Author name: CBCL

Tackling Corporate Frauds with Carrot-over-Stick approach: Envisioning an Indian DPA

Leave a Comment / Corporate Governance /

[By Anupam Verma & Navtej Vatsa] The authors are students of National Law University Odisha.   Introduction India has witnessed a significant number of white-collar crimes (bribery, corporate fraud, etc.) in recent decades, because of which, and rightly so, questions have been raised on the competency of the country’s financial and corporate regulators. It is true that regulators should proactively employ all the resources at their disposal to prohibit such crimes, but should it happen, it is equally important for the investigative agencies to effectively and efficiently prosecute an erring organisation and associated individuals. In India, the investigative agencies, in dealing with white-collar crimes, primarily work on the detection-prosecution mechanism, i.e., upon detection of crimes or frauds, they investigate them and prosecute the offenders in court. In this article, the authors will be vouching for the addition of the United Kingdom (UK) Styled Deferred Prosecution Agreements (hereinafter “DPA”) mechanism to the country’s anti-white collar crime framework, which is based on the ‘carrot’ principle rather than the ‘stick’ one, as is being followed by the Indian agencies currently. The article will first explain the concept of DPAs and then move forward to have a comparative analysis between the UK’s and the United States’ (US) versions of DPAs in order to find the model framework for India to build upon. This will be followed by case analyses that will prove the supremacy of DPAs and the need for an Indian DPA, respectively. At last, the authors will provide suggestions for formulating a DPA mechanism suited to Indian needs. What is DPA? A DPA is a way to settle a case against a corporation accused of fraudulent practices. It lets the authorities frame charges against the erring company while also agreeing not to pursue the charges. In exchange, the company undertakes to comply with specified obligations as laid down in the agreement. The mechanism for DPAs can be traced back to the 60s in the US, where it was used to mitigate minor offences by making the signatory admit his or her guilt and pay fines, and in exchange, no proceedings were instituted against such persons. In the case of Salomon Brothers in the US, this mechanism was extended for the first time in the corporate world. The US and the UK are the two major jurisdictions around the world that actively use this mechanism. The UK DPA In the UK, DPAs were introduced for the first time in 2014, under Schedule 17 of the Crime and Courts Act, 2013. The Serious Fraud Office (SFO) and the Crown Prosecution Service (CPS) are the key agencies when it comes to its implementation. A UK DPA is an agreement between a prosecutor and an erring organisation under the oversight of a judge who makes sure that the terms and conditions of the agreement are just, equitable, and reasonable. If the organisation complies with the conditions, the agreement permits a trial to be postponed for a specific amount of time. After the successful conclusion of the agreement, charges are dropped. Thus, it allows an organisation to fully atone for illegal activity without suffering negative effects like insolvency proceedings, loss of jobs, monetary setbacks to investors, etc. DPAs are applicable to various kinds of corporate offences like bribery, fraud, embezzlement, etc. Furthermore, at least in the UK, it is only applicable to organisations and not individuals. Moreover, not every organisation can come to the authorities and demand a DPA. Only those companies that properly assist and cooperate in investigations will be considered by the authorities for the same. The US DPA One of the most prominent distinctions within the regulatory frameworks of the United Kingdom and the United States lies in the fact that, in the latter, even an individual, for example, an erring director or officer, can enter into a DPA. Secondly, the judiciary has a limited role in the determination of the terms of the agreement and usually grants approval to the agreement reached between the authorities and the wrongdoers, be it a company or an individual. This is in contrast to the UK, where judicial sanction is required even for beginning the negotiations and later the court also has full authority to modify it. Why the UK’s Framework is Best for India As mentioned above, only organisations are allowed to use the DPA mechanism under the UK’s framework, unlike in the US, where individuals can also enter into a DPA. Furthermore, under the UK’s framework, the judiciary has more power and an active role in formulating and executing the DPA. There is also a growing voice in the US to put DPAs under judicial oversight, which shows the supremacy of judicially induced DPAs. Considering the factors that (a) allowing an individual to use the DPA mechanism may not resonate well with the Indian public and (b) India’s robust judicial system, it is preferable that the UK’s framework be used as a model on which the Indian DPA should be built. Effectiveness of the DPAs: The Standard Banks Case In 2015, The Standard Bank (hereinafter “the bank”) became the first entity to enter into a DPA since the mechanism’s incorporation into the UK’s anti-corruption framework. The bank was alleged to have violated Section 7 of the Bribery Act, 2010, which provides for liability in cases of failure in the prevention of bribery. The bank, as per the terms of the DPA, was mandated to pay a total of US $32.2 million in fines, including US $7 million to the Government of Tanzania. In parallel with paying the fine, the bank also committed to submitting its current anti-bribery and corruption controls, rules, and protocols to an external review. Just after three years, i.e., in 2018, the SFO announced that the bank had successfully complied with and fulfilled all the conditions as laid down in the terms of the DPA, thus marking the successful culmination of UK’s first DPA. Need for an Indian DPA In 2017, Rolls Royce PLC entered into a DPA with the SFO

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Navigating the Changing Landscape: CCI’s Approach to Defining Relevant Markets in the Digital Era

