Author name: CBCL

Nature of Section 7 (5) of the IBC – Discretionary or Mandatory

Insolvency Law /

[By Ritik Jhanwar & Kiran Nilawar] The authors are students at Gujarat National Law Univeristy.   Introduction In this article the author would highlight the interpretation of word ‘may’ in Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”) and the difference between ‘may’ and ‘shall’ of Section 7 and 9 of the IBC respectively which are two mirror provisions in their application. The author would also explore the discretion exercised by adjudicating authority while deciding to admit any application filed under Section 7 of IBC in light of the recent judgement of the Supreme Court in M. Suresh Kumar Reddy v. Canara Bank & Ors.[1] The legal issue that this article clarifies comes into its existence because of the provisions Section 7 and Section 9 of the Insolvency and Bankruptcy Code (“IBC”) which are almost mirror provisions apart from the fact that while the former mentions application for Corporate Insolvency Resolution Process (“CIRP”) by Financial Creditors and the latter talks about the application by Operational Creditors. The issue stems from the fact that Section 7 (5) uses the word ‘may’ while section 9 uses the word ‘shall’ thus leading to conundrum as to whether Section 7 (5) confers discretion on the part of Adjudicating Authority while deciding an application for CIRP filed by Financial Creditors. In the Innoventive Industries Ltd. v. ICICI Bank and Ors.[2] (hereinafter “Innoventive Industries”), the Supreme Court stated that Section 7(5) of the Code confers the Adjudicating Authority to either accept or reject an application based on their assessment of whether a default has taken place or not. In Pratap Technocrats (P) Ltd. and Ors. v. Monitoring Committee of Reliance Infratel Limited and Ors.[3] (hereinafter “Pratap Technocrats”) it was further emphasized that a default refers to the failure to make a timely payment of a debt, and the jurisdiction of the Adjudicating Authority  is limited to identifying such defaults by the corporate debtor. Once the Adjudicating Authority is satisfied that a default has taken place, the application should be admitted, as long as it is properly filled out and there are no ongoing disciplinary actions against the proposed Resolution Professional. A similar stance was taken in E.S Krishnamurthy and Ors. v. Bharat Hi-Tech Builders Private Limited[4](hereinafter “E.S. Krishnamurthy”) wherein the Apex Court held that the Adjudicating Authority has only two options under Section 7(5) of the Code: either to accept or reject the application based on the verification of whether a default has taken place or not. But a contrary stance is taken in the case of Vidarbha Industries Power Limited v Axis Bank Limited[5] (hereinafter “Vidarbha Industries”), wherein some of the major issues that were discussed were: Whether there is a distinction between Section 7(5) and Section 9(5) of the IBC, 2016? Whether Section 7(5) of the IBC is a mandatory provision? The apex court while deciding these issues observed that Section 9 of the Code deals with initiation of CIRP by operational creditor, wherein a mandatory demand notice to be served on the Corporate Debtor by the Operational Creditor and after the expiry of 10 days of the notice and Operation Creditor without receiving the payment due or a notice of dispute by the Corporate Debtor, the Operational Creditor becomes qualified to file application to initiate CIRP before the Adjudicating Authority. Section 9(5)(i) also entails some conditions to be fulfilled for admitting the application by the Adjudicating Authority. On the contrary, Section 7(5) of the IBC deals with initiation of CIRP by the financial creditors. The court also observed that there was some legislature wisdom that led to using of word “may” in Section 7(5) and “shall” in Section 9(5) of the Code. Thus, an application under Section 9(5) is intended to be a mandatory provision but an application under Section 7(5) to be interpreted as a discretionary provision. The justification for this interpretation is rooted in the distinction between the business activities of financial creditors, who concentrate in investing and financing activities, whereas operational creditors, who often involves in supplying goods and services. Financial credits are typically characterized by larger amounts, secured assets, and longer repayment periods, while operational credit tends to involve smaller amounts, lack of collateral, and shorter repayment terms. As a result, it is inappropriate to compare the financial strength and business nature of a Financial Creditor with that of an Operational Creditor involved in the supply of goods and services. The non-payment of acknowledged dues can have a much more severe impact on an operational creditor compared to a financial creditor. Thus, court held that while deciding application filed by financial creditors under Section 7(5) of the IBC, the adjudicating authority has been conferred discretion. Adjudicating Authority may exercise this discretion while taking into account the overall financial health and viability of the corporate debtor and the relevant facts. From the above-mentioned judgements, a key conclusion that can be drawn is that while Innoventive Industries, Pratap Technocrats and E.S Krishnamurthy reiterate the delimited power of the Adjudicating Authority in the admittance of an application under Section 7 of the Code thus supporting the interpretation of mandatory nature of Section 7(5) of the Code, the decision in Vidarbha Industries supports the interpretation that discretionary nature of Section 7(5) of the Code. The position of law regarding nature of Section 7 of the Code was that of Vidarbha Industries only i.e., discretionary nature. Therefore, the Adjudicating Authority has discretion while deciding an application for CIRP filed by financial creditors under Section 7 (5) of the IBC by virtue of the word used in the provision “may” in the section. But this position was recently questioned in the case of M. Suresh Kumar Reddy v. Canara Bank & Ors.[6] Suresh Kumar Reddy v. Canara Bank & Ors. (hereinafter “M. Suresh Kumar Reddy”) Brief facts: Respondent bank had sanctioned a Secured Overdraft Facility of Rs. 12 Crores and a Guarantee Limit of Rs. 110 Crores to the Corporate Debtor on 28 February, 2017. However due to irregularities committed by the Corporate

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The Unresolved Conundrum of Commercial Wisdom of Committee of Creditors

