Author name: CBCL

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

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,

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

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

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

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

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

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

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Navigating Insolvency Challenges: Insights from UK’s Legal Approach

Insolvency Law /

[By Philip John] The author is a student of the National University of Advanced Legal Studies, Kochi   Introduction The evaluation of the Insolvency and Bankruptcy Code (IBC) in India necessitates an insightful comparative analysis with insolvency laws in international jurisdictions. This article places a magnifying glass on the United Kingdom’s (UK) Insolvency Act of 1986, a legislation in the realm of insolvency, and juxtaposes it with India’s own Insolvency and Bankruptcy Code 2016. Moreover, the context is enriched through references to the Recast Insolvency Regulation and the Cross Border Insolvency Regulations of 2006. Historical Shift and Comparative Approach The historical evolution of insolvency laws in the UK has manifested a leaning towards safeguarding debt holders’ interests at the expense of debtors. However, the transformative Cork Report marked a pivotal juncture by catalysing an increased recognition of the imperative of corporate rescue and the survival of companies as growing concerns. This paradigm shift underscores the pivotal significance of rescuing distressed entities to preserve competitiveness and ultimately benefit creditors, employees, and business owners. This paradigm shift is encapsulated in the enactment of the Insolvency Act of 1986, which concretized provisions for rescuing and rejuvenating viable segments of companies undergoing financial turmoil. Influence of EU Membership and Brexit The regulatory framework of the UK was profoundly influenced by its membership in the European Union (EU). This phase saw the ascendancy of the Recast Insolvency Regulation, which assumed a commanding role post-June 26 2017, governing insolvency proceedings initiated during this period. This regulation superseded the Insolvency Regulation Act and exemplified the influence of EU membership. However, the formal departure of the UK from the EU necessitated a recalibration, contingent on potential future agreements. Post-Brexit, the Insolvency (Amendment) (EU Exit) Regulations of 2019 upheld the applicability of the Recast Insolvency Regulation for insolvencies where primary proceedings were instigated prior to December 31 2020, thus ensuring continuity within the EU. Regulation 1346/2000, a landmark introduction, facilitated streamlined cross-border insolvency processes within the EU framework. It delineated three categories: main proceedings, secondary proceedings, and territorial insolvency proceedings. Substantial reformulation of this framework was witnessed through the Recast Insolvency Regulation, embellishing its efficacy and scope. Evolution and Enhanced Dynamics: Recast Bankruptcy Regulation The contours of insolvency proceedings were further refined through the introduction of the Recast Bankruptcy Regulation, activated from June 26, 2017, with applicability to new insolvency cases. Retaining the tripartite structure of the Recast Insolvency Regulation, this new iteration integrated substantial amendments. The crux of this evolution was the elevation of the “centre of main interests” (emphasis supplied) as the locus of consistent administration of a debtor’s interests, discernible to external stakeholders. It’s notable that the presumption of the registered office as the centre of interests could be rebutted by compelling evidence. Cross Border Insolvency Regulations The aftermath of Brexit ushered in the Cross Border Insolvency