Author name: CBCL

Critical Analysis of the SAT Order on NSE Co-location Scam

Capital Markets and Securities Law /

[By Vikram Singh Meena &Rajvi Shah] The authors are students of Gujarat National Law Univeristy, Gandhinagar.   Introduction Recently, the Securities Appellate Tribunal (“SAT”) set aside an order by the Securities and Exchange Board of India (SEBI) that would have compelled the National Stock Exchange (NSE) to disgorge Rs. 625 crores as a penalty for violating the SEBI (PFTUP) Regulations, 2003 in the co-location scam. In 2019, the NSE was ordered by the Whole Time Member (WTM) of SEBI to disgorge Rs. 624.89 crores (with interest at the rate of 12% p.a. from April 1, 2014) to the Investor Protection and Education Fund (IPEF), following an investigation by SEBI. SAT while setting aside this order noted that the “WTM had exonerated NSE of the charge of violating SEBI regulations”. The authors seek to analyse the approach of SAT towards SEBI in the NSE Co-location case, considering the amount of penalty involved along with the seriousness of the alleged fraud. About the scam  In the year 2009, the NSE introduced co-location facilities, offering traders and brokers the opportunity to house their servers within the NSE data centre for a monthly fee. This allowed them to enjoy advantages such as low latency connectivity, faster access to price information, and quicker transaction execution by being in close proximity to the stock exchange servers. A whistleblower claimed in various complaints to the market regulator in the year 2015 that certain brokers involved in algorithmic trading had access to the NSE systems via hardware specifications that allowed them to gain access to the data stream of the exchange in a fraction of a second faster than other brokers. Thus, a trader who connects to the NSE server using the least load would receive updates on buy/sell orders, cancellations, and modifications and traders before those who join the exchange server later. Unlike a broadcast, where everyone receives the pricing information at once, this ‘Tick-By-Tick’ (TBT) data feeds distributed information sequentially in the order the brokers connected or signed in to the server. SEBI’s order SEBI issued an order in the NSE co-location case in 2020, which involved allegations of unfair access to the NSE’s trading systems by certain traders, known as “co-location” clients. SEBI’s investigation found that the NSE’s systems and processes were unfair, non-transparent, and discriminatory, thereby violative of the provisions of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and the SEBI (PFUTP) Regulations, 2003. In its order, SEBI imposed a fine of Rs. 625 crores on the NSE for failure to ensure fair access to its trading systems. The regulator also barred the exchange from launching any new products or services for six months and directed it to conduct a forensic audit of its systems and processes. The NSE was also directed to put in place proper systems and processes to ensure fair access to its trading systems. SEBI also imposed a fine of Rs. 1 crore on the former Managing Director and Chief Executive Officer of NSE, Chitra Ramkrishna, and Rs. 25 lakhs each on three former executive directors of the exchange – Ravi Narain, R. Srinivasan and C. B. Bhave for their failure to ensure fair access to the trading systems. The SEBI order also imposed a fine of Rs. 5 crores on SUN Trading and Rs. 25 Lakhs each on three individuals, Rajendra Gupta, Ashok Kumar Jain and R. Venkattesh who were found to have availed unfair access to NSE systems. SEBI’s order also directed NSE to disgorge the amount of Rs. 62.50 crores, which has been calculated as the net profit made by the NSE due to the above-mentioned violation. This disgorgement amount was to be deposited with SEBI within 45 days from the date of the order. SAT’s order SAT set aside the order noting that the WTM had exonerated NSE of the charge of violating SEBI regulations. A bench of Justices Tarun Agarwala (Presiding Officer) and MT Joshi (Judicial Member) held in its order passed on January 23, “In the instant case, the lack of due diligence is not on account of any violation of any provisions of the Act or the Regulations or circulars but is on account of human failure to comply with the circulars completely in letter and spirit… …WTM has exonerated NSE of the charge of violation of the PFTUP Regulations holding that no fraud was committed by NSE or its employees. We, therefore, find that the activity of NSE was not in contravention of any provisions of the SEBI Act or the Regulations or circulars made therein and it is only a case of non-adherence of a circular to some extent.” The Appellate Tribunal, however, directed the NSE to deposit a sum amounting to ₹100 crores in the IPEF as a deterrent and as a penalty for lack of due diligence which resulted in -“a lapse which is not expected from a first-level regulator”. Moreover, SAT overturned the order that prohibited NSE from entering the securities market for six months and ordered NSE to conduct system audits regularly. Impact Analysis of the SAT order The entire saga, which is far from over, has taken a new turn since the SAT ruling. The order stated that SEBI’s approach was sluggish and lackadaisical, taking turns based on what transpired on the floor of parliament. The position of SAT in cases of disgorgement has been constant since the very establishment of the concept. In National Securities Depository Ltd. vs. SEBI, the SAT under the then-Presiding Officer Chief Justice N K Sodhi held that, “persons who have made illegal or unethical gains alone may be required to disgorge their ill-gotten gains.” This was in the context of the IPO scam (Roopalben Panchal Scam), in which SEBI issued a disgorgement order against depositories NSDL and CDSL for failing to conduct adequate due diligence by allowing certain key operators, financiers, and afferent account holders to create multiple demat accounts using photographs from Shaadi.com, and ultimately cornering the retail quota in as many as 21 IPOs. The SAT

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Tribunal’s Discretion Under IBC: Analysing the Suresh Kumar Reddy Case