Insolvency Law /

[By Priyanshu Mishra] The author is a student at National Law School of India University.   Introduction The implementation of the Insolvency and Bankruptcy Code (Hereinafter as “IBC”) was intended to tackle the increasing problem of loan defaults and non-performing assets (Hereinafter as “NPA”). Unlike the previous insolvency law, the IBC focused on reviving companies rather than liquidating them and gave priority to the interests of creditors. Under the IBC, financial creditors played a crucial role as part of the Committee of Creditors (Hereinafter as “CoC”), which held significant decision-making power in the corporate insolvency resolution process (Hereinafter as “CIRP”). However, in a recent case (MK Rajagopalan v Dr Periasamy Palani Gounder), the Supreme Court ruled that the principle of commercial wisdom cannot be stretched too far to overlook a significant flaw in the functioning of the CoC. This article seeks to explore the implications of this court ruling on the principle of Commercial Wisdom of the CoC. It also questions the absolute authority of the CoC based on the principle of commercial wisdom and suggests the implementation of a Code of Conduct to govern the actions of CoC members. Legal Precedence: Examining existing jurisprudence on the Principle of Commercial Wisdom of the COC. In the landmark case of Vallal RCK v M/s Siva Industries, the Supreme Court established that the adjudicatory authority cannot scrutinize the details of a settlement plan approved by the CoC when assessing a resolution application under section 12A. Similarly, in the case of Ashish Saraf v Bhuvan Madan, the Court emphasized that the CoC has the responsibility of making business decisions regarding the approval or rejection of a resolution plan. This includes evaluating its feasibility and viability, and such decisions are considered beyond the scope of judicial review. Furthermore, in the case of K Shashidhar v Indian Overseas Bank, the Supreme Court concluded that the adjudicating body (NCLT) cannot dispute the autonomy of the CoC, but Judicial Review is limited to the grounds provided in the Act itself, which is a self-contained code. As a result, the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) cannot overrule CoC rulings. The Court reiterated this stance in the case of Committee of Creditors of Essar Steel India Ltd v Satish Kumar Gupta and Ors, emphasizing that adjudicatory bodies should exercise their jurisdiction as defined in the IBC. They must adhere to the guidelines outlined in Section 30(2) of the IBC and exercise their judicial review power in accordance with Section 32 of the IBC. A similar question arose in the Kalpraj Dharmshi case, where the Court reaffirmed that adjudicatory bodies cannot interfere with the commercial decisions made by the CoC. Examining the Court’s Role in CoC Decision-Making in the present case: Opening Pandora’s box? The Courts have generally interpreted the principle of commercial wisdom of the CoC as non-justiciable, granting significant discretion to CoC members, as discussed earlier. However, in this particular case, the Court aimed to limit the broad interpretation of the principle of commercial wisdom while also ensuring limited judicial intervention in insolvency proceedings. The Court found the resolution plan to be in violation of Section 88 of the Trust Act, the IBC Act (specifically Section 29A), and the Companies Act (specifically Section 164(3)), which rendered the resolution applicant ineligible for the insolvency proceedings. The Court clarified that the commercial wisdom of the CoC refers to a well-considered decision made by the CoC in the best interests of both commercial aspects and corporate revival. In its judgment, the Court sought to define the boundaries of the principle of commercial wisdom within insolvency proceedings, adopting a balanced approach. It also emphasized that judicial intervention should not be disregarded under the pretext of the principle of commercial wisdom of the CoC. The Court recognized that resolving legal conflicts, which are necessary for enforcing the resolution settlement, can only be accomplished through the court’s interpretation of the law. Therefore, the Court stated that limited judicial intervention in the conduct of CoC members is necessary but should focus on matters beyond the scope of the principle of commercial wisdom. However, while the Court’s approach was commendable, it raised certain unaddressed concerns. By balancing the principle of commercial wisdom of the CoC and the power of judicial review, the Court inadvertently risks increasing never-ending litigation. This outcome is contrary to the legislative intent, which aims to ensure effective and efficient insolvency proceedings for debt-ridden companies. In previous cases such as Essar Steel and Swiss Ribbon, the Court emphasized that the relevance of the commercial wisdom of the CoC is to expedite the resolution process of insolvent companies. Therefore, to align the legislature’s intent with the court’s reasoning on the principle of commercial wisdom of the CoC, it is necessary to establish accountability and transparency within the CoC’s decision-making process. This can be achieved by implementing a structured framework that specifies the conduct and procedures for insolvency proceedings. However, before implementing such a framework, it is crucial to identify the potential challenges within the insolvency proceedings. In analyzing the current CoC framework, three major problems emerge: procedural delays, difficulties in consensus building, and unreasonable haircuts (reductions in the value of creditors’ claims). These issues primarily stem from the unrestricted authority granted to CoC members, who are shielded from judicial scrutiny under the principle of commercial wisdom. Procedural Delay: The Essar Steel case highlighted that the Bankruptcy Law Reform Committee Report of 2015 emphasized the importance of speed in insolvency proceedings in India. However, data from the report indicated that 71% of insolvency cases exceeded the stipulated 180-day timeline. This significant deviation from the intended objective of the code indicates a clear issue with procedural delays. In the Jindal Saxena Financial Service Pvt Ltd v Mayfair Capital Pvt Ltd, the Court identified that a major cause of delay in insolvency proceedings is the lack of decision-making power given to nominated members of financial institutions within the CoC.[1] This leads to time-consuming internal approval processes within financial

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A Tale of Non-obstantes: Scrutinizing the IBC’s (Supposed) Primacy over the SEBI

