Author name: CBCL

Analysis of Coal India Ltd v. Competition Commission of India

Competition Law /

[By Siddharth Chaturvedi] The author is a student of Dharmashastra National Law, University.   Introduction Indian Public Sector Units (PSUs) have enjoyed monopoly in different sectors for a long period of time. However, this is likely to change in the coming time as we analyse the findings of the Supreme Court in the case of Coal India Ltd. vs the Competition Commission of India (Coal India).. The judgement has paved the way to challenge the monopolies of the Public Sector Unit by holding that the Competition Act will be applicable to Coal India Ltd. This piece attempts to analyse the judgment’s findings and its significance. . In doing the same, the author briefly traces the history of the Nationalisation Act along with Schedule 9 of the Constitution, before proceeding to analyse the judgment. The author concludes that, though the judgment should be welcomed because of opening nationalised companies to competition and strengthening the powers of the CCI, however, the ratio decidendi of the judgement rests on a weaker foundation, due to a few wrong assumptions such as the mention of the Essential Commodities Act, which will be subsequently highlighted in the piece. Coal Mines Nationalisation Act, 1973 and the 9th Schedule of the Constitution The Coal Mines Nationalisation Act, of 1973 was introduced to ensure  that the ownership and control of resources are held with the State in order to serve the common good of people through the distribution of resources. In the 9th Schedule of the Constitution, one gets to see that Coal Mines Nationalisation Act, 1973 is mentioned as the 99th item. However, the Coal Nationalisation Act, of 1973 was repealed by the Repealing and Amending (Second) Act, of 2017, thus taking the Act outside the ambit of the 9th Schedule of the Constitution. Hence, the Coal Mines Nationalisation Act, of 1973 could be challenged on grounds of being ultra vires of the Constitution. It is also important to note that prior to the judgment of Coal India Ltd. vs CCI, the Supreme Court had already stated in IR Coelho vs State of Tamil Nadu(IR Coelho) that any law which has been inserted in the 9th Schedule, has to be tested on the principles of the basic structure of the Constitution. Thus, there is no absolute bar on testing the validity of any law inserted under the Ninth Schedule. Against the backdrop of these two important developments, it is necessary to examine the judgement of the Supreme Court of India in Coal India vs CCI. Analysis of the Judgement Before arriving at its ruling, the Apex Court observed that Coal India Ltd is a Government Company. Further, the Court also stated that Nationalisation Act was passed in order to realise the goals of Article 39(b) of the Constitution, which states that ownership and control of the material resources of the country are to be distributed in order to subserve the common good. The Court also drew a lot of interesting analogies while arriving at its decision, amongst which was a reference to ‘slaughter mining’ and whether the same runs in violation of Section 4(2) (b) of the Competition Act. Section 4(2) (b) prohibits abuse of dominance if the enterprise limits or restricts the production of goods or provision of services or it restricts or limits the scientific development of the goods. However, the Court failed to provide any empirical evidence of Coal India Ltd indulging in slaughter mining, rather it proceeded on a hypothetical situation that Section 2(4)(b) of the Competition Act may be violated in the case of slaughter mining. The Court also rightfully drew the attention of the parties to the report of the Raghavan Committee where it was stated that despite being a State monopoly, these state enterprises had to operate within the realm of competition law. Importantly, the Committee had noted, which also finds mention in the judgement that the public sector should be open to competition and not given any preferential treatment. Further, the Committee Report also pointed out various ills such as preference in bidding, state patronage, restrictive trade practices etc. . However, the Court then, in the humble opinion of the author, unnecessarily devoted pages to highlighting the transformation of economic policies from 1991 to the present date, which could have been explained keeping in mind brevity.  The Court also answered in the affirmative that Section 19(4) of the Competition Act, which gives CCI power to assess whether a particular enterprise enjoys a dominant position or not,  a single factor itself. Moving ahead, the Court also proceeded to point out the importance of Section 19(4)(g) of the Competition Act, which gives the CCI the power to investigate whether an enterprise enjoys a dominant position or not, by taking into consideration whether the enterprise is a monopoly or in a dominant position due to being a Government Company or public sector unit. Thus, the Court effectively indicates that Coal India Ltd falls within the ambit of the purview of the Competition Act. The central argument of Coal India Limited, which was based on Article 39(b) of the Constitution, was also negated by the Court when it questioned how the Competition Act which provides for avoidance of anti-competitive agreements, abuse of dominance serves against ‘common good’? The Court’s central assumption behind the same premise was that while enacting the Competition Act, of 2002, the Parliament was aware of the Nationalisation Act and intended to regulate the competition of the State-owned companies or Public Sector Units. This certainly seems to be a correct argument, otherwise, in the author’s opinion, the Parliament could have carved an exception for State-run entities within the Competition Act itself. However, the Court could have further proceeded to strengthen its ratio decidendi on other arguments, rather than relying on Coal being removed from the Essential Commodities Act. The  Court observed that  Coal was removed from Essential Commodities Act, and thus observations of the judgment of Ashok Smokeless Coal India Ltd vs The Union of India ( Ashok Smokeless)will not

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A Stitch in Time saves nine: Notice to creditors mandatory?