Leave a Comment / Competition Law /

[By Mohd. Fahad Ansari] The author is a student of National University of Study and Research in Law (NUSRL) Ranchi.   Introduction Recently, the Competition Commission of India (CCI) has initiated investigative operations targeting technology giants such as Amazon, Whatsapp, Zomato, and others. This move has been prompted by the increasing prevalence of dominant practices among online platforms. In response to rising consumer demand for online services and the resulting antitrust apprehensions, the CCI’s investigative actions may be interpreted as its endeavors to examine means of mitigating the unchecked dominance of digital platforms. In this context, the CCI has been actively involved in broadening the definition of the ‘relevant market’ to encompass online platforms within the purview of competition law. Consequently, it has presented an expansive yet somewhat ambiguous interpretation of this term. While the rationale behind this broader interpretation is rooted in the purposive understanding of the ‘relevant product market‘ and the socio-economic needs of the nation, there are concerns that it might inadvertently result in adverse and undesirable consequences. Approach of CCI to Online Intermediaries: Restrictive or Expansive? The Competition Act, 2002 (Act) offers a comprehensive framework for curbing anti-competitive behavior by entities operating in India. However, owing to the intricate technicalities within the legal framework, the significance of the CCI as a regulatory authority has become increasingly prominent within the evolving socio-economic landscape. In this context, the CCI’s approach to addressing online intermediaries can be categorized as either ‘restrictive’ or ‘expansive.’ In the case of Ashish Ahuja v. SnapDeal (SnapDeal case) and in preceding rulings, the CCI has consistently adopted a limited viewpoint.. In this perspective, it viewed online and offline market segments as distinct distribution channels rather than a unified market entity. This interpretation can be attributed to the fundamental principle of interpreting statutes based on their plain and literal meanings, as well as considerations related to the socio-economic context aimed at safeguarding traditional offline markets. However, subsequent to 2016, there was a notable shift in the stance of the CCI, exemplified in the Rubtub Solutions Pvt. Ltd. v. Makemytrip India Pvt. Ltd. & Anr case. In this juncture, the CCI embraced a more comprehensive perspective, considering both online and offline segments as distinct markets. This shift was predicated on the recognition of dissimilar standards and technical intricacies inherent in the delivery of services within these segments. Subsequently, this broader perspective was consistently applied in various instances, leading to the classification of applications such as Google (in the domain of online general web search), Whatsapp (pertaining to OTT messaging apps through smartphones in India), and Apple (in relation to app stores for iOS in India) as separate and distinct markets. Comparing Substitutability Tests: Cross Elasticity vs. SSNIP Approach The paramount factor in ascertaining the relevant market for a product is the concept of ‘substitutability’ or interchangeability of the product. This criterion finds its origins in the United Brands case, a landmark decision rendered by European courts. In this pivotal case, it was firmly established that a product’s resemblance should be evaluated concerning products within the market rather than those external to it. It is crucial to underscore that there exist two approaches for assessing the ‘substitutability’ of a product: (a) the Demand Substitution method, often referred to as the Cross Elasticity Test; and (b) the Small but Significant Non-Transitory Increase in Price (SSNIP) Test. The Cross Elasticity Test was initially introduced in the Cellophane case, where factors such as price and product quality were deemed pivotal to its application. Conversely, the SSNIP Test posits that if an increase in the price of one product leads to a shift in the demand for another, these products are considered substitutable. While both of these tests remain valid, the effective application of the former necessitates a thorough evaluation of consumer preferences rather than relying solely on conjecture. In this context, conducting a comprehensive survey of consumer preferences within the Indian market appears to be an undertaking yet to be realized. Conversely, the latter test has already found substantiation through the observable shift in consumer preferences toward online shopping, driven by disparities in prices thereby justifying the narrow approach of the CCI. Adapting to the Digital Age: CCI’s Expansive Approach and Its Consequences Based on the preceding examination, it is reasonable to conclude that the implementation of a more expansive definition of the relevant market appears challenging, and the CCI position predominantly leans towards a ‘protectionist’ stance, aimed at ensuring equitable competition within the nation. The adoption of this approach during the early stages of the online market’s evolution served a dual purpose. It, on one hand, safeguarded emerging online startups, and on the other, acted as a deterrent against the misuse of dominance, in accordance with the provisions of Section 4(2)(e) of the Act. Consequently, this approach managed to strike a balanced equilibrium, offering both incentives and prevention, with a discerning application on a case-by-case basis. Nevertheless, the dynamics have shifted in contemporary times, with online startups now holding dominant positions within various markets. In light of this, the prevalence of online players’ dominance can only be mitigated by their endeavors to enter or safeguard other relevant markets. Furthermore, the adoption of a more expansive approach renders the relief provided under Section 19 of the Act inapplicable in instances of unilateral agreements, owing to the condition stipulated in Section 19(5). This outcome, in turn, has adverse repercussions on offline retailers. Nonetheless, it appears that the broader approach adopted by the CCI has not posed a substantial impediment to its regulation of the online market. The Indian regulatory authority has been actively addressing contemporary concerns by pursuing allegations of discriminatory practices and by invoking measures to prevent other market participants from entering the arena. While the actions taken by the CCI may offer interim solutions, they tend to constrain the utilization of the diverse legal remedies made available by the Act. Moreover, in contrast to previous circumstances, the contemporary challenges extend beyond the mere abuse of dominant positions, encompassing

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Analysing the Conflict Between Detention Certificates and Right to Demurrage