Insolvency Law /

[By Shubh Jaiswal & Mayannk Sharma] The authors are students at Jindal Global Law School.   Introduction A division bench of the Apex Court is set to hear the applicant on 26th July in the case of SEBI vs Rohit Sehgal, which has been pending before it since 2019. The appeal arises out of an order by the NCLAT, which had previously upheld an order of the NCLT admitting an insolvency application under Section 7 of the IBC and subsequently declaring a moratorium under Section 14 of the act. The SEBI had contended that the Corporate Debtor had violated Regulation 3 of the Collective Investment Scheme Regulations and consequently, had attached the debtor’s properties. While the Securities Appellate Tribunal had upheld this direction, the NCLT (and NCLAT) had observed that SEBI could not recover their dues (as per the procedure laid out in Section 28A of the SEBI Act) during the imposition of a moratorium due to the non-obstante clause present in the IBC—which postulates that the provisions of the IBC shall have effect even if they are inconsistent with another law. It is precisely this position of the NCLT that this article intends to critique. After exploring the arguments furthered by proponents of this position vis-à-vis Section 238 of the IBC (i.e., the non-obstante clause) that assert that the IBC should prevail as it was enacted after the SEBI Act, we take the opposite stance. We contend this position on the primary ground that the IBC would prevail over the SEBI Act only if there were a manifest inconsistency between the 2 acts—however such is not the case as the IBC and SEBI Act deal with entirely different subject matters. Furthermore, we elucidate how allowing the SEBI to recover its dues as an operational creditor barely benefits the watchdog and instead, propose a harmonious interpretation of the two statutes that would ensure that the legislative intents of both the statutes is furthered. Battle of the Non-Obstantes: the Conundrum Explained In essence, the dispute between the legislations arises due to the IBC’s “creditor in control” regime, that empowers the “Adjudicating Authority” to issue a moratorium on the NCLT’s admission of an application of the Corporate Insolvency Resolution Process (“CIRP”). This power, enshrined in Section 14 of the IBC, prohibits inter alia the institution of fresh suits, continuation of pending suits and the execution of any judgement, decree, or order till the culmination of the CIRP, i.e., till the resolution plan is approved by the NCLT or liquidation proceedings are initiated. Thus, once the moratorium period kicks in, the corporate debtor (i.e., the corporate person that owes the debt) is protected from all proceedings, including those that demand the recovery of dues before a court of law, tribunal or “any other authority”. The efficacy of such shielding under Section 14 is catalysed when read with Section 238 of the IBC, which contains a non-obstante clause and consequently, authorises the IBC to have primacy (and an over-riding effect) over all existing laws, provided they are “inconsistent” with its provisions. On the contrary, Section 28A of the SEBI Act allows the SEBI to recover proceeds or any other penalties imposed by it via attachment and sale of property, bank accounts etc. The SEBI does so when a perpetrator is unable to pay a penalty/dues or fails to comply with an order issued by it. This provision is further bolstered by a non-obstante clause of its own—Section 28A (3)—which postulates that the recovery of any amount under Section 28A (1), would precede over “any other claim” against the said person. The conundrum, thus, is plainly apparent. Can the SEBI exercise its power to recover penalties/dues from corporate debtors even when a moratorium (that expressly prohibits such action) has been imposed? The jurisprudence on this issue has not been established concretely—while the decisions of the NCLT have held the IBC to be supreme, a catena of other decisions have opined otherwise. When Late is Great: Analysing the intent behind Section 14 Academicians assert that the SEBI’s power under Section 28A is rendered void (and futile) against companies undergoing CIRP and base their claim on 2 primary contentions—the legislative intent behind Section 14 and the principle of generalia specialibus non derogant. The Apex Court, in Rajendra K. Bhutta, has previously affirmed that the objective behind the introduction of Section 14 was to maintain a “statutory status quo” on the Corporate Debtor and his assets, to ensure that the Resolution Professional could fulfil his role effectively—without any outside intervention or impediments. Along similar lines, in the case of Bhanu Ram, the NCLT stipulated that the legislature intended that the Interim Resolution Professional carry out the day-to-day affairs of the corporate debtor, and accordingly drafted Section 14 in a manner that allowed him to do so effectively. As the possession of the debtor’s property is sine qua non for the Interim Resolution Professional (“IRP”) to effectively carry out their function, the NCLT Bench unanimously held that Section 28A could not be imposed by the SEBI during a moratorium on the debtor. Furthermore, the NCLAT in Anju Aggarwal, posited that regulatory entities such as SEBI and the Bombay Stock Exchange fit within the contours of “other authority. In that regard, the tribunal declared that Section 14 (1) (a) of the code included the SEBI (Listing Obligations and Disclosure Requirements) Regulations within its ambit, and a corporate debtor need not comply with them after a moratorium had been issued in light of Section 238 of the IBC. It is precisely in this regard that innumerable academics contend that the objects and purposes of the IBC, when read with the aforementioned precedents, unequivocally showcase that the moratorium period hinders all statutory bodies, including the SEBI from collecting their dues. The NCLT also placed reliance on the Supreme Court decision in Monnet Ispat and Energy Limited which had  held that the IBC would prevail over all inconsistent laws (including the Income Tax Act),  while acknowledging the supremacy of the non-obstante clause in

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Anti-Avoidance provision in SEBI: A game-changer for market regulation and foreign investors