Regulations of 2006, designed to recognize foreign insolvency proceedings post-Brexit, regardless of their occurrence within or outside the EU. These regulations encompass foreign proceedings as collective judicial or administrative processes in foreign states, emphasising reorganisation or liquidation. The crux of determining foreign main proceedings hinges on their location within the territorial ambit where the debtor’s primary interests are established. Correspondingly, foreign non-main proceedings occur in the state where the debtor’s core interests find residence. Comparative Insights and Potential Assimilation The potential refinements identified below have the capacity to bolster the effectiveness, efficiency, and accessibility of the IBC, ultimately contributing to a more robust and equitable insolvency regime. I. Bridging Jurisdictional Insights In elucidating the juxtaposition of the United Kingdom’s insolvency law with the Indian Insolvency and Bankruptcy Code (IBC), this discourse discerns salient provisions that could potentially enrich the latter. A particular focus is directed toward the UK’s diligent approach in disseminating information regarding the existence of a moratorium, accompanied by a comprehensive explication of its ramifications for creditors. This accentuation of transparency and awareness highlights a distinct avenue where the IBC could potentially refine its operational framework. Furthermore, the United Kingdom’s intricate and refined mechanisms governing voluntary arrangements and winding-up proceedings furnish proactive strategies for addressing instances of financial distress. The integration of these strategies into the IBC could serve as a formidable deterrent against the accumulation of unsustainable debt burdens. Aligned with the United Kingdom’s legal framework, the proposition of permitting operational creditors to collectively initiate the Corporate Insolvency Resolution Process (CIRP) is proffered as a means to alleviate the administrative complexities currently associated with the IBC. This suggested modification holds the potential to expedite the insolvency resolution process and render it more efficient. Additionally, the United Kingdom’s practice of allowing creditors to institute CIRP proceedings on the grounds of uncontested non-payment of debts is evaluated. This practice, if incorporated into the IBC, has the potential to uphold the principle of equitable access to insolvency proceedings, thereby fostering a more inclusive and accessible legal framework for resolving insolvency matters. II. The UK’s Specialized Court System, A Model for Efficiency The Indian insolvency and bankruptcy landscape is marred by prolonged litigation due to inadequate judicial infrastructure and delayed appointments of Adjudicating Authority (AA) members. The UK’s approach to insolvency cases through specialised courts offers a blueprint for India. Judges with a profound understanding of insolvency law streamline intricate cases. Complex cases are directed to designated courts that possess in-depth insolvency knowledge, expediting resolutions. Referring cases from lower to higher courts when necessary ensures expertise alignment. The High Court intervenes in complex or high-value cases, showcasing the UK’s commitment to streamlined insolvency adjudication. NCLT and NCLAT, being generalist forums, adjudicate diverse corporate law issues encompassing insolvency matters. This broad jurisdiction may result in procedural delays and inefficacies, given that adjudicators may lack the specialized expertise requisite for addressing intricate insolvency cases. Meanwhile, the UK’s High Court employs specialised lists for bankruptcy cases, presided over by Insolvency and Companies Court (ICC) judges. These judges possess extensive insolvency law knowledge, technical expertise, and commercial understanding. This focus enhances the efficiency and accuracy of insolvency resolutions, utilising a specialised pool of

