CBCL, Author at NLIU CBCL - Page 39 of 101

The Goodwill Payment Conundrum: A Never-ending Debate

[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 / CBCL

[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 / CBCL

[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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Out of Focus: SEBI’s Distorted Lens on Shareholder Protection in the IBC Landscape

Insolvency Law / CBCL

[By Devansh Dixit & Abhimanyu Pathania] The authors are students of Gujarat National Law University. Introduction The insolvency regime prioritizes the interests of creditors and hence, the interest of minority shareholders of an entity undergoing CIRP remains largely ignored. They occupy the lowest position in the ‘distribution waterfall’. They don’t have any representation in the CoC. The minority shareholders of DHFL and Sintex Industries suffered huge losses when the resolution plans suggesting for the delisting of the entities were approved by the NCLT and they were left with no recourse. SEBI recently issued a consultation paper on safeguarding the interests of public equity shareholders in listed companies undergoing CIRP under the IBC. This article aims to critically analyse the consultation paper and its potential impact on the protection of public equity shareholders if the suggested framework is implemented. The current legal framework As highlighted above, the IBC hardly has any provision for protecting the minority shareholders. Through precedents like Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC and Keshav Agrawal v. Abhijit Guhathakurta, it has been laid down that minority shareholders cannot raise objections against a Resolution Plan (RP) approved by the CoC. The IBC coupled with several regulations further adds to the distress of the public shareholders. Regulation 3(2) of the SEBI Delisting Regulations provides exemption delisting carried out in accordance with a resolution plan approved under IBC if such plan provides for “exit opportunity to the existing public shareholders at a specified price”. Hence, the public shareholders are denied a fair bargain by providing an exit opportunity at a market-determined price and are instead left at the mercy of the Resolution Applicant (RA). The provision that existing public shareholders be given exit opportunity at a price which equal to or more than what is offered to the promoters is of little help considering that promoter’s equity is often written off, making it highly unlikely that public shareholders will receive any value. Further, in insolvent liquidations, there is no liquidation value attributable to equity-holders. Another amendment in the Securities Contracts (Regulation) Rules, 1957 (SCRR) in 2021 mandated a minimum of 5% public shareholding for an entity to remain listed post-CIRP. Such a mandate disincentivises the new entity post-CIRP to be listed and hence, they go for delisting which again is against the interest of minority shareholders. Therefore, once a RP is approved for a listed company, the possible scenarios are: Liquidation of the company in which case they get virtually nothing; Continuation of the company with or without listing, based on the resolution plan which largely results in dissolution of shares again squeezing out the shareholders. In both the scenarios, the existing public equity shareholders get squeezed out and usually end up with almost nothing. Need for protection of minority shareholders One could argue that the treatment of such shareholders is justified if they chose to remain interested in the company even when the company had reached at that stage. While this reasoning is not misplaced, it is also important to consider that the shareholders are often misled hoping that they might end up getting a better deal. The minority shareholders argue that they don’t have much say when equity owners run down the company. Further, most of such minority shareholders are retail or small shareholders who don’t possess the awareness and the level of information to make a timely decision. Another concern is that the CIRP can be triggered on a mere default and the company need not be balance sheet insolvent. Data shows that as of June 30, 2022, 517 companies were resolved by resolution plans and in 56 cases, FCs realized at least 10% of their claims. Hence, there is a realistic possibility that some of these companies may have residual value in its equity yet in many cases it is wiped out in the resolution plan. The SEBI consultation Paper Addressing the concern of the minority shareholders, SEBI came out with a framework for protection of interest of public equity shareholders in case of listed companies undergoing CIRP. The key recommendations are as follows: Opportunity for Public Equity Shareholders: Public shareholders will have the opportunity to acquire equity in the new entity that is formed post CIRP. Promoter and promoter group, KMPs etc. would be excluded while identifying such public equity shareholders. Minimum and Maximum limit: The acquisition of equity by public shareholders will be minimum 5% and a maximum of 25% of the capital structure. The pricing terms for this acquisition will be the same as those agreed upon by the resolution applicant. Mandatory Delisting on failure to achieve minimum Shareholding: For the company to continue as a listed entity, at least 5% of the fully diluted capital structure must be held by public shareholders. If the resolution applicant fails to achieve the 5% public shareholding, the company will be delisted, and the consideration received from public equity shareholders will be refunded. Exemptions from Delisting Regulations: The recommendation also states that exemptions from Delisting Regulations will be applicable only in cases of liquidation or if the public equity shareholding remains below 5% of the new entity after the offer. SEBI’s Proposal: A measure for protection or an instance of myopia? Should IBC protect the minority shareholders? The IBC was designed to promote entrepreneurship, improve credit access, and strike a balance between the interests of all stakeholders while maximising the value of a company under insolvency. It identifies two main sets of stakeholders: shareholders and the creditors and hence, endeavours to balance their rights. The Bankruptcy Law Reforms Committee in its first report, observed, “The limited liability company is a contract between equity and debt. As long as debt obligations are met, equity owners have complete control, and creditors have no say in how the business is run. When default takes place, control is supposed to transfer to the creditors; equity owners have no say.” The problem with the suggested framework is that it assumes that the minority shareholders must be given any

