kalyanpur Cement Ltd. and Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P., the court reaffirmed the principle that indefinite and unexplained justifications and a simple assertion of change of policy would not be enough to absolve the Government of its responsibility. However, in contrast, in Shrijee Sales Corp. v. Union of India,  the court observed that the government is competent to revoke a promise even if there is no evident public interest involved, provided no one is placed in an adverse situation that cannot be resolved. Hence, it can be inferred from the majority of the judicial decisions that the establishment of overriding public interest forms the pre-requisite for withdrawal of tax-exemption benefits prior to be appointed date. This thereby introduces an exception to the established rule of promissory estoppel and doctrine of legitimate expectation.

Applicability of Equitable Doctrines in Withdrawal of Tax Exemption Benefits: A Judicial Analysis Pre- and Post-GST Regime Read More »

Unveiling the Shadows: Legal Implications of “Accustomed to Act” with relation to Shadow Directors

Leave a Comment / Company Law /

[By Divyansh Bhatnagar & K Prashant Agrawal] The authors are students of Damodaram Sanjivayya National Law University.   Introduction The concepts of Related Party and Shadow Director and the implications of the phraseology “any person in whose advice, directions, or instruction the Board of Directors of a Company is accustomed to act” involves jurisprudence of utmost relevance to corporate law in India and foreign jurisdictions. The jurisprudence of the phrase has abundantly been utilized in corporate law legislations in India, namely the Companies Acts of 1956 and 2013 as well as the IBC, 2016. It is also evident in foreign jurisdictions, such as the UK Companies Act of 1948, the Australian Corporate Act, 2001, and the Singapore Companies Act, 2006. Sec. 5 of the Companies Act, 1956 establishes the meaning of “officer who is in default”. The section mentions that any person under whose directions or instructions the Board of Directors of the company is accustomed to act may be designated an officer who is in default and shall be liable to any punishment or penalty where a company undertakes such illegal or noncompliant acts. Similarly, Sec. 2(69) of the Companies Act, 2013, defines who a “promoter” is, states “in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. Similar usage of the phrase is found in definitions of “officer”, “officer in default”, and “Related Party” under Sec. 2(59), (60), & (76) respectively of the Companies Act, 2013. The concept of a related party is of utmost importance to understanding the intention behind these provisions. Related Party The definition of “related party” is broad, both concerning an individual and with regard to a business, therefore identifying the parties included would need careful consideration. A company’s KMPs as well as some relatives are considered related parties. Companies must make sure that a procedure for updating the related parties list is set up with consideration for any potential external modifications. For instance, in order to guarantee that all subsidiaries comply and adhere, any modifications to a holding company’s KMPs must be informed to all of them. Although the majority of the definition of a related party is fairly clear-cut, one must exercise discretion when interpreting the term person to refer to someone whose advice, directions, or instructions a director or manager is “accustomed to act” upon. The 2013 Act does not introduce the idea of being “accustomed to act.” A person who imparts the