Capital Markets and Securities Law /

[By Tanishq vijay] The author is a student of Gujarat National Law University.   Introduction Anti-avoidance provisions prevent taxpayers from using contrived and non-commercial arrangements to abstain from or reduce their tax liability.[1] These provisions in the realm of market regulation can be relevant in curbing tax leaks from corporate entities who devise various schemes to circumvent share market rules. SEBI has recently pitched before the committee appointed by the Supreme Court looking after Adani mayhem for anti-avoidance provisions to regulate corporates who devise innovative schemes to avoid share market rules.[2] SEBI wants a proviso similar to General Anti Avoidance Rules (GAAR) in the Income Tax Act 1961. This will help regulators stop activities like insider trading and transactions violating market rules.[3] General Anti-Avoidance Rules GAAR is a system to prevent tax evasion. It is covered under Chapter X-A of the Income Tax Act of 1961.[4] It contains impermissible avoidance arrangements, which are entered into to create tax benefits. A transaction that is a result of misuse of the act or does not have a bona fide explanation or commercial solidarity to it is covered in this arrangement. The Hon’ble SC in Vodafone International Holdings B.V v. Union of India & Anr.[5] GAAR “intends to prevent tax avoidance, which is inequitable and undesirable.” The court further provided valuable insight into the necessity of legislation of this nature. The lack of provisions and effective legislation gives rise to judicial uncertainty. Hence, maintaining market stability and complying with market rules and regulations will prevent tax avoidance motives and boost genuine commercial transactions. Instances of Anti-avoidance Provisions in SEBI The Securities and Exchange Board of India Act, 1992 (SEBI Act hereinafter)  does not provide for any specific anti-avoidance provision.  Within the framework of the SEBI Act, 1992, Section 12A stands as the closest provision addressing anti-avoidance measures. [6]  This section explicitly prohibits the use of manipulative, deceptive to defraud or deceive any person engaged in stock exchange securities. It also prohibits insider trading. It gives powers to SEBI to take action against those who try to use deceptive practices to defraud investors. Still, the problem with this is that it deals mainly with defrauding a company or stock exchanges which may include siphoning of a company’s funds or artificially increasing or decreasing the prices of the stock exchanges. It does not provide for a compliance regime against corporate transactions that seek to avoid compliance with the rules of SEBI. Chapter VIA of the SEBI Act, 1992[7], delves into penalties and adjudication. It is founded on the tenet that anyone who violates or disregards any provision of the Act, the regulations, or any directions issued by SEBI is subject to penalty or adjudication, regardless of whether they had any malicious intent or rationale. However, we cannot equate it with Anti-avoidance rules as it is a specific provision intended towards imposing and adjudicating penalties in case of an artificial increase or  a decrease in share price. At the same time, anti-avoidance in market regulation is a more general principle based on substance over form, where transactions inconsistent with the economic stability and leading to immoral gains to a corporation are discouraged. Enhancing Transparency in foreign portfolio investors SEBI has recently proposed more transparency and stricter disclosure norms for Foreign Portfolio Investors (FPI) in the backdrop of the Adani-Hindenburg saga. SEBI wants additional information regarding foreign investors investing in Indian entities with a concentrated holding in one single entity so they can be monitored more closely.[8] FPIs with over 25,000 crores or 50% Asset Under Management (AUM) must make additional disclosures. This was done so that promoters do not circumvent the minimum public shareholding requirement.[9] Under the Prevention of Money Laundering (Maintenance of Records) Rules 2005, a ‘beneficial owner’ is defined as an individual with a controlling ownership interest of more than 25% in the case of companies.[10] SEBI aims to obtain granular information regarding ownership, economic interest and control rights of these FPIs, which will help categorise these based on risk. SEBI had observed that some foreign investors have a large portion of investments in a single company for an extended period.[11] The current requirement for minimum public shareholding is 25% which means that the company’s promoters must maintain at least 25% of its share capital to the public. To bypass this regulation, the promoters invest through FPI by concentrating a substantial portion of the equity in one single investee company ultimately resulting into a deflective image of the actual situation of the publicly traded shares. SEBI has also observed that it is difficult to identify the beneficial owner of FPI based simply on economic interest. Most investor entities fall below the threshold required for identification as Beneficial owners.[12] The same Beneficial Owner holds ownership in FPI through different entities, each falling below a certain requirement that needs to be followed to become a beneficial owner, leading to decreased transparency. For example, there is a FPI company based in Mauritius named ABC Funds. It has multiple shareholders in the name of X,Y,Z Ltd holding 9% each and 73% being held by others. SEBI’s guidelines states that Beneficial Owner of an FPI is a natural person who owns or controls more than 25 of that FPI. However, here ABC Funds Beneficial owner is hidden by different entities below 25%. This leads to a creation of a loophole in SEBI’s requirements resulting in exploitation of disclosure agreements and a breach in transparency. This is one instance of anti-avoidance measures to bring transparency in market regulation. The big corporates will not be able to use loopy laws to circumvent the shareholding requirement resulting in irregular increase or decrease in the price of shares. Impact of Anti-avoidance provision in SEBI on foreign institutional investors According to section 2 (f) of the SEBI (FII) Regulations 1995, FII is “institutions established or incorporated outside India which proposes to invest in India in securities”[13]. Companies pool large amounts of money from investors and invest it in securities, real estate, and other assets.[14] Anti-avoidance proviso in

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Enhancing Investor Empowerment: SEBI’s Dispute Resolution Clause for Regulated Intermediaries