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The Digital Competition Act?: A Dispensable Dilemma

Competition Law / CBCL

[By Aastha Gupta] The author is a student of National Law University Jodhpur. INTRODUCTION The 21st century has witnessed a boom in digital markets powered by Information and Communication Technology. It has transformed market dynamics and spawned phenomena inexplicable by the traditional theories of harm in competition law. Consequently, The Competition Act, 2002 (Act) is deemed outmoded since it was drafted considering traditional brick-and-mortar markets. Pursuant to the Report of the Standing Committee on Finance (Report) titled ‘Anti-competitive practices by Big-Tech companies,’ the Ministry of Corporate Affairs set up a Committee on Digital Competition Law (Committee) to draft a Digital Competition Act (DCA) regulating competition in digital markets. Presently, the European Union (EU) and Germany have introduced such ex-ante laws to rein in the Big-Tech. However, the author argues that a separate DCA modelled on EU’s Digital Markets Act (DMA) is premature for a rapidly growing economy like India. The extant regime bolstered by certain amendments is well-equipped to deal with the challenges. This article will firstly, asses the challenges posed by digital markets; secondly, analyse the disadvantages of the proposed ex-ante framework; thirdly, suggest amendments to the extant regime in the backdrop of its overall suitability. CHALLENGES POSED BY DIGITAL MARKETS Defining the relevant market (RM) is the first step in antitrust scrutiny. Over the years, the Competition Commission of India’s (CCI) approach has evolved from Ashish Ahuja v. Snapdeal where it considered online and offline markets as merely separate distribution channels in the same RM; to Federation of Hotel & Other Restaurant Associations of India v. MakeMyTrip India Pvt. Ltd. (FHRAI) where the it segregated online and offline markets as different RM. However, the traditional touchstone of product substitutability is of limited assistance in digital markets. Digital ecosystems often involve two-sided and multi-sided platforms like Google, Uber, Swiggy characterised by zero-price services, network effects, positive-feedback loops etc. The interdependence of consumers on different ‘sides’ of the platform, warrant both sides to constitute the same RM as in Ohio v. Amex. However, in the Facebook/Whatsapp merger, the European Commission delineated separate RMs in a two-sided platform comprising platform users on one side and online advertising activity on the other. Thus, there is no uniform approach and novel approaches of delineation based on ecosystems, secondary-markets, cluster-markets are being explored. Additionally, these markets are prone to concentration of market share in a few dominant players due to low marginal costs, increasing returns to scale, monopoly leveraging through acquisition of complimentary assets which leads to a winner-takes-all situation. This, is viewed as a perfect recipe for monopolistic outcomes and anti-competitive practices like self-preferencing, deep discounting, anti-steering provisions etc.; hence the call for an ex-ante regulation. CRITICISMS OF AN EX-ANTE FRAMEWORK Presently, Sections 3 and 4 are governed by an ex-post regime wherein firms may be penalized only after they have been adjudged guilty of contravening the Act. The Report recommended designating certain firms as ‘Systematically Important Digital Intermediaries’ (SIDI) and prescribed mandatory obligations for