Author name: CBCL

SEBI’s Spoofing Crackdown: Safeguarding Investor Trust in India’s Securities Market

Capital Markets and Securities Law /

[By Palash Varyani] The author is a student of Institute of Law, Nirma University.   Introduction Recently, the Securities and Exchange Board of India (SEBI) has made a significant breakthrough by explicitly addressing and defining the practice of “spoofing” in its recent order. Spoofing, a method employed by traders worldwide to extract illegitimate profit from the stock market, has been a longstanding concern. This article focuses on the SEBI’s order concerning Nimi Enterprises, highlighting the concept of spoofing and recent developments in its regulation within India’s financial landscape. By examining the implications of the SEBI’s action and the measures taken to combat spoofing, this article sheds light on the evolving dynamics of market integrity and investor protection. The Practice of Spoofing Spoofing entails a manipulative strategy employed in financial markets, wherein a trader deliberately places deceptive buy or sell orders, without genuine intent for their execution within the market. This deceptive practice frequently relies on the deployment of algorithms and automated bots, with the objective of distorting market dynamics and asset prices by fabricating a false impression of supply or demand. In simple terms, spoofing refers to the act of a trader initiating orders to purchase or sell a specific security, only to subsequently alter or cancel those orders with the aim of extracting profits. For example, Mr. A submits a purchase request for 5000 shares of XYZ company, which will lead to an increased demand for the stock. Consequently, the price of the stock will escalate. Later on, he cancels the order and proceeds to sell his existing shares. By doing so, he aims to generate an artificial demand and achieve a higher selling price than originally anticipated. This practice is also known as “Layering” which encompasses the utilization of a disruptive algorithmic trading strategy. This particular approach can potentially instigate either excessive “optimism” or “pessimism” within the market. It constitutes a form of illicit market manipulation that is prohibited in the majority of countries worldwide. Within the USA, engaging in such conduct is deemed unlawful and classified as a criminal offence according to the Dodd-Frank Act of 2010. In the UK, spoofing is governed by Article 15 of the Market Abuse Regulation, and sections 89 and 90 of the Financial Services Act, 2012. SEBI and the Nimi Enterprises case The SEBI has recently passed an order against “Nimi Enterprises” and has ruled that it was involved in spoofing of shares in the Indian securities market. The firm was involved in securities trading and was subject to an investigation regarding its trading operations to determine whether it violated the regulations outlined in the SEBI Act and the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003. Throughout the probe, SEBI uncovered evidence indicating that the firm engaged in a trading scheme designed to artificially manipulate the perception of demand or supply for specific stocks. As an illustration, the firm placed substantial buy orders for a security, offering a price significantly distinct from the current market value. Subsequently, the firm would place another order for the same stock, but at a price in line with market rates, although for a lower number of shares. After this order was executed, they would cancel the initial order, which consisted of a higher quantity of shares. As a result of the public disclosure of these activities, the parties concerned received a “Show Cause Notice”. The firm asserted that its approach of placing many large purchase and sell orders, some of which were executed at prices higher or lower than the current market price, was driven by the anticipated price changes caused by a variety of causes. Certain big orders, however, were not fulfilled and were subsequently cancelled in order to free up the “margin” for trading in alternative equities. Furthermore, they claimed ignorance of the word “spoofing” used in the “Show Cause Notice”, emphasising that it was not defined by SEBI. Moreover, they asserted that their actions evidenced a genuine intention to carry out the orders, as they openly disclosed them to participants of the market. According to their argument, a trader who harbours no intention of executing an order would refrain from making such disclosures. Consequently, they contended that there was no substantiated proof indicating any fraudulent motives behind the activities in question. SEBI’s investigation determined that there was a brief time interval, often just seconds, between the fulfilment of “small orders” and the subsequent cancellation of “large orders”. On multiple days, a similar trend was observed for several stocks. This information revealed the firm’s recurrent mode of operation as a usual trade practice. SEBI also emphasised the rules of the stock exchanges, which require traders to reveal to market participants either the complete quantity of their order or at least 10% of the overall quantity. A further amount equal to 10% of the total quantity then becomes publicly viewable in the “Order book” once the revealed quantity has been traded. According to SEBI’s inquiry, the firm purposefully disclosed all of their significant orders in the “Order book”. They chose to report only a portion of shares, however, while making deals involving significantly lower amounts for the same stocks. Based on this factual investigation, SEBI reached the conclusion that the firm had placed “large orders” with no genuine motive of executing them. Instead, they harboured a “malicious intent” to rig the price of the stock. By capitalizing on the non-authentic demand or supply generated within those stocks, the firm was able to purchase or sell shares at the price that was influenced by these artificial market conditions. This unethical practice ultimately affected the interests of sincere investors trading in the stock market. In this order, the SEBI also defined spoofing for the first time as: “The unlawful practice of placing orders containing a large number of shares on one side of the market (buy/sell) and eventually executing orders containing relatively smaller quantities of shares on the opposite side (sell/buy) and cancelling the orders containing large orders.” According to SEBI, the firm was involved in the act of spoofing and its

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Revisiting Put Options in Cross-Border M&A: Absence of Assured Returns a Critical Hindrance?