Insolvency Law /

[By Saumya Mittal & Keerthana Rakesh] The authors are students of Gujarat National Law University.   Introduction In a dramatic chain of events, Go First, one of the most profitable and most sought-after airlines in India, had to take a flight on the wings of Section 10 of the Insolvency and Bankruptcy Code, 2016. With its faulty engines, the aviation company found itself in hot water due to mounting losses and unpaid credit. But the news didn’t bode well for the operational creditors of the company who were well aware that a Corporate Insolvency Resolution Process (CIRP) takes an average of 588 days in India and by the time a resolution plan develops, most of the value of the assets would have eroded. To counter the same, they presented the National Company Law Tribunal (NCLT) with multiple arguments, one of them being that no notice of initiation of CIRP under section 10 was served to the operational creditor by the corporate debtor, thus depriving them of the opportunity to object to the said application. Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) allows the Corporate Debtor to initiate CIRP against itself by filing an application before the Adjudicating Authority. Having heard both the sides, the NCLT vide order no. (IB)-264(PB)/2023 admitted the application and favored the Corporate Debtor by stating that a Corporate Debtor is not obliged to serve notice to its creditors as Section 10 or 11 of the IBC does not prescribe the said requirement. The position on serving of notice being clear, this article attempts to inspect the decision of the NCLT with respect to the serving of notice under section 10 and whether the same should be made mandatory. Issue and Contentions of the Parties The issue arose when Go Airlines (India) Limited filed an insolvency application under Section 10 of the IBC before the NCLT, Delhi, to initiate the CIRP proceedings against itself. The Corporate Debtor submitted that it is in financial distress due to continuous default in payments to vendors and aircraft lessors. Since it has a subsisting debt of more than Rs. 1 Crore, it is entitled to file an application under the said section of the IBC. The creditors of the Applicant, on the other hand, were against the insolvency application as they contended that the Corporate Debtor did not give them due notice before filing the application before the NCLT. They pleaded that they were entitled to prior notice and that principles of natural justice should be duly adhered to. Further, the creditors contended that they should be provided with an opportunity to file an application under Section 65 of the IBC, which provides for action to be taken against any person who initiates CIRP with malicious intent. Notice under Sections 7 and 9 similar to that under Section 10? One important observation made by the tribunal in the Go First proceedings was that serving of notice to a corporate debtor by the financial and the operational creditor under sections 7 and 9 respectively, was a matter of right as application under the two sections was in personam and in the nature of a litigation thus making the corporate debtor a respondent. Also, the tribunal noted that a corporate debtor is an ‘aggrieved party’ and thus it should be served notice. But the same was not the case for notice under section 10. Since creditors didn’t constitute an ‘aggrieved party’ and are in the nature of a third party, serving notice to them is not legally compulsory and it merely depends upon the facts of each case. Thus, the notice under sections 7 and 9 is significantly different from that under section 10. The matter of whether notice under this section is obligatory has been largely resolved by the tribunal. However, a new consideration arises: Should this requirement be mandated? Before addressing this, it is prudent to examine Section 65, which grants distressed creditors the authority to initiate fraud proceedings against any deceitful CIRP. Rationale behind notice requirement in light of Section 65 Mention of section 65 whilst dealing with section 10 is a no-brainer. Section 65 of the 2016 code deals with the fraudulent initiation of Insolvency resolution proceedings by a person in order to defraud any stakeholder. It is settled law that section 65 proceedings can be initiated even after the imposition of a moratorium under section 14 of the code, and the same has been reiterated in the Go First NCLT Order. In this order, one sound question was raised- why should notice be served under section 10 if the provision of section 65 is there? If a party has the grievance that application for CIRP is fraudulent and has been filed just to defraud the creditors of their loans, the latter can very well file an application under section 65, and the proceedings would go along with the CIRP proceedings. Why does one, then, need an intimation via notice of filing for CIRP by the corporate debtor just to make sure that no fraudulent proceedings are initiated? The answer lies in the limited scope of section 65, which deals with only those cases where ‘fraudulent intention’ exists. However, consideration must also be given to instances where the corporate debtor’s actions were not driven by malicious intent. Nonetheless, these actions still had a substantial adverse effect on the creditors. In such cases, a prompt notification of the impending CIRP filing was essential to allow creditors to strategize appropriately. For these scenarios, regardless of intent, the necessity for a notice persists, and this requirement cannot be solely addressed by the provisions of section 65. Need for serving of notice under section 10 Serving notice to creditors during the initiation of the CIRP is a prudent approach that aligns with the spirit of IBC 2016 while fostering transparency, efficiency, and the best interests of all stakeholders involved. One of the primary reasons to serve mandatory notice to creditors is to enable them to be adequately prepared for

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SEBI’s New Rumor Clarification Regiment