them. However, introducing objective quantitative thresholds to identify SIDIs is dubious since it paints disparate digital platforms like Uber and Amazon with the same brush. This is undesirable in a dynamic market governed by multitudinous factors that require case-based analysis. It will increase false-positives that will further complicate enforcement, increase compliance costs and time for firms through a system of notices, approvals, disclosures, thus marking a step back in the government’s efforts to ensure ease-of-doing-business. Additionally, consider that presently, proving a charge of ‘abuse of dominance’ requires the enterprise firstly, to be dominant in the RM, i.e., be able act independently of market participants like suppliers, competitors, customers etc. which is a high threshold given the inherently inter-connected nature of the market system. Secondly, dominance must be abused. However, in the new framework, SIDIs will have to follow a list of obligations that limit their freedom of operation, which amounts to a regression to the outdated principle of the Monopolistic and Restrictive Trade Practices Act where dominance itself is bad. In CCI v. SAIL, it was held that the main objective of competition law is to promote creation of market responsive to consumer preferences. It is well-recognized that the innovations helmed by Big-Tech firms are responsible for the comfort and convenience we enjoy today, be it e-commerce, social-networking, or food-delivery. Contrarily, it is often argued that this innovation would have reached new heights absent Big-Tech. However, this is mere speculation. Consider for instance, the denunciation of acquisition of smaller firms by large firms as stifling competition. These acquisitions fuel the investment cycle since venture-capital firms often invest in startups hoping that these would be acquired by a large firm. Prohibiting these acquisitions might curb venture-capital investment. Moreover, small firms may not have the wherewithal to make their product successful, depriving consumers of its benefit. An over-intrusive regulation would be surprising considering CCI’s decisional practice of favouring innovative and fast-developing markets. In RKG Hospitalities Pvt. Ltd. v. Oravel Stays Pvt. Ltd., CCI viewed Oyo’s single largest market share only as ‘significant’ noting that the market of franchising for budget hotels is still untapped. In Re: Bharti Airtel Limited and Reliance Industries Limited & Reliance Jio Infocomm Limited, CCI effectively allowed Reliance Jio to offer free services and gain share in the broadly-defined market for wireless communication services. PROPOSED AMENDMENTS Interestingly, the Report cited the need for a global harmonisation of the competition law regime. However, out of over 120 competition law jurisdictions across the globe, only the EU and Germany have enforced ex-ante regulation; others are still considering the same. The DMA came into effect only on 2 May 2023 and has not been fully implemented. Thus, its actual effect is speculative. Further, India is still in the growth phase of its digital and technology industry as opposed to EU that has seen its heyday. Varied market conditions and consumer needs warrant broad-based market studies and consumer surveys before implementation. Thus, CCI must not jump the gun by introducing a DCA which would amount to choosing ‘fair’ over

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Exploring the Enigmatic Realm of Blockchain Technology through the Competition Act, 2002