Leave a Comment / Taxation Law /

[By Jaipreet Singh Alag] The author is a student of Rajiv Gandhi National University of Law, Punjab.   Introduction With the advent of the Delhi High Court’s judgement in the case of Bhavik S. Thakkar v. Union of India, a debate has started between the power of the customs authority to issue detention certificates and the right of the custodians to claim demurrage charges from the importers of goods. In the said case, there was a mis-declaration of goods on the part of the petitioner leading to their confiscation by the Directorate of Revenue Intelligence (DRI). Once the case was settled a detention certificate was issued by the Customs Authority to the Container Corporation of India (hereinafter, referred to as ‘CONCOR’) i.e., the custodian of imported goods. However, the same was not heeded by the CONCOR, leading to a dispute between it and the Petitioner. Detention Certificates are issued by the customs authority to waive demurrage charges which are levied by the custodian of imported goods on the importers, primarily in cases of illegal detention of goods by the customs authority. They derive their legal standing from Regulation 6(1)(l) of the Handling of Cargo in Customs Areas Regulations (HCCAR, 2009). The aforementioned judgement has placed primary reliance on Section 63 of the Customs Act, 1962 while not giving much consideration to the detention certificate issued under HCCAR, 2009. However, the Finance Act, 2016 has omitted Section 63 from the Customs Act which has enhanced the status of the HCCAR. The article analyses the conflict that has emerged between the HCCAR and the relevant statutes in the area of customs because of the omission of Section 63 from the Customs Act. Right to Demurrage of Custodians Demurrage is a charge that is levied by a custodian of imported goods under Section 45 of the Customs Act in return for the services provided by it, such as warehousing. In certain cases, the imported products are detained by the customs authority for investigation which can be a lengthy process. In such a case the investigation takes place while the services of the custodians are under continuous use. Upon the conclusion of the investigation, the custodians demand the charges (referred to as demurrage) for the usage of their services from the importers. In cases of illegal detention of goods by the customs authority, the chances of conflict between the custodians and the importers increase exponentially. In such cases, the judiciary has usually taken a stand in the interest of the custodians. In the case of International Airports Authority of India v. Grand Slam International, the Supreme Court upheld the Right to Demurrage of the custodian even when the goods were illegally detained. However, the judiciary’s stance is not entirely one-sided. For instance, in the case of M/s Shipping Corporation of India v. CL Jain Woolen Mills, the Supreme Court transferred the liability of paying the demurrage charges to the customs authority instead of the importer of goods. Nevertheless, in the said case, the decision stood in favour of the custodians. Therefore, it can be suitably said that judicial precedents continue to recognise the right to demurrage of custodians. Impact of the Omission of Section 63 from the Customs Act The conflict between detention certificates and the right to demurrage fees of custodians appeared to be settled because of the established precedents. However, the omission of Section 63 from the Customs Act has led to this conflict coming to the fore again. It is pertinent to note that Regulation 6(1)(l) of the HCCAR, 2009 begins with a ‘subject to’ clause which makes the regulation prone to the provisions of other statutes in the country. In this regard, the detention certificates did not possess much power since Section 63 of the Customs Act upheld the right to demurrage of the custodians countering the regulation. The same was affirmed in the case of Bhavik S. Thakkar v. Union of India wherein, the Delhi High Court gave primary consideration to the aforementioned provision of the Customs Act while upholding the decision of the custodian i.e., CONCOR to not release the goods until the demurrage charges for the usage of its warehousing are paid. The intention behind the omission of Section 63 of the Customs Act The omission of Section 63 from the Customs Act has been consistently used as a means to justify the violation of the right to demurrage of custodians. However, while dealing with the instant omission it is important to consider the intention behind the omission of the aforementioned provision. Thus, reference must be made to the explanatory notes of the Finance Bill, 2016. The explanatory note to clause 126 of the Finance Bill explicitly mentions the intention behind the omission of Section 63 to be “privatization of services, and free market determination of rates, including those by facilities in the public sector.” The instant explanation to clause 126 of the Bill cannot be interpreted in a manner that curtails the right to demurrage of the custodians since privatisation is the primary aim of the instant omission. Therefore, any adverse effect on the demurrage rights of the custodians would be contrary to the omission of Section 63. Section 170 of the Indian Contract Act and its interplay with the issue of Demurrage Rights The Finance Act, 2016 has provided for the omission of Section 63 from the Customs Act, it has become important that alternative statutes are used to protect the demurrage rights of custodians. In most cases, the relationship between a custodian and an importer is foundationally based on a contract of bailment. In such contracts of bailment, the importer is considered the bailor while the custodian is the bailee of the goods imported. This view has been upheld by the Supreme Court in the case of M/s Shipping Corporation of India v. C.L. Jain Woolen Mills wherein, it was held that such a relationship requires the application of Section 170 of the Indian Contract Act, 1872. The said provision of the Contract

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Investor Dispute Resolution with ODR