Capital Markets and Securities Law /

[By Anirudh Das] The author is a student of National Law University, Vishakapatanam.   Introduction The Securities Exchange Board of India, via the amendments to the LODR Regulations on June 14th, 2023, has introduced a rather peculiar sort of Obligation on a Listed Entity, specifically on India’s top 100 & 250 listed entities (based on market capitalization), who would have to with effect from October 1st, 2023 and April 1st, 2024 respectively mandatorily confirm, deny, or clarify market rumours to the stock exchanges. Now let’s try and analyze this move by SEBI and speculate on the potential impact of this regulatory step on the Indian securities market. We will try to provide a comprehensive analysis of the move, including its benefits, challenges, and potential implications for market participants and investors. By evaluating the regulatory framework and the underlying reasons for such a requirement, this study seeks to shed light on the effectiveness of this measure in enhancing market transparency and investor confidence. History of the Provision and Need for the Amendment SEBI’s existing regulations include guidelines on disclosure and transparency requirements for listed companies, mandate companies to promptly disclose any material information or events that could have a significant impact on their financial position or stock prices. However, the recent move goes a step further by specifically focusing on addressing rumors, rumors that often circulate in the market and have the potential to create confusion and market volatility. Prior to the recent move, SEBI had already instituted regulations to address issues related to market rumors and misinformation. Regulation 30(11) of the Listing Obligations and Disclosure requirements gave an option to Listed Entities to “..confirm or deny any reported event or information to stock exchange(s)”. Now it has become mandatory for the Top 250 Companies.  Dissecting the Words In order to fully appreciate the Obligation that this proviso confers let us break down the requirements for the Proviso to be triggered: Information must be in Mainstream Media Must not be General in Nature & Indicates Rumors of Impending Specific Event In terms of the Provision of this regulation Circulating amongst the Investing Public And in response to which the company must perform the following: Deny or Confirm any reported Material event or Information. Within a reasonable time or 24 hours from the time when the Event has been reported In trying to examine each and every element, we must pay close attention to the words used. Several of these words do not have any defined legal meaning and hence we would try and subject them to interpretation and define the Set of Conditions to be met in order for them to be fully met. Firstly, The expression ‘Mainstream media’ has been, in the prefaces of the amendment, said to include both print and electronic by stating that it would not just be “print media but television and Digital Media”. It is interesting to note that Social Media has not been mentioned as a source of news, implying quite literally that Rumors or news that is circulated on Social Media, which constitutes a significant avenue for news consumption, would fall outside the purview of this Regulation. The Jury’s out on whether it is a willful omission or a negligent one. Secondly, rumors that would qualify to be subject to clarification would require specific averments in reference to the Material Event or information. The Current Amendment quantifies by Para 3.1.6 , Material Events on specific Criteria. The criteria are based on a combination of turnover, net worth and profit/ loss after tax (PAT) where such event/ information is considered “material”, whose value or the expected impact in terms of value, exceeds the lower of the following; two per cent of turnover, as per the last audited consolidated financial statements of the listed entity; two per cent of net worth, as per the last audited consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative; five per cent of the average of absolute value of profit or loss after tax, as per the last three audited consolidated financial statements of the listed entity. Hence only such events that are probable to trigger the aforementioned thresholds would qualify for disclosure under this bracket. Additionally, the term used here is ‘impending’ Specific Event or information, and hence thereby must be an even that is set to happen in the near future. Meaning that speculations about events that said to occur in distant future or a general policy decision not relating to an event or information other than an event would not trigger the said Regulation. And lastly, it must be a piece of information that is circulated within the Investing Public, therefore any piece of information by merely becoming widely speculated would not attract the provision, since prosecution would have to prove that it is circulated within the Iinvesting public. All the same quantifying whether a certain information has been circulated to the Investing Public would be difficult. It wouldn’t be surprising to think that the amendment stems from the recent speculative train ride that was faced in Jio-Facebook deal,[1] but it could also be seen as a provision providing for greater transparency and robust regulatory environment. The Clarification Conundrum The most evident pitfall of the Regulation would definitely be the volume of such rumors. Consider, India has over 392 news channels and over 20, 278 newspapers. And hence the question that arises is that does any rumor or speculation that has been brought forth by these news outlet mandate a clarification by the company? Because if that is the case one could only imagine the volume of clarifications that would arise. It could also be argued and has been in fact contented in the feedback to the consultation brief that some listed entities subject to these conditions would lose their competitive Edge while vying for various contracts and Concession. The author feels that this argument has no merit since the Companies that would have to

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SEBI’s Stance on Financial Influencers: A Case of Executive Overreach or A Strategic Move?