Mergers & Acquisitions /

[Siddharth Sengupta & Tanay Dubey] The authors are students of National Law University Odisha.   Introduction Over the past decade, the Indian Government has implemented a range of measures to attract foreign direct investment (FDI) into the country, resulting in a notable upsurge in FDI inflows from $24 billion in 2012 to $49.3 billion in 2022. A key factor behind such a dramatic increase in FDI in the last few years is the growing cross-border M&A activities. In 2013, the Securities Exchange Board of India (SEBI) permitted the use of option agreements in M&A transactions. An ‘option’ clause within a Shareholder’s Agreement (SHA) is a provision that gives the parties a right to either purchase (in case of a call option) or sell (in case of a put option) shares at a pre-determined price, after a pre-determined period. SEBI’s notification, which was applicable only to domestic transactions, was followed by an amendment to Foreign Exchange Management Regulations by the Reserve Bank of India (RBI), allowing foreign investors to include an optionality clause as an exit mechanism. The problem with the amendment was that in the case of the sale of securities via a put option, such an exit is without the component of “pre-determined rate” or ‘assured returns’, as per RBI’s amended Pricing Guidelines for FDI in India. Despite the law being largely clear, a ruling by the Madras High Court in January of this year, in the case of GPE (India) Limited v. Twarit Consultancy, has reignited the contentious discussion surrounding the implementation of put options which ensure assured returns. Deviating from an established line of precedents set by the Apex Court and other High Courts, the court, in this judgment, allowed assured returns under a put option between the parties, This article explores various aspects of cross-border M&A transactions and the use of put options as an exit mechanism. The article highlights the importance of assured returns during exits using put options and identifies the absence of them as a key hindrance in cross-border M&A transactions. Further, the article explores approaches that may be adopted as an alternative to put options in order to protect foreign investors under the current regulatory framework and the need for revision of pricing guidelines. Understanding Cross-Border M&A Transactions and the Importance of Assured Returns Cross-border M&A involves the integration of assets and operations from companies hailing from distinct jurisdictions. The term ‘acquisition’ pertains to the purchase of assets or stocks, either in whole or in part, of another company, thereby granting operational control over the whole or part of the said company; while the term ‘merger’ denotes the scenario wherein two independent companies are combined or consolidated into a single entity. Due to the international nature of cross-border M&A, investors face some unique challenges especially while investing in an Indian company. Under the FDI Policy, for example, there are sectoral caps in place for the amount of foreign investment in certain industries. These sectoral caps can be changed by the Union Government very easily, which can compel investors to sell their shares at a loss. Further, especially in FDI, the investor may not be able to get reliable information about the seller for a variety of reasons such as market data being opaque or hard to get. This is particularly prevalent in angel investments and investments into Micro, Small, and Medium Enterprises (MSMEs). Abrupt changes in tax laws combined with the acute difficulty in enforcing contracts in India are further problems that make foreign investments in India challenging. Incorporating put options in SHAs would typically offer a significant remedy to these issues by eliminating the uncertainty related to the ‘future value’ of shares in foreign investments. Regardless of whether the share prices experience significant fluctuations, the investment would remain secure. This approach proves particularly advantageous for investments in developing economies, where investors would be guaranteed a pre-determined amount upon exercising the put option at its expiration, even in the event of a sharp decline in share prices. However, the RBI’s prohibition on ‘assured returns’ clauses in foreign investments has resulted in the inability of put options to serve this purpose. Globally, having a provision for assured returns in a put option is considered standard, as it is essential for effectively hedging risks in foreign investments, which is the primary purpose of having an option clause in the first place. Regulatory Considerations and Legal Frameworks in India In 1999, the Parliament, enacted the Foreign Exchange Management Act (FEMA) with the objective to facilitate external trade and payments and regulate the foreign exchange market in India. Gradually, restrictions vis-à-vis FDI were eased, resulting in a tremendous increase in the value of FDI each year. In furtherance of the above-stated objectives, the Securities Exchange Board of India (SEBI), in 2013, allowed put & call options in M&A transactions. Subsequent to SEBI’s approval, the RBI through its circular and notification, allowed optionality in equity shares and compulsorily and mandatorily convertible preference shares/debentures to be issued to a person resident outside India with the objective to provide greater freedom and flexibility to the parties concerned under the FDI framework. Foreign investors now had the choice to exit the investment after the one-year lock-in period by invoking the optionality clause, thus enabling the investee company to buy back securities. However, such an exit cannot be made at a pre-determined value i.e., without any assured returns. The investors are obliged to at the market price prevailing on the recognised stock exchanges (in the case of listed companies) or a price determined through internationally accepted pricing methodology (in the case of unlisted companies), thus, defeating the very purpose behind the revision of pricing guidelines. Interestingly, there is no such restriction placed in regulations relating to domestic investments. Thus, such restrictions as are placed under FEMA are redundant. Until the pricing guidelines are amended, it is imperative to explore alternative approaches to Assured Returns clauses in FDI transactions, to protect investor interest. Alternative Approaches for Investors and Need for a

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Data as an essential facility: Understanding the flipside