Insolvency Law /

[By Pavitra Priyadarshan & Dikshya Debipya Panda] The authors are students of National Law University, Odisha.   Introduction Section 7 of the “Insolvency and Bankruptcy Code, 2016” (IBC or Code) empowers a financial creditor to file a petition at the tribunal when the debt owed to him is due. This marks the initiation of the “Corporate Insolvency Resolution Process” (CIRP) against the Corporate Debtor (CD). The tribunal’s power at this stage to exercise its discretion in admitting or denying a petition has been a subject of a conundrum since the Vidarbha Industries Power Limited v. Axis Bank Limited (Vidarbha case). In this article, the author attempts to examine the discretionary power of the tribunal with respect to the admission of the petition under Section 7 (u/s. 7) of IBC, taking into consideration the M. Suresh Kumar Reddy v. Canara Bank & Ors (Suresh Kumar Reddy case) as a case study. In the Suresh Kumar Reddy case, the Supreme Court (SC) established that the ruling in the Vidarbha case will only be applicable to the facts and circumstances of the case and will not set a precedent against the settled position. Furthermore, the general norm is that the National Company Law Tribunal (NCLT) has to accept the petition filed u/s. 7 in the presence of a debt which is due and payable. Consequently, regardless of whether debt or other default on the part of the CD exists, the Adjudicating Authority (AA) does not possess discretion at the stage of admittance of the insolvency application. Thus, the AA cannot reject the petition u/s. 7 based solely on its discretion. Brief Facts Canara Bank (Financial Creditor) provided credit facilities to “M/s Kranthi Edifice Pvt. Ltd.” (Corporate Debtor), that failed to pay it back. To start the CIRP against the CD, the Financial Creditor filed a petition with the NCLT u/s. 7 of the IBC. By order dated 27th June 2022, the NCLT accepted the respondent-Bank’s application and proclaimed a moratorium for the purposes outlined in Section 14 of the IBC. Suresh Kumar Reddy, a suspended director of the CD, filed an appeal before the “National Company Law Appellate Tribunal,” claiming that he was an aggrieved party. However, the appeal was dismissed. Mr. Reddy then went to appeal the decision in the SC. The appellant argued that the settled principle of the Vidarbha Case provides that despite the existence of debt and default being proven, the tribunal has the option of refusing to admit the petition u/s. 7. Therefore, the tribunal can exercise its discretion while admitting the petition. Supreme Court’s Verdict The Hon’ble SC identified the issue as to whether after a petition has been filed u/s. 7, the AA may reject a petition solely based on its own discretion, even though it has verified the debt to be due and payable. The Court relied on the Innoventive Industries Limited v. ICICI Bank and Others (Innoventive Industries case), in which it was held that the tribunal must admit a petition u/s.7 once it is satisfied that a default has occurred on the financial debt owed. Following that, in E.S. Krishnamurthy and others v. Bharath HiTecch Builders Pvt. Ltd. (E.S. Krishnamurthy case), the SC outlined the tribunal’s powers by stating that it only has the power to ascertain if there is a default. Further, once the default’s existence has been verified, the said petition u/s. 7 must be admitted. Further, the Court discussed the SC’s decision in the Vidarbha case, where the Court had opined that in a case where it has been proven that there exists financial debt and default on the part of the CD, the tribunal is empowered to exercise its discretion in admittance of the petition u/s. 7 unless there is a clear and compelling reason to admit the petition. Finally, the SC in the Suresh Kumar Reddy case held that the rejection of a petition u/s. 7 could only be done when the debt is not due and payable. Analysis of the Verdict The Section 7(5)(a) of the IBC states that: “Where the Adjudicating Authority is satisfied that– a default has occurred, and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application.” The word “may” in the provision has been interpreted differently by Courts. In the Vidarbha case, the Court interpreted “may” as discretionary and not mandatory. Whereas, in the Innoventive Industries case and E.S. Krishnamurthy case, it was interpreted to be mandatory. Therefore, “may” has been a matter of dilemma. In Swiss Ribbons Private Limited v. Union of India (Swiss Ribbons case), the SC observed the Code’s primary objective as reorganization and insolvency resolution of the CD. The mandate of the Code is a prompt resolution of the CD in distress. This profoundly impacts supporting and developing the credit markets. In this case, the apex court observed that the Code is a facilitator for promoting credit availability in markets while ensuring the CD’s revival and continuous operations. The bench in the Suresh Kumar Reddy case observed, citing SC decisions in the Innoventive Industries case and E.S. Krishnamurthy case, that once a default on the part of the CD is verified, the tribunal has no discretion to refuse to admit a petition u/s. 7. It is a settled principle that the only reason for the dismissal of a petition is that the debt has not become due and payable. Moreover, failure to pay a portion of a due and payable debt constitutes a default. In such circumstances, an admission of petition u/s. 7 becomes necessary. If it comes to the notice of the NCLT that a debt is not due and payable, then there is no scope to allow an application. When Axis Bank Limited filed a review petition following the judgement in the Vidarbha case, the SC dismissed it in the order dated 22nd September 2022, with the observation that the elucidation made in the case was factual in nature and was

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Locked-box Mechanism: A Seller Friendly Approach