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A Step Forward to List Equity on Foreign Exchanges

Capital Markets and Securities Law /

[By Vanshika Singh] The author is a student of Jindal Global Law School.   Introduction Ministry of Finance and Ministry of Corporate Affairs have been in the news lately as the discussion on listing of Indian equity on foreign stock exchanges is gaining traction. They have announced that the much-awaited framework for direct listing of Indian companies abroad could be introduced later this financial year. It is notably a significant development for the Indian companies as their exposure and opportunities to raise funds in the capital markets is going to expand at a global level. This international exposure brings with itself the need to balance certain pros and cons that the companies must be ready to explore wisely. Present Means of Raising Funds Internationally Currently, fund raising by Indian entities can be done in primarily three ways. Firstly, by raising debt in global markets by listing their debt securities via various bonds like masala bonds, foreign currency convertible bonds, etc. Second, by way of issuing depository receipts such as by issuing American Depositary Receipts (“ADR”) or Global Depository Receipts (“GDR”). This is an indirect way of listing on a foreign exchange by entering into an arrangement with a recognised depository facility in the relevant jurisdiction. Another way of issuing equity shares abroad is doing Regulation S (“Reg S”) and Rule 144A offerings under U.S. Securities Act, 1933. Doing a public issue under Rule 144A requires registration on the relevant foreign stock exchange and adherence to heavy reporting standard in such jurisdiction. Until 2020, listing of Indian companies on foreign exchanges was not permitted let alone standardized, therefore, this method could not be accessed. However, Rule 144A provides an exemption to such registration by allowing private placement of securities to only sophisticated investors, i.e., qualified institutional buyers (“QIBs”) in the U.S. and not the retail investors. The rationale behind the same is that sophisticated investors are resourceful and diligent enough to know the risk of entering an investment, and thereby need little regulation. On the other hand, Reg S offering is done outside the U.S. that allows Indian companies to tap primarily into the European markets such as London or Luxembourg Stock Exchange. An important difference between these two types of offerings is that the Rule 144A route requires higher disclosure and due diligence as compared to the Reg S route. The former requires a negative assurance letter, also known as the Rule 10b-5 letter, from the issuer’ or issuer’s lawyers. It provides a confirmation that nothing has come to their attention that gives them a reason to believe that the statements in the offering documents are untrue or inaccurate. This is a higher diligence standard than what is currently followed in the Indian market and places a higher liability on the entities such as law firms and merchant bankers who may issue such a letter. Proposed Change The buzz about this change started way back in 2018 when Securities and Exchange Board of India (‘SEBI’) released its expert committee report for public comments. Amongst other things, the expert committee scrutinized the economic effects of this change on the country and Indian companies. Additionally, they discussed various legal, operational and regulatory nitty-gritties that require a rehaul to implement this change and facilitate Indian companies in listing their equity share directly on foreign stock exchanges. It was clarified in the report that in case of unlisted Indian companies seeking to list aboard, the laws of foreign jurisdictions pertinent to listing will apply while ensuring compliance with Companies Act, 2013 (“Companies Act”). With respect to companies listed in India seeking to list abroad, the companies can expect to continue compliance with the relevant laws they are subjected to India and in case of variation, a comparative analysis of compliance is to be provided by such company. Such onerous requirements can inevitably result in longer timelines for conclusion of raising capital via this method. In late 2020, MCA, via the Companies (Amendment) Act, 2020 (“Amendment Act”), passed an amendment to S. 23, amongst other sections of the Companies Act to permit a particular class of public companies to list their securities abroad in permissible foreign jurisdictions or jurisdictions as may be prescribed. The permissible jurisdictions include Japan, China, U.S., South Korea, United Kingdom, Hong Kong, France Germany, Canada and Switzerland. This has been a momentous development because India’s current legal framework prohibits the direct listing of equity shares of domestically incorporated companies on international stock markets. Since the Amendment Act was passed in 2020, various provisions of the same have been notified from time to time but the amendment to S. 23 has not been notified yet. In light of the same, MCA and SEBI are proposing to introduce the much-awaited framework later soon to this allow such foreign listing. Expected Impact of this Change This much awaited change will not only result in increase in competitiveness for Indian companies but also bring better valuation to companies, increase and diversify the investor base, and most importantly provide an alternate source of capital for Indian companies. Moreover, companies that want to list their securities on international stock exchanges with sophisticated expertise and resources can expect to receive more accurate valuations for their assets as compared to the current valuations in India. This is because it will expose them to niche investors who have sectoral and institutional expertise, and are therefore better equipped to assess such shares on its own merit and also comparatively. The ability of Indian businesses to access larger, more diverse pools of money and cheaper costs of capital will serve to bolster their competitiveness in industries like technology and internet sectors where this change will lead to strategic advantages by overlooking geographical distances. Additionally, having more foreign investors on board may invite more robust international corporate governance practices, induce maximization of efficiency and fast-paced innovation to catch up with global competitors. It will also encourage embracing best practices, international cooperation and improve peer to peer benchmarking. At the same time, cross-listing may make

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Comparative Analysis: Investment Opportunities with India’s MSM REITs Regulatory Framework