Competition Law /

[By Khushi Saraf & Jhankar Katare] The authors are students at National University of Juridical Sciences, Kolkata.   Introduction In the modern digital era, data is of paramount importance, and getting access to data is quintessential to entering new markets. The holding and acquisition of data provide entities with the much-needed inputs they require to provide their services more efficiently and effectively. Access to data can enable the reduction of search costs, reduce entry barriers, and allow for easy entry and expansion into markets. With the ever-increasing importance of data in the survival of smaller entities, data has come under the lens of the essential facilities doctrine. Competition authorities across jurisdictions are criticising the practice of refusing to share data with competing entities. On the flip side, refusal to share data may not be competitive in every case. The availability of data on a large scale and its replicability suggests that not all data gives one a competitive advantage.  Against this backdrop, the present article explains the concept of the essential facilities doctrine (“EFD”). It has also sought to analyse the concerns associated with the refusal to share data by bringing it under the lens of the EFD. The last leg suggests that every kind of data may not fall under the ambit of EFD. Essential Facilities Doctrine The EFD propounds that monopolists must provide certain inputs that are essential to competition. A facility is considered essential if it is impossible or difficult to duplicate owing to technological, economic, geographic, or legal constraints. EFD doctrine has not been explicitly defined in India, but its development can be traced through various case laws in India and other jurisdictions. EFD is seen to be a subset of ‘refusal to deal’ cases. The doctrine can be seen as a limitation to the general rule that a firm is not obliged to share its resources with other firms. Further, EFD may be applied to §4(2)(c) of the Competition Act, 2002, which prohibits those practices that result in the denial of market access. Because no court in India has delved into the idea of data being an essential facility, the EU jurisprudence is worth noting. Is data an essential facility? For data to be considered ‘essential data’, i.e., data essential to competition, it must fulfil the same criteria as essential facilities. There must be a predominant monopoly over the data, it should be indispensable and irreplicable, and there must be a justified reason for denial of access due to the viability of the data. The applicability of EDF has been reviewed in the EU Commission Report, which states that data can be considered essential for competition under the purview of Article 102 TFEU. Whether data can be ‘indispensable’ is a heavily impugned topic. Owing to its non-competitive nature, many question the applicability of EFD to data. This is furthered by the opinion that the monopolisation of data by one dominant position in the market does not prevent competitors from gathering equivalent data from other sources. There are also cases where data can be exclusive for contracts or database secrecy, giving the monopolist the right to deny access. The irreplaceability of data is contingent on the type and relevance of the data. In Telefonica UK/Vodafone UK/Everything Everywhere/KV, the Commission held that even though joint ventures can process more consumer data, it doesn’t hinder the competitor’s ability to collect equivalent data from substitute comparable resources. A recent joint report published in 2016 by France and Germany analysing the essential characteristics of the data-driven sector stated that EFD is only applicable in cases where the data is truly distinctive and unique, and the competitors are stopped from performing their services due to its absence. The second aspect requires that for the facility to be essential to competition, it is pertinent that other firms cannot compete without it, and the firm having access to the facility can easily eliminate competition. In online markets, data can be deemed to be essential because it helps in creating positive feedback loops, as access to large data troves guides the investments that an entity makes. For instance, data analysis enables targeted advertisements and improves the efficiency of the services offered, which in turn increases the profits of a company. Some have opined that the elimination of competition’s indispensability shares a cause-and-effect relationship. Notably, in the recent Microsoft I judgment the criterion was rephrased as ‘eliminates all effective competition’. The need arises due to the fact that Microsoft does not eliminate all competition in secondary market spaces even though being a 60% stakeholder, failing the criterion of eliminating all competition. The last criterion is ‘objective justification’ for the denial of access, which may include the capacity of platforms exceeding its limits, the impossibility of supply, and consumer welfare. The justifications used may depend on various requirements but there are no intrinsic vices that stop the application of this criterion to essential data. Not all data is an essential facility Data sharing and the refusal to share data is a relatively new area in competition law, which has received attention only in the recent past, ergo there is a dearth of applicable laws and guidelines. For this reason, data as an essential facility ought to be analysed on a case-by-case basis. Not all data falls under the purview of EFD. For instance, in the EU cases of Google/ Doubleclick and Facebook/ Whatsapp, the Commission, despite acknowledging the importance of the data troves held by the big firm, held that access to that data would not impact competition negatively or provide an added advantage. Furthermore, the relevance of data depends on the product-market in question, and it may be different in different markets. This implies that not all kinds of data is indispensable to competition, and it is solely dependent on the circumstances in the relevant market. Additionally, in the Telefónica UK/Vodafone UK/Everything Everywhere case, the Commission opined that consumers share their data with multiple platforms. This again points to the fact that certain data

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Deviation in Asset Distribution: Conundrum of Waterfall Mechanism under IBC