Competition Law / CBCL

[By Shivangi Paliwal] The author is a student of National Law University, Jodhpur. I. Introduction Blockchain technology has gained significant attention in recent years due to its potential to revolutionize various industries. India, currently, does not have any cryptocurrency legislation in place, although the parliament has proposed various bills to address the regulatory concerns associated with them. In January 2021, it was reported that the Indian Parliament was considering the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.” The Competition Act, 2002 prohibits any practice which leads to adverse appreciable effect on competition. Cryptocurrency and blockchain technology can be used in an anti-competitive manner, thus it is pertinent to address concerns surrounding blockchain technology within the framework of the Competition Act, 2002, This article delves into key questions regarding blockchain technology, such as its classification as an enterprise, the treatment of agreements within the blockchain ecosystem, the jurisdiction of the Competition Commission of India (CCI) over blockchain enterprises, competitive concerns raised by blockchain, and the impact of algorithmically determined prices. Additionally, relevant case laws from USA too, are analyzed to provide a comprehensive understanding of the legal landscape surrounding blockchain technology. II. Classification of Blockchain Applications as an Enterprise Section 2(h) of the Competition Act defines an enterprise as “a person or a department of the government engaged in any activity.” In the case of Re: Dilip Modwil and Insurance Regulatory and Development Authority, the CCI adopted an expansive interpretation of the term “enterprise,” encompassing entities engaged in economic and commercial activities. Accordingly, based on the joint discussion paper released by the CCI, blockchain applications providing distributed ledger technology (DLT) services can be regarded as enterprises governed by the Competition Act. III. Agreements within the Blockchain Ecosystem The Competition Act’s Section 2(b) defines an agreement as any arrangement, understanding, or action in concert, regardless of its form or enforceability. Section 3 encompasses the prohibition of anti-competitive agreements among enterprises, individuals, or groups of enterprises or individuals, pertaining to various aspects such as production, supply, distribution, storage, sale, pricing, and trade of goods, as well as the provision of services. More specifically, the Act imposes restrictions on firms, or associations of firms, from engaging in collusion with other firms or associations of firms, regardless of whether they operate within the same or different levels of the production chain. In the context of competitors engaged in the same economic activity, these anti-competitive agreements commonly manifest as collusion, encompassing practices such as cartelization or bid rigging. The CCI’s joint guidance paper acknowledges that when two firms or individuals participate in a blockchain application with pre-defined rules, they have effectively entered into an “agreement.” Consequently, any anti-competitive conduct arising from participation in a blockchain application may be deemed a contravention of the Competition Act. IV. Jurisdiction of the CCI over Blo. ckchain Enterprises Blockchain technology transcends geographical boundaries, and participants often remain anonymous. While this poses challenges, the CCI retains jurisdiction over global blockchains if it can demonstrate that significant adverse effects on competition in the relevant