Mergers & Acquisitions /

[By Pranjal Kinjawadekar & Gunjan Hariramani ] The authors are students of Maharashtra National Law University Mumbai.   Introduction The significant component in any commercial contract is the pricing clause which states the pricing mechanisms which the parties would follow to complete the deal. A pricing mechanism is an important factor as it determines the amount of consideration to be paid by one party to another. In order to determine the purchase price of the target company, the parties involved in the transaction need to arrive at the value of the company. The value of the company is called the ‘base purchase price’ or ‘initial purchase price’ defined in the stock purchase agreement. In the past few decades, the widely used pricing models in mergers and acquisitions (“M&A”) transactions are the locked-box mechanism and the closing accounts adjustment management. In this article, the authors have attempted to analyse the concept of the locked-box pricing mechanism used in private M&A deals in India. Further, an analysis of the order against Bharti Airtel Limited wherein the Competition Commission of India had imposed penalties on the acquirer for gun jumping due to the use of locked-box mechanism, has been provided. Locked-Box Mechanism and Closing Accounts Adjustments Mechanism The locked-box mechanism is defined as a pricing mechanism used by the parties in commercial contracts where they freeze the purchase price of a target company based on a historical balance sheet date. In this pricing mechanism, there are three important dates, first, the locked-box date, second, the signing date of the sale and purchase agreement (“SPA”) and third, the closing date. At the date of SPA signing, the parties agree to a fixed equity value of the target company. The historic balance sheet is used to calculate the equity value of the target company that is fixed at the locked-box date. Further, in the locked-box mechanism, the parties identify and agree to various factors like working capital, cash, and debt of the target company that could change the value of the company in the future. However, once the price has been fixed at the SPA signing date, the parties cannot adjust anything between the SPA signing date and the closing date. Additionally, the target company cannot take dividends, management fees, assets at an under-valued price, and bonuses out of its business. During this interim period, the target company is only allowed to make payments in its ordinary course of business. This approach is gaining popularity in M&A transactions as it enables both the buyer and seller to determine the price of the target company early at the signing stage, thereby reducing the risk of post-completion price adjustments. On the other hand, the closing accounts mechanism is considered a traditional approach for determining the purchase price of a target company in a commercial contract. In this mechanism, the parties at the signing stage agree on a tentative purchase price by calculating the actual value of the target company’s assets and liabilities as of the date of closing the transaction. This means that the purchase price is adjusted and determined after the closing date of the transaction based on the actual financial performance of the target company. This approach is known as a buyer-friendly approach because the target company is responsible for all the economic risks till the closing date. The buyer undertakes all the risks and liabilities after the closing date. The closing accounts mechanism is considered a time-consuming, expensive, and complex process because it involves negotiations between the parties. Why Locked-Box Mechanism should be preferred? The locked-box mechanism serves the buyers and sellers with huge benefits in commercial contracts. One of the primary benefits of this mechanism is that it provides price certainty. By establishing a purchase price based on a historical balance sheet date of the target company, the buyer and seller can avoid the uncertainty and risk associated with post-completion price adjustments. This approach could be used to tackle times like COVID-19, where the sellers’ faced a downturn in business. For buyers, this mechanism is generally used as a stopgap measure in M&A transactions, in order to avoid value leakage and to prevent the seller from extracting value from the target company after the locked-box date. This mechanism makes the pricing process simpler by reducing the need for complex calculations and negotiations that often occur in the traditional M&A deals. Further, it allows the seller to continue to keep the benefit of the company’s control and management until the purchaser acquires the target company. In a traditional M&A transaction, the seller is supposed to prepare an up-to-date completion balance sheet, which would include the company’s cash flows up to the completion date. However, in the locked-box mechanism, the seller is not supposed to provide an up-to-date completion balance sheet, and the buyer is assumed to take the risk and benefit of the company’s cash flows from the historical balance sheet date. Additionally, the locked-box mechanism can help to speed up the negotiation process and reduce the cost of transaction. By agreeing on a price early in the negotiation process, the parties can focus on other key deal terms, such as representations, warranties and closing conditions. Therefore, it can be inferred that this process helps to reduce the time and costs associated with negotiating these other terms. When should it be preferred? There are several key considerations when opting for a locked-box mechanism in M&A transactions. It is commonly preferred when the parties involved in the transaction can agree on a fixed acquisition price based on past financial records, given the target company has steady and consistent cash flows. Additionally, as the locked-box mechanism gives them assurance and lowers the possibility of post-closing adjustments, it is frequently preferred by sellers. This type of mechanism works best when the buyer has completed thorough due diligence before signing the agreement and is satisfied with the accuracy of all the financial statements that have been furnished by the seller. However, alternate mechanisms should be preferred if,

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Virtual Digital Currency: A Conundrum in the International Tax Regime