Capital Markets and Securities Law /

[By Vaibhavi Pedhavi & Divik Silawat] The author is a student of Gujarat National Law University.   Abstract SEBI holds significant importance in the regulatory landscape of India’s securities market. After recognizing the importance of effective dispute resolution, SEBI has introduced “SEBI (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023”. The new amendment introduced by SEBI aims to enhance investor protection through dispute resolution. It covers a wide range of intermediary regulations, emphasizes on mediation and conciliation alongside arbitration, and introduces measures such as reducing timelines and recognizing designated bodies for grievance monitoring. This amendment has resulted in substantial modifications to the existing regulations that govern different entities operating in the securities market, with the aim of empowering investors. The authors of this article examine the scope of this new amendment introduced by SEBI and its impact on investor protection, with a focus on promoting transparency, trust, and confidence in the securities market through effective dispute resolution mechanisms. Dispute Resolution Mechanism of SEBI In order to safeguard investor interests, build trust, transparency, and awareness in the securities market, SEBI has Alternate Dispute Resolution (ADR) mechanism. This mechanism aims to provide an effective resolution platform for disputes between investors and regulated entities, ensuring their protection and enhancing confidence in the market. SEBI has established an online platform called the “SEBI Complaint Redress System” (hereinafter, SCORES) which allows investors to approach SEBI directly for dispute resolution without having to exhaust other channels first. By providing an accessible online platform, it simplifies the complaint registration process for investors. Within the framework of SCORES, investors have the opportunity to resolve disputes through arbitration if they hold an account with a depository participant or a broker. This option provides investors with an alternative means of resolving conflicts, further enhancing the effectiveness of SCORES mechanism in addressing grievances in the securities market. When an investor’s grievance remains unresolved by a stock exchange or depository due to disputes, the investor has the option to file for arbitration according to the rules and regulations of that specific stock exchange or depository. This mechanism provides for additional avenue for resolving conflicts and seeking fair resolutions in the securities market under  chapter 15 of the “Model Bye Laws of Stock Exchange”. SEBI’s ADR mechanism, facilitated through the SCORES platform, and the Model Bye Laws for Stock Exchange outline the procedure for arbitration in resolving investor disputes related to the securities market. These mechanisms establish the guidelines and framework for conducting arbitration proceedings, ensuring a structured and fair process for resolving conflicts between investors and market participants. About the amendment On July 4, 2023, SEBI introduced the “SEBI (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023”. These regulations were introduced to modify the existing 17 regulations that govern various SEBI-regulated intermediaries, such as Merchant Bankers, Mutual Funds, Credit Rating Agencies, Alternative Investment Funds, Investment Advisers, etc. For each category of market intermediaries, SEBI has formulated separate investor charters. These charters encompass crucial details regarding the services offered by intermediaries to investors, including specific timelines, significance of preserving relevant documents, and also outline the mechanism for resolving investor grievances. Additionally, the “SEBI (Listing Obligations and Disclosure Requirements) Regulations” for listed companies were also subject to amendments. The revised mechanism now includes clauses for “mediation, conciliation, and arbitration”, with the guidelines issued by the SEBI’s board for each intermediary. These amendments are primarily intended to create a thorough dispute resolution structure, which is essential in resolving any claims, disagreements or disputes that may arise between these entities and their clients or investors. Procedural modifications through the amendment Reducing timelines: This revamp includes reducing the timelines for resolving complaints, implementing an automatic routing system that directs complaints to the relevant regulated entities, and auto-escalating complaints when the prescribed timelines are not adhered to by the regulated entity. By implementing these provisions, the amendment ensures a more efficient and timely resolution of investor grievances, promoting transparency and accountability among regulated entities and ultimately enhancing investor protection in the securities market. Recognizing designated bodies for monitoring: The new amendment has brought about investor protection enhancements through dispute resolution by recognizing designated bodies responsible for monitoring and handling grievances filed by investors against regulated entities. This recognition ensures that there are specific entities assigned to oversee the resolution of investor complaints, providing a dedicated and specialized approach to addressing investor grievances. By establishing these designated bodies, the amendment strengthens the investor protection framework and ensures that their concerns are effectively addressed in a timely manner. Integration of SCORES and Online Dispute Resolution Platform: To enhance investor empowerment and improve the resolution of investor grievances in the securities market, SEBI has approved revamping of the SCORES. SCORES will be linked with an Online Dispute Resolution (ODR) platform, providing investors with an additional avenue for resolution. Lastly, a new portal will be created to collect market intelligence inputs. Two Levels of Review: Additionally, designated bodies will be recognized for monitoring and handling investor grievances, offering a two-level review process. In this process, if an investor is unsatisfied with the resolution provided by the regulated entity, the designated body responsible for monitoring and handling investor grievances will conduct the first review. If the investor remains dissatisfied even after the first review, the second review will be conducted by SEBI. Creation of a portal: This initiative is aimed at enhancing investor protection through dispute resolution by providing a platform for gathering valuable market insights. The new portal serves as a means to gather information and data that can contribute to a better understanding of market dynamics and potential issues that may affect investors. By utilizing this portal, regulators can stay informed and take proactive measures to address any emerging concerns, thereby strengthening investor protection in the securities market. Enhancing Investor Protection The new amendment introduced by SEBI differs from the previous framework in several significant ways. Unlike the previous framework, which may have had limited or specific provisions for dispute resolution, the new amendment covers all intermediary regulations. This means that it

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Taxability of Pre-GST Government Works Contracts: Resolving the Differential Tax Liability Conundrum

Taxation Law /

[By Abhishek Bhatra] The author is a student of National Law University and Judicial Academy, Assam.   Introduction The treatment of Works Contract in the Pre-Goods and Service Tax (GST) era subjected the Service Provider to a variety of indirect taxes such as Service Tax, Value Added Tax (VAT), and Central Excise. However, if the Works Contract was awarded by the Government, a Government Authority, or a Local Authority, the Service Provider was given the liberty to claim exemption from the applicable Service Tax. With the implementation of the GST Regime, the erstwhile exemption under the Service Rate notification 25/2012 for Government Contractors has been done away with. Furthermore, liability towards GST for Works Contract is now imposed on the ‘Time of Supply’. This reform has opened up a pandora’s box for the various Service Providers who had been awarded a Works Contract by a Government body in the Pre-GST era but had executed the said work – either partly or wholly – in the GST regime, as to on whom the burden of the additional tax liability shall be imposed. This article explores this lacuna in light of the legislative actions undertaken and the judicial position established, whilst presenting comprehensive solutions to resolve this conundrum. The question of law involved The immediate impact of the GST regime has been the clubbing together of all the applicable different indirect taxes, and now Works Contracts are taxed under a single head – on the entire amount – at a uniform rate, which has been divided into three slabs, namely, @18%, @12%, and @5%, depending on the nature of the works executed. The liability to pay GST for Works Contract executed is determined on the basis of ‘Time of Supply’ –under Section 13 read with Section 31 of the CGST Act – which constitutes the date on which supply of the services is deemed to have been rendered. In case the invoice is raised within the prescribed period of 30 days, then the date on which invoice is issued by the Service Provider or the date on which he receives the payment – whichever is earlier – is deemed to be the ‘Time of Supply’. And if the invoice is not raised within 30 days, the date of completion of service would be deemed to be the ‘Time of Supply’. Another integral transposition has been the discontinuance of the distinction between the works contract awarded by a government body and the works contract awarded by a private entity with respect to the Service Tax exemption provided to the former. Consequently, after the GST regime came into effect, Government bodies were hit with a deluge of representations from the various under contract Service Providers regarding the extra financial burden imposed because, as per ‘Time of Supply’ they would be liable to pay taxes under the GST regime even though they had prepared and submitted their bids taking into consideration the erstwhile taxation rates. This gave rise to a pertinent question of law as to on whom the burden of such differential tax liability must be affixed, because standard works contracts stipulate that the bid price quoted shall be inclusive of any State or Central Taxes. Steps taken hitherto To overcome this impediment, the Central Public Works Department, the Ministry of Railways, and various State Governments, such as Kerala, Tamil Nadu, West Bengal, Andhra Pradesh, Bihar, Orissa, as well as various departments under the Karnataka and Chhattisgarh governments, took into consideration the plight of such Service Providers and consequently issued clarifications vide Government Orders, Gazette Notifications, Circulars, and Standards of Procedure. There was also Judicial Activism for the purpose of resolving this impediment. For instance, the Hon’ble High Court (HC) of Jharkhand, in the case of M/s Sri Sai Krishna Constructions v. State of Jharkhand and Others, had vide its order dated 16.03.2021 directed the State of Jharkhand to formulate guidelines on this issue, in compliance of which the State had accordingly issued requisite directives for dealing with this matter. These steps, although beneficial, nonetheless encountered a series of difficulties for their effective enforcement, negating the intent behind introducing them because many aggrieved Service Providers could not get the intended relief, due to inefficacious redressal by the State Departments, and thereby had to seek judicial intervention in the process. For instance, in the case of M/s D.A. Enterprises v. State of Chhattisgarh and Others, the State Government had refused to accept the request of the aggrieved Service Provider for refund of the additional tax burden – by failing to abide by its circular – upon which the Service Provider had to file the instant writ petition seeking the Hon’ble Chhattisgarh HC’s intervention for claiming relief. A similar situation was presented before the Hon’ble Madras HC in the matter of Subaya Constructions Company Limited v. Tamil Nadu Water Supply and Drainage Board and Others. wherein the treatment of additional tax burden was processed under the third method of calculation, whereas it was contended by the Service provider that it should have been under another method. The Hon’ble Court, after considering the submissions, ruled in favor of the Service Provider. At this juncture, there still exists a vast majority of states that have yet to adopt effective measures for the purpose of overcoming this impediment. In such states, the only mechanism for redressal available to the aggrieved Service Providers is the long and expensive route of litigation. Resolving the conundrum Since the erstwhile VAT was a state subject under the Seventh Schedule, it is integral that the remaining states implement the requisite clarifications or guidelines for dealing upon this aspect, and the existing states should revise their clarifications or guidelines, through appropriate policy decisions, for effective enforcement and redressal. Firstly, it must be ensured that a uniform guideline is issued that is applicable for the Works Contracts entered into by all the authorities and departments of a particular state prior to the commencement of the GST Regime. This is pertinent in view of the question