Indian market have occurred, as stipulated in Section 32 of the Competition Act. V. Competitive Concerns Raised by Blockchains Opacity Effect of Permissionless Blockchains Permissionless blockchains, characterized by data encryption and pseudonymous nodes, pose challenges for competition authorities in analyzing blockchain application data. This opacity effect makes it difficult to identify economic evidence of anti-competitive conduct. However, the CCI has acknowledged this challenge in Re: XYZ Corporation, emphasizing the need for innovative approaches to address anti-competitive concerns within permissionless blockchains. Enforceability of Permissioned Blockchains In contrast to permissionless blockchains, permissioned blockchains are governed by centralized entities that scrutinize and list participants. As a result, concerns regarding enforcement and anti-competitive behavior are minimized within permissioned blockchains. Exchange of Sensitive Information Blockchains often contain sensitive information, including pricing, discounts, production, sales, costs, and strategies. The CCI has established, in various orders, that the exchange of commercially sensitive information can lead to an appreciable adverse effect on competition, contravening Section 3 of the Competition Act. For instance, in Re: Cartelization in Industrial and Automotive Bearings, the CCI held that the exchange of commercially sensitive information is an anti-competitive practice. Therefore, if a blockchain application involves the exchange of such information, the CCI has the jurisdiction to investigate the matter. Smart Contracts and Anti-competitive Behavior Smart contracts, integral to the functioning of blockchains, are self-executed digital contracts that automatically execute based on predetermined conditions without human intervention. In the case of Hyundai Motor Company and Kia Motors Corporation, the CCI ruled that the mere use of algorithms in smart contracts is not inherently discriminatory. However, it emphasized that such algorithmic means should not be utilized to promote anti-competitive behavior in the relevant market. Given that algorithms are an essential component of blockchain technology, the CCI will closely scrutinize any instances where algorithms are employed to facilitate anti-competitive conduct, raising concerns for blockchain applications. Impact of Algorithmically Determined Prices on Collusion The Competition Act stipulates that human involvement is necessary to provide relief in cases of collusion. The CCI’s decision in Samir Agarwal v. ANI Technologies affirmed that algorithmically determined prices do not automatically lead to collusion or cartelization within the scope of competition law. However, it is worth noting that every process involved in the functioning of a blockchain is algorithm-based, presenting a quandary for the CCI in assessing the potential for collusion or anti-competitive behavior within blockchain ecosystems. VI. Position in USA Under the U.S. antitrust regime, the following are the major cases which shed light on competition concerns associated with Bitcoin technology. In the case of Gallagher v. Bitcointalk.org, a Bitcoin enthusiast filed a claim against the Bitcoin Foundation and the forum owners, alleging that they conspired to exclude him from the website, thereby stifling competition in the Bitcoin space. The plaintiff argued that this conduct violated Section 1 of the Sherman Act, which prohibits anti-competitive agreements and conspiracies. The court considered whether denying access to a blockchain facility, in this case, Bitcointalk.org, could constitute an