Insolvency Law /

[By Manas Shrivastava & Adaysa Hota] The authors are students at National Law University Odisha.   INTRODUCTION During a company’s liquidation proceedings, a secured Creditor has been presented with two options under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) “relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator” or “realise its security interest”. If the secured creditor realises its security interest outside the liquidation proceeding, two circumstances follow. Firstly, where the enforcement of a security interest results in a sum by way of proceeds that is greater than the amount owed, they must give the liquidator any surplus funds in addition to their share of the costs associated with the liquidation procedure. The previous situation is straightforward, but the complexity arises in the second situation, where the proceeds of realisation are insufficient to cover the debt, and the liquidator must pay the secured creditor’s outstanding debts in accordance with Section 53. Furthermore, in accordance with Section 52, as stated above, the secured creditor may also choose to relinquish its security interest but this too must be done in the manner specified under Section 53. This is where the waterfall mechanism for liquidation comes into play, i.e. when a corporate debtor is unable to repay all its creditors, the entire sum due. The remaining amount of debt and number of creditors is the Rubicon of the waterfall mechanism. The debt, thus befitting the term “waterfall”. Although the waterfall mechanism is considered to be the heart of the IBC, it was introduced in the Companies Act, 2013. COMPARING THE WATERFALL MECHANISM UNDER COMPANIES ACT 2013 AND IBC 2016 Since the inception of the IBC, there has been a debate raging on whether the mechanism under the Code is essentially the same as that enshrined under Section 326 of the Companies Act, 2013. And if the answer to that is yes, scholars argue that the redundancy must be done away with. Even the Supreme Court has recently considered this matter. But, before we try to find the answers to these questions, it is imperative to understand the mechanism, separately, from the context of IBC as well as the Companies Act 2013. One can decipher from the provisions that there are several tiers of creditors, and priority will be granted in accordance with their order. For instance, under the IBC, secured creditors rank second while government obligations rank fifth. But while the Act lays the mechanism for winding up of the company, the Code focuses only on liquidation. Insolvency Resolution Procedure (IRP) and liquidation costs are paid with the highest priority under section 53 of IBC. Thereupon, “workmen’s dues for twenty-four months preceding the liquidation commencement date” and “debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52” are placed in the same hierarchy for repayment. Herein lies the second distinction between the waterfall mechanisms used by IBC and CA. In contrast to the Code, payment of workmen’s compensation and a secured creditor who has achieved its security interest is not pari passu from the outset under section 326 of the 2013 Act. They will be in the same hierarchy only after paying any outstanding workmen’s compensation and accumulated vacation pay from the two years before the winding up order. The Proviso to Section 326(1) requires the company to reimburse the above-mentioned sum to workers or “in case of their death, to any other person in his right” before repayment to the secured creditors within thirty days from the sale of assets. Thirdly, IBC’s waterfall mechanism requires payment of “wages and any unpaid dues owed to employees other than workmen for twelve months preceding the liquidation commencement date,” whereas CA only allows four months. Thereafter IBC ranks unsecured creditors for repayment but CA has no such provision for such creditors. IBC at fifth position ranks, “any amount due to the Central and State Governments including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date” and “debts owed to a secured creditor for any amount unpaid following the enforcement of security interest” equally. Whereas, CA provides for payment of the preceding year only. Additionally, IBC houses provisions for payment of the debt owed to unsecured creditors and to Secured Creditors if they relinquish their security interest and opt for preferential payment, whereas CA fails to do so. Furthermore, the IBC Amendment Act of 2019 has added provisions for operational creditors and dissenting financial creditors in the waterfall mechanism, which the CA has yet not recognized. DEVIATION SHOWN BY THE COURTS FROM THE PATH OF THE WATERFALL MECHANISM The supreme court in various cases has upheld the validity of the waterfall mechanism under IBC, but still, there is a current trend going on where the courts are deviating from following the waterfall mechanism while distributing the assets. In a recent case of State Tax Officer v. Rainbow Papers Limited (hereinafter “Rainbow Papers”) where the court clearly showed a deviation from the waterfall mechanism under section 53 of IBC 2016. The case deals with state legislation, where the state tax authority has a security interest against the corporate debtor thus, making the state tax authority as “secured creditor”. The court carved this exception under section 48 of Gujarat Value Added Tax Act, 2003 which provides a first charge to state tax authority, on the property of a corporate debtor, which goes against the mechanism. Similarly, in the case of Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia (hereinafter “The Jet airways case”) the court deviated from following it and held that until the onset of the insolvency, the company has to pay the whole provident fund to the workers and employees and the gratuity payment. It is pertinent to note that under section 53(1)(b) of IBC, these payments are limited to a

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Not So Universal: Differing Timing Approaches to COMI and the Policy Challenge for India

Insolvency Law /

[By Sachika Vij & Kartikeya Misra] The authors are students of Ram Manohar Lohiya National Law University Lucknow.   INTRODUCTION The UNICTRAL Model Law on Cross-Border Insolvency (MLCBI) has recently celebrated its 25th anniversary.  The inclusion of the UNCITRAL MLCBI has gained significant traction and is now being incorporated into the domestic legislation of numerous countries worldwide. An increasing number of international jurisdictions, including Hong Kong and Singapore, are aligning themselves with the global trend of embracing a Centre of Main Interest (COMI)-based approach to recognition to insolvency proceedings. However, several challenges have cropped up in its implementation. One such issue is with the interpretation of the date of determination of COMI. India on the other hand is still in the process of enacting the cross-border insolvency framework. With the different interpretations already in place there is a greater mantle on the Indian authorities to ensure that these loopholes are not used to delay the resolution process and that they do not hamper the interests of the parties involved in seeking recourse. THE CENTRALITY OF COMI IN INSOLVENCY AND ITS DETERMINATION Imagine a scenario, where a debtor company finds itself entangled in insolvency proceedings spanning multiple jurisdictions. The COMI holds immense significance when it comes to navigating such a complex realm of cross-border insolvency. Article 17(2)(a) of the Model Law states that a foreign main proceeding is where the COMI lies. It acts as the determining factor as to which jurisdiction shall have the authority to grant the necessary relief for the debtor’s ongoing financial concern. Though, it has not been defined anywhere in the Model Law but has been of extensive use worldwide. For determining COMI, a comprehensive assessment of various factors is required. Article 16 of the Model Law lays down a rebuttable presumption that the debtor’s registered office is taken to the COMI and as per the Recitals (12) and (13) of the European Commission Regulation should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties. However, UNCITRAL MLCBI with Guide to Enactment and Interpretation provide for other factors which may include the jurisdiction where the debtor takes its key managerial decisions and conducts the majority of its economic activities, where it manages its key assets, etc. Ascertaining COMI is not simple and the determination is to be based on the fulfillment of two important requisites which are: Determination of the date for deciding the debtor’s COMI Determination of the factors for deciding the location of the debtor’s COMI It is only once the first element has been determined, the Court will determine the location of COMI under various non-exhaustive factors. Although the preamble and interpretation under Article 8 of the Model Law clearly state that it was enacted for the sole purpose of bringing uniformity to cross-border insolvency proceedings by harmonizing national insolvency laws dealing with it. However, there is no established position on the specific date that will serve as the decisive factor for determining the COMI. THE TIMING CONUNDRUM IN COMI DETERMINATION In 2013 answering the approach to be adopted for the timing of determining COMI, the Guide to the Enactment of the MLCBI mentioned that the relevant date for determining the  COMI should be the date of commencement of the foreign proceeding. However, before this guide, US developed its own principles for the date of determining the COMI in the case of Fairfield Sentry which was upon the filing of the recognition application. Australian Courts have on the other hand, stemming from the case of Australian equity investors, held the relevant date of COMI to be the time the Court is called for a decision on the requisite recognition application. In 2022, a Hong Kong Court Global Brands Group Case opined that the determining factor of COMI should be the date of the   foreign office-holder’s recognition application The Court noted that this preference aligns with Article 6 of The Supreme People’s Court’s Opinion on Taking Forward a Pilot Measure for the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region. Moreover, claiming it to be consistent with the approach taken by the Singapore Courts in Re Zetta Jet in 2019. Therefore, Courts internationally have come up with different approaches in deciding the timing  of COMI which are relevant because they can have a huge impact on the proceeding and can even impact the location of COMI. INDIAN APPROACH TO DATE OF DETERMINING COMI India’s iteration of the Model Law on Cross-Border Insolvency is still under consideration in the form of Draft Part Z to be introduced in the Insolvency and Bankruptcy Code, 2016. The Cross Border Insolvency Resolution Committee (CBIRC) in its Report on the Rules and Regulations for Cross Border Insolvency Resolution recommended that for the determination of the timing of COMI, appropriate date should be the date of commencement of a foreign proceeding under the local law of the jurisdiction. By adopting this approach, the CBIRC aimed to minimize forum shopping opportunities. Considering the time of filing of the recognition application as determining point of COMI there would only be the proceedings and actions of the foreign representative that would help indicate the COMI. Therefore, relying on the date of commencement of foreign proceedings would provide a clearer result compared to determining COMI at the time of the application. Additionally, this approach would be easier to apply across different jurisdictions, simplifying the practical implementation of the rule. On the other hand, proponents of the time of filing of the application approach argue that delving into the debtor’s past interests can be complex and may result in denying the true COMI. They believe that determining COMI based on the time of filing the application could prevent such complications and ensure a more accurate determination of COMI. WORKING IT OUT: THE POLICY CHALLENGE The different approaches in the timing of determination of COMI have been evolving as has been seen recently in