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Unraveling the Conundrum: DLG Guidelines and the Future of Digital Lending

Banking Law /

[By Dhaval Bothra & Rajdeep Bhattacharjee] The authors are student of Symbiosis Law School, Pune.   Introduction The verbiage related to loss-sharing models has been a predicament for a substantial period now for the Reserve Bank of India (RBI). Post its Guidelines on Digital Lending (DL Guidelines) on 2 September 2022, a certain conundrum prevailed across the regulatory landscape concerning the validity of the same as it did not explicitly bar the arrangements of loss sharing but suggested that the Reserve Bank of India‘s (Securitization of Standard Assets) Directions 2021 (Securitization Directions),  paragraph 6(c), be adhered to for financial products involving contractual loss sharing modalities. However, under the recent Guidelines on Default Loss Guarantee in Digital Lending (DLG Guidelines), the air has been cleared by the regulator. Express permission has been granted to DLG arrangements subject to specific conditions, taking cognizance of all the stakeholders involved. The DLG Guidelines aim to boost confidence and growth in digital lending by allowing fintech companies to expand their customer base while lowering default risk. Prudent lending approaches, thorough credit evaluations, and modern data analytics should be prioritized for long-term lending practices. To limit risks, borrowers’ creditworthiness, income security, and repayment capacity must be carefully evaluated. This article compares the guidelines to past RBI norms, addresses industry issues, considers alternate options for addressing the stated concerns and suggests a way forward. Analysis and Interplay with Securitization Directions Under the guaranteeing ambit, two entities exist: Regulated Entities (REs) are permitted to retain the loans and associated credit risk of loans on their balance sheet, under Section 5(b) of the Banking Regulation Act 1949. The Lending Service Providers (LSPs) function either in liaising with the credit facilities provided by the REs or the acquisition of borrowers thereof, in a digital landscape. To provide access to the loan exposures for investors of different classes, a RE repackages the credit risk in a securitization structure into tradable securities with varying levels of risk. This enables a lender to share the risk of a loan with those third parties who might not have otherwise been able to access a loan exposure directly. These transactions that involve the redistribution of credit risk in assets by RE lenders are governed under paragraph 4 of the RBI‘s Securitization Directions. The DL Guidelines required REs participating in First Loss Default Guarantee (FLDG) arrangements to follow the RBI Securitization Directions, particularly its clause 6(c) about synthetic securitization. Therefore, the three possible interpretations were: An arrangement that is specifically related to the credit risk underpinning a pool of loans is called synthetic securitization. Herein, fintech companies could offer loan-specific guarantees. Only REs are covered by the Securitization Directions. So, if any regulatory flexibility on FLDG is allowed, it will only apply to RBI-recognized REs. Without obtaining a regulatory license, such as one to run an NBFC or small finance bank, the unregulated entities may not be able to offer FLDGs. Since synthetic securitisation is prohibited by the Securitisation Directions, any form of risk transfer in a pool of loans to a third party by a lender RE while keeping the pool on its balance sheet is prohibited. However, this res intergra position was addressed effectively by the Guidelines, hence clearing the air around this interpretative conundrum and it has been laid down that the DLG arrangements which are subjected to the provisions enlisted under Annex I to the circular, shall not be treated under the mandate of synthetic securitisation and/or the loan participation provisions. Thus, the RBI has provided clarity to LSPs regarding the extension of FLDGs. Industry Concerns FLDG To prevent borrower defaults, REs and LSPs must collaborate under the FLDG. FLDG acts as a risk-sharing mechanism in the domain of online lending. However, there can be concerns regarding how FLDG will be implemented under the DLG Guidelines. These include DLG provider eligibility requirements, DLG coverage constraints (capped at 5%), and the need for detailed disclosure guidelines to promote transparency. Additionally, further clarification is needed regarding the relationship between DLG arrangements and the RBI’s Master Direction on Securitization of Standard Assets 2021 to ensure compliance and avoid ambiguity. Excessive Data Collection and Misuse The DLG Guidelines and the DL Guidelines have failed to recognize the privacy concerns and exploitation risk when Digital Lending Aggregators (DLAs) and LSPs obtain superfluous data and permissions. These can include personal and financial information. From past scenarios, it is imperative to protect borrower data. This is crucial to prevent fraud and maintain trust in digital lending. DLAs and LSPs must prioritize strong data security measures like multi-factor authentication and upgraded encryption. The erosion of consumer trust hampers the growth of digital lending, so a comprehensive regulatory framework is needed. The framework should include explicit permission procedures, clear data retention and sharing policies, and strict penalties for noncompliance. To resolve this, a model akin to the European Banking Authority (EBA) Guidelines on the Security of Internet Payments can be adopted which comprehensively addresses the bottleneck and mitigates the concerns. ‘Buy Now Pay Later’ (BNPL)Applications These Guidelines will have a substantial impact on BNPL applications, particularly in terms of credit levels and operations. The effects of the DLG Guidelines on credit lines on BNPL platforms include the prohibition on loading non-bank Prepaid Payment Instruments (PPIs) through credit lines, changes to operational procedures, and the challenges faced by BNPL enterprises. The DLG Guidelines will impact the credit limitations of BNPL platforms. Specific conditions and new rules will be imposed on REs offering BNPL services, necessitating an evaluation of credit line practices and structures for regulatory compliance. BNPL companies must adjust their credit line policies accordingly. Additionally, DLG arrangements for BNPL platforms need to be reviewed to ensure adherence to the guidelines. This requires the development of clear and binding contracts between the RE and the DLG supplier, specifying the scope, categories, timeframe, and disclosure requirements of DLG coverage. Meeting these standards may involve investments in infrastructure, technology, and changes in business practices for BNPL companies. Mitigating Industry Concerns We propose the following alternative