Capital Markets and Securities Law /

[By Dhrutvi Modi & Harshit Chauhan] The authors are students of Gujarat National Law University. INTRODUCTION In recent years, the Indian real estate market has grown significantly, with Real Estate Investment Trusts (REITs) playing a crucial role in attracting investments. Introduced in India in 2014 to enable small investors to access the real estate market, the market has been primarily dominated by large-scale REITs due to high investment thresholds, restricting opportunities for small and medium-sized investors. In August 2020, SEBI proposed Micro, Small, and Medium REITs (MSM REITs) to address the limited investment opportunities for small and medium-sized investors in real estate. These REITs offer lower investment thresholds, providing capital sources for real estate developers and reducing reliance on traditional financing. Recently, in May 2023, SEBI released the regulatory framework for MSM REITs, aiming to stimulate the Indian REIT market’s growth by broadening investor participation and expanding financing options for developers. This article provides an analysis of the regulatory framework for MSM REITs released by the SEBI. The article evaluates the proposals put forth by the regulatory framework and assesses their potential impact on the REIT market in India. The article also examines the challenges faced by the REIT market in India, including high tax rates, limited availability of quality assets, and the need for regulatory clarity. It analyses how the regulatory framework for MSM REITs aims to address these challenges. ISSUES FACED DUE TO LACK OF PROPER REGULATION Lack of uniformity in disclosures – non-uniform disclosures on Fractional Ownership Platforms (FOPs) raise concerns due to involvement of non-institutional investors and untested real estate mechanisms. More transparency and oversight are needed, leaving investors with limited legal recourse for potential issues. Lack of assurance – FOPs issue unlisted securities for real estate investments, but they may not provide adequate exit information or liquidity options, which is unfavourable for investors’ long-term interests. Unclear claims of succession and inheritance after lapse of Power of Attorney (POA) – FOPs enabling joint real estate ownership through POA structures impose binding liabilities on the FOP and raise concerns about valuation, liquidity, transparency, and potential misuse of POAs. Investor’s death, insolvency, or bankruptcy may lead to POA lapses, exposing other owners to succession and inheritance claims on the stake of the deceased or insolvent investor. No application of Know Your Customer (KYC) and Anti-Money Laundering (AML) norms – The absence of financial sector regulation for FOPs means that they often do not adhere to KYC and AML norms. This non-alignment with Prevention of Money Laundering Act, 2002 and financial regulator’s KYC requirements leads to inconsistent customer identification practices, raising risks of identity misuse, fund source concealment, and money laundering, thereby posing a threat to the financial system. Absence of standardized grievance redressal mechanism – FOPs lack standardized grievance redressal mechanisms, each with its own policies that may not favour investors. Even if some FOPs are registered with state-level RERA as real estate agents, this registration does not imply comprehensive regulation of the FOP and its activities by RERA, leaving investor interests potentially unaddressed. Non-uniform selling practices – non-uniform selling practices and lack of independent valuation could lead to investors falling prey to mis-selling. REGULATORY FRAMEWORK FOR FOPs IN OTHER COUNTRIES United Kingdom In the UK, key regulations for fractional ownership include the Companies Act 2006, which mandates registration and reporting to Companies House, board of directors, and corporate governance standards. The Financial Services and Markets Act 2000 (FSMA) requires authorization from the Financial Conduct Authority (FCA) for public offerings, with FCA oversight and enforcement powers for non-compliance. There is a stamp duty land tax (SDLT) payable on purchasing the fractional interest in the property. The amount of SDLT depends on the purchase price of the property and the percentage interest being acquired. The rate of SDLT is generally 0.5%, but higher rates apply to second homes and buy-to-let properties. There may be ongoing tax liabilities associated with fractional interest ownership as well. When selling the fractional interest in the property, capital gains tax (CGT) may be payable on any profit made. CGT is charged on the gain made on the sale, calculated as the difference between the sale and purchase prices, deducting any allowable expenses. The CGT rate is determined by an individual’s overall taxable income and gains for the tax year, and it can vary between 10% and 28%. Hong Kong Real estate investment trusts (REITs) are collective investment schemes set up as unit trusts in Hong Kong. They are listed on the Hong Kong Stock Exchange and invest primarily (at least 75% of their gross asset value) in real estate assets that generate income. The purpose of REITs is to give investors returns resulting from ongoing rental revenue. A REIT Code and other guidelines on the authorization and management of REITs have been released by the Hong Kong Securities and Futures Commission. According to the REIT Code, REITs can only invest in vacant land if certain conditions are met, and they can only engage in property development activities if certain conditions are fulfilled. Additionally, REITs can borrow up to 50% of their gross asset value. REITs must pay their investors a dividend equal to at least 90% of their annual audited net income after taxes. United States of America The United States Securities and Exchange Commission (SEC) oversees the trading of securities in the country. Fractional ownership is classified as a security based on the criteria set forth in the Howey test, which was established by the US Supreme Court in the case of SEC v. W.J. Howey Co. Fractional ownership is typically sold as a security offering, which must be registered with the SEC unless an exemption applies. One standard exemption is for private placements of securities to accredited investors or investors who meet certain income or net worth thresholds. California has specific regulations for real estate fractional ownership, including disclosure requirements and provisions for escrow accounts to hold funds from investors. The state also requires fractional ownership interests to be sold through