advice, instructions, or orders that a director, manager, or the board is used to acting upon is commonly referred to as a “shadow director.” A similar idea was present in the 1956 Act. Shadow Directors The primary purpose of the law’s reference to “shadow directors” is to designate individuals whose instructions the board of a firm is customarily following. Shadow directors are individuals who are not technically appointed to the board but who still have the ability to exert absentee control over the board due to their ownership of shares or advantageous control over the business. Such a person is a “deemed director” even though they do not officially possess the title of director. Accordingly, related parties would include a ‘shadow director’ i.e., any person under whose advice, directions, or instructions the company’s director or manager or board of directors is accustomed to act. It is necessary to demonstrate that the company’s directors followed the ‘alleged’ shadow director’s instructions rather than using their discretion or judgment in order to establish shadow directorship. The phrase “accustomed to act” calls for general behavior from the directors, demonstrating that they routinely follow the guidelines or orders of the relevant third party (the “shadow director”). The concept appears to be to hold accountable (as “related parties”) those individuals who actually control the company and are able to direct its affairs by designating as directors their own delegates or individuals who are subservient to them. The term is intended to identify those, other than professional advisers, with real influence over corporate affairs. Judicial Interpretation & Application Judicial pronouncements by the Indian courts and tribunals, although relatively few, have been able to effectively interpret and help further demonstrate the application of the phrase and interpretation of related concepts in the Indian context. In the case of Raj Chawla v. SEBI,[i] the Delhi High Court quashed a criminal complaint against the petitioner. He was not found to be in a position where he could control corporate affairs as a director or as an executive of the company, and he was not found to be a person under whose advice, directions, or instructions the company was accustomed to act at the time the company conducted the incriminating act. In Re: Issuance of Optionally Fully Convertible Debentures by Sahara India Real Estate Corporation Limited and Ors.,[ii] a Sahara India Group company had issued a red herring prospectus following which Mr. Subrata Roy Sahara was served a Show Cause Notice for the same. He contested the notice by stating that since he was neither in a directorial nor a managerial position in the company in question. However, SEBI held that Mr. Sahara, apart from being the founder of the Sahara Group, was a major Shareholder in the company. Hence, he was adjudged to be a person in whose directions or instructions the Board of Directors of the Company was accustomed to act and, therefore, he falls within the ambit of “Officer in default.” In the case of Cyrus Investments v. Tata Sons & Ors.,[iii] the NCLT while determining whether Mr. Tata could be referred to as the “Shadow Director” interpreted the term and mentioned how it was slightly differing from “Officer in Default”. The NCLT stated that the term “shadow director” itself suggests that the individual in question is one who subtly induces another person to act in a way that is against the law or otherwise prohibited. Consequently, the idea of a “shadow director” cannot be compared to the recommendations and counsel offered by Mr. Tata. Moreover,