Capital Markets and Securities Law /

[By Shyam Gandhi] The author is a student of National Law University, Jodhpur.   Introduction Recently, Securities and Exchange Board of India (“SEBI”), has stated that it will be framing rules and regulations regarding fin-influencers to protect the consumers. SEBI has emphasised on the potential dangers posed by influencers, particularly when individuals blindly adhere to their financial advice, promising substantial returns. Fin-influencers are individuals who have public social media profiles and use these platforms to offer advice and share personal experiences with matters pertaining to finances and investments in stocks. A concern has been raised that these fin-influencers lack the requite license and qualifications and they may possibly provide completely flawed advice to earn profit from the promoter of specific products illicitly, which results in loss to the innocent consumers who rely on them. Need For Regulations The SEBI plays a pivotal role in the facilitation of investor protection and the advancement of market development within the Indian context. In recent years, there is an increase in the number of fin-influencer. The emergence of financial influencers was propelled by the significant growth of the cryptocurrency market in 2017 and the subsequent impact of the COVID-19 pandemic, leading to an extraordinary jump in the stock market and attracting a larger audience of inexperienced investors. However, on the other side of the pendulum, financial literacy in India is only 27%. It implies, most of the investors lack the requisite knowledge and thus depend upon these fin-influencers. Usually, investors take their advice for granted and they act as per the instructions of fin-influencers. A fallacious or biased advice can cause irreparable loss to the investors. Take for example, SEBI’s action in the Vauld case. Further in case of Stock Recommendations using Social Media Channel (Telegram), it has been ascertained that the individuals responsible for managing the channel were found to be lacking registration as Research Analysts or Investment Advisors. Furthermore, it had come to light that these individuals had imposed fees on the innocent investors that were deemed to be unjust and inequitable. Thus, from the above the following can be culled out to be the reasons why such steps by SEBI were required: Unregulated Advice: Finfluencers, being private individuals or entities, are not necessarily subject to the same level of scrutiny as registered financial advisors or investment professionals. This lack of regulation can lead to a risk of misinformation or unverified advice, which could harm investors. Market Manipulation: In some cases, Finfluencers may have vested interests in certain stocks or financial products. They may use their influence to manipulate the market or promote certain assets without adequate disclosure, potentially harming investors who follow their advice without understanding the full picture. For example, Arshad Warsi through the fraudulent advice manipulated the share prices of Sadhna Broadcast and Sharpline Broadcast. Retail Investor Vulnerability: Retail investors, especially those new to investing, might be more susceptible to making decisions based on the recommendations of Finfluencers without conducting thorough due diligence. SEBI aims to protect these investors from potential risks arising from misleading or unverified information. Maintaining Market Integrity: A well-regulated market is crucial for its stability and long-term growth. By establishing rules and guidelines for Finfluencers, SEBI seeks to ensure that market participants, including influencers, adhere to ethical practices and maintain market integrity. Does SEBI Have Jurisdiction To Make Rules And Regulations? One of the key legal aspects is whether SEBI has the jurisdiction to make such rules and regulation. The SEBI Act, 1992 primarily empowers SEBI to regulate and oversee various entities and activities related to the securities market in India. These include stock exchanges, listed companies, brokers, portfolio managers, mutual funds, and other market intermediaries. Financial influencers, who provide financial advice and insights to their followers through various media channels, may not fall directly within the purview of entities typically regulated by SEBI. I. SEBI Investment Advisers Regulations, 2013 As per the SEBI Investment Advisers Regulations, 2013, under the proviso to Regulation 2(l), state that “investment advice given through a newspaper, a magazine, or any electronic, broadcasting, or telecommunications medium that is widely available to the public shall not be considered investment advice for these regulations.”Thus, as per the above provision, if advice has been given through a electronic medium, which is widely accepted, then that advice will not be considered as Investment advice.  As the fin-influencers utilize social media platforms as a means to distribute their expertise in the field of finance, leveraging the widespread accessibility of electronic media to reach a broad audience. Hence, it might be argued that the guidance provided by them does not meet the criteria of investment advice as outlined in the SEBI Investors Advisers Regulations. Therefore, it is not feasible to regulate fin-influencers within the scope of an ‘Investment Advisers’ regulations. II. SEBI Research Analysts Regulations, 2014 According to Regulation 7 of the SEBI Research Analysts Regulations 2014, individuals registered as Research Analysts, as well as those employed as research analysts as and partners involved in preparing and publishing research reports or analyses, must meet specific minimum qualifications and certification requirements issued by the National Institute of Securities Markets. However, even though fin-influencers may possess knowledge and have a substantial following, they may not have the necessary certification and training required to be registered as research analysts with SEBI. As a result, under the SEBI Research Analysts Regulations, 2014, they are not authorized to provide investment advice or research reports, and they may not be classified as research analysts. III. Advertising Standards Council of India Guidelines, 2013 Although, Advertising Standards Council of India [“ASCI”] has released the guidelines in this regard. As per the guidelines, If there is a material connection between the advertiser and the influencer, it must be disclosed and disclosure needs to be clearly and prominently presented to ensure that it is not overlooked by customers. Material connections includes but not limited to monetary compensation, discounts, gifts, etc. However, the guidelines of ASCI are not mandatorily applicable on these influencers. These guidelines do not

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Decoding the Secondary Market: Continuation Funds

Capital Markets and Securities Law /

[By Sayali Dodal] The author is a student of Maharashtra National Law University Aurangabad.   Introduction Over the past few years, the Indian markets have witnessed a remarkable growth fuelled by ever evolving desire of General Partner (“GP”) and Limited Partners (“LP”) to take part in secondary transaction structures with an aim to deliver solutions to the challenge faced by investors which is lack of liquidity. These GP led Secondary Transaction such as Strip Sale or Continuation Funds are utilized when, in the opinion of the GP, the investments would not yield the expected returns at the originally expected due time of making exits for closed-end funds. In recent years, continuation funds which involves setting up a new fund to simply transfer unrealized investments out of an existing fund, have emerged as an innovative investing method. Continuation funds provide a solution by extending the investment life cycle of venture capital and private equity funds thereby providing liquidity to early investors while also supporting business growth. Presently, at the end of tenure of a scheme of an Alternative Investment Funds (“AIF”), the manager can seek extension of the tenure of the scheme by two years upon approval of two third of the investors which is decided on the basis of their investment in the scheme. Furthermore, after acquiring approval of at least 75% of the investors by value of their investment, the managers also have the option to distribute the assets of the AIF in-specie. In case neither of the aforementioned investors’ consent is received, or if the two-year extension  of  the AIF  is  complete without  investor  approval  for  in-specie distribution of  residual  assets, the AIF is left with no other option than to liquidate the scheme within one year in accordance with AIF Regulations of 2012. The Fund is expected to exit its investments during the harvesting period, and in any case, upon the completion of its tenure. However, sometimes it may be more conducive from a value generation perspective to have a longer holding period for some of these investments. This necessitates a fine balance of expectations, since not all LPs may be on board with extending the holding period and may seek liquidity by the end of the originally communicated tenure of the Fund. Over the past few years, the branding of GP led secondaries has improved particularly in the light of COVID-19, and GP-led secondaries are being used more frequently to continue investments in assets which can potentially provide higher returns in future commonly referred to as the “trophy assets”. One way to structure secondary transaction is by Continuation Funds. Mechanism Of Continuation Funds Continuation Funds are a form of restructuring, partaking transfer of assets by an existing fund to a new fund. These new funds often invest in existing portfolios of successful early-stage firms, allowing initial investors to earn partial returns while reinvesting in fresh prospects. LPs in the existing fund can quit their investments (“Dissenting Investors”) while still being exposed to potential future gains since continuation funds provide liquidity or roll into the new, longer life fund. The purchase of interests from cashing-out LPs is funded by subscription funds from new LPs or current LPs increasing their stakes. Additionally, these new funds are typically managed by the same GP thus mirroring the old fund. Continuation Funds provides General Partners two options: first, they can retain those assets that have given satisfactory returns and may generate additional value in future, and second, they can let the weaker performing assets to stabilise by giving it more time. A continuation vehicle can also be used strategically to create additional funds to be used in expansion prospects by investing in newer buildings or equipment. SEBI’s Take On Continuation Funds Keeping in view the growing popularity of Continuation Funds, Securities and Exchange Board of India (“SEBI”) issued a Consultation Paper in February, 2023 with the proposal to allow AIFs and the managers to carry forward unliquidated investment of a scheme upon completion of its tenure to a new scheme of the same AIF. As per the Consultation Paper, this step came as a response to the sample data collected by SEBI which highlighted the expiration of 24 AIF schemes with a total valuation of Rs. 3,037 crores in FY 2023-24. Another 43 schemes with a valuation of Rs. 13,450 would also expire in the subsequent FY 2024-25. With closure of an existing fund, the introduction of Continuation funds would benefit the investors by providing them the required liquidity while also ensuring disclosure, recognising its asset value  and tracing fund performance. Accordingly, AIFs/managers can transfer unliquidated assets to a new scheme at the end of its tenure with the consent of 75% of investors by value. One condition to be imposed on such AIFs/managers is to arrange bids for atleast 25% of the unliquidated investment in order to provide liquidity to the investors who do not wish to continue. When the bid is obtained from related parties of the AIF/manager/sponsor or existing investors, it has to be disclosed to the investor for transperancy and according to SEBI “such bids can only be used to provide pro-rata exit to other remaining investors”. It is assumed therefore, that to provide liquidity to the dissenting investor who do not wish to transfer to the new scheme, bids obtained from related parties or existing investors can only be utilised. But this pose the question that wouldn’t bids from parties who do not fall in this purview be used to provide liquidity? Another interesting point is that this obligation to obtain bids for 25% of the unliquidated investment is not mandatory since the proposal itself provides an alternative.  In case such bids cannot be arranged, the closing valuation of the scheme will be based on the liquidation value as determined under IBBI Regulation, 2016 or other IBC norms. The ambiguity concerning whether Dissenting investors have to be paid or not poses another issue. In the scenario when 25%  bids are obtained for the unliquidated assets,