Leave a Comment / Capital Markets and Securities Law /

[By Anchal Raghuwanshi] The author is a student of Dharmashastra National Law University, Jabalpur.   INTRODUCTION Financial framework of a country represents the strong and efficient capital market inviting investors from around the world. The need for addressing disputes related to securities market has become crucial in order to have an effective capital market structure in the country. Investors who have suffered because of the mistakes of unscrupulous works of certain market players deserve a dispute resolution and complaint management system that is accessible, swift, and fair. Acts such as these not only reduce investor confidence but also affect India’s position at the global level. A strong and efficient dispute resolution will guarantee effective capital market operations. While creating laws and regulations, SEBI’s main objective is to govern and oversee the Indian commodity and securities markets. The regulatory framework of SEBI covers a wide spectrum of market participants, including listed businesses, stock exchanges, brokers, and investment advisers. The new ODR approach is poised to make resolving disputes more effective and affordable. ODR, which can be done online or in person, leverages technology to help the parties communicate and negotiate. This would increase the effectiveness and efficiency of India’s system for resolving investor disputes and increase its appeal to foreign investors. The objective of this paper is to look into the various facets of India’s Securities and Exchange Board’s dispute resolution process. COMPLAINT MANAGEMENT SYSTEM OF SEBI In June 2011, SEBI established the ‘SCORES’ centralized web-based complaints resolution system. The goal of SCORES is to provide an administrative venue for dissatisfied investors whose securities market issues have not been handled by the relevant listed company registered intermediary, or recognized market infrastructure institutions.[1] It accepts complaints arising from issues covered by the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Securities Contract Regulation Act, 1956, the Companies Act, 2013, and rules and regulations made under the aforementioned acts.[2]The SCORE system emphasizes investor advocacy since investors can contact SEBI directly before exhausting other routes of redress. Complaints filed on SCORES are subject to a three-year limitation period from the date of the complaint’s causation date. In a circular dated March 26, 2018[3], investors were instructed to first address their concerns with the relevant firm before approaching SCORES. According to master circular dated November 07, 2022, the business must file the ATR within 30 days.[4]If an investor is dissatisfied with the entity’s settlement or the entity has not produced an Action Taken Report within 30 days, the issue escalates to SEBI and is addressed by a SEBI Dealing Officer[5]. When investors file a complaint with SCORES, they provide confirmation of the same by self-declaration. A sample research was conducted to determine if investors are approaching businesses first before self-declaring. It has been discovered that around 42% of investors who stated that they approached the business first, really approached SCORES directly[6]. The Dealing Officer will review the ATR upon receipt and, if satisfied, will close the complaint with reasoned closure remarks. If the Dealing Officer is dissatisfied, he may request explanation from the entity and/or the investor. A complaint is considered resolved/disposed/closed only when SEBI disposes/closes the complaint on SCORES. Once the complaint has been resolved, the investor has the ability to request a review within 15 days if he or she is dissatisfied with the resolution of the complaint.[7] The Division Chief of the concerned Dealing Officer, who handled the usual complaint, handles the review complaint. “Review complaints” are the name given to these types of complaints.[8] ARBITRATION MECHANISM In line with the terms of the Circular of 11 August 2010[9], read with Section 2(4) of the Arbitration and Conciliation Act, 1996[10], SEBI provides for an arbitration procedure for settling disputes between customers and members. Age, credentials, and expertise in financial services are all taken into account while forming the panel of arbitrators. When opposed to the usual filing of lawsuits in courts, conflict resolution through arbitration is a more cost-effective way of ADR. If an investor has an account with a Depository participant or a broker, he or she has the option of settling disputes through Arbitration under the SCORES process. If a Stock Exchange or Depository fails to resolve an investor’s grievance due to a disagreement, the investor may petition for Arbitration under the rules and regulations of that Stock Exchange or Depository. All disputes, claims, or disagreements between investors and stock brokers or Depository participants can be resolved through the Arbitration system. The steps for Stock Exchange Arbitration are summarised below: First, the Applicant files an Arbitration application to a Stock Exchange; the application is then verified and delivered to the Respondent. Following that, an Arbitrator is selected, and all papers are delivered to the Arbitrator; the Arbitrator then hears both parties’ contentions and issues the award. If a party is dissatisfied, he or she may submit an appeal. Following that, the appeal hearing is held, and the ultimate award is made. The time restriction for submitting arbitration claims is three years. A single arbitrator will hear an arbitration reference for a claim/counterclaim up to Rs 25 lakhs, while a panel of three arbitrators will hear claims beyond Rs 25 lakhs. The appointment of arbitrators should be completed within 30 days of the applicant’s application being received. Within four months after the appointment of arbitrators, the arbitration shall be finished by issuing an arbitral award. The arbitration facility must be provided at SEBI-designated arbitration centers.[11]Furthermore, if any party to the arbitration is unsatisfied with the award, the party may submit an appeal against the judgement through the Stock Exchange’s Appellate process. Also, Chapter 15 of the Model Bye Laws of the Stock Exchange[12] contains procedures for resolving securities disputes through the Arbitration and Conciliation process. As part of the Bye Laws, the provisions of the Arbitration and Conciliation Act of 1996 apply. ONLINE DISPUTE RESOLUTION SYSTEM The proposal to implement an ODR system and extend it to all registered intermediaries in the securities market was

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Balancing Autonomy and Oversight – SEBI’s Prudential Norms for Clearing Corporations

Leave a Comment / Company Law /

[By Tamanna Das Patnaik] The author is a student of National Law University, Odisha.   Introduction Financial Market Infrastructures (FMIs) play a vital role in the economy. They serve as coordinating mechanisms and bring a network of counterparties together for the efficient operation of financial markets. Clearing Corporations (CCs) are one such important category of FMIs that deal with the clearing and settlement of transactions, management of counterparty credit risks and protection of transactional systems. Given the vital role that they play, it becomes essential to maintain vigilant oversight over these entities. Regular reforms and timely adjustments are continuously required to avert any potential systemic risks. In light of the same, on July 20, 2023, the Securities and Exchange Board of India (SEBI) released a consultation paper titled ‘Prudential Norms for Clearing Corporations’. In the course of their usual business operations, CCs interact with various bank and non-bank entities, through deposits of their own funds, or collaterals like Fixed Deposits, Bank Guarantees, stock or debt instruments etc. This makes them susceptible to credit concentration risks arising from over-reliance on a single party. Thus, if there is any imbalance in the solvency or stability of that counterparty, it will significantly affect the CC and in turn, the entire financial system. The Consultation Paper aims to minimize such exposure and concentration risk of CCs by the means of adequate diversification and liquidity. Current regime The existing guidelines rely on a vague set of principles, which makes their supervision and enforcement difficult. CCs are required to frame an Investment Policy, the foundation of which must give the greatest priority to safety and reduction of market risks. This entails them tailoring their investment strategy and focusing on a particular set of allowed instruments, such as Fixed Deposits made at banks with more than INR 500 crore net worth and A1 or equivalent rating, Central Government Securities, Liquid schemes of debt mutual funds and Overnight Funds. However, the total amount invested in Liquid Funds and Overnight Funds have to be restricted to 10% of the CC’s total investible resources. Furthermore, adherence to exposure limits is also compulsory. According to the guidelines, the CC’s overall exposure to debt or equity securities of any company cannot be greater than 15% of its total liquid assets. Moreover bonds, considered as non-cash components, must be limited to a maximum of 10% of the clearing member’s total liquid assets. Proposed changes The proposed norms aim to closely oversee the exposure of CCs by presenting a comprehensive list of the type of exposures that require monitoring. This list comprises of the CC’s own funds and core Settlement Guarantee Fund (SGF) with a bank, balances with the bank acting as a clearing bank, fixed deposits (FDs) and bank guarantees (BGs) lien, pledged or re-pledged equity shares, debt instruments and mutual funds and lastly, exposure through economically reliant subsidiaries. The selection criteria for banks have also been made more well-defined. Assessment of financials, capital adequacy and credit worthiness are pre-requisites. Only banks with a minimum net worth of more than INR 5000 crore, unsupported long-term rating of AA or above and fulfilment of capital adequacy requirements given by the Reserve Bank of India (RBI) are eligible for exposure via cash, FDs and BGs. Investment is allowed only in specific financial instruments like FDs, treasury bills, government securities and liquid mutual funds. Further, in case the bank’s rating downgrades from the specified criteria, CCs have to adjust the exposure within three months of such occurrence. Coming to credit rating impacting the selection of a bank, a balance must be maintained between liquidity and diversification. Exposure to banks with credit rating AAA and between AAA to AA should be capped at 15% and 10% of the average daily exposure of the past three months respectively. An extra 5% exposure will be afforded to CCs only in exceptional circumstances, provided they undertake action to reduce the same within permissible limits within three months. Additionally, exposure concerning equity and debt instruments provided by a single clearing member (CM) should be within 15%, in both cash and F&O segments. Acquisition of collateral from CMs should not occur through bespoke transactions or comprise of FDs, BGs or debt or equity instruments issued by them themselves or their associates. Exposure to such corporate bonds should also be subject to the issuer’s credit rating. As a matter of prudence, total daily exposure should never surpass 20% of the total exposure and overall exposure limits should be lowered proportionally if there is a fall in credit rating. Periodic objectives should be integrated in the internal policies of CCs to ensure adherence to the exposure limits. Real-time monitoring of exposure and a buffer of limits to ensure that it stays within the specified limits without encountering operational challenges should be made certain. The guidelines also give out a list of timelines for the smooth implementation of the above measures in a phased manner. The dichotomy between preserving the autonomy of CCs and having a pre-determined list There are several benefits of letting CCs devise their own criteria for selection of banks. Each CC has its own distinct risk tolerance threshold and method of operation. Given this diversity, a predefined list by RBI or SEBI outlining permissible banks may prove to be ineffective. Thus, allowing CCs to formulate their own criteria for selection will ensure that their risk management policies respond better and more promptly to address the changing market conditions and associated risks. In such cases, a one-size-fits-all approach can prove to be detrimental. On the contrary, a predetermined list by regulatory bodies like RBI or SEBI can guarantee a standard process of creating a level playing field and setting a benchmark of creditworthiness that all banks strive to achieve, thereby enhancing the overall health of the financial system. The list will also ensure that all banks are assessed based on a common set of criteria, reducing potential inconsistencies and guaranteeing a uniform risk assessment process. It will also simplify regulatory oversight and