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When Platforms Themselves Compete: Preferential Listing and Unfair Contracts

Competition Law /

[By Akash Gulati & Sanidhya Bajpai] The authors are students at RMLNLU, Lucknow.   Introduction India is the fastest-growing e-commerce market in the world. Online platforms like Amazon, Flipkart, Zomato, etc., offer a marketplace where the divergence of buyers, sellers, and advertisers partake in commerce. The presence of an online marketplace makes trade and commerce efficient and transparent. The testimonies of the stakeholders involved reveal that the online platforms, through preferential listing and unfair contract terms prima facie, constrain the marketplace and consequently bring competition concerns to the forefront. This piece delves into the key competition issues which have a proclivity to comprise the platform neutrality of the e-commerce platforms. Platform Neutrality Platform neutrality simply means a neutral treatment of complements by the platform free of unreasonable bias and discrimination. In the context of e-commerce, it means that any platform connecting the seller to the market cannot unreasonably put sellers at a disadvantage, either in isolation or in conjunction, by preferencing their own products over the other sellers. Platforms being in control of all listing parameters find themselves in such powerful positions where they can push around the discoverability of products that systematically alter sales. Further, platforms can also bestow perks upon certain sellers, some of which they directly or indirectly own, which make them seem more authentic when compared to peers. This piece is in the context of the market-leading platforms. Online marketplaces rely on algorithms to provide a sorted list of products from sellers in response to a user query/demand. This seems to be a task that enables efficiency, but when coupled with the vertical integration of goods sold by the marketplace itself, a leeway is cracked open. Thereon the platform is not only a service provider to the sellers, but also a competitor. Skewed Listing The algorithms which sort the sellers do not seem to produce neutral results. A common complaint of sellers on platforms such as Amazon and Flipkart is that their preferred sellers are usually displayed on the first few pages of search results (see CCI’s report as well). Consequently, the non-preferred sellers are pushed away from the reach of the customers onto the later pages. It is seen that even the lesser-priced products from general sellers are pushed back in order to increase the visibility of the same products from preferred sellers. Vertical Integration Foreclosing Competition The preferred sellers include the directly or indirectly owned entities of the platform itself and the other sellers who sign up for the preferred seller program. This vertical agreement between the sellers and the platform allowing sellers to pay a fee to gain visibility and outperform peers can tend to foreclose competition. Especially in cases where the competitors who are as efficient as the preferred sellers, both in terms of pricing and quality, lose out on sales simply because of lesser visibility. Such vertical arrangements seem to be in violation of Section 3(1) read with 3(4). These agreements tend to foreclose competition and drive current competitors out of the market which might result in an appreciable adverse effect on competition (“AAEC”). The lack of transparency on the modus operandi of these platforms makes it an iffy affair to determine the extent of such AAEC. Role of Private Labels A private label product is a third-party manufactured product that the retailer sells under its own brand name. In the e-commerce sector, giants such as Amazon and Flipkart sell private label products in vertical integration to their service as an intermediary. Such giants have access to the plethora of user data and preferences which the competitors lack. Therefore, the platforms have the means to delineate the most profitable market segments and enter with the most personalized products. This strategic entry into new relevant markets can be termed as the efficiency of the platform. However, when this gets coupled with the undue advantage of preferential listing of private label products (vis-a-vis similar products of identical ratings) and the deep discounting offered on these products, the platform might be venturing into violation of the Sections 4(2)(a)(ii), 4(2)(b)(ii) and 4(2)(c). Unfair Terms of The Contract The leading online shopping and other e-commerce platforms such as Amazon and Flipkart have a superior position to other sellers by virtue of them owning the platform and occupying large market shares. This bestows them with superior bargaining power and makes other sellers susceptible to the unfair terms of the contract coupled with unilateral changes. The same was also observed in the CCI’s report on the e-commerce market study in India. The French courts fined Amazon on the grounds that it imposed ‘unfair’ terms on its suppliers. The courts found that Amazon, through its higher bargaining power, has obtained contracts that allow it to change the terms and policies at any time without prior notice. The sellers in the commission’s report have alleged that e-commerce platforms have imposed similar onerous obligations in India. The seller/vendor testimonies prima facie show that the e-commerce platforms have indulged in agreements that are likely to have exclusionary effects on the competition and are unfair/exploitative to the sellers and consequently are in contravention to Section 3(4) of the Act. The platform’s higher bargaining power allows it to impose exploitative/unfair terms on the sellers, and how these terms distress the sellers and distort the competition will be discussed further. Exclusivity agreement The e-commerce platforms engage in exclusive supply agreements that make a certain product exclusively available on only one platform. This hampers the customer’s ability to choose from a wide range of products and impairs the seller from selling the products on different platforms. The exclusive agreements, as reported in the commission’s report, are of two types; a) agreements that make a product exclusively available on one platform, and b) agreements that make a platform list only one brand in a specific product category. These types of agreements could lead to situations where a certain brand’s product is listed on a platform exclusively, and its competitor is delisted, which would be detrimental to