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The Concerns around the New Settlement and Commitment Provisions under the Competition (Amendment) Act, 2003

Competition Law /

[By Akul Mishra] The author is a student of Jindal Global Law School. Introduction: The Competition (Amendment) Act, of 2023 introduced several amendments to its parent statute which was in force since 2002. However, the amendments ignore a specific red flag when it comes to ensuring accountability in the remedial actions taken by companies who may have violated Chapter II of the Act after being served a notice or brought to the Appellate Tribunal.  However, the new amendments have followed the EU model, which now allows enterprises called into question over violations, to have a remedial commitment to violations stated by the Competition Commission of India. However, there are several issues regarding this newly introduced provision under Section 48(1). Although following the EU model, which has now developed as a rather strict competition regulator worldwide is not a liability for the CCI, there must be further considerations under the new provisions for the CCI to ensure that its jurisdiction and adjudicating ability are not withheld, and competition regulations are not downgraded to a checklist. Tracing the New Process: The new amendments have introduced Section 48A, which introduces the term ‘settlement’. Simply put, settlement allows for the enterprise under 48A(1) for settlement of proceedings initiated under Section 26(1). The onus on applying for settlement is on the enterpriseIt must follow the strict timeline and only apply between the date of the receipt of the report and the date  of any order has been passed by the CCI. Settlement is placed on the fact that the enterprise indirectly admits (without any liability, per se) the violation and offers to pay a fee or even introduce means to invalidate any violative process. Thus, it flows from a different tangent of a general ex-post proceeding Further, the CCI has the discretion to assess the violation on its gravity, timeline, nature etc., and assess whether the settlement is adequate for the violation or requires greater action. Otherwise, under 48A(5)  the CCI can pass an order to reject the settlement offer, and continue with the investigation, the order being non-appealable. Further, Section 48B also provides a distinct yet similar concept, by enabling the enterprise to offer commitments, to address all the violations assessed in receipt of the investigation report. The CCI is similarly enabled under 48B to have a discretionary power to assess whether the commitments are enough, and whether to accept or reject the application from the enterprise. Further, 48C gives a safeguard to the CCI if the enterprise applies for settlement or commitment but defers the improvements or contravenes a supportive order under Sections 48A and 48B. The Issues arising out of the Statutory Gap: A bare reading of 48A(3) and 48B(3) simply infers that the CCI needs to, after discretion over the submissions of settlements/ commitments simply has to accept them through an order. Further, there is no mention of whether the CCI has to record the infringement in question, and the sole discretion remains with the CCI if it wants to revoke the order which ascertains a settlement/commitment. The reason behind Competition law is to regulate markets, with a wide array of stakeholders in these transactions, including the enterprise, customers, sellers etc. Thus, there are ample provisions for addressing the concerns of a layman who may indirectly or directly suffer due to the violation of Competition Regulations/ the act itself and must get enough redressal at the appellate tribunal for the same. Thus, Section 53N provides redressal opportunities for the layman under the new amendments. Any person under Article 53(N) can now approach the Appellate Tribunal for damages amounting out to several instances including because of an order of settlement passed by the Commission. This amended provision provides a redressal forthe new provisions under Section 48A only. However, it is extremely hard to prove that there is damage arising out of a settlement order unless an infringement is mentioned in that order, which is not mandated by any provision under the new amendments. Furthermore, there is no provision for redressal for a layman who may suffer from damages out of a commitment order. The logic here could be, that a commitment order means improvement, where the enterprise has taken steps from the violations that made part of the investigation report. However, there is no guarantee that one investigation report encompasses all the violations, which may be encompassed by one guaranteed commitment, but never rectified by the commitment, so quoted by the enterprise. Although the CCI has the discretionary power under 48C to check on all the commitments/ settlements promised by the company, the procedure will not be completed within a small timeline. During the timeline that ranges from an order of commitment to a revocation under 48C, which would then reinitiate the investigation under Section 26, stretching the wait for further redressal. Thus, there is a clear gap because there is no feature under the newly amended 53N for redressal/damages during an investigation. Further, there is no obligation to list the infringement that occurred under orders passed in the positive, under 48A. Thus, if the settlement order does not include the right so infringed, it would be nearly impossible to bring in the provisions of 53N, as damages must amount out of an infringed statutory provision. Further, the draft Settlement Regulations, particularly reg 7 clearly demarcates that the settlement order will not amount “finding of contravention by the Commission against the Settlement Applicant”. This would then amount to having absolutely no mention of the right so infringed, which was settled through an applicable payment. Thus, it is not clear how a layman may appeal to the tribunal for damages out of a settlement order. Further, the only recourse may be reg 5 of the draft regulations, which may allow a layman to submit objections to the settlement order. However, it is not clear if the term any party under 5(1) would amount to any party in public, or any concerned party regarding the complaint under Section 26. Thus, this gap is