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90 Days Period for Scheme of Arrangement – Mandatory or Directory?

Leave a Comment / Banking Law /

[By Chetna Alagh] The author is a student of UPES, Dehradun.   The process of schemes of arrangement, which falls under the purview of the Companies Act, 2013, has a significant role to play in the dynamic world of corporate complexities. These arrangements provide businesses with a methodical way to restructure their operational and financial situations. A company is legally allowed to restructure its financial debts using a scheme of arrangement if it can reach an agreement with all its stakeholders, including creditors, debtors, and holders of debentures. Once the proposed plan gets approved, it becomes enforceable against all parties. Section 230 of the Companies Act, when read in consonance with Regulation 2-B of the Insolvency and Bankruptcy Board of India’s (IBBI hereinafter) Liquidation Process Regulations 2016, establishes guidelines for the approval of time period in relation to “Schemes of Compromise or Arrangement”. Regulation 2B specifically addresses the time period for the scheme of arrangement when the company is in liquidation. It specifies that the proposed scheme of compromise or arrangement shall be completed within 90 days of the order of Liquidation. The persons who are not eligible under the Insolvency and Bankruptcy Code of India, 2016 (IBC, 2016 hereinafter) to submit the Resolution Plan shall not be a party to such compromise or arrangement. A significant question that arises with regard to schemes of arrangements or compromise is the fundamental character of the 90-day period required by Regulation 2B i.e., whether or not this period is directory or mandatory in nature. In the case of Arun Kumar Jagatramka vs. Jindal Steel & Power Ltd., the apex court talked about the interplay between the IBC, 2016, and Section 230 of the Companies Act, 2013. The court stated that the IBC and Section 230 must be construed in harmony. It was determined that suggested compromise or arrangement solutions should follow the IBC’s guiding principles, particularly in situations when companies are in liquidation. This was held keeping in view with the objective of safeguarding businesses against poor management and going into liquidation. The court ruled that Section 230 and the IBC are inextricably linked when addressing firms that are in liquidation, rejecting the claim that Section 230 stands alone and has no relationship to the IBC. In the case of Bharat Sharma Resolution Applicant vs. Reshma Mittal RP & Anr the National Company Law Tribunal (NCLT) order was the subject of the case’s appeal. The main question was whether the appellant, an MSME, should have been permitted to propose a compromise/arrangement scheme under Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, and whether the rejected Resolution Plan of the appellant should have been taken into consideration. The Liquidator argued that liquidation was the best option given the failure of the plan. It was held that the 90-day window under Regulation 2B was flexible and that the appellant should be permitted to submit a compromise/arrangement scheme within a month as per Section 230 of the Companies Act. Even though the 90-day window had passed, the appellant was allowed to submit a scheme of arrangement within one month, the tribunal did not view the 90-day window as an inflexible requirement, but rather as a directory provision. Further, in the case of Kshitiz Gupta (Liquidator in the matter of Abhishek Corporation Ltd.) Vs. Asset Reconstruction Company (India) Limited and Ors, the tribunal was asked to rule on how the Companies Act of 2013’s Sections 230 to 232 should be applied when a corporate debtor is being liquidated under IBC, 2016. The issue was whether the liquidator should try to save the business by reaching a scheme of arrangement with the creditors in accordance with Sections 230-232, and if that failed, move forward with the asset sale. It was held that the liquidator should prioritize trying to revive the company using the procedures outlined in Sections 230-232 of the Companies Act, 2013, and that these proceedings could take longer than the usual 90 days and emphasized that asset sales should only be pursued in cases where Sections 230–232 revival efforts have failed. This interpretation permitted a more adaptable strategy, acknowledging that the precise timetable for revival efforts and legal actions could change depending on the situation. The decision emphasized that when considering the revival and arrangement processes under the Companies Act, 2013, adherence to the strict 90-day period was not required. In the context of an ongoing liquidation processing the case of Small Industrial Development Bank of India and Ors vs. Delicious Cocoo Water Pvt. Ltd. and Ors, the tribunal was asked to decide whether to accept or not a Scheme of Arrangement pursuant to Section 230 of the Companies Act, 2013. The main issue was whether the submission deadline outlined in Regulation 2B (1) of the IBBI (Liquidation Process) Regulations, 2016, was mandatory or merely directory in nature. It was held that the timeline can be extended if it serves the scheme’s purpose as there was no specific timeline prescribed in the IBC, 2016 itself for submitting such a scheme. The tribunal’s decision emphasized the IBC’s goals of maximizing the value of a corporate debtor’s assets and favouring resolution over liquidation. As a result, the tribunal ordered the liquidator to present the proposed plan as soon as possible for the creditors’ consideration, maintaining the status quo with regard to the corporate debtor’s assets until the creditors decided regarding the plan’s viability. However, in the case of Mr. Harish Sharma vs. C&C Constructions Ltd. & Ors, the appellant sought an extension of the timeline for a scheme of compromise. It was held that the appellant had not met the requirements to request an extension of the deadline for submitting a compromise and arrangement plan, i.e., a formulated and ready plan was not demonstrated by the appellant, and their proposed plan was not approved by at least 75% of the secured creditors. Furthermore, no proof of the scheme’s readiness had been provided by the end of the process’s prescribed 90-day period. Therefore, it was concluded