Taxation Law /

[By Riya Sharma] The author is a student of Institute of law, Nirma University.   Introduction The realm of international tax law is nowhere defined with its treacherously advantageous nature in the Indian income tax system. It also spans the complex web of virtual currencies that are used in the digital world. This complex scenario creates a predicament where residents of one country may earn income from foreign sources, leaving both nations with legitimate claims to tax that wealth and the power to enforce their respective rights. Inevitably, this situation leads to a potential loss of revenue as either country may need to relinquish its right to levy taxes on such income. The G20 meeting brought forth discussions on the mounting apprehensions surrounding digital virtual currencies and their consequential market.[1] As a response to these emerging needs, a committee report was released, delving into an analysis of the digital currency market, notably addressing the aspect of taxation.[2] However, the current scenario reveals a fragmented landscape, with each country independently formulating tax laws pertaining to digital currencies. Consequently, a notable gap persists in the domain of international law and to adequately handle this changing paradigm, its development is required through the establishment of comprehensive and coordinated international tax frameworks. International collaboration and the development of unified guidelines can contribute to a fair and efficient system, ensuring that tax obligations are appropriately addressed without creating undue burdens or revenue losses for any country involved. Navigating The Challenges The taxation of Virtual Digital Assets (VDAs) presents two primary challenges that require international tax law guidance. Firstly, in cases where a transaction involves two countries and the Double Taxation Avoidance Agreement (DTAA) is silent on the taxability of such income, it becomes unclear which country has the right to tax the income generated.[3] Due to the conflicting nature of the relevant jurisdictions, international tax law is necessary to clarify the distribution of taxation rights in cross-border VDA transactions. Secondly, the valuation method for determining the taxable income generated by individuals through VDA transactions is another crucial issue.[4] Accurately determining the taxable value of such transactions is challenging at the moment because there isn’t a standardized valuation technique available. By creating clear rules and a standardized method for valuing VDAs for taxation purposes, international tax law should address this valuation challenge by providing clear guidelines and establishing a consistent approach. Taxation for Cross–border transactions The Indian domestic law, specifically Section 115BBH, states that VDAs are subject to a 30% tax rate on capital gains upon transfer[5]. However, this section does not explicitly address the tax treatment when the individual is a non-resident of India. Consequently, it raises questions regarding the taxation of income accrued while residing outside India or if the source of income is located outside India as per the definition of accrual provided in the income tax act.[6] The lack of clarity in this regard necessitates a comprehensive interpretation of the applicable tax laws and potential guidance from Indian tax authorities to determine the tax liability in such situations. The international nature of cryptocurrency transactions creates specific taxes issues. With the help of cryptocurrencies, people may conduct transactions without using real money or conventional financial intermediaries in a borderless digital world. However, because cryptocurrencies are digital, it can be difficult to determine how to manage them tax-wise, especially for those who are subject to DTAA. At this time, neither current DTAA treaties nor international tax legislation give any precise instructions on how to tax Virtual Digital Asset transactions. As they struggle to determine the tax liabilities related to these transactions, tax authorities, and taxpayers are both left in the dark by this lack of transparency. The absence of guidelines from international authorities, including the OECD, regarding the taxation of cryptocurrencies has resulted in countries implementing their own tax laws, often imposing tax rates  as high as  30%. This discrepancy in tax treatment compels individuals to explore alternative methods, including trading in tax havens, in an attempt to mitigate the tax burden. Unfortunately, this situation has also given rise to scams on a large scale, as exemplified by the case of FTX.[7] Addressing this issue requires international cooperation, the development of clear guidelines, and effective measures to prevent tax evasion and fraudulent activities associated with cryptocurrencies. The efforts to establish a clear international tax framework for cryptocurrencies are crucial. By developing specific provisions within DTAA treaties and international tax laws, countries can ensure consistency and fairness in taxing cryptocurrency income. Absence of Methodology for Valuation The absence of procedures for valuing cryptocurrencies in India’s current laws makes it difficult to calculate their taxable worth. Despite the ease with which cryptocurrencies may be exchanged for fiat money anywhere in the globe, the precise procedure for valuing them for tax reasons is not specified. The valuation of VDAs presents a challenge in the Indian context. While VDAs are considered property under Section 56(2) of the Income Tax Act,[8] the specific valuation method for VDAs is not outlined. The Fair Value method as defined in Rule 11UA of Income Tax Rules,[9] does not explicitly cover the valuation of cryptocurrencies and other VDAs, and no proposed modifications have been made to address this gap.[10] In situations where an individual is subject to taxation in India but receives income in a wallet based in another country, determining the appropriate valuation becomes crucial. There are two options: using the amount in the other country or valuing the income in India at the time of taxation. However, clear guidelines and direction from Indian tax authorities are needed to address this valuation dilemma in cross-border scenarios involving cryptocurrency income. Indian tax authorities may assist in creating transparent and uniform standards for valuing digital currency revenue, maintaining fairness in taxation, and encouraging compliance by giving explicit clarity and direction. Potential Tax Regulations In the regime of global taxation, two distinct jurisdictions prevail: source nation-based jurisdiction and resident nation-based jurisdiction. The majority of jurisdictions, like the United States of America and China, use both concepts in their

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Jurisdiction of Competition Commission of India: An authority under perpetual judicial scrutiny

