Author name: CBCL

Banking Regulation Amendment Act, 2020: A Flog on the Co-operative Bank and Powers of the State

Leave a Comment / Banking Law /

[By Eilin Maria Baiju and Hemang Arrora] The authors are students of Gujrat National Law University. Introduction Post the Punjab and Maharashtra Cooperative Scam, the Banking sector of the country faced quite a setback affecting the financial market as well as disrupting the trust of innocent depositors. As eye-opening as it was for the banking sector, it also showed the Indian economy the need for regulating the conduct of the corporative bank sector. The cooperative banking of India had major age-old lacunas owing to the dual regulatory framework under the Reserve Bank of India and the Registrar of Cooperative Societies. That is the Urban Cooperatives Bank is supervised by the Registrar of Cooperative Societies whereas the licensing, regulation, and supervision are vested with the RBI. Under Schedule VII of the Indian Constitution, the regulation of corporate banks is a subject of both the State and the Centre. The problem originated from the 1966 rule[i] that extended the applicability of the provisions over certain categories of cooperative banks provided under the Reserve Bank of India. By the virtue of the 2020 amendment, these lacunas were attempted to be cemented and certain new progressive measures were implemented. These include changes pertaining to the cash reserve ratio, restrictions on holding shares and lending loans and advances, regulation of the board of directors, etc. Towards the end of this paper, the authors have also made a humble attempt to discuss how the amendment act possibly took away the Legislative powers of the State under Item 32 List II in Schedule 7 and discusses the constitutionality of the amendment act. Significance and Scope of Study The Banking Regulation Co-operative Societies Rules[ii] along with the amendment created Part V and extended the applicability of provisions to certain sectors of cooperative banking societies under the Second Schedule of the Reserve Bank of India Act.[iii] This not only constituted the conflict of interest between the Centre and the State but also helped in the budding of future scams in the banking sector. The scope of this study is to analyse the developments revolving around the 2020 amendment act[iv] and the recent measures of the Reserve Bank of India through various precedents and analyse the rationale behind the respective cases, by following a doctrinal type of interest. The Banking Ordinance: Formulation, Implementation, and Implications India’s banking system has often been criticized for its dual framework for regulating cooperative banks. There has always been a tussle between the Registrar of Cooperative Societies (‘ROCS’) and the Central Bank of India, i.e., the Reserve Bank of India (‘RBI’).[v] Although, at a broad level, the ROCS primarily deals with the administrative aspects of such banks like auditing and managing elections, on the other hand, the RBI deals with finance-related factors like the minimum liquidity ratio, maintenance of cash reserves, inspection, etc. The past indicates several flaws in the framework, which has led to inadequate measures in resolving those banks’ financial distress, which is finding it difficult to perform their everyday functions.[vi] A few of such failures include the government’s lack of success in reviving the cooperative bank of Madhavpura, wherein a ten-year plan scheme was implemented, but the same could not restore the bank.[vii] Similarly, in 2019, seeing Punjab and Maharashtra Cooperative Bank’s condition, the Reserve Bank of India was forced to issue directions under S.35A(1)[viii] to limit depositors’ daily withdrawals and take hold of the bank’s operations.[ix] The Rajya Sabha had recently passed the Banking Regulation (Amendment) Bill 2020 (Bill) in its session on September 22, 2020. Several aspects of the Bill will impact the banking industry long-term. It aims to alter the Banking Regulations Act (Act) and broaden its scope to include cooperative banks’ operations. While introducing the Bill in parliament, Finance Minister Nirmala Sitharaman stated that, in light of the recent failures of the Punjab and Maharashtra Cooperative Bank and other cooperative banks, it was imperative to regulate the conduct of such cooperative banks whose failures had severely impacted the financial market and disrupted depositor’s trust in the banking industry. Without a moratorium, devise a plan for reconstruction or merging Post the task of placing a bank under a moratorium, the Reserve Bank of India may propose a strategy for its amalgamation or reconstruction under the Banking Regulation Act. This could be done to ensure good bank administration or protect depositors, the banking system, or the wider public. For up to six months, banks that have been put under a moratorium are immune from legal action. Furthermore, banks will be unable to make any payments or discharge any liabilities during the moratorium. The Bill empowers the Reserve Bank to launch a bank restructuring or consolidation scheme without imposing a moratorium on a stressed lender.[x] Issuance of shares by the corporate banks Under the new BR Amendment Bill 2020, cooperative banks are exempt from the provision on the issuance of securities and shares. Other banks are permitted to issue equity or preference shares, and the RBI has the authority to impose preference share issue restrictions. In most cases, voting rights are distributed on a one-to-one basis. An equity shareholder’s voting rights are limited to 15 per cent under the Act (read with the directions of the Reserve Bank of India). Hence, no person would be entitled to demand towards surrender of shares issued by a co-operative bank in future. The bill changes the Banking Regulation Act to allow cooperative banks to offer equity, preference, or special shares to members or other persons who live in the banks’ operational zone at face value or at a premium, subject to the Reserve Bank’s approval. Unsecured debentures or bonds with a 10-year maturity period may also be issued by banks.[xi] Without clearance from the Reserve Bank, banks are unable to withdraw capital. Members are also not eligible for reimbursement from the bank if they relinquish their shares. Provisions related to the appointment of chairman, qualification of Board, etc. Prescription of management qualifications: Cooperative banks are exempt from the Banking Regulation Act’s restrictions on