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Killer acquisitions and a more rational approach

Mergers & Acquisitions /

[By Sanidhya Bajpai] The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.   Introduction Companies with an extensive capital and dominant position in the market have mastered ways of staying at the helm of the competition, and one strategy which they frequently follow is killer acquisitions. When a company eliminates an innovative firm by acquiring it at a nascent stage to eliminate any future competition from that firm, it is seen as a killer acquisition. The acquiring company can either terminate its innovative efforts or its development of an innovative product to stay at the helm while avoiding competition. Competition law regimes worldwide are trying to solve this Gordian knot to prevent the transactions from having any “appreciable adverse effect on competition” (A.A.E.C.). This piece focuses on how the current regime cannot curb these acquisitions and will only increase the Competition Commission of India’s (from herein CCI) burden and hamper businesses and proposes a more rational approach considering all stakeholders. Deal Value Threshold (DVT), De Minimis Exemption, and how killer acquisitions escape from scrutiny The infamous killer acquisitions generally escape from scrutiny as they fall under De Minimis exemption or small target exemption, which makes way for absolute exemptions for transactions from notifying the Competition Commission of India in cases where the value in India does not exceed INR 3.5 billion or the revenue from India does not exceed INR 10 billion. In today’s digitized market, foreign companies have operational centers in India, which are the backbones of their foreign parent firms. However, their on-paper value is low, which makes them eligible for the De Minimis exemption. This allowed Facebook’s acquisition of Whatsapp, made at around US$ 19 billion in the U.S., to escape antitrust scrutiny in India as the deal was below the assets and turnover threshold. Recently the parliament passed the Competition Amendment Bill, which, among other things, amended Section 5 of the Competition Act (from herein “the Act”) and provided that, if the enterprise being acquired, taken control of, merged, or amalgamated has “substantial business operations” in India, the CCI must approve any transaction involving the acquisition of control, shares, voting rights, or assets of an enterprise, as well as mergers or amalgamations with a value exceeding INR 20 billion. The bill also states that the De Minimis exemption will not apply where DVT is surpassed. However, killer acquisitions are, by their nature, acquisitions of small innovative firms or start-ups. It is not only possible but highly probable that these acquisitions will escape the DVT. The experience of the prominent antitrust regime of Europe shows that the introduction of DVT has not just increased the burden on the antitrust regulators but has not yet made a considerable dent in curbing these acquisitions. The predicaments of DVT The DVT of INR 20 billion is already seen as a threat to the ease of doing business in India as many transactions will be notified regarding the recent amendments, which will increase the burden on the CCI and affect business. Moreover, the evidence from countries that have introduced a lower DVT, like Austria and Germany, shows that it has increased the burden on antitrust regulators without any considerable dent in killer acquisitions. The example of European countries is noteworthy in this regard. Germany and Austria introduced the DVT in their competition law regimes to include transactions not addressed by the previous threshold and prevent transactions from turning into killer acquisitions. The countries introducing new thresholds also issued a slew of guidelines, including that the threshold will be applicable on transactions where the target has significant activities in the said countries, among a few other local nexus requirements. However, both countries are still apprehensive about DVT’s assistance addressing anticompetitive transactions. The findings of Germany, which it submitted to the Organisation for economic cooperation and Development (O.E.C.D.), reveals two things (i) an insignificant number of increased notification since the introduction of DVT, and (ii) as of 2020, the complete absence of a critical case to be notified before Germany’s Federal cartel office based on DVT. The European commission, understanding the shortcomings of the DVT approach, introduced a novel interpretation of E.U. merger control regulation which allows the E.U. member countries to refer to the commission to control acquisitions below the controllability of DVT. It is discernible from the E.U. experience that a DVT has not solved the Gordian knot of killer acquisitions but has only increased the regulatory burden as the member states still heavily recommend transactions below the threshold for antitrust scrutiny after gaining discretionary powers. The European Court has also allowed the national authorities to review below-threshold mergers under the abuse of dominance rules. We need to learn from these approaches of European antitrust regulators and have a more balanced approach that will aid not only pro-competitive business but also curb anti-competitive transactions. A more rational approach India, a developing economy, needs an approach that will put less regulatory burden on the business while curbing killer acquisitions. A more rational approach would be “to increase the DVT and make it mandatory for the firms with a dominant position in the relevant market to notify their acquisitions.” This approach would reduce the burden on the CCI and help businesses as it will exempt most benign transactions from antitrust scrutiny, destined to come under CCI purview in the present context. This approach of notifying the commission in cases of acquisition by a dominant firm is more rational as the dominant firms are the ones that mainly acquire these nascent firms preempting a future threat of competition to perpetuate their dominance. This is visible from the fact that Facebook, Google, Apple, and Amazon made more than 300 combined global acquisitions from 2009 to 2019. The pharma industry, which has a massive propensity of dominant firms acquiring small nascent firms, will also be strengthened by this development. The mandatory notification of acquisition by dominant firms in the relevant market will ensure the implications of the antitrust scrutiny at