Competition Law /

[By Badal Singh] The author is a student of Hidayatullah National Law University.   Introduction Owing to the nascent origin of Competition law in India, not many judicial precedents have been set with respect to the jurisdiction of CCI. Instances of conflict of jurisdiction between CCI and specific regulators have become a common muddle for the judiciary to deal with. The judiciary’s role in determining the conflict of jurisdiction or “forum shopping” has become crucial in a period where innumerable such cases have been on the rise. Delhi High Court’s recent judgment in the case of ICAI v. Competition Commission of India, excluding the role of CCI as a market regulator in matters concerned with other independent statutory regulators not related to trade or commerce has re-augmented the need to define and determine the jurisdiction and scope of power of CCI to inquire into matters pertaining to market monopoly and competition. The court in its judgment held that CCI’s jurisdiction to entertain matters is limited only to matters that impact the market and are related to trade, business, or commerce. In this article, we shall be discussing the extent of CCI’s jurisdiction as provided under the Competition Act,2002 with special reference to the recent decision passed by the Delhi High Court in the matter of ICAI v. Competition Commission of India and various other judicial pronouncements. Jurisdiction of CCI as per Competition Act, 2002: Extent and challenges Section 18 of the Competition Act,2002 elucidates it to be the duty of CCI to eliminate practices having a negative impact on the competition prevailing in the market, preserve the interests of the consumers, and promote freedom of trade carried on by individuals in the Indian market. Along with that, Section 19 is a complementary clause that ensures that CCI carries its duties in the prescribed manner. It provides CCI the power to inquire into any alleged contravention of provisions mentioned under Section 3(1) and Section 4(1) of the concerned act. These provisions prohibit the parties from entering into any agreement that is likely to cause an “appreciable adverse effect” on the market in India and abuse of dominant position in the market in India respectively. The use of the “may” clause makes it a discretionary power at the instance of CCI whether to carry out such inquiries or not. Also, Section 20 of the act provides CCI similar powers to conduct inquiries in matters of the combination of entities. It is evident from the manner in which the provisions have been drafted that the jurisdiction of CCI is wide and legislative restraints upon the same are minimal.  Section 60 of the act stipulates the provisions to have an overriding effect over other laws, meaning anything inconsistent with any other statute in force for the time being shall not invalidate the provisions of the concerned act. It can thus be concluded that CCI’s power to carry out inquiries and its untamed jurisdiction over the stipulated matters widens the ambit of its interference in business matters. CCI’s jurisdiction has always been a matter of deliberation before the Judiciary in the recent past. The dispute arises when there exists a point of intersection with respect to the ambit of statutory regulatory authorities and the jurisdiction of CCI to inquire into the matter. The major reason behind the same is due to the usurping of the jurisdiction of other regulators or courts by the CCI, in matters that are to be specifically dealt with and tried by them. Legislative ambiguity, jurisdictional error, or irregularities in interpretation, whatever the reason may be, the conflict has always been a cumbersome task for the judiciary to determine and decide. CCI and its conflict with IPR and statutory regulatory authorities IPR and Competition: A Conflict of Jurisdiction IPR and competition are antithetic notions and an approach that balances the interests of IPR holders and promotes competition within the market is essential to attain the goal of a free and fair market. The Competition Act, 2002, through its section 3(5) tries to create such balance by excluding IPR holders and their rights to restrain from any kind of infringement or to impose any “reasonable” restrictions necessary for the protection of their IPR, from the purview of anti-trust or anti-competitive agreements. But the protection is diluted by “reasonableness” as the condition precedent in providing licenses to the registered users, and the power to determine whether the conditions imposed are “reasonable” and not in restraint of competition, vests in the Competition Commission of India. Thus, a dilemma as to when CCI can enjoy jurisdiction in matters related to patents, copyright, and other forms of IPR has been one of the prime causes of the rise of litigations. The primary case dealing with a similar conflict of jurisdiction between the Competition Commission of India and The Copyright Board was Super Cassettes Industries Ltd. vs. UOI & Ors. Delhi High Court in its judgment held that the authority and jurisdiction granted to CCI and Copyright Board govern diverse aspects of law and that the Copyright Board is not a potent instrument capable of dealing with and promoting competition in the Indian market.  The court held that in case there exists a conflict between the Competition Act and the Copyright Act, the authority to determine the jurisdiction shall vest in the Competition Commission of India. Thus, it can be said that remedies provided under various statutes governing IPR and under the Competition Act, of 2002 to are distinct. While the statutes dealing with IPR provide the right in personam, the Competition Act provides the right in rem to the individuals against the abuse of dominant power by several entities. The presence of efficacious remedies under other statutes does not negate CCI’s jurisdiction to entertain the matter and remedies under such acts are capable of standing independently without any conflict. The same has been held in the case of Ericsson v. Micromax as well. Is CCI usurping the jurisdiction of statutory regulatory authorities or regular courts?

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Taxation Of Cryptocurrencies As Rewards From Online Gaming

Taxation Law /

[By Tanya Verma] The author is a student of Dr. Ram Manohar Lohiya National Law University.   INTRODUCTION In the Budget 2022, the Finance Minister introduced a provision to impose income tax at a rate of 30% on profits obtained from the transfer of virtual digital assets (VDAs), although a clear provision still lacks, an attempt to shed clarity on VDAs and their exchange has been made. To that, this piece provides an in-depth analysis of the tax implications surrounding direct and indirect taxation, specifically focusing on the complexities involved in determining the taxable nature of winnings, including digital assets such as bitcoins and tokens, that are received as rewards from online games. Further, the article explores legal literature surrounding the skill-chance dichotomy inherent in online gaming and contributes to the existing discourse around technology driven transactions as rewards. VDAs UNDER INCOME TAX ACT Previously, income earned from cryptocurrencies was taxable based on the nature of the activity. Individuals involved in cryptocurrency investment were taxed under Income from Capital Gains or Income from Other Sources, as per IRS provisions. On the other hand, individuals engaged in cryptocurrency trading were taxed under Income from Business/Profession.However, this classification changed with the introduction of the Finance Bill, 2022.The author believes, considering the unique characteristics of online gaming in India and the necessity for specific regulations regarding taxation, the government has taken steps to address this, however a clear framework still lacks. In terms of income tax, if an individual sells bitcoins received as gaming rewards, the resulting gains would be taxable. The tax treatment of these gains can vary depending on the intent of the individual, whether they classify the gains as business income or capital gains. Previously, there was no dedicated provision for the taxation of online gaming. Instead, Section 194B of the Income Tax Act (ITA) was applied, which dealt with TDS deduction by person who is “responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees.”Additionally, Section 194BB covered TDS deduction for horse racing and wagering. Furthermore, Section 115BB of the Act imposed a 30% tax rate on winnings. Though these provisions existed, it failed to provide an exact framework involving technology driven transactions or a settled position of earnings from games, be it that of skill or of chance. The Finance Bill 2023 introduces two new sections under ITA to regulate winnings from online gaming: Section 115BBJ: This section states that net winnings from online games will be subject to a 30% tax rate, effective from April 1, 2023. Section 194BA: This section mandates the deduction of tax at source at a rate of 30% on winnings from online games, effective from July 1, 2023. Together, these provisions signify the government’s intent to establish a comprehensive framework for taxing and regulating winnings from online gaming. The introduction of specific tax rates and the requirement of tax deduction at source aim to facilitate better monitoring, compliance, and revenue generation in the evolving landscape of online gaming, primarily under direct taxation provisions. VDAs UNDER GOODS AND SERVICES TAX (GST) GST Act lays no specific definition for cryptocurrencies or digital assets, new provisions provide that VDAs cannot be classified as money or securities and are considered as goods for GST purposes. Additionally, the Central Board of Indirect Taxes and Customs (CBIC) has opined that cryptocurrencies are not treated as currency but rather as goods or services, which is important to note as currency is not taxable under the same, while goods and services are subject to taxation under different slabs. Crypto-related activities, including mining, exchange services, wallet services, payment processing, barter systems, and other transactions, require classification as either goods or services to determine the appropriate treatment. However, for determination of tax rates, there is no specific Harmonized System of Nomenclature (HSN) code for digital assets. However, HSN code 960899, which pertains to other miscellaneous articles, is often used with an applicable GST rate of 18%, the highest in that category. To understand how this is implemented, it is important to delve into the skill versus chance discourse. In a significant development last year, the Online Gaming Industry faced a major upheaval when the Department issued a Show Cause Notice to Gameskraft, demanding an extraordinary sum of Rs. 21,000 crores taxing as Goods at a rate of 28%,  however, the Karnataka High Court delivered a landmark judgment addressing the concerns related to the key questions in the GST-related litigation for the Online Gaming Industry are: Skill-based or chance-based: Are the games considered skill-based or games of chance (betting/gambling)? Taxable amount: Should GST be levied on the full amount pooled by players or only on the platform fee charged by Online Gaming Platforms? Addressing the first prong, the Supreme Court established that competitions requiring a significant degree of skill are not considered gambling. If a game is primarily based on skill, even if it involves an element of chance, it is classified as a game of ‘mere skill.’ The Court relied on the Supreme Court’s judgment and determined that Dream11’s fantasy sports predominantly rely on users’ superior knowledge, judgment, and attention, making it a game of skill rather than chance. Similarly, the Bombay High Court analysed Dream11’s Fantasy Games and concluded that they do not involve betting or gambling since the outcome is not dependent on the real-world performance of any particular team on a given day. Rajasthan High Court reached a similar conclusion and dismissed a Public Interest Litigation, stating that the issue of treating the game ‘Dream11’ as involving betting or gambling has already been settled. As for the second limb, the target of taxation, in the context of GST, can vary depending on the specific circumstances and regulations of a particular jurisdiction. However, in general, both players and the platform can be subject to GST. Players may be liable to pay GST on in-game purchases