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A Revamped Regulatory Landscape for Digital Competition in India

Competition Law /

[By Mahiya Shah & Chaitley Sharma] The author are students at Gujarat National Law University.   INTRODUCTION Today’s world is rapidly transitioning into a new digital era, with digital marketing being one of the latest additions to the global economic landscape. This new digital economy involves the sale of goods through cyberspace, using digital platforms which facilitate interaction between multiple suppliers and customers. The present era sees this global phenomenon as a critical driver of prosperity by impacting innovation, productivity, and, most importantly, consumer welfare. Digitization has enabled the emergence is what is popularly known as “Big Tech,” which refers to Google, Amazon, Facebook, Microsoft, and Apple. The sizes and worldwide influence of these companies have prompted calls for antitrust action to put a rein on their growing size and power. Globally, imposing heavy penalties has been the go-to reprimand to address the concerns about unfair business practices and maintain a level playing field in the technology industry. First, Microsoft and now, Google and Meta Platforms have faced penalties due to their anti-competitive practices. Google was fined a whopping $5.1 billion for breaching EU antitrust rules in the 2018 decision of the European Commission. More recently, this year, the European Data Protection Board (EDPB) imposed a fine of $1.3 billion on Meta Platforms, the parent company of Facebook, for breaching the data privacy regulations of the European Union. The recent cases of Google Android, Google Play store, FHRAI & anr. v. MMT-GO and OYO, ongoing inquiries against Apple, WhatsApp privacy policy, Amazon & Flipkart, Zomato & Swiggy, and Bookmyshow are illustrations of the growing convergence of digital markets and competition in the global economy. Undoubtedly, the Competition Commission of India (CCI) has done its fair share of keeping a check on these big-tech companies by conducting inquiries, imposing severe penalties, and passing orders to correct their wrong actions. However, there had been doubts regarding the effectiveness of such actions by the authoritative bodies under the existing regulatory framework which led to the formulation of the ex-ante regulations,  under the new Competition (Amendment) Act, 2023. Ex-ante regulations are those which are formulated with the purpose of identifying and resolving potential issues in advance, aiming to influence the conduct of stakeholders through proactive regulatory intervention and the potential detrimental effects of such adopting regulations in India will be discussed in the upcoming sections. RECENT MODIFICATIONS TO THE COMPETITION ACT: AN ATTEMPT AT STRENGTHENING FAIR TRADE Given this growing importance and the swift growth of digital businesses in the present age, discussions regarding the requisite modifications to the Competition Act of 2002 have been in progress since the constitution of the Competition Law Review Committee (CLRC) by the Ministry of Corporate Affairs (MCA) in 2018 intending to provide the CCI with enhanced capabilities to monitor and regulate digital giants. In July 2019, the committee submitted its report, leading to the subsequent passing of  ‘The Competition (Amendment) Bill, 2022’. The Bill contained certain amendments targeted explicitly at digital markets. Later in 2022, the Ministry of Corporate Affairs (MCA) proposed specific amendments to the Competition Act, which were subsequently referred to the Joint Parliamentary Standing Committee (Standing Committee) for comprehensive examination and engagement with different stakeholders. After considering the inputs from the Standing Committee, the MCA incorporated additional amendments and presented the final draft to Parliament on 8th February 2023. On 22 December 2022, the Standing Committee issued its 53rd Report concerning ‘Anti-competitive Practices by Big Tech Companies‘ advocating the need for ex-ante regulations through a new legislation called the ‘Digital Competition Act’ (DCA). In consultation with various stakeholders, the committee highlighted anti-competitive practices in the digital sector and to combat these practices, it proposed enacting a sui generis law to govern the digital market in an ex-ante way. The rationale behind implementing such rules was to tackle anti-competitive practices and market dominance at an early stage, thereby promoting fair competition and protecting consumers’ interests. By imposing specific obligations on ‘big’ digital players, the goal is to ensure a level playing field and prevent market distortions caused by the dominant position of certain players. Following the Standing Committee’s report, the MCA provided the Committee on Digital Competition Law (CDCL) with specific terms of reference: (i) determine whether the current framework of the Competition Act is adequate to address the challenges brought on by the digital economy; (ii) clarify the need for a separate piece of legislation is necessary to establish an ex-ante regulatory mechanism for digital markets; and (iii) research global best practices for regulation in the area of digital markets. In light of this, CDCL held its first meeting on February 22, 2023, to discuss the need for ex-ante law. The Lok Sabha passed the amendments to the Act on March 29, 2023, for stricter compliance, including by giving the antitrust regulator the authority to impose penalties on the global turnover of offending firms, which could pave the way for harsher sanctions against organizations like Big Tech. Today, the CCI cannot penalize corporate entities based on their annual worldwide turnover. Penalties only apply to the company’s sales in the relevant market. The amendments also simplify compliance by giving CCI the authority to control mergers and acquisitions (M&A) based on deals valued at or above the 2,000-crore threshold, provided that the target company has significant business operations in India. It also suggested that CCI must decide within 30 days whether a merger or acquisition will likely negatively impact the market. While these amendments were introduced with the view to provide a suitable conclusion to these discussions and ensure fairness, contestability and innovation in the digital landscape, the ex-ante nature of these regulations has sparked a new debate on whether ex-ante regulations while seeking to address competition concerns proactively, may inadvertently create adverse effects in the existing ecosystem. The recommendations put forth by the committee demonstrate commendable intentions and justifications but the n ex-ante method to govern the firms’ activity is doubtful to be suitable for the current landscape. If ex-ante regulations in a digital