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The MFN Twilight Zone in India: Courtesy, Judiciary v. CBDT

Taxation Law / CBCL

[By Sanika Deshmukh and Aditya Garg] The authors are students of Gujarat National Law University. Introduction to DTAA & MFN Clause Double Taxation Avoidance Agreement (DTAA) refers to a tax treaty between sovereign states, undertaken with an intent of fostering trade, while deterring the payment of taxes twice on the same income by taxpayers. It finds application in scenarios wherein an individual is a legal resident of one country, but earns income in another. Such treaties aspire to regulate global trade, and shield the interests of the taxpayers concurrently. Several DTAAs consist of a ‘Most Favoured Nation’ or MFN clause, which permits greater beneficial treatment in matters surrounding taxation to a resident of the contracting state. It refers to providing equally advantageous treatment to the contracting nation as provided under similar treaties to other nations, as such an MFN clause effectually binds one state to another in connection with favourable treatment afforded by it to any other state in future, as Treaty Partners can avail identical benefits that the other contracting country has subsequently acceded to a third country in its respective agreement. The World Trade Organisation and the Organisation for Economic Co-operation and Development (OECD) have noted that MFN treatment acts as a cornerstone of the multilateral trading system, and intends to ensure that trading partners are treated equally, regardless of other considerations. By ensuring that all the countries receive identical treatment, MFN clauses can create a level playing field for all countries, and promote non-discrimination. This can be vital for bringing underdeveloped nations at par with larger or superior nations. MFN clauses can be incorporated as an integral part of the treaty during its inception, or subsequently through an amendment protocol. In India, such protocol accomplishes legal validity as a result of past Income Tax Appellate Tribunal and Delhi High Court decisions. Tug of War in India: Judiciary vs Revenue Authority India currently has an MFN clause arrangement with over 10 nations, including Belgium, France, Spain, etc. However, the MFN clause has certainly experienced turbulence and discomfort on the Indian shores, as the clause has debatably failed to receive ‘favourable’ treatment from the Indian taxation authorities. The central controversy with regard to the MFN clause in the Indian scenario has been India’s DTAAs with nations such as France, Netherlands, Spain containing MFN clauses permitting utilisation of benefits identical to those India provide to OECD member nations in future DTAAs. India subsequently signed DTAAs with nations such as Lithuania, Columbia and Slovenia, containing withholding tax rates (WHT) of 5% for dividends. It is pertinent to note that these countries were not OECD members at the time of entering into DTAAs with India, however, the genesis of the controversy can be tracked back to time these third nations attained OECD membership, which attracted shouts of activation of the MFN clause from the Dutch and French authorities, in an attempt of availing the benefit of a lower WHT rate of 5%, contrary to the greater 10% rate provided in their respective treaties. Judicial position – This dispute regarding interpretation of the MFN clause between taxpayers and revenue authorities has attracted involvement of the Indian judiciary, which has notably decided matters encouraging the taxpayer’s position, as evident from a string of decisions. The Delhi High Court has come to the relief of taxpayers’ interests’ multiple times in the last few years, as the Court notably allowed the benefit of a lower 5% rate to a Dutch corporation on account of activation of the MFN clause in the Indo-Dutch DTAA in light of India’s agreement with Slovenia, in the case of Deccan Holdings B.V. v. ITO . Correspondingly, Delhi HC awarded the benefit of 5% rate to two Swiss corporations on activation of the MFN clause in Indo-Swiss DTAA in backdrop of India’s treaties with Columbia and Lithuania, in Galderma Pharma and M/S Nestle, respectively. Delhi HC’s concrete position in the Optum Global-Concentrix Services judgement of 2021 formed the core for these aforementioned decisions, as therein, base for an argument in favour of activation of the MFN clause was formed. The Delhi HC took into consideration the decree passed by the Dutch authorities in 2012[i], when the issue first arose, wherein, the Dutch interpreted the issue in favour of activation of MFN clause, and the taxation rate to effectively change to 5% from the date nations like Slovenia, Lithuania, Columbia achieved OECD membership. Delhi HC went on to derive the benefit of a lower taxation rate and brought into effect activation of the MFN clause in India’s treaty with Netherlands. Thus, the Delhi High Court has passed a series of decisions supporting the taxpayer’s position. Revenue’s ‘Rebuttal’ – However, in contravention to these Delhi HC judgments, The Central Board of Direct Taxation (CBDT) released a circular on February 3, 2022 in an attempt to clarify India’s stance on the application and interpretation of the MFN clause present in Protocol to India’s DTAAs with certain European nations, and it disclosed that – Firstly, to import provisions of any third-nation agreement into the relevant DTAA by virtue of the MFN clause, a government notification pursuant to Section 90 of the Indian Income Tax Act, 1961, as reiterated by the Supreme Court in the Azadi Bachao Andolan case. Thus, favourable provisions present in India’s DTAAs with Slovenia, Lithuania, and Colombia will not find automatic implementation in the DTAAs with France, Netherlands, or Switzerland. Secondly, the circular states that the norms of interpretation of international treaties prohibit the selective invocation and use of the MFN clause as suggested by these nations in their unilateral documents (reference to the Dutch decree). The circular claims that the European nations[5] had been informed of India’s view regarding interpretation of the MFN clause. Moreover, the circular further clarified that the MFN clause plainly states that the third State must be an OECD member both at the time the DTAA with India is signed and at the time the MFN clause is applied. Thus, as Slovenia was not an OECD member