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SEBI v. Abhijit Ranjan: A case of Judicial Overreach?

Capital Markets and Securities Law /

[By Siddharth Sharma] The author is a student of Institute of Law (Nirma University).   Introduction In the world of the securities market, insider trading is one of the most heard and frowned upon terms. The term insider trading in its simplest connotation implies the advantage churned out of some confidential information, where the information lies with the person due to the position or privilege he holds in an entity and the information is of such nature which has the potential to either soar the value of the securities or plunge it. The indulgence in selling and purchasing of securities on the basis of such information that is generally not available to the public consequently results in insider trading Across jurisdictions, the practice of insider trading has been considered to be both immoral as well as illegal in nature. This article analyses the judgment of the Supreme Court of India in the case of SEBI v. Abhijit Ranjan. The Apex Court through its judgement in the aforesaid case has changed the yardstick for holding a person guilty of insider trading to some extent. The article further delves into the question of whether this decision of the apex court is an overreach. The Factual Matrix of the Case The respondent in the present case, Mr. Abhijit Ranjan was the chairman and managing Director of Gammon Infrastructure Projects Limited (GIPL) till 20th September 2013 and thereafter he continued only as director of the company. In the year 2012, a special purpose vehicle (SPV), Vijayawada Gundugolanu Road Project Pvt. Ltd. (VGRPPL), was created for the execution of the project worth Rs 1648 Crores which was awarded to GIPL by the National Highway Authority of India (NHAI).  Simplex Infrastructure Limited (SIL) was similarly awarded a contract worth Rs. 940 Crores by NHAI for a project in Jharkhand and West Bengal. For the execution of this project, SIL set up an SPV called Maa Durga Expressway Private Ltd. (MDEPL). Thereafter two shareholders agreement was signed between SIL and GIPL, pursuant to these agreements SIL had to invest in VGRPPL and similarly GIPL had to make an investment in MDEPL. The structure of this investment effectively meant that each of the parties would have 49% stakes in each other’s project. However, on 09.08.2013, the abovementioned agreements between the parties were terminated by the GIPL Board. Later, the respondent on 22.08.2013 sold a total of 114 lakhs of his shares of GIPL worth Rs. 10.28 crore. The disclosure regarding the termination of the shareholder’s agreement was made to the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) was made on 30/08/ 2013. The Securities and Exchange Board of India (SEBI), based on the input of the NSE regarding the transaction and the possibility of the trade being concluded based on unpublished price sensitive information (UPSI), conducted a preliminary enquiry, wherein it prima facie held that the respondent violated the provisions of Section 12A(d) and (e) of the SEBI Act, 1992. This was later confirmed, upon hearing the respondent, by its order dated 23.03.2015. Further, notices were served upon to the respondent and another company named, Consolidated Infrastructure Company Pvt Ltd (CICPL) along with its two directors. Upon receiving the replies and hearing the notices, an order holding the respondent guilty of insider trading was passed and he was made liable to disgorge Rs. 1.09 crores, which is the said amount of unlawful gain from the trade. However, the other noticee i.e., CICPL. Subsequently, a statutory appeal was filed by the respondent which was ruled in its favour and thus the SEBI went to appeal against it before the apex court, which is the present case. The Bone of Contention The apex court in this appeal by the SEBI formulated primarily a three-pronged issue for consideration. Two of the main issues were: (i) Whether the decision of the board to terminate the aforesaid agreements can be characterized as ‘Price Sensitive Information’ within the meaning of section 2h(a) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. (ii) Whether the said sale of the shares by the Respondent would amount to insider trading under Regulation 3(i) and Regulation 4. A. Unpublished Prince Sensitive Information The expression Price Sensitive Information has been defined under Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. It is defined as ‘any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.’ The explanation to regulation 2(ha) provides 6 specific pieces of information which are to be characterized as price sensitive, whereas the seventh sub-point of explanation mentions a relatively broad entry i.e., significant changes in policies, plans or operations of the country. The term ‘unpublished’ has been defined under regulation 2k as ‘information which is not published by the company or its agents and is not specific in nature. Further, regulation 3 prohibits dealing, communicating or counselling on matters related to insider trading. Any person who enters into a transaction of securities in contravention of the provisions mentioned under regulation 3/3A was made to be held guilty of the mischief of insider trading. Therefore, for rendering a person guilty of insider trading two essentials are to be fulfilled in accordance with Regulation 4, they are a) the person happens to be an insider b) the transaction in securities should be in violation of regulation 3/3A. The apex court held in its judgement that the information which resided with the respondent would definitely fall within the category of Unpublished Price Sensitive Information as it found the information regarding the termination of the said agreements capable enough to materially affect the price of the security in the market where the effect of such information could either be beneficial or have an adverse effect. B. Guilt of Insider Trading: Introduction of a New Element While the apex court affirmatively answered the essentials with regard to the said information being rendered to be a UPSI and