Unveiling the Shadows: Legal Implications of “Accustomed to Act” with relation to Shadow Directors Read More »

MCA’s Latest Move – Inconsistency with the Insolvency and Bankruptcy Code, 2016

Leave a Comment / Insolvency Law /

[By Uravi Pania] The author is a student of National Law School Of India University, Bengaluru   Introduction In May 2023, the National Company Law Tribunal (hereinafter the ‘NCLT’) admitted Go First’s insolvency plea with regards to default of around Rs. 2660 crores to its aircraft lessors and of Rs. 1202 crores to its vendors. The National Company Law Appellate Tribunal (hereinafter the ‘NCLAT’), on an appeal contending that the plea of insolvency was malicious, upheld the NCLT’s order and presently, the airline company is undergoing the Corporate Insolvency Resolution Process (hereinafter the ‘CIRP’), with Shailendra Ajmera as the resolution professional. Post the NCLT’s order, a moratorium mandated by section 14 of the Insolvency and Bankruptcy Code 2016 (hereinafter the ‘Code’) was imposed, which prohibited the initiation of any proceedings, transfer of assets or legal rights, foreclosure of securities or, recovery of any property of the Corporate Debtor (hereinafter the ‘CD’).  A major question arose in the midst of the matter regarding the rights of the aircraft lessors, who faced a bar on recovering the same due to the imposition of a moratorium under section 14 of the Code. The Ministry of Corporate Affairs (hereinafter the ‘MCA’) and the Ministry of Civil Aviation appeared to be in support of differing positions regarding the aircraft lessors’ rights vis a vis the moratorium. However, the MCA via a notification dated October 3, 2023, exempted the application of s.14 moratorium on transactions, arrangements or agreements, relating to aircraft, aircraft engines, airframes and helicopters. This post analyses the exemption notification vis-a-vis the aims of the Code to highlight its inconsistency. It argues that the notification violates principles of insolvency process in India and, that the utilisation of a notification route leads to an inadequate adoption of the Cape Town Convention (hereinafter the ‘CTC’). India being a signatory to the Convention, planned to ratify it through the Cape Town Convention Bill, which has not been introduced yet. Not only is this mechanism of implementing provisions of the Convention procedurally deficient as the CTC has not been ratified yet, but it also principally goes against the Insolvency and Bankruptcy Code. The scope of this post is limited to the latter proposition. Firstly, the exemption of lessors from the moratorium goes against the underlying principles of the Code, which includes not just credit recovery but also managing and sustaining a stressed firm’s operations and helping its resolution. Secondly, by utilising the notification route, the government has brought in inadequate application of the CTC, making the present Code incompatible with it—though the Convention provides for a gradual and balanced approach, the same cannot be incorporated into India’s insolvency proceedings without an amendment of the Code. Aviation Industry’s Demands India’s aviation market consists of a large share of 80% leased aircrafts as compared to purchased ones due to its cost-efficiency, enabling airlines to provide low-cost airline services too. However, with Go First filing for insolvency, its market share declined, leading to a surge in market shares as well as the prices of its competitors. Additionally, on the admission of the insolvency application by the NCLT, Go First’s aircrafts entered the protection of the moratorium period as provided by section 14 of the Code. The lessors of Go’s aircrafts filed interlocutory applications before the NCLT, to which the Tribunal held that the recovery of the leased aircrafts couldn’t be made due to the moratorium. Thus, section 14 prohibited the aircraft lessors from initiating any proceeding to recover the leased aircrafts. However, with the MCA notification, the moratorium would be exempted and, aircraft lessors would be able to recover their aircrafts. Disagreement with IBC Principles The Code’s inception in 2016 brought in a streamlined procedure to deal with reorganisation of assets in a time-bound manner and aimed to balance and maximise multiple stakeholders’ interests. The Supreme Court noted the object of the Code to be discerned by the Preamble of it—that it is “first and foremost a code for reorganisation and insolvency resolution of corporate debtors”. It also observed that IBC seeks to ensure revival and continuation of the CD from its own management as well as from a corporate death through liquidation. This view has been consistently argued and affirmed by various Courts and Tribunals. Protecting assets of a CD is significant towards treating it as a going concern, which is also another important objective of the legislation. The MCA notification exempts section 14 from “transactions, arrangements or agreements, under the Convention”. The Convention allows for the possession of the aircraft to be returned to the creditor on occurrence of an “insolvency related event”. Such allowance goes against the very essence of section 14 of the Code as section 14(2A) of the Code provides that an Interim Resolution Professional (IRP) or the Resolution Professional (RP) can prevent such return if the supply of such goods or services is critical for value of the CD or to manage its operations. It is evident that aircrafts would be critical to preserve the value of an airline business as well as to manage its operations. The Supreme Court in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, considering an ipso facto clause in a power purchase agreement (PPA), held that the “going concern” status of the debtor would be nullified if the PPA was terminated. The PPA would be the “sole basis for the CD’s existence” and its termination would affect the going concern status of the CD. The Court considered section 14(2) and 14(2-A) to maintain the status of a CD as a going concern and that it should not be hampered on insolvency. A similar reasoning can be extended to the essentiality of the aircrafts for airline corporate debtors. Aircrafts are the sole basis of airlines and termination of aircraft leases on insolvency will affect the going concern status of such CDs. This violates the existing jurisprudential reasoning of section 14 of the Code, as employed by the NCLT tribunal while considering Go First’s lessors’ pleas as well. The tribunal observed that