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Revisiting SEBI(PIT) Law: SEBI v Abhijit Rajan and Motive to Trade

Capital Markets and Securities Law /

[By Himanshi Garg] The author is a student at University Institute of Legal Studies, Panjab University, Chandigarh. Abstract The Supreme Court (Hereinafter as “SC”) in the case of the SEBI v Abhijit Rajan has held that the motive on the part of an insider is an essential element to hold an insider in violation of the provisions of the SEBI (PIT) Regulations 1992 .This present blog seeks to critically analyze the judgment of the SC referred to above in light of the insider trading jurisprudence developed in the U.S.A, by securities fraud scholars, courts, and commentaries. The author then tries to draw home her argument as to why the possession test should be used in determining the liability of the person charged for violating the Act and why the SC’s judgment sets a bad precedent. Analyzing Supreme Courts judgment holding ‘motive’ as an essential element in violating SEBI Act 1992 The brief facts of this case were as follows Mr. Abhijit Rajan was the chairman and managing director of Gammon Infrastructure Projects Limited  GIPL.  and another company Simplex Infrastructure Limited   SIL were awarded separate contracts by the National Highways Authority of India NHAI. However,in 2013, the Board of GIPL passed a resolution authorizing the termination of contracts. The information was communicated to the stock exchange 21 days later. During that period, Mr. Rajan had already sold his shares which became the subject matter of an investigation of insider trading shares by SEBI. The Securities regulator held Mr. Rajan liable for the violation of SEBI(PIT)Regulations, 1992, On appeal, the Securities Appellate Tribunal (Hereinafter as “SAT”) overturned the order of SEBI holding Mr. Rajan not guilty. The SAT order was now appealed before the SC by the SEBI. Two issues arose before the SC, one of which was Does the Sale of Equity Shares by Mr. Rajan, under the compelling circumstances amounts to insider trading? There is no requirement under the SEBI (PIT) Regulations,1992, for SEBI to prove the motive of the insider, only an essential requirement of possession of unpublished price-sensitive information (UPSI) on part of the insider is required to be established by SEBI to prove his liability. Mr. Rajan advanced his arguments by contending that the sale of shares was occasioned by the compelling need to save the bankruptcy of the parent company of GIPL and utilize the proceeds of the share sale towards it rather than making unlawful gains. He further advanced that he had no motive to use the UPSI to defraud the securities market. The SC in its turn went beyond the SEBI Regulations by applying a profit motive test.The Supreme Court observed that Mr. Rajan’s actions were contrary to the arithmetic movement of the Securities market, had the UPSI been disclosed. Based on this analysis, the SC concluded that Mr. Rajan’s actions did not originate from unlawful motives, but from a pressing need to prevent the parent company of GIPL from going into bankruptcy. In view of the Court, the result that is profit/loss from the resulting transaction may not provide an escape route to the insider, but one cannot ignore human conduct. The determining factor is whether the insider has the necessary motive to make unlawful gains and manipulate the securities market. However, one may observe that in holding ‘Motive’ as an essential requirement,both the SC and SAT have deviated from their past rulings. In Chairman, SEBI v Shriram Mutual Fund the SC held that unless the language of the statute otherwise indicates, it is unnecessary to ascertain whether the violation is intentional or not. A similar viewpoint was shared by SAT with SEBI in Hindustan Lever Ltd v SEBI. The Rationale of the Courts in adopting the Possession Test The fundamental provision governing insider trading in the U.S. is SEC Rule 10b-5, etched in the light of Section 10(b) of the Securities Exchange Act, 1934. This Section prohibits fraud in connection with the purchase and sale of any security. However, different Circuits have adopted different tests in determining the liability of the insider based on different rationales which are analyzed below. The first case that extensively dealt with this issue was United States v Teicher  in which a lawyer leaked the inside information to the defendant. The defendants argued that he had other reasons to trade such as his fundamental research about the value of the stock. His contention that there could only be a violation when trading was casually connected with the information established by the SEC was rejected by the Second Circuit, which upheld his conviction. Teicher case, therefore, stands for a Pro-Government approach, where a trader is judged for the worst reasons to trade and the reasons for trade are rejected.  The Second Circuit observed that it’s difficult to assume in light of human nature, that the UPSI would not have influenced the behavior of the insider and “Unlike a loaded weapon, ready to use but not used, material information cannot lay idle in the human brain and the Use Standard pose difficulties for the SEC in requiring factual inquires in the state of mind.” Motive Test: A Safe Harbour for the Insiders? The supporters of the Use test primarily argue that adopting the possession test to determine liability would encompass in its punishable net the innocent trader who did not use the UPSI. The innocent trader is no better than the uninformed trader because he did not use that information and no unfair disadvantage accures to the uninformed trader. The Ninth Circuit in United States Vs Smith took this view, in that Smith argued that the jury must prove that there is a causal connection between the information and trade to convict him. The Ninth Circuit accepted his arguments and acquitted him. The burden of proof shifts from the defendant to the SEC. Thus, the Ninth Circuit comes to a very stronger conclusion that if the insider does not use the information, there cannot be any inference of his motive to defraud the market. Why the Possession of