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The Goodwill Payment Conundrum: A Never-ending Debate

Company Law /

[By Saloni Neema & Jeeri Sanjana Reddy] The authors are students of Damodaram Sanjivayya National Law University Visakhapatnam.   Introduction Partnerships have emerged as a distinguishing element of the business world as a long-term success element. An established business accrues goodwill by building relationships in the market based on customer trust and preference. Goodwill is therefore considered to be the reputation associated with a business or the “economic benefits a going concern may enjoy as compared to a new firm.” The goodwill of a partnership is ascribable to all partners since it is the result of their collaboration. Dissolution of partnership is followed by the distribution of assets, and factoring in goodwill as an intangible asset is not uncommon. However, while the law is well-settled on the sale of goodwill after dissolution and the intricacies surrounding non-competes, a partner’s demand for payment for the goodwill of the firm after leaving the firm remains controversial. When a partner is fired, will the firm’s refusal to pay up lead to a breach of fiduciary duty by the remaining partners? These questions remain largely unaddressed in India, where the law on the existence and ownership of goodwill is not very uniform. Goodwill Payment: Lessons From Across Jurisdictions In the landmark judgment of Dawson v. White & Case LLP (‘Dawson’), Mr Dawson returned from a vacation in July 1988; he found that his partners had decided to dissolve the firm and start a new one without him. The partners of White & Case founded a new firm with the same name, address, and customer list after expelling him. He filed a lawsuit to see if the Court would rule in his favour about his claim to goodwill in the company and if so, the value of that goodwill. Judge Ciparick settled the issues in this case as to whether goodwill is a “distributable asset” of a partnership and whether an underfunded pension plan would become a liability of the firm upon its dissolution. Regarding the first issue, the court determined that goodwill should be considered as the partnership’s asset, unless the agreement declares it to be of no value and the partners’ business conduct supports that assertion. The Court will honour an agreement among partners, whether express or implied, to determine the goodwill and assets of the firm. According to White and Case, unfunded pension plans, the future pension payments were property disallowed as partnership liability. This case stirs up many questions on the valuation of goodwill, classifying it as a distributable asset and the possibility of paying goodwill compensation to a fired partner. Entitlement To Goodwill: Conflicting Views Generally, the goodwill earned by an employee’s actions belongs to the employer, and the firm ensures the quality of services provided by every attorney. Lord Hacon in Bhayani v. Taylor Bramwell LLP[i] (‘Bhayani’) held that the individual creates goodwill in his professional capacity as a partner of the firm, not personally. Therefore, if a person worked for a partnership, the goodwill created by his actions would typically belong to the partnership. Similar reasoning was adopted in Starbucks (HK) Ltd v. British Sky Broadcasting Group Plc. (‘Starbucks’). If the quality falls short, the firm is liable for the compensation, not the individual attorney. The Court further concluded in Mrs Sujan Suresh Sawant v. Dr Kamlakant Shantaram Desa (‘Sujan Suresh’). Even a partner’s legal representative will be eligible for a share of goodwill of a continuing partnership. It was further held that, “it is impractical to direct a sale of goodwill between partners when goodwill has been fully appropriated by the surviving partner with all the benefits resulting from the previous business dealings.” In these situations, it is more likely to distribute a proportionate share of goodwill to the heirs of the deceased partner after proper valuation. Another argument in favour of goodwill payment is that “partnership assets encompass anything to which the firm or all of its partners may be deemed entitled.” Referring to Section 52 of the Partnership Act, 1932 the Calcutta High Court, in Bhuban Mohan Das v. Surendra Mohan Das reasoned that in the event that a contract creating a partnership is rescinded, the party who rescinds has the right to the “surplus” of the firm’s assets which remain after its debts have been paid, and for any amount paid by him towards the partnership. Contractual Stipulation of Goodwill in the Agreement Another approach of determining whether or not a leaving partner is owed goodwill depends on whether or not the partnership agreement specifically mentions goodwill. The Supreme Court of Ohio in Spayd v. Turner, Granzow & Hollenkamp held that good will payments to a terminating partner are subject to contractual specifications and should be specified in the partnership agreement with the approval of all partners. In contrast, the approach taken in Roger Siddall v. Cletus Keating et al. (‘Siddall’) holds that a partnership, whose repute depends on the individual skills of the members, has no goodwill to be divided as a partnership asset following its dissolution. This approach is further backed by the settled position of law that partnership books and entries belong not only to the firm but to each member of the firm, as laid down by Justice Sterling in Tregov. Hunt (‘Trego’).[ii] The Bombay High Court in Sujan Suresh appears to have followed a similar line of reasoning when it ruled that under Section 55(1) of the Partnership Act, 1932, goodwill must be categorised as an asset even if the partners have not made any provisions for it in their partnership agreement. In the event that the agreement mentions it, goodwill must be sold in accordance with it. Decoding The Reluctance: Are Goodwill Payments and Loss To The Existing Firm Interconnected? The standard practise is for a departing partner to sell his share of goodwill to the other partners if the firm continues regardless of his departure. He doesn’t sell his share of the firm’s goodwill but loses it when expelled. Therefore, he should be able to rightfully claim compensation. Moreover, as recognized in Johnson v. Hartshorne (‘Jonhson’), the firms’ anticipated earnings are largely linked to the partners’ qualifications and standing. So why