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Pitfall of Deal Value Threshold: Lessons From the Indian Pharma

Leave a Comment / Competition Law /

[By Monesh R B] The author is a student of Tamil Nadu National Law University, Tiruchirappalli.   Introduction: In the year 2018, the Ministry of Corporate Affairs of India constituted the Competition Law Review Committee (CLRC) in order to check and assess the implementation of the Competition Act of 2002 (hereafter ‘the act’). The CLRC submitted a report on 26 July 2019, highlighting the issues revolving around the current legislation, various policy changes, assessing new age markets and tackle mechanisms, etc. The report paved the way for introduction of the concept of ‘Deal Value Threshold’ (DVT) as the government brought in an amendment to the act, making it the Competition (Amendment) Act, 2023. In the pharmaceutical industry, incumbents frequently conduct acquisitions and shut it down when the technology or innovation of the target is still in its infancy, also popularly termed as ‘Killer Acquisitions.’[i] The Organisation for Economic Co-operation and Development (OECD) defined Killer Acquisitions as “an incumbent firm acquiring an innovative target and terminating the development of the target’s innovations to prevent future competition.” In most cases, these types of acquisitions, especially in the Pharma sector, do not get notified to the Competition regulators as the value of these acquisitions will fall well below the traditional asset or turnover based threshold values as these target firms are in their nascent stage. Even though the rationale behind introducing Deal-value based threshold was to tackle this issue,  due to the lack of sector specific threshold values, there remains a gap that needs to be addressed by the law makers. Thus, this article will attempt to critically analyse the role of DVT with regard to ‘Killer Acquisitions’ in the Indian pharmaceutical industry. It will try to address the issues surrounding the absence of sector-specific threshold values, especially by highlighting the issues in the Indian pharmaceutical sector. What is Deal Value Threshold? Following the recommendations made by the CLRC, the legislature by Section 6 of the Competition (Amendment) Act 2023, inserted two new clauses to the already existing section 5 of the 2002 Act by which mergers, acquisitions and amalgamations will trigger a notification to the Competition Commission of India (CCI), if; “(i) the value of the transaction exceeds rupees two thousand crores (i.e., for acquisition, merger or amalgamation) (Approx. USD 242 Mn.) and; (ii) the target enterprise has “Substantial Business Operations in India.” The Ministry of Corporate Affairs, from its submissions before the Standing Committee, clarified that DVT is primarily meant for digital and new-age markets, where the target entity may have minimal assets and turnover, but may possess significant potential in terms of data, technology, innovation, etc. However, the text of the amendment does not restrict the application of DVT to any particular sector.[ii] Deal Value Threshold vis-á-vis  The Indian Pharma Sector: In the Pharmaceutical Industry, firms developing innovative technologies are often purchased by larger firms which provide R&D space, resources and money to develop their innovation into drugs. However, these small firms may become a potential competitor to the larger firms due to their innovation and hence becoming the targets of killer acquisitions. Competition in the pharma sector is important because it can motivate brands to create new and advanced medicines and encourage generic companies to offer less expensive alternatives.[iii] Taking a look at the deal value of pharma mergers that has taken place in India in the year of 2022 (as per data provided by the Times of India)[iv], except 2 out of 16 mergers, the rest of them will not meet this currently prescribed deal value threshold of INR 2000 crores (Approx. $242 Mn. USD). As per the CLRC’s report, the rationale behind this amendment was to bring the mergers/acquisitions under the ambit of CCI, that causes an Appreciable Adverse Effect on Competition (AAEC) in the Indian market but goes unnotified to the CCI as they do not meet the asset or turnover based threshold as prescribed in section 5 of the act. But this rationale is being completely defeated when it comes to specific sectors, like  pharmaceuticals, as the deal value of these mergers does not exceed the prescribed threshold values in most cases, because these firms are in their nascent stage and do not possess a significant market share. Thus, these mergers will not be under an obligation to notify the CCI neither under the asset and turnover based threshold nor the DVT. One may pose an argument that Killer acquisitions may be curbed down within the ambit of section 4 of the Competition Act. But the problem in doing so is that, section 4 of the act can be brought in only when the damage has already been inflicted but not prevent such activity. Thus, there is a significant gap with regard to the currently prescribed deal value of INR 2000 crores when it comes to specific sectors like pharma. If not Sector-based threshold, then what? Even though one cannot assume that every merger or acquisition will result into a Killer Acquisition, it is necessary to take some steps, with a particular focus on specific sectors, by fixing certain requirements for examination by the Competition Regulators or granting them ‘Residuary Powers’ to investigate into mergers that does not meet the prescribed threshold values for mandatory notification. As of now, no country has sector-specific threshold values for notification of combinations. But, the Competition regulators and their respective legislatures across the world are implementing various measures, in order to curb down killer acquisitions and other such anti-competitive practices.[v] In Europe, the European Commission (EC) has determined in the case of Novartis/GlaxoSmithKline Oncology Business, that drugs undergoing phase III clinical trials are potential competitors to the drugs existing in the market and thus, an incumbent acquiring the target firm in the same therapeutic category as the existing products of the incumbent, would be considered as a horizontal overlap. This is a very welcoming move in order to curb down or prevent killer acquisitions in the initial stage itself as this practice generally prevents any incumbent from acquiring a target which