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Excessive Pricing Allegation against three Hospitals: CCI’s Golden Opportunity to take Cognizance?

Leave a Comment / Competition Law /

[By Swetha Somu] The author is a student of Gujarat National Law University. In 2015, a social worker filed a complaint to the Competition Commission of India [CCI] against Max Super Specialty Hospital and its disposable syringe supplier, Becton Dickinson India, an MNC. The complainant alleged that the in-house pharmacy of Max Hospital charges an excessive amount of Rs.19.50 (the printed MRP) for Becton Dickinson’s disposable syringe bought by its patient. This allegation was made because the same brand of disposable syringe had a cheaper MRP of Rs.11.50 when bought outside from a local pharmacy. On the basis of this 2015 complaint, the CCI in April 2022 sent a notice to Max Healthcare, Apollo Hospitals, and Fortis Healthcare for the furnishing of details on its suppliers of pharmaceutical products, its method of determining prices when selling in its in-house pharmacies, and other relevant details. The matter is slowly shaping towards an issue of excessive pricing. Now, this article aims to explore the grey area of excessive pricing predominantly in relation to the Indian pharmaceutical sector. It analyses excessive pricing in other international jurisprudence before suggesting how to mould and incorporate the same into the Indian landscape efficiently. How ‘excessive pricing’ is dealt with in other countries Firstly, excessive pricing can be defined as an antitrust violation in which a dominant firm charges an excessive price relative to an appropriate competitive benchmark in an unfair manner. It does not necessarily mean that there’s a threat to fair competition but rather an abuse of one’s dominant position for one’s own advantage. European Union [EU] The first EU case which took a full-fledged attempt to look into the aspect of excessive pricing was the prominent United Brands case (1978). The European Court of Justice [ECJ] laid down a standard two-fold test under erstwhile Article 82 of the Treaty of Functioning of European Union [TFEU] (now, Article 102 of TFEU) that states that a price shall be deemed excessive if (i) the difference between the dominant entity’s cost of production and the actual price charged by it must be excessive (cost-plus assessment test) and, (ii) the price in comparison to competitor’s price or market price is unfair or by itself unfair. Before the United Brands decision, the European Court of Justice [ECJ] in General Motors Continental NV v. Commission of the European Communities (1975) held that a price is to be termed excessive against the economic value of the provided service. The ECJ referred to and upheld the merits of this economic-value test in its British Leyland (1985) case. However, the European Commission in Scandlines Sverige AB v. Port of Helsingborg (2004) stated that this economic-value test of cost and price comparison is to be used only as a preliminary step in the determination process as it is inconclusive on its own in deeming an action violative. The Commission went on to say that the price could be compared with either (i) the price charged by that dominant undertaking for the same good/service in other relevant markets (cost-plus assessment test), or (ii) the prices charged by businesses providing similar goods/services in various relevant markets. Post the Scandlines decision, the topic on ‘excessive pricing’ was brought up again by the EC in the Aspen Pharma (2021) case. The EC concluded that Aspen’s prices for cancer-related products were unquestionably excessive in this particular circumstance as it routinely generated sizable profits. Aspen was easily able to charge these amounts since the market did not offer any substitutes for these specific cancer treatments. As a result, the national governments of the member states were unable to switch the products and eventually gave in to pressure to provide the necessary medications at whatever cost Aspen demanded. The court held that the two prongs of the test are not necessarily to be applied cumulatively but rather as an alternative. In the EU, the authorities don’t intervene in price wars unnecessarily and only to compelling needs. The Aspen case, which took four years to conclude, failed to use this opportunity to lay down general guidelines comprising accurate parameters and acceptable pricing behavior which could have allowed for a uniform application across all jurisdictions. Still, the Commission failed to seize the opportunity. United Kingdom The UK’s Competition Markets Authority [CMA] in Napp Pharmaceuticals case, stated that Napp’s prices and profit margins were much greater than those of its rivals, hence coming to the conclusion that it was charging unreasonable prices. Although the verdict made significant points about misuse of a dominating position and exorbitant pricing, it can be criticized because Napp’s rivals could profit from it and force Napp out of its dominant position. Moreover, there are a handful of notable, recent national cases as well. In particular, in Pfizer/Flynn Pharma (2020) case, both Pfizer and Flynn Pharma were fined by the CMA for charging exorbitant prices after applying the first part of the two-fold test. This was done by simply observing that sales return was above the determined threshold rather than comparing it against a benchmark. The decision was subsequently annulled by the Competition Appellate Tribunal for the incomplete application of the two-fold test laid down in United Brands case. However, the UK Court of Appeal found that the CMA was correct as it cannot be forced to go beyond the first prong (cost-plus assessment) to determine price excessiveness. Recently, in Auden Mckenzie/Actavis UK (2021) case, the CMA found that the prices charged were excessive and unfair under Chapter II prohibition in the Competition Act 1998 (the equivalent of Article 102 of TFEU). Other recent cases include the Essential Pharma case and the Advanz Pharma (2021) case. Interestingly, the CMA has applied the United Brands two-fold test with no strict adherence to the same. Unlike the EU, the UK authorities do not look at the two parts of the test as solid alternatives to each other. The authority is bound to accept other evidence submitted by the alleged company even if it is only under one prong of the test,