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Fairness and RoC’s Compliance: Natural Justice under Section 248.

Company Law /

[By Anaya Nandish Shah & Pulkit Rajmohan Agarwal] The authors are students of Gujarat National Law University.   INTRODUCTION The National Company Law Appellate Tribunal (“NCLAT”), New Delhi in the matter of M/s Sanmati Agrizone Private Limited v. Registrar of Companies & Anr., upheld the decision of National Company Law Tribunal (“NCLT”) and favoured the move of the Registrar of the Companies (“RoC”) in striking off the name of M/s Sanmati Agrizone Private Limited from the list of Register maintained by the RoC. The Companies Act, 2013 (“the Act”) by virtue of Section 248 empowers the RoC to strike off the names of all those companies: that have been incorporated but have not commenced their business within a year of incorporation, that have not obtained the status of a ‘dormant company’ after failure to carry on business operations for a period of two years immediately preceding the financial year, whose subscribers at the time of incorporation obtained the subscription, however, they have not paid the subscription amount and a declaration for the same has not been filed within a hundred and eighty days, that fail to carry on its business operations after physical verification. However, it is important to note that such a strike-off under the aforementioned section can only be undertaken after serving appropriate notice to the company and its directors, along with providing them with an adequate opportunity to submit their defences. Following that, a notice must also be published in the Official Gazette,in order to inform other stakeholders of the company such as creditors, business traders, vendors, etc. In the present case, the records indicate that Sanmati Agrizone Pvt. Ltd. dealt in a number of agricultural activities, and filed income tax regularly . However, it failed to file returns and other financial statements from 31.03.2016 to 31.03.2020 before the RoC, owing to certain financial uncertainties. Upon becoming aware of the issue of non-submission of documents, the Company decided to expeditiously deposit all the relevant documents with the RoC. However, on 08.08.2018, they discovered that their name had been abruptly struck off by the RoC, without any prior notice. The legal conundrum that arises herein, is whether such a non-compliance results in a violation of principles of natural justice and whether the aftermath of such judgment creates adversities among the already existing companies. Typically, the repercussions of such non-compliance  with statutory procedural requirements have proven to be detrimental. Abstractly omitting essential requirements before coming to a conclusion often leads to more harm than good. INFRINGING THE PRINCIPLES OF NATURAL JUSTICE In the present case, the problem stems from the fractional and erroneous application of the law. While analysing the section, the tribunals merely ensured that the act of striking down was well within four corners of the provision. However, they failed to acknowledge the mandatory procedural obligations upon the RoC to serve the notice to the company before such a strike off. Moreover, the principles of natural justice, which are very well-established within our legal system, were blatantly disregarded. The Supreme Court in its landmark judgement of A.K. Kraipak v. Union of India, expanded the principles laid down in the case of Ridge v. Baldwin, infamously referred to as the Magna Carta of principles of natural justice in the English law. It emphasized on the importance of these principles and defined them as the safeguards of justice. Natural Justice, which is synonymous with “fairness”, is centred on two fundamental principles: “Nemo Judex in Causa Sua” and “Audi Alteram Partem”. The latter principle finds its application in the case at hand, which stands for “the right to be heard and to defend oneself”. Recently, the Apex Court in State Bank of India v. Rajesh Agarwal upheld the principle of Audi Alteram Partem and stated that an opportunity of being heard is quintessential before declaring the defaulters as fraudulent. Supreme Court in another case, State of Orissa v. Dr. Binapani emphasized the right to be heard especially in situations where an administrative action has civil repercussions. It can thus be agreed upon that the fundamental tenet of a fair hearing, is that the party being sued be made aware of the case against him, before the adjudication process begins, so as to give him a fair opportunity to defend himself. It is through the notice, that the concerned party is informed of the case and the proposed actions/ charges levelled against him. The Apex Court in Olga Tellis v. Bombay Municipal Corporation underlined the importance of notice in adjudicatory proceedings. Thus, notice is a sine qua non of a fair hearing, in the absence of which, the fundamental right to be heard stands compromised. IMPLICATIONS OF OVERRIDING THE LEGAL PROCEDURE This arbitrary application of the law, without following the due procedure, can have multifold implications. It is pertinent to note that once a company is deregistered it can undoubtedly approach the NCLT under Section 252 of the Act for its re-registration. The NCLT may also reverse the orders, nonetheless, the harm caused cannot be wholly remedied. This can have substantial ramifications for a company since its day-to-day operations, contractual commitments, and prospects stand stalled. Moreover, regaining stakeholders’ trust becomes difficult, consequentially resulting in the loss of a company’s value and its probable insolvency. Furthermore, the whole process of reinstating the company’s name comes at an enormous cost, which could have been avoided if an opportunity to present their case had been offered initially. Without affording an opportunity to represent, like in the present case, the fallacious removal of names from the register by RoC can lead to a loss of reputation and credibility of a company. The Supreme Court’s ruling in Erusian Equipment & Chemicals Ltd v. State of West Bengal & Anr. highlighted the damaging effects of arbitrary blacklisting on a business’s reputation.  This can be compared to the de-registering of a company by RoC. The implications of the latter are even more perilous since the company ceases to exist. The Tribunals have not only overlooked the procedural irregularity