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Revolutionizing Financial Transactions: Dissecting SEBI’s One-Hour Trade Settlement Leap

Leave a Comment / Capital Markets and Securities Law /

[By Parv Jain & Palash Varyani] The authors are students of Institute of Law, NIrma University.   Introduction Recently, in a breakthrough announcement, the Securities and Exchange Board of India (SEBI) Chairperson, Mrs. Madhabi Puri Buch has declared that the SEBI intends to implement one-hour trade settlement in Indian stock exchanges by March 2024. According to her, India will be the first jurisdiction in the globe to move towards one hour trade settlement and it will be a stepping-stone to instantaneous settlement. This article provides an insightful analysis of SEBI’s introduction of the one-hour trade settlement system in India. It highlights certain advantages of this system, encompassing increased market efficiency and reduced settlement risk. Furthermore, it predominantly focuses on potential concerns, notably amplified market volatility and the imperative for substantial technological enhancements. The article places significant emphasis on the meticulous execution and training requisite for the seamless adoption of the new settlement framework. Additionally, it underscores the potential susceptibility to fraudulent activities, necessitating robust risk management strategies. What is One-Hour Trade Settlement? Settlement is a two-way process that involves the transfer of money and securities on the settlement date. A transaction settlement is considered to be complete when stocks, once purchased from a listed company are delivered to the buyer and the seller receives payment. From February 25, 2022, India became the second nation in the world to begin the ‘trade-plus-one’ (T+1) settlement cycle in top-listed securities, offering operational efficiency, quicker fund transfers, share delivery, and ease for stock market players. Trade-plus-one (T+1) settlement cycle means that settlement relating to trades will take place within a day. But now, with the introduction of one hour trade settlement, when an investor would sell a share, the sale proceeds would be deposited to his account within an hour, and the purchaser would receive the sold shares in their demat account within the same time period. This will lead to a significant reduction in settlement time compared to the existing T+1 settlement. Merits of Implementing the One-Hour Trade Settlement Regimen The one-hour trade settlement system is a revolutionary approach that brings numerous advantages to the financial markets. This innovative system has been meticulously designed to significantly bolster market efficiency while simultaneously reducing settlement risks, particularly those associated with counterparties and market fluctuations. The core premise of this system is the swift settlement of trades within a mere one-hour timeframe, a feature that unlocks a plethora of benefits for investors and the broader financial ecosystem. The primary benefit of this rapid settlement cycle is the speed at which investors can access their assets and the proceeds from their trades. This newfound agility promotes liquidity within the market, allowing investors to quickly reinvest their funds. Consequently, this not only benefits individual investors but also contributes to the overall stability of the market. By minimizing the duration during which financial commitments are open, this system mitigates the potential for market disruptions and enhances reliance on the financial infrastructure. In addition to these advantages, the implementation of such an innovative system places India at the forefront of global financial innovation. It underscores India’s commitment to nurturing a technologically advanced and competitive market ecosystem. This move not only attracts domestic investors but also positions India as an attractive destination for international investors seeking a cutting-edge and efficient financial marketplace. The one-hour trade settlement system represents a significant leap forward in the realm of financial markets. Drawbacks of the One-Hour Trade Settlement System The introduction of the one-hour trade settlement system showcases a promising future for the financial ecosystem. However, it is crucial to acknowledge that this progressive shift may also present certain drawbacks and challenges that warrant careful consideration. The potential drawbacks can be outlined as follows: Market Volatility: With the introduction of one-hour trade settlement system and swift transfer of funds; liquidity would exponentially increase. This increase in liquidity can lead to a sense of urgency among market participants, which may influence their trading behaviour. Generally, more liquidity and increased volumes of trade are appreciated but this has some drawbacks too. For example, more liquidity may lead to less stability and more volatility, and due to this, traders may feel compelled to make rapid decisions, especially in times of market uncertainty or breaking news. They may not have sufficient time to thoroughly analyse market conditions or company fundamentals before executing trades. This can result in impulsive trading decisions thereby resulting in regular hitting of upper and lower circuits. The compressed settlement window encourages traders to buy or sell securities within a shorter timeframe. As a result, price fluctuations can become more pronounced as traders rush to complete their transactions, potentially leading to increased price volatility. Furthermore, traders may react more impulsively to news events, earnings releases, or economic data, leading to exaggerated market moves. In a one-hour settlement system, there would be limited time for the information to be digested and for rational decision-making, increasing the risk of overreactions and herding behaviour. Hence, the perception of a more volatile market may discourage long-term investors, such as institutional funds or retail investors, from participating. They may opt for less risky assets or investment vehicles with longer settlement cycles. Technological & Infrastructural Constraints: Transitioning to a one-hour trade settlement system requires substantial upgrades to the technology and infrastructure of stock exchanges, brokers, and other market participants. This includes enhancing trading platforms, and communication networks to handle the increased volume and speed of transactions. In such a system, all trade-related data, including order execution, trade confirmation, and settlement instructions, must be processed in real time. This necessitates high-speed data processing and analytics capabilities to ensure accuracy and minimize errors. Regulators will require robust technology solutions for real-time monitoring, surveillance, and reporting. They must be able to track and investigate trading irregularities and market abuses promptly. SEBI Chairperson, Mrs. Madhabi Puri Buch has indicated that the necessary technology for achieving a one-hour trade settlement is presently available. However, the implementation of a one-hour trade settlement system demands a comprehensive overhaul