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Latent Defect Period: Application In Construction Contracts

Contract Law / CBCL

[By Ashish Kumar and Rebecca Singh] The author are a students of NMIMS School of Law, Bangalore. Introduction In the realm of construction and infrastructure contracts, the inclusion of a Latent Defect Period is essential to address the potential emergence of hidden flaws or deficiencies after project completion. However, this provision poses legal challenges regarding limitations and applicability. Determining a reasonable timeframe and defining eligible defects are crucial considerations. Additionally, notice requirements for timely defect reporting must be established. By effectively navigating these challenges, the Latent Defect Period can ensure project quality and protect the interests of both clients and contractors. This article will be analyzing the legal standing of India on Latent Defect Period with the application of law of limitation and liability of contractor with a comparison with other jurisdictions. What is Latent Defect? A latent defect refers to a flaw or fault that is not readily apparent to the naked eye or noticeable upon ordinary inspection. It represents a concealed flaw in either workmanship or design, which may not be immediately detectable but can impact the functionality, safety, or value of the subject matter. This distinction is crucial, as the focus lies on the defect itself rather than the potential danger it may pose. Characteristics of Latent Defect: Concealment: A latent defect is characterized by its hidden nature, making it difficult to identify through routine observation or ordinary care.[1] Lack of Knowledge: The defect is one that the owner or party responsible for the subject matter does not possess knowledge of or should not have had knowledge of, even with reasonable care exercised[2]. Reasonable Inspection: To determine the presence of a latent defect, the level of inspection that a party should reasonably anticipate the subject matter to undergo is considered. The defect must remain undiscovered within the bounds of such anticipated inspections.[3] Legal Analysis In the context of sales where goods are described as the basis of the contract, the accuracy of the description is vital. The Indian perspective recognizes that the falsity of this description, resulting in substantial differences, constitutes a failure of consideration. Moreover, when goods are bought by description, an implied condition exists that the goods should be of merchantable quality, i.e., free from defects[4]. This article explores relevant cases and legal observations to provide insights into the Indian perspective on defects, implied conditions, and latent defects in the sale of goods by description. Defining Latent and Patent Defects: In Sorabji Hormusha Joshi and Co. vs V.M. Ismail and Anrs, the court established a distinction between two types of defects: patent defects and latent defects. Patent defects are those that can be reasonably identified by a person of ordinary prudence through a careful examination of the goods. On the other hand, latent defects are not readily detectable through such an examination. The seller implicitly bears responsibility for latent defects, while the buyer assumes responsibility once they have been identified. Whether a defect is considered latent, or patent depends on various factors such as the nature of the goods, the specific defects involved, and the level of examination required to discover such defects. Each case must be individually evaluated based on its own circumstances. Implied Conditions and Examination: Under the Indian Sale of Goods Act, an implied condition exists that the goods sold by description must be free from latent defects. However, for a seller to be absolved of responsibility, the buyer must have had a genuine opportunity to examine the goods thoroughly. If the buyer only conducts a superficial examination of the goods, the implied condition that they are free from latent defects may be nullified. This is because defects that could have been discovered through a more thorough examination are no longer the seller’s responsibility. The required level of examination by the buyer varies depending on the circumstances and nature of the goods. Board of Trustees of the Port of Calcutta v Bengal Corporation Pvt: In this case, where wire ropes were supplied for crane use, the court held that the goods were bought by description, and the seller was obligated to supply goods reasonably fit for use in cranes. As the defective nature of the goods was not apparent through ordinary examination and could not be detected before use in cranes, Section 16(2) of the Sale of Goods Act, 1930,regarding defects, was not applicable. The Section 16(2) of the Sale of Goods Act prescribes when the goods are purchased from a seller on the basis of the description then there is an implied condition that the goods must be of satisfactory quality. However, if the buyer has examined the goods, there is no implied condition for defects that could have been discovered during the examination. Thus, there was an implied condition of merchantable quality, which the goods supplied by the seller did not meet. Hasenbhoy Jetha, Bombay v New India Corporation Ltd., Madras: In this case, the court noted that when the defect is latent and cannot be revealed through ordinary inspection, the opportunity for inspection or a hand-operated inspection is insufficient. The defect must be revealed through a demonstration with electric power, as in the case of a crushing machine producing only 1.5 tons per hour. In such situations, the buyer is entitled to damages for breach of contract or warranty. Law of Limitation The liability for latent defects in India is an area where the law lacks explicit clarity. However, the Limitation Act provides guidance by establishing a three-year limitation period for bringing claims related to latent defects. This period commences from the date when the cause of action accrues or when the relevant contract is breached or ceases to exist. To address latent defects in the construction industry, the Delhi Development Authority has issued guidelines for decennial latent defect liability. The term “decennial latent defect liability” refers to the liability arising from latent structural defects discovered or becoming apparent within ten years from the date of issuing the occupation cum building completion certificate by the authorized sanctioning

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Implications of CCI’s power for imposing penalties on Global Turnover