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The Rise of Finfluencers: Call for Responsible Regulations

Contemporary Issues /

[By Pritha Lahiri & Ria Agrawal] The authors are students of Institute of Law, Nirma and University Symbiosis Law School, Noida   PROLOGUE: WHO ARE FINFLUENCERS The audience on social media platforms is growing worldwide, resulting in a more varied group of people. To sustain such engagement, creating diverse content is crucial, ranging from entertaining dance videos to educational lectures and even valuable financial advice. Individuals who use their social media presence or websites to discuss financial products and services and provide investment advice are referred to as “Finfluencer”. Finfluencers often generate income and receive incentives by endorsing specific financial information or products. Finfluencers have played a significant role in increasing financial literacy and engagement amongst  young people. According to a survey, 33% of people aged 18 to 21 follow a financial influencer on social media, while 64% changed their financial behaviors based on finfluencer’s advice. However, it is crucial to recognize that every concept has both positive and negative aspects, and the rise of finfluencers is no different. Trust is a fundamental component of the influencer-audience relationship, as the audiences’ trust allows the influencers to thrive. The concern arises when considering the extent to which finfluencers are maintaining the trust of their audience. According to Regulation 2(1)(l) of the Securities Exchange Board of India (“SEBI”) (Investment Advisers) Regulations 2013, “investment advice” encompasses guidance related to securities and investment products, including recommendations on buying, selling, and managing portfolios. However, this regulation explicitly excludes advice provided by finfluencers through social media. On a similar footing, such advice is covered under the SEBI (Research Analysts) Regulations 2014, specifically under the provision of research reports as stated in Regulation 2(1)(w). Unfortunately, financial advice offered by finfluencers does not fall within the purview of these regulations since research reports can only be provided by SEBI certified research analysts who hold a postgraduate degree from the National Institute of Securities Markets, as required by Regulation 7(1)(iii). Consequently, there is currently no precise definition or specific guidelines outlined in Indian legislation regarding the financial advice provided by finfluencers. In light of such enigma, the article explores the existing regulatory framework, identifies its limitations, proposes potential solutions and measures to address the concerns surrounding finfluencers. The authors have argued that by striking a balance between financial education and safeguarding investors, a regulatory environment can be created that promotes responsible behavior amongst finfluencers  upholding the integrity of the financial market. NEED FOR REGULATION Lately, Finfluencers have faced backlash from SEBI as well as the investor community for providing unsolicited stock recommendations on social media platforms without being registered as investment advisers. In the most recent instance, the regulatory authority punished PR Sundar, a YouTuber, for violating Investment Advisor norms by providing advisory services without obtaining the requisite registration from SEBI. Furthermore, it fined a self-styled investment advisor Gunjan Verma for offering unregistered services violating the SEBI Act. Earlier in the case of In Re: Sadhna Broadcast Limited[1], SEBI, under the provisions of the SEBI Act read with Prohibition of Fraudulent and Unfair Trade Practices (“PFUTP”) Regulations, had prohibited Arshad Warsi and his wife from accessing the securities market after allegations of stock manipulation through dubious and misleading youtube videos. Securities Appellate Tribunal[2], however, granted interim relief stating that the SEBI order was bereft of evidence. In the case of Marico Limited v. Abhijit Bhansali[3], wherein “social media influencers”  were regarded as a nascent category of individuals who have acquired a considerable follower base on social media and a certain degree of credibility in their space. The decision also noted the need to impose specific responsibility on such influencers, considering the power they wield over their audience and the trust placed in them by the public. The lack of transparency regarding the finfluencers’ qualifications and expertise raises doubts about the reliability of their financial advice. Additionally, there is uncertainty surrounding any potential financial transactions between finfluencers and the entities they endorse. This situation is concerning as the regulatory gap creates an opportunity for scammers to exploit the platform and manipulate stock prices and hence there is a pressing need for stringent regulation. A CLOSER LOOK: DISSECTING EXISTING REGULATORY FRAMEWORK SEBI Act read with PFUTP Regulations Through Section 12A of the SEBI Act, SEBI possesses the authority to investigate and take action against entities involved in fraudulent and unfair trade practices. This provision empowers SEBI to impose penalties and implement necessary measures to safeguard the interests of investors. Regulations 3 and 4 of the PFUTP Regulations offer specific guidelines and rules to prevent fraudulent and unfair practices in securities trading. These regulations outline prohibited activities, such as making misleading statements, manipulating prices, and engaging in insider trading. They also establish a framework for enforcement actions, including penalties and other disciplinary measures, with the aim of ensuring compliance with fair trading practices. SEBI’s utilization of Section 12A of the SEBI Act and the implementation of Regulations 3 and 4 of the PFUTP Regulations reflect its commitment to upholding the integrity of the securities market, protecting investors, and fostering transparency and fairness in trading activities. The Advertising Standards Council of India (“ASCI”), on 27th May 2021, released the final ‘Guidelines For Influencer Advertising In Digital Media’ wherein it laid down specific disclosure requirements and obligations and procedures for registering a complaint in case of violation of the guidelines. National Stock Exchange (“NSE”), in a circular dated February 2. 2023, stated that any payment made by brokers to influencers/bloggers would require prior approval of the exchange and should include specific standard disclaimers. Further, SEBI, vide its Circular dated April 5, 2023, introduced an advertisement code for IAs and RAs wherein it has stated the mandatory contents of the advertisement along with specific prohibitions and requirements of Prior Approval from SEBI before the advertisement. While Sebi has been discussing regulations to address the issue of financial influencers since January 2022, official guidelines have yet to be issued. In a recent Board Meeting held in June 2023, SEBI disclosed that it is in the