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Reconsidering Related Party Regulations: Critical Analysis of SEBI (LODR) Regulations 2021

Leave a Comment / Company Law /

[By Chaitanya Gupta] The author is a student of Jindal Global Law School.   Introduction Related parties are important to corporate transactions because the parties have a pre-existing special relationship. Such transactions include business deals, series of contracts, etc. These relationships that exist prior to the transaction may appear in the form of parent-affiliate companies, parent-subsidiary companies, transactions between family members, and others. Usually, such transactions are employed for illegal, profit-making purposes, like fraudulently diverting resources and earnings (tunnelling). It can have severe consequences like affect shareholder dividends/profits, create a negative perception about the company’s governance, and hamper the growth of the company. Nevertheless, in certain circumstances, RPTs can benefit the company. Oftentimes, RPTs can cut transaction costs and creating operational efficiency. In fact, in some cases it has been observed that companies operating in groups, can save on operational costs, share risks, and improve productivity. RPTs in India In India, there is a peculiar pattern of ownership, i.e., a high concentration of ownership in the hands of particular individuals or families, and a large number of companies that are grouped under the ownership of one family or particular individuals. Thus, one promoter group often owns a group of companies. This pattern is bound to create conflicts between this promoter group and the minority shareholders. The rationale behind such conflicts is that the promoter groups tend to divert resources and profits for their benefit, so as to avoid proportional distribution of profits. The most common way to achieve this is to engage in ‘self-dealing transactions’, wherein finances are driven towards another company owned by the promoter group. Latest disclosure requirements and its problems The Indian corporate law regime qua RPTs is captured in Ss.2(76) and 188 of the Companies Act 2013. This regime is extended by SEBI’s Listing Obligations and Disclosure Requirements (LODR) 2015, the amendment of which came in force on April 2022 and 2023. It was formulated to incorporate the recommendations made by the Working Group Report of January 2020. One of the significant changes made is that RPTs require prior shareholder approval, as opposed to ex post facto approval. The primary argument of this article is to determine if SEBI cast the net too wide with the current disclosure requirements. Definition of ‘RPTs’ As per the latest LODR, the definitions of ‘related parties’ and RPTs were expanded, and the threshold of transaction value for shareholder approval was lowered. A related party thus includes a person/entity in possession of 20% equity shares or above, either directly, or on a beneficial interest basis. This 20% threshold fell down to 10% on 01.04.2023. Such a pure shareholding threshold to determine who is a related party precludes them from approving the transaction and would disenfranchise several investors. Financial investors like LIC, and the Indian Government would not be exempt from this disenfranchisement if they crossed these thresholds. The chances that investors will get disenfranchised double when the threshold goes down to 10%. This reduction arguably has no legal basis. The 20% threshold was grounded in the rationale of the Working Group Report, to deter shareholders with ‘significant influence’ from voting on material RPTs, and this Report does not endorse the further reduction to 10%. Nevertheless, some transactions have been exempted under these new guidelines. Transactions that directly and equally affect all shareholders or investors will not come under the fold of RPTs. However, the Reg.2(1)(zc) provides a finite list of such exempted transactions, viz., rights or bonus issue, buy-back of securities, dividend payment, and consolidation of securities. This change brings routine transactions under the purview of material transactions that require shareholder approval and/or audit committee scrutiny. Thus, transactions in the ordinary course of business, between affiliate companies of a large group or conglomerate are also scrutinised. This subjects routine transactions to auditory approvals, which not only obstructs the transaction but also unnecessarily burdens the audit committee. Even instances of real estate transactions that occur at below fair market value, while may trigger alarms of an abusive RPT; are a day-to-day transaction within conglomerates to promote struggling companies. While this may be a fair trade-off to create excessive audit scrutiny, lest an abusive RPT slips through the cracks, the additional burden on the committee creates an environment where all transactions do not get sufficient deliberation. Even though the exempted transactions are exhaustively listed, it raises uncertainty about other corporate actions and, whether transactions other than those exempted require prior shareholder approval or auditory scrutiny? The 1000 crore threshold These regulations have also stipulated a new monetary threshold of INR 1000 crore. RPTs that are beyond this limit need to be reported, so as to be subject to shareholder scrutiny. This new threshold is an absolute limit compared to the erstwhile provision, which had a threshold of 10% of the annual turnover of the company. This threshold can arguably be ultra vires of As.14 and 19(1)(g) of the Constitution. By virtue of the SEBI Act, SEBI will come under the definition of ‘the State’ as under A.12, and therefore its actions would be amenable to challenges of fundamental rights violation. The Khoday Distilleries case provides that regulations, specifically delegated legislations, can be struck down for being ‘manifestly arbitrary’ on the anvil of A.14. In fact, such delegated legislations are accorded less immunity than statutes of the legislature. Per Om Kumar, ‘non-classification arbitrariness’ is assessed under the ‘proportionality test’, and ‘classification arbitrariness’ is assessed under ‘Wednesbury principles’. The former tests if the means adopted are proportional to achieve the desired object, and the latter determines if the means share a sufficient nexus with the object. In the context of SEBI trying to protect the interests of minority shareholders and maintaining high standards of corporate governance, does this threshold create a disproportionate impact on large listed companies, thereby making it arbitrary? While it can be claimed that the aim of ensuring rights to minority shareholders and the maintenance of corporate governance could be achieved by scrutinising transactions that would not have been examined previously,

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