MCA’s Latest Move – Inconsistency with the Insolvency and Bankruptcy Code, 2016 Read More »

Analysis of SEBI’s Consultation Paper on Review Voluntary Delisting Norms

Leave a Comment / Capital Markets and Securities Law /

[By Aryan Dama] The author is a student of Maharashtra National Law University, Mumbai. Introduction – The Process and The History In August 2023, the Securities and Exchange Board of India (‘SEBI’) floated a consultation paper to review voluntary delisting norms under the SEBI (Delisting of Equity Shares) Regulations, 2021 (the ‘Regulations’). Under the Regulations, to delist a company, the acquirer must provide an exit opportunity to all public shareholders of the company at a price discovered using the reverse book building process (‘RBB’). The RBB process begins with the calculation of a floor price in accordance with the Regulations. The acquirer can also provide an indicative price, which must be higher than the floor price. Second, public shareholders are required to tender their shares in favor of the acquirer through stock exchanges. If the shareholding of the acquirer does not cumulatively reach 90% (acquirer’s shareholding + shares tendered by the public shareholders in the acquirer’s favor), then the delisting is failed. Third, if the cumulative shareholding of the acquirer does reach 90% then a discovered price is determined based on eligible bids by the public shareholders. Fourth, the acquirer has the option to either accept (which would mean that the acquirer has agreed to buy the shares at the discovered price) or reject the discovered price. If the acquirer rejects the discovered price, then it can give a counteroffer at a price not less than the floor price. Fifth, the shareholders are allowed to tender their shares at the counter-offer price. If the post-counter-offer shareholding of the acquirer reaches 90%, then the delisting is successful. India is the only country that follows the RBB process. The RBB process was adopted in 2003. It was felt that the exit price offered under the fixed-price process then did not justify company fundamentals and its true worth. Moreover, minority shareholders felt compelled to sell their shares at the offered exit price, even if it was not attractive enough, or else they held a potentially illiquid stock. Thus, the RBB process was adopted – to harmonize the interests of the acquirers and shareholders. However, the RBB process has been far from successful prompting SEBI to keep making amendments to the delisting regulations from time to time. The changes proposed in the consultation paper are the latest slew of changes proposed to the Regulations, hopeful of ensure a smooth delisting of companies. Practical inefficiency of the RBB process Year Name of Company Floor Price (₹) Discovered Price (₹) Premium Public Shareholding Comments 2023 Shreyas Shipping & Logistics Ltd. 375 (indicative) 870 138.35% 29.56% Discovered price rejected. Counter offer of ₹400.   TTK Healthcare Ltd. 1,201.30 – – 25.44% Insufficient tender by public shareholders.   R Systems International Ltd. 262 – – 47.4% Insufficient tender by public shareholders. 2022 Universus Photo Imagings Ltd. 567.43 1,500 164.34% 25.45% Discovered price rejected by acquirer.   Jindal Photo Limited Ltd. 268.04 – – 27.28% Insufficient tender by public shareholders.   Xchanging Solutions Ltd. 39.23 – – 25% Insufficient tender by public shareholders. 2021 Shyam Telecom Limited Ltd. 6.15 – – 33.84% Insufficient tender by public shareholders.   Brady and Morris Engineering Company Ltd. 61.04 750 1128.70% 26.25% Discovered price rejected by acquirer. 2020 Vedanta Ltd. 87.25 – – 49.87% Insufficient tender by public shareholders.   Hexaware Technologies Ltd. 264.97 475 79.27% 37.92% Successful but at high premium. As evident, the two main causes of the failure of the RBB process are i) insufficient tender by public shareholders and ii) unrealistically high discovered price. Insufficient tender by public shareholders and high discovered price bring the delisting process to the end as the 90% threshold is not met or the discovered price is rejected by the board of directors of the respective company.  Thus, these two issues are the premise upon which SEBI has proposed the changes in the consultation paper. But before we move ahead to discuss the proposed changes, I think it is important to understand some inherent issues in the RBB process to truly appreciate the proposed changes. Fundamental problems with the RBB Process The RBB process is restricted to very limited participants – the public shareholders. Let us juxtapose the RBB process with the booking building (‘BB’) process used in an initial public offering. The BB process is open to the entire market, allowing for forces of demand and supply to operate freely. Since the sample size is so big, it results in a relatively fair price discovery. However, since the RBB process is open only to the public shareholders of the delisting company, the forces of demand and supply are not able to operate freely. Since the sample size is small, the determination of the discovered price is prone to manipulation by shareholders. Thus, the RBB process fails. Further, the exit price should be suggestive of the price the buyer is willing to pay. In the RBB process, the only reference points for the shareholders are the floor price and/or the indicative price. It is important to understand that neither of these prices is an actual representation of the price the acquirer is willing to pay for the strategic value of the company. This was also acknowledged by SEBI in the form that delisting without the knowledge of what the acquirer is willing to pay leads to a lot of speculation. This lack of information is a double-edged sword as it creates a scenario where the shareholders can either squeeze out the maximum price from the acquirer based on the idea that the acquirer might be willing to pay more, or it results in exploitative amounts of premium being sought. The uncertainty also causes the public shareholders to not tender their shares at all. These fundamental conceptual issues related to the RBB process along with the practical efficiency of the RBB proves as understood in the case studies prompted  SEBI to propose the changes in the voluntary delisting norms through the consultation paper. Solutions Proposed in the Consultation Paper As a part of the

Analysis of SEBI’s Consultation Paper on Review Voluntary Delisting Norms Read More »