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Aviation Industry’s Exclusion from Moratorium: A Catalyst for Change?

Insolvency Law /

[By Rupakshi Sharma] The author is a student of Symbiosis Law School, Pune   Introduction: The present article analyses the exclusion of the Aviation Industry from imposition of Moratorium under S.14 of IBC,2016 w.r.t MCA Notification dt. 03.10.2023. It highlights the plausible advantages of this catalytic move while laying due emphasis on the enactment of CTC Bill, 2022 in light of the GoAir Fiasco.  I. Moratorium under S. 14 of IBC, 2016: It is well-founded in law that an application for initiating a Corporate Insolvency Resolution Process (CIRP) can be filed  either by a Financial Creditor (FC)/Operational Creditor (OC) or the Corporate Debtor (CD)itself. Once such application is admitted before NCLT, a ‘moratorium’ is imposed on CD under Section 14 of  the Insolvency and Bankruptcy Code, 2016. . It is a ‘calm period’ where financial and operational creditors are barred from institution of new suits and proceedings or initiation of debt recovery actions against the CD during CIRP. All actions are suspended against the CD to preserve the status quo and revive the CD through a resolution plan. 2 Since the Insolvency and Bankruptcy Code, 2016 regulates insolvency matters in India, a time-bound moratorium period is imposed after admission of CIRP application by NCLT. Under the said section, clause (d) specifically bars an owner/lessor to recover/possess a property which is in the possession of a CD during CIRP as observed in the case of Maharashtra Industrial Development Corporation v. Santanu T. Ray, Resolution Professional & Anr. II. The Juxtaposition of Aircraft Leasing and Imposition of Moratorium: Aircraft leasing is a prevalent industry practice in the Aviation Sector as majority Indian Airline Operators have leased a significant number of aircrafts in their fleet. However, the overwhelming operational costs attached to the sector often poses a great difficulty for long-term sustainability of an airlines. This has a rippling effect on the creditors/lessors whose investment remain at stake due to challenges in aircraft reclaiming during insolvency. Once an application for insolvency of an airline is admitted under IBC, there is a temporary freeze of all actions against the CD, including restriction on lessors’ rights to claim re-possession of their leased aircrafts. This embargo adversely affects the progress of the Indian Aviation Sector as: it discourages lessor companies to lease their aircrafts to Indian Air Carriers; it leads to imposition of higher lease rent for instance, about an extra $1.2-1.3 bn is paid by Indian carriers because of hurdles faced in aircraft re-claiming; it levies stricter terms and conditions on the lessee, which is counter-intuitive for India’s endeavour towards a flexible aviation policy. Moreover, it is the customers who have to ultimately bear the brunt of high lease rentals in the form of high fares. III. Exemption of Aviation Industry under S. 14 of IBC, 2016: A sweeping move by MCA India’s Legal Position before MCA’s Exemption Notification: It is widely known that India is a signatory to the Convention on International Interests in Mobile Equipment or Cape Town Convention (CTC), 2001 and Protocol on Matters