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Powers of the Facilitation Council under Section 18 of the MSME Act.

Contemporary Issues /

[By Arshia Ann Joy] The author is a student of the National University of Advanced Legal Studies (NUALS), Kochi.   Introduction The Micro, Small and Medium Enterprises Development Act, 2006 (hereafter ‘MSME Act’) envisages an effective and less time-consuming resolution mechanism for disputes pertaining to micro, small and medium enterprises in the country, thus facilitating the smooth functioning of these enterprises. Section 18 (2) of the MSME Act clearly specifies the procedure to be followed by the Facilitation Council (hereafter ‘the Council) when a dispute is referred to it. The section states that once the Council receives a reference under section 18 (1), the primary step is to conduct conciliation[i] followed by arbitration, should the conciliation attempts be unfruitful.[ii] This article attempts to discuss whether the scope of the powers envisaged under section 18 can be expanded expanded  to include the power to pass an ex parte order by the Council. This article delves into the nature of the Council as a civil court and its role within the realm of conciliation and arbitration. Furthermore, it examines the ramifications of procedural errors committed by the Council and explores potential remedies available in such circumstances. This article delves into the nature of the Council as a civil court and its role within the realm of conciliation and arbitration. Furthermore, it examines the ramifications of procedural errors committed by the Council and explores potential remedies available in such circumstances. The Council as a Civil Court Ex parte refers to a proceeding by one party in the absence of the other. The Civil Procedure Code under Order IX Rule 6 enables a court to issue an order that a suit shall be heard ex parte once it is proved that summons was duly served. While construing this provision, the Apex Court in Arjun Singh reiterated that if the defendant is absent after due service of summons, the court can proceed ex parte. Furthermore, an ex parte order has to contain the summary of the plaint, the issues and the findings arrived at by the court.[iii] The court further held that, “The burden becomes much more onerous in ex parte matters. The Court cannot blindly decree the suit on the ground that the defendants are ex parte.”[iv] Appreciating the evidence before the court is hence key to a valid ex parte order. The Facilitation Council is however not in the nature of a Civil Court as per the Civil Procedure Code and hence it does not have the authority to pass an order ex parte. This is because firstly, the CPC itself provides for a definition as to what constitutes a civil court. As the Apex Court rightly pointed out in Nahar Industrial Enterprises Ltd. “Which courts would come within the definition of the civil court has been laid down under CPC itself…..Civil courts are constituted under statutes like the Bengal, Agra and Assam Civil Courts Act, 1887.” The Supreme Court recently in Bank of Rajasthan Ltd. vs. VCK Shares and Stock Broking Services Ltd, affirmed the rationale in Nahar. Secondly, a parallel can be drawn between the Facilitation Council and other similar bodies like the Debt Recovery Tribunal and the Securities and Exchange Board of India (hereafter ‘SEBI’). A comparison can be made between these bodies as they are statutorily formed for specific purposes and have certain powers including powers of adjudication ordained to them by the legislature through those statutory provisions. The Apex Court in Nahar Industrial observed that the Debt Recovery Tribunal could not be treated as a civil court as under the relevant statute, the debtor or a third party does not have an independent right to approach it first nor can any declaratory relief be sought for by the debtor from the Tribunal. The court also noticed that there is no deeming provision in the relevant statute which allowed the Tribunal to be deemed a civil court. Applying the same rationale to the Facilitation Council would provide similar results except for the fact that the Facilitation Council can provide declaratory relief under section 18(3). However, the provision makes it clear that this power could be exercised by the Council when it acts as an Arbitral Tribunal and not as a Civil Court. Hence, as the name suggests, the powers entrusted with the Council is to act as a ‘Facilitator’ rather than as a court. Unlike the DRT, the SEBI is empowered to pass ex parte orders. However, it can do so only in extreme and urgent cases. As the Securities Appellate Tribunal (SAT), Mumbai has held, “We hasten to add that Respondent No. 1 (SEBI) is empowered to pass ex-parte ad-interim orders in urgent cases but this power is to be exercised sparingly in most deserving cases of extreme urgency.” The MSME Act however has no such enabling provision which allows the Council to pass an ex parte order. Further, it is a settled position of law that if a statute prescribes a mode of action, the act done must not deviate from the prescribed procedure. As the Apex Court reiterated in Babu Verghese, “It is the basic principle of law long settled that if the manner of doing a particular act is prescribed under any statute, the act must be done in that manner or not at all.” Since section 18 envisages a clear procedure of conciliation and arbitration, the Council cannot resort to passing an ex parte order without adhering to the specifications of the statute. Role of the Council during Conciliation The very heart of dispute resolution through conciliation lies in the mutual nature of the proceedings. Conciliation is a process of persuading the parties to reach an agreement.[v] In conciliation, the parties reach an agreement on the basis of mutual consent and not on the basis of legal propriety or legal reasonableness.”[vi] This follows that if either of the parties fail to cooperate, the entire proceedings will be vitiated. Thus, the Council acting as the Conciliator as per section 18, cannot pass an order

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