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Corporate Transparency Act, Its Loopholes and a Comparison With LODR

Capital Markets and Securities Law /

[By Shivesh Didwania] The author is a student of Maharashtra National Law University, Mumbai.   Introduction Corporate Transparency Act (hereinafter ‘CTA’) was brought forth by the Congress of the USA on 1 January, 2021. CTA is a part of the Anti-Money Laundering Act of 2020. Financial Crimes Enforcement Network of the Department of the Treasury (hereinafter ‘FinCEN’) finalized the guidelines for implementation of the CTA on 30 September, 2022. The CTA will come into force from 1 January, 2024 for new companies and from 1 January, 2025 for the already existing companies. The objective of the enactment is to is to fight money laundering, tax evasions, etc. by the way of mandatory corporate reporting which will enhance corporate transparency. However, the CTA has been hailed as a ‘seismic shift’ towards achieving a better version of corporate transparency in the USA. It will help in curtailing the illegality that is carried on by the activities of shell companies.[i] In India, such corporate reporting which is mandatory for the companies is governed and regulated by the Securities and Exchange Board of India’s Listing Obligations and Disclosure Requirements (hereinafter ‘LODR’) 2015. The objective of these regulations is to make transparency an intrinsic part of the Indian corporate regime. The objective of this article is to make the reader aware of the new legislation – the CTA of the USA and the loopholes that it suffers from. It will be followed by a comparison of the CTA with the existing regime of LODR in India. Corporate Transparency Act: What does it entail? The USA had a weak legal regime to tackle the transparency with regard to the beneficial ownership information. The CTA creates a federal framework for the information relating to the beneficial ownership in the USA.[ii] The CTA creates a rule for a ‘reporting company’ to disclose beneficial owners of the company.[iii] The company is required to disclose this information to the FinCEN, which will maintain a central registry.[iv] The information is to be provided on an annual basis. If there is a change in the ownership structure which needs to be reported, then the company must intimate the change to the FinCEN within period of thirty days.[v] FinCEN, in turn, shares the information with investigation authorities as and when the need arises. These authorities may very well include any federal enforcement agency or may also include any overseas law enforcement bodies who have made request to a federal enforcement agency. However, there are stringent safeguards to ensure the data protection and privacy concerns.[vi] Beneficial owners according to the CTA Beneficial owners are persons/ entities that directly or indirectly have a substantial control over the reporting company; or which hold at least 25% in the reporting company. Substantial control essentially means that the entity/person has an intrinsic role to play in decision making in the affairs of the reporting company. This means that the person/entity holds a substantial control over the main company. It is important to note that ‘substantial control’ is not defined adequately in the CTA. A senior officer of a reporting company will also be said to have a substantial control over the affairs of the reporting company. Moreover, a person having control over the appointment or removal of the senior officer or the majority of the board of directors will also be said to have a substantial control over the reporting company.[vii] However, this interpretation of substantial control is not exhaustive in nature.[viii] Moreover, persons/ entities are beneficial owners irrespective of their citizenship or residency.[ix] However, serious data privacy and confidentiality aspects may arise when the requesting party is a foreign agency. It may be justified when it is under a treaty between USA and the requesting country. However, it will be a matter of concern when the request is not made in furtherance of a treaty.[x] Beneficial owner may also include a person/ entity that receive substantial economic benefits from the assets of the reporting company. This wide definition or, as some people argue, lack of a proper definition opens the gate for the FinCEN to include numerous actors within the ambit of the CTA.[xi] CTA is not free from loopholes The CTA has been lauded as a land and mark step towards tackling corporate shell crimes. However, this legislation is also not without flaws. One of the problems that this mechanism may face is the time period of reporting the information. This mechanism may require the companies to report the required data on an annual basis which may, in turn, lead to untimely and non-updated information.[xii] Another problem is that this mechanism does not lay down rules for entities like trusts.[xiii] These bodies may take advantage if they are kept outside the regime of the CTA. The information demanded is to be kept confidential and only the prescribed government agencies can access the same. However, there are arguments that whether the CTA really promotes transparency if the beneficial ownership information is highly confidential and secretive.[xiv] The scope of financial institutions to which information may be shared is also a restricted one and includes only a certain class of institutions as governed by the CTA.[xv] Access to the information can only be acquired so as to ensure requirements relating to the customer due diligence (CDD).[xvi] This might pacify the concerns of the companies that may be worried about the horizon of the disclosure of the beneficial ownership information. There can be serious privacy concerns about the data that is reported by the reporting company. The question posed may be that whether the right of a reporting company to keep its data confidential is greater than the importance of tracking the illegality pursued by shell companies.[xvii] Another major problem is that companies may have reservations in declaring the information which might be available in the public domain.[xviii] They may be concerned about the extent of information that the CTA might effectively demand. This criticism will be present for a very long time because the USA might very well

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