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Leniency Plus: Incentivization in Dearth of Enough Deterrence

Competition Law /

[By  Akash Gulati & Ashutosh Yadav] The author are students of Dr. Ram Manohar Lohiya National Law University.   Introduction The Competition (Amendment) Act of 2023 (hereinafter “amendment”) has introduced an addition to the existing leniency mechanism popularly called “Leniency Plus.” The new provision aims to enhance cartel detection and cooperation with antitrust authorities by incentivizing cartels to disclose the existence of another cartel during the original leniency proceedings. However, the true efficacy of the mechanism will depend on the uniform application of leniency principles, the imposition of aggravated penalties, and the potential introduction of criminal provisions for cartels. This article puts forth the case that a greater deterrence for cartels making disclosures related to selective cartels is missing from the framework to fully utilize the increased incentives. What is leniency plus? The amended provision purports to provide an extra layer of leniency to the cartel cooperating with the anti-trust authorities by providing information about the existence of another cartel during the original leniency proceedings resulting in an additional reduction in the penalties. According to the amended Section 46 (4), any producer, seller, distributor, trader, buyer, or service provider who discloses the existence of another cartel violative of Sec. 3 of the act would be rewarded with further reduction in the penalty. This leniency not be provided concerning the newly disclosed article, but also reduced penalty would be levied on the original case of a cartel, therefore justifying the word “plus”. The need behind the introduction of a “plus” mechanism can be construed by the arduous task of cartel detection, which through the added incentive in this mechanism in the form of extra leniency, the Competition Commission of India (hereinafter “CCI”) might detect and penalize more cases. Efficacy of existing leniency mechanism The leniency mechanism was originally introduced in the year 2009 with the objective of ramping up cartel detection in the market. To achieve this, it resorted to the means of providing a lesser penalty as an incentive where the cartels themselves disclose their violations of the act. However, a total of only 21 leniency application cases emerged during the period of 2009-2022, with the majority of them being reported in the period 2021-2022 whereas the first application was filed way in 2017, also known as the Brushless DC fan cartel case. The reason for such low turnout of the leniency application though being a remedial policy, can be, firstly, because the advantages from it are minimal in comparison to the gains from future collusion with the same associations, i.e., the monetary relief granted on the penalty levied is less than the profits made under the continued cartelization. Secondly, in cartel enforcement, the cartels often carry the thought they will not be detected or in the case of being detected, the penalty levied on them can outweigh the profits gained from cooperation, preventing them from self-report under the leniency mechanism. Furthermore, according to the “leniency principle” the amount of leniency to be granted must be proportionate to the “relevance of the information” shared by the leniency applicant with the authorities. In contrast to that, it has been observed that CCI often acted vaguely without providing the rationale for granted leniency based on the “relevancy” of the information disclosed, which raised scepticism on the application of the leniency mechanism as happened in the Brushless Case, where a 75% leniency was awarded without providing any rationale. The Competition Law Review Committee, in its report published in 2019, acknowledged these reasons and recommended the need to inculcate the “leniency plus” with the reasoning that the promise of added reward for reporting another cartel would encourage more enterprises to come forward with disclosures about anticompetitive agreements, making it considerably easier for the Competition Commission of India (“CCI”) to uncover and prosecute cartels. The view was also upheld by the CCI as highlighted in the case of Chief Materials Manager, North Western Railway v. Moulded Fibreglass Products. How good is the amendment equipped to ramp up whistleblowing The newly added Section 46(4) now formally incentivizes whistleblowing for the cartel participants to disclose another existing cartel either connected or unconnected to the existing one. The quantum of the further reduction in the penalty will be decided by the CCI and regulations regarding the same would be added to the existing lesser penalty regulations. Currently, the regulations provide for a reduced penalty of up to or equal to 100% to the first applicant, while the second applicant gets a reduction of up to 50% and the subsequent ones are eligible for a reduction of up to 30%, which now coupled with the reduction for a subsequent cartel disclosure, would yield greater reductions. To understand the magnitude of the effect that such further reductions can cause we look at the case of the Beer Cartel which was initiated upon the lesser penalty application by Crown Beer & SAB Miller. In this case, the CCI levied penalties computed upon 2% of relevant turnover or 0.5 per cent of relevant profit, whichever was higher. The penalties were to the approximate tune of 1253 Cr, 317 Cr, and 151 Cr for United Breweries Limited, Anheuser Busch InBev, and Carlsberg India Private Limited respectively. Wherein Anheuser was granted a hundred per cent reduction in penalty for being the first applicant, fifty per cent for United Breweries, and twenty per cent to Carlsberg. Even after the reduction by the CCI, the penalties are still cumbersome enough for the companies to look for more ways to do away with them, herein, the incentive of disclosing a new cartel, and then achieving more reduction in the current fines and the new cartel-related fines, would be a good enough incentive. This would now be possible post the application of the amendment and will strengthen enforcement via incentivized whistleblowing. The increased scope of availing reduced penalty also gets coupled with the increased scope of penalties as the amendment also pegs up the quantum of the penalties by introducing the provision of using the global turnover,