Specific to Aircraft Equipment since 31.03.2008. Read and interpreted as a single instrument their primary aim is to address the challenge of obtaining opposable rights to high-value aviation assets, viz. airframes, aircraft engines and helicopters having no fixed location. Alternative A, Clause (2) of Article XI of the instrument requires a contracting state to allow a lessor to re-possess an aircraft after expiration of waiting period as specified in the declaration of that State. Since India has declared a waiting period of 2 calendar months under Article XI, a resolution professional is required to either (i) cure all the defaults of a CD or (ii) give possession of the aircraft to the lessor, within 60 days from the commencement of CIRP. Moreover, the Aircraft Rules, 1937 drafted under the Aircraft Act, 1934 under Sections 30(6)(iv) and 30(7) allows de-registration and re-possession of aircrafts by creditors after issuing an irrevocable deregistration and export request authorisation (IDERA) in the case of default by a debtor. In Awas 39423 Ireland Ltd & Ors v. Directorate General of Civil Aviation & Anr., the Delhi High Court relied on Article IX of Protocol on Matters Specific to Aircraft Equipment and Rule 30(6)(iv) of the Aircraft Rules, 1937, thereby allowing deregistration of aircrafts of SpiceJet Limited. However, enactment of the Insolvency and Bankruptcy Code in 2016 unintentionally sabotaged lessors’ right under CTC as it lacked formal ratification by the Indian Government in the form of a separate implementing legislation due to which the municipal law (IBC) was given precedence over India’s International law obligations w.r.t. CTC. Realising drawbacks of an uncodified regime, an attempt was made by the Ministry of Civil Aviation by drafting Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 to implement the Cape Town Convention/Protocol and give primacy to its provisions assuring lessors de-registration and re-possession of their aircrafts, in case of default by the lessee. Reciprocal provisions under Section 15(1) and Section 19(5) & (7) were incorporated in the Draft Bill, 2022 with respect to de-registration and re-possession respectively. Moreover, the proposed bill had an overriding effect over any other Indian Law for the time being in force under Section 31(1). However, as no concrete steps have yet been taken for its enforcement, the insolvency code will have an overriding effect under Section 238 until the enactment of the Bill. India’s Legal Position after MCA’s Exemption Notification: Taking into the consideration the adverse effect of mandatory imposition of moratorium on aircraft lessors which had corollary consequences on air-carriers due to increased lease rentals and pass-through effects on end-users (air-passengers), the Ministry of Corporate Affairs in its Notification S.O. 4321(E) dated 03.10.2023 notified exemption of aviation industry from application of moratorium provisions under Section 14(1) of the Insolvency and Bankruptcy Code, 2016. It stated that as  India has ratified the Cape Town Convention and its Protocol, any transactions, arrangements, or agreementsrelating to aircraft, aircraft engines, airframes and helicopters under it shall be exempted from the application of Section 14(1) of the

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