Competition Law / CBCL

[By Himanshi Srivastava] The author is a student of Dharmashastra National Law University. Introduction With the Competition (Amendment) Bill of 2023, receiving the President’s assent, the market is abuzz with questions revolving around the major amendment which has empowered the Competition Commission of India (CCI) to levy penalties on global turnover. In Section 27(b) of the Competition Act, the definition of turnover has been now enhanced to mean ‘global turnover’ derived from all the products and services by a person or an enterprise. This contrasts the earlier meaning of turnover, which was restricted to ‘relevant turnover’, as interpreted by the Supreme Court in the landmark judgement in the Excel Crop Care Ltd. case. In this case, the Apex Court determined that the penalty under Section 27(b) must be on the relevant turnover, i.e., relating to the specific product(s) in relation to the breaches. Until now, the definition of ‘turnover’ in Section 2(y) did not specify anything, it is for the first time that the words of the statute explicitly provide for the nature of the turnover to be global, extinguishing any possible ambiguities and room for judicial discretion. Thus, it will be quite crucial to see the development which will follow this unprecedented change in the Indian economy and the stakeholders. The amendment brings into discourse, the aspects of proportionate penalties, determining turnover, and the nuances of the constitutionality of the amendment. To understand the potential impact of this change in a global paradigm, a comparative assessment of jurisdictions like- the European Union (EU), the United Kingdom (UK), and Germany would be immensely fruitful. Analysing the penalty on turnover in a global paradigm For the purpose of contextualising the analysis, a parallel comparison could be drawn in the global paradigm, to ascertain the practical nuances of this amendment from a broader perspective. The EU, CMA guidelines, and the German Competition Act are relevant to this discourse. Article 30 of the EU’s Digital Markets Act penalises the gatekeepers with a fine of up to 10-20% of the total worldwide turnover in the preceding financial year, on breaches of the Act. However, as a precaution, this provision is followed by the ‘right to be heard and access to the file’ in Article 34 of the Act. By virtue of this provision, the gatekeepers have the right to the defence which includes the right to access the file of the Commission and submit their observations regarding the preliminary findings of the Commission. Similarly, the Competition and Markets Authority (CMA) of the UK has permitted a maximum penalty of 10% of the worldwide turnover of the entity in the last business year for engaging in anti-competitive conduct. The guidance also provides for mitigating factors, assessing whether the undertaking is operating under duress, if the infringement is halted upon CMA’s intervention and cooperation with the process. Section 36 of the Competition Act, 1998, provides for a mandatory requirement of a notice in writing, while also directing the CMA to consider the seriousness of the breach and the deterrence for ascertaining the penalty. A like provision is present in Section 81(c) of the Competition Act of Germany, which has fixed the upper limit of the fine amount from an undertaking to 10% of the total turnover generated in the business year preceding the authority’s decision. Various factors like- the nature and gravity of the infringement, its duration and manner, the economic condition of the undertaking, its efforts to redress the consequential harm, etc. are also required to be considered to determine the fine. Hence, we see a likeness in all these legislations, which provide for penalties on global turnover, while equally ensuring the rights of the defaulters. However, one fails to see similar provisions in both the Indian legislation as well as the current amendment bill. It is thus vital for the lawmakers to provide for certain leniency reductions or settlement reductions in fines imposed, lest the defaulting enterprise may suffer due to the unbridled powers bestowed upon the CCI. Since the antitrust regime in India is still nascent, unlike the mature and highly volatile market structures of economies like the EU, UK, Germany, etc., it is reasonable to say that the novel change in India’s Competition law necessitates including various precautionary measures, to maintain an equilibrium in the CCI’s approach to a case of a breach. A lack of such measures may pose a possible threat to the regime against the anti-competitive conduct of corporations. Possible implications in the Indian scenario The meaning of turnover in the Indian context can be traced from the Excel Crop Care Ltd. case. In this case, the CCI imposed a penalty of 9% on the average ‘total turnover’ for the last three years on establishments accused of entering into an anti-competitive agreement. The Court concurred with the decision of the Competition Appellate Tribunal (COMPAT) in its interpretation of turnover in Section 27(b) as relevant instead of total. To arrive at this conclusion, the Court considered factors, the first being the possibility of any inequitable and discriminatory outcomes of the penalty imposed on multi-product and single-product companies alike. Further, an analysis in light of the principle of strict interpretation of statutes and the doctrine of proportionality also suggested that the usage of relevant turnover would be proportionate and not antithetical to the entities. The novel provision of penalties on global turnover will undoubtedly have far-reaching consequences for businesses operating in India. Penalty for anti-competitive practices on global turnover will not only increase corporations’ pecuniary liability manifolds but may also have adverse impacts on the competition in the market. The expansion in the scope of the powers of the CCI will certainly increase regulatory oversight and scrutiny of multinational companies in India. The enormous amount of penalties resulting from this amendment could potentially sabotage business operations, draining their balances, eventually leading to unnecessary compliance burden and discrimination against multi-product corporations. Big enterprises could be denied potential investments if there is a lack of transparency and uncertainty in the market.

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Author name: CBCL