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Asset Reconstruction Companies as Resolution co-applicant – Interplay of SARFAESI and Insolvency and Bankruptcy Code

Insolvency Law /

[By Aritra Mitra] The author is a student at National Law University, Odisha.   Introduction In the recent judgment of Puissant Towers India (P.) Ltd. v. Neueon Towers Ltd., the Chennai bench of the NCLAT overturned the order of the Adjudicating Authority and held that ARCs (hereinafter “Asset Reconstruction Companies”)  can act as Resolution Co-Applicant in an Insolvency and Bankruptcy Code, 2016 (IBC) resolution process, even without the permission of RBI. It observed that the Adjudicating Authority ought not to have placed reliance on Section 10(2) of the SARFAESI Act, 2002 as Section 238 of the IBC would prevail over the provisions of the SARFAESI Act, 2002, if there was any inconsistency with any provisions of the IBC. But the conundrum arises because ARCs are regulated under the SARFAESI Act and ARCs intending to perform any activity other than securitisation, reconstruction, and statutorily allowed functions, prior approval of the RBI is a must. Hence, even though there have been judicial precedents that state that IBC will override other conflicting other acts, but permitting ARCs to act as Resolution co-applicant without RBI approval creates issues, which the NCLAT has failed to consider before passing the order, and which the author shall discuss  in the following paragraphs. ARC as Co-Resolution Applicant – Beyond objectives under SARFAESI ARCs were introduced with the objective of helping banks and financial institutions manage their stressed assets by reducing the non-performing assets on their books. Whereas IBC was introduced to perform the function of reorganisation and resolution of insolvent entities. Since both IBC and SARFAESI perform a similar objective of reconstruction of bad loans, there are chances of inconsistencies and overlaps. The petitioners relied upon ARCIL v. Viceroy Hotels Limited, Manish Kumar v. Union of India, and the Delhi HC judgment in UV Asset Reconstruction Company v. Union of India, where it was clearly held that ARCs have to take RBI approval. But the appellate authority completely rejected the submissions of the appellants. But by passing such judgment it failed to discuss certain points which should have been considered before passing such a decision. The legal and regulatory design of ARCs is primarily focused on recovery of debt from the borrower and not on resolution of the borrower’s insolvency. Under Section 2(1)(ba) of the SARFAESI Act, ARCs are set up solely for the purpose of asset reconstruction or securitisation, or both. Further restrictions have been provided in Section 10(1) in the form of business that ARCs are allowed to perform. There is no mention of resolution applicant. Furthermore, Section 10(2) of the SARFAESI restricts ARCs from performing any business without prior RBI approval. It clearly denotes the specific purpose of ARCs. Allowing ARCs to act as resolution applicant without RBI approval seems to go against the provisions of SARFAESI. Also, Section 12(2) lays out the RBI’s power to issue directions to ARCs. And the implied meaning of those directions cannot go beyond the business provided in the SARFAESI Act. Section 15(4) of the SARFAESI Act states as following: “if any secured creditor jointly with other secured creditors or any asset reconstruction company or financial institution or any other assignee has converted part of its debt into shares of a borrower company and thereby acquired controlling interest in the borrower company, such secured creditors shall not be liable to restore the management of the business to such borrower.” Thus, there is no such obligation on the ARC to return the business to the borrower where it has already acquired a controlling interest in the entity. This goes against the very objective of the Code and should have been considered before allowing ARC to act as resolution applicant without RBI approval. Beyond Legislative Intent The idea of establishing ARC was recommended for the sole purpose of performing recovery of NPAs of banks. The Expert Committee for Recommending Changes in the Legal Framework concerning Banking System, and the BLRC Report, 2015 had clearly demarcated the functions of the ARC to reconstruction and securitisation. There was no mention of roles in insolvency resolution. It was clearly explained that the intent and objective of an ARC is to ‘realise the dues’ and reposition the borrower, and not ‘rescue’. The NCLAT also failed to consider the legislative intent behind establishing the ARCs. Allowing them to act as resolution professional in IBC would effectively go beyond the purpose of the ARCs. This may Furthermore, the resolution of stressed assets under IBC is expensive. the resolution applicant has to burn cash for an elongated timeline before being able to derive profits from these assets. However, ARCs are required to redeem SR’s within a period of maximum 8 years, meaning that ARCs cannot burn holes in their pocket and are required to recover their dues within a tight timeline. Accordingly, the luxury of a long gestation period is not available with ARCs making them unsuitable for resolution of stressed assets under IBC. Inefficiencies in RBI notification Now even though the NCLAT did not even discuss it, but RBI on 11th October, 2022 came out with a new notification ‘Review of Regulatory Framework for ARCs’, which permits ARC to act as Resolution Applicant under IBC. But even such permission is conditional upon fulfilment of certain grounds. The NCLAT did not even consider whether the ARC has a minimum Net Owned Fund of ₹1,000 crore and a committee, consisting mostly of independent directors, to make decisions about proposals for the submission of a resolution plan under the IBC. Since the RBI notification was not considered to grant permit to the ARC, the NCLAT made another error in granting permit without even considering whether the statutory requirements were fulfilled. Furthermore, the RBI notification also mandates that ARCs cannot exert significant control over the acquired insolvent entity and has to dilute such control within five years of the date of approval of the resolution plan. This ultimately means that a situation may arise where the ARC will look to sell the insolvent entity at a high price instead of reviving it. This

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