Android Antitrust Case: Diving into Effect-Based Approach of CCI

Leave a Comment / Competition Law /

[By Aryan Rawat] The author is a student of National Law University Odisha.   Introduction At the outset, the competition watchdog of India has booked Google, the creator of Android operating system for a barrage of anti-competitive restraints and abuse of dominant market mechanisms in the licensable mobile operating systems. As its zenith, Google has dominance in India with a monopoly of 99.74% share in the web search market raising concerns over the level playing field for other players. In this discussion, the test of effect-based analysis for establishing dominance by Google in relevant markets has been implemented and its relevance in India and the EU has been brought to light. The article implores the probe by CCI and NCLAT’s orders against Google while examining the way forward for antitrust suits for big techs in India. Test for Dominance: Checks and balances Through a series of decided cases, it has been a common judicial norm to use effect analysis to prove the dominance in digital markets. In Indian National Shipowners’ Association (INSA) v. ONGC Case No. 01 of 2018, a reasonability and fairness test has been instrumented to find out how the conditions lead to the dominant power of an enterprise and also examine the objective necessity for an enterprise to impose such conditions. The test of dominance need not be proved individually for every unit of an enterprise and the existence of abuse by parent company is enough to establish the liability for abuse. However, while dealing with cases like Faridabad Industries Association v. Adani Gas and GHCL Ltd v. Coal India, the effects-based approach was not adopted which marks the inconsistency in the application of the effects analysis test. In the European Union, under the ambit of the Treaty on Functioning of the European Union (TFEU), the courts have adopted the effect-based approach while dealing with dominant position and exclusionary abuse created by an entity. Precisely, Article 102 of the TFEU deals with abuse of dominance in relevant markets and is in cohort with Section 4 of the Indian Competition Act of 2002. Also, the European Couts of Justice have booked Google for anti-competition practices in compliance with Article 102 in 2018.  ‘Dominance’ as referred to in Article 102 of TEFU would mean “a position of economic strength on the relevant market by giving it the power to behave independently to an appreciable extent of its competitors and ultimately of its consumers.” The effect-based approach has been implored to develop a comprehensive framework to identify consumer harm and point out anti-competitive foreclosures. In the Intel v. Commission case, it was held that ‘exclusionary abuses’ can be considered only after a conclusive process of effect analysis to decide on the dominance factor of an entity in the market. This indicates that conduct will be termed as abusive and illegal only if it will deter competition, have anti-competitive effect and reproduce exclusionary effects. One of the issues that arose in the Google Android case was the application and necessity of an effects-based test and NCLAT, in appeal has decided in the affirmative regarding the usage of the effect-based perspective to check the dominance of Google in the market. The step is in adherence to establishing semblance with EU Competition law. In past, Indian antitrust adjudicating authorities have been lukewarm and inconsistent in adopting the effect-based approach, unlike EU. The approach is evolving towards the effects of dominance and not only protecting the competition but also the competitors. Facts deciding the faith of Google The parent company of Google, Alphabet has been faced with numerous antitrust investigations and proceedings in jurisdictions across the globe. With advancements in technology, Google has diversified its services and developed the Android Operating System, which is used by about 80% of smartphones worldwide, further widening the consumer reach by launching breakthrough applications and software in the Android smartphone industry.  However, these numbers serve as a trembling disadvantage to original equipment manufacturers operating in the Android market. The competition watchdog of India has condemned dominance created by Google services like Chrome, YouTube, and Google Play Store in contravention of Section 4 of the Act and imposed a penalty of INR 1337.76 crore vide Section 32 of the Act. The investigation was conducted by Director General and the final report chalked out the issues pertaining to anti-competitive practices. The dynamic nature of digital markets has  called in new forms of competition by creating network effect and multi-sided markets which are challenging to analyse under the traditional competition law jurisprudence. The tendency of consumers to not shift to new systems due to high switching costs or limited portability of data causes barriers to entry in digital markets.  The issues framed by the CCI are evidently similar to the antitrust proceeding by the EU where Google was fined 4.34 billion euros for strengthening the dominance of Google’s search engine. For the analysis of the anti-competitive practices and Google’s dominant position, CCI has delineated five relevant market(s) which are (i) licensable OS for smart mobile devices, (ii) apps stores, (iii) general web search services, (iv) non-OS mobile web browsers and (v) market for online video hosting platforms (OVHP) in India. Under Section 27 of the Act, the Commission has ordered Google to modify the agreements in contravention of fair coemption and innovation. The lawsuit can be traced back to 2018 when CCI adjudicated a complaint case in Mr. Umar Javeed & Ors. v Google LLC , where the Google services were called into question for scrutiny under section 4 of the Act. Although the paramount position in occupied by Google by owning Android’s governance model, deciding the roadmap, restrictive compatibility of Google forks and charging a commission of 30% for all in-store purchases. Appeal to NCLAT against CCI Orders The orders and penalty imposed by the CCI have been appealed by Google in National Company Law Tribunal (NCLAT) and the tribunal has admitted the appeal on submitting 10% of the imposed penalty. CCI imposed INR 1337.76 crore for violation of

Android Antitrust Case: Diving into Effect-Based Approach of CCI Read More »

Scroll to Top