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Empowering Creditors: A Reformation of Insolvency regime through Preferential Voting

Insolvency Law /

[By Vaibhav Kesarwani & Kamakhya Nadge] The authors are students of Gujarat National Law University, Gandhinagar.   Introduction In the realm of the Insolvency and Bankruptcy Code, 2016, one of the most common contentions of the stakeholders regarding the resolution process has always been either lesser value realization after the process is over or the high amount of time taken for the completion of the process which is much longer than what is prescribed under the law. With the release of the IBBI Discussion Paper on June 07, 2023, the board has proposed introducing a “Preferential Voting Method” to ensure that the preference of the Plan is captured and the creditors can vote freely. The introduction of preferential voting represents a pivotal shift, offering creditors a powerful tool to shape the outcome of insolvency proceedings. Unlike the existing binary voting system, preferential voting allows creditors to rank their preferences on received bids, opening the door to a more nuanced and comprehensive evaluation process. According to this method, the Committee of Creditors (COC) provides preference to all the resolution plans that are received, and then the plans are scrutinized according to the first preference of the COC; if no plan has achieved the required 66% votes of the COC, as required under section 30(4) of the Code, the Plan with least first preference is eliminated. Its first preference is allocated to the second preference. Thereby the process continues till one Plan has secured the required majority. However, if no plan secures the 66% threshold after the Preferential voting process is complete, it can be said that no plan was accepted by the COC. The Preferential Voting Method entails an iterative approach where preferences are reallocated until a plan secures the necessary majority. This iteration further involves keeping track of multiple preferences and reallocation that prolong the decision-making process and increase the complexity of arrival at a final resolution. Despite this complexity, Preferential Voting successfully reduces the burden of NCLT and, at the same time, provides flexibility to the creditors. This article delves into the paramount importance of implementing preferential voting in insolvency proceedings, exploring its potential to enhance creditor empowerment, drive transparency, and optimize value recovery. By examining both domestic and foreign jurisprudence, the authors have attempted to glean valuable insights into the benefits, challenges, and best practices associated with this progressive approach and, at the same time, navigate the dynamic landscape of insolvency, where preferential voting emerges as a catalyst for equitable and efficient decision-making in an ever-evolving economic environment. Advantages of Implementation of Preferential Voting in Insolvency Proceedings Enhanced Creditor Expression Traditionally, the Creditors used to vote in favour of all the IBC complaint resolution plans to prevent the corporate debtor from ending in liquidation, leaving the creditors with little to no relief. This was more common for cases concerning the Real estate, as the real estate allottees had to experience huge losses if they became dissenting creditors. Consequently, the corporate debtor went into liquidation due to not crossing the 66% threshold. The proposed framework would successfully solve this problem and allow the creditors to vote according to their preference and ensure that the Plan which is most beneficial to them is accepted. The method of preferential voting unleashes a nuanced decision-making process that expands the scope of evaluation from the binary system to a robust and comprehensive analytical approach that empowers the creditors to express their preference in the proposed resolution plans. With this process, the creditors can assess each resolution plan’s relative merits and drawbacks, allowing for more informed choices that align with their individual priorities. By unleashing this heightened level of scrutiny and discernment, preferential voting maximizes the potential for value optimization. It fosters a fair and transparent decision-making environment that upholds the interests of all parties involved. Flexibility and Informed Decision Making The proposed priority-based method for evaluating the Resolution plan enables the creditors to make an informed choice before accepting the resolution plan. It prevents the plans from going under liquidation if the concerned creditor does not individually prefer a particular resolution plan. For instance, if creditor A wanted to prefer Resolution Plan 1 and dissent from Resolution Plan 2, he/she would be forced to vote for both plans without any preference to prevent himself from being a dissenting creditor and the company from going under liquidation. The priority voting method gives a multi-dimensional approach to evaluating creditors and empowering them to optimize value recovery without worrying about the company going under liquidation if they dissent from the resolution plan. The introduction of preferential voting enables creditors to tailor their decision-making process based on their unique priorities and objectives. Creditors can rank bids according to various criteria, such as maximizing financial recovery, preserving jobs, or promoting sustainable business practices. This customization ensures that value recovery aligns with the specific needs and goals of creditors within the IBC framework. The economic environment in India encompasses a wide range of industries and businesses, each with its complexities and challenges. Preferential voting recognizes this diversity and allows creditors to adapt the decision-making process accordingly. By expanding flexibility, creditors can assess bids based on industry-specific factors, operational considerations, or market dynamics, thereby optimizing value recovery in line with the intricacies of the Insolvency and Bankruptcy Code, 2016. Promoting Fairness and Transparency The introduction of preferential voting can provide an equitable approach to creditors by eliminating any potential bias or favoritism of a resolution plan by the other creditors. The ranking of the resolution plan provides a transparent view of how the creditors perceive and evaluate different plans, and this visibility not only fosters accountability among creditors but also facilitates an open and informed dialogue between stakeholders, contributing to greater trust and credibility in the insolvency process. It levels the playing field by taking the individual preference of each creditor. With the preferential voting framework, the Creditors, investors, and other stakeholders can have greater faith in the decision-making outcomes, knowing that their interests are being considered fairly and

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