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The Emanation of Green Bonds in India: An instrument of Sustainable Financing

Leave a Comment / Capital Markets and Securities Law /

[By Dhairya Jain] The author is a student of Hidayatullah National Law University. Introduction In light of India’s projected 3,000 GW Renewable Energy (RE) potential, the nation plans to increase its RE capacity augmentation goal to 175 GW by 2022. Higher capital investments, projected at roughly USD 200 billion over the next years, would be necessary to achieve the much higher capacity objective, which will increase energy security and access while also creating more jobs. The present project finance sources in the Indian market are exhaustive enough to satisfy the expected capital and investment needs. In order to attract a larger pool of potential investors, such as pension funds, sovereign wealth funds, insurance firms, and the like, new financial instruments and financing methods must be developed. Another pushing reason for the need to introduce new funding sources and mechanisms in India is the high cost and short duration of project finance presently available for RE projects. The need for alternative instruments of finance India must diversify its capital sources in order to accomplish its capacity addition objectives despite the fact that the sector’s demand for capital has been low in the previous two to three years owing to policy changes and the economic recession. In India, the following are the main challenges that are preventing the funding of RE projects: The Environment of high interest rate: It is believed that the unattractive terms of debt and exponentially high interest rates discourage the growth of RE projects. It leads to increasing the upfront cost by a margin of 24-32%, as compared to projects financed in The United States and The Europe. Non-Availability of debts of longer tenure: Due to the short-term nature of the capital that these banks generate, Scheduled Commercial Banks in India are typically comfortable with loan tenures of five to seven years. Nearly 79 percent of bank deposits in 2009-10 had an average maturity of less than three years, according to RBI figures. However, there are a few examples of infrastructure projects, including RE projects, that have been able to get ten-year terms. Due to the banks’ short-term lending, loans in India tend to have variable interest rates rather than fixed ones. An expanding economy means that long-term hedging products are often unavailable. Variable Interestsmake cash flows to equity investors less reliable when borrowing at a variable interest rate. As a result, banks are limited in their ability to invest in a single area or technology. The RE sector falls within the overall power sector restriction, which generally lacks the depth necessary for large-scale finance of RE projects. More banks will approach and breach their sector exposure restrictions for the power industry, leaving RE projects without enough bank funding as a result of a growth in RE. As a result, the financial market will need to provide tools and procedures that fit the special needs of the sector, such as lengthy duration, significant pumping of funds, and active engagement by a range of investors, in order to meet the massive deployment of RE in the nation. What are green bonds? In the world of finance, a green bond is a fixed-income vehicle created expressly to fund environmental and climate change initiatives. Most of the time, these bonds are linked to the issuer’s assets and backed by its balance sheet. This means that they usually have the same creditworthiness as the issuer’s numerous different debt liabilities. The same rules apply to green bonds as they do to any other kind of business or government debt. lenders issue these securities in order to obtain funding for initiatives that have a good effect on the environment, such as ecological reconstruction or emission reduction..  When these bonds reach maturity, investors will be able to cash in on their investment and profit. Investing in green bonds might also result in tax advantages for investors. ​ Investors are increasingly considering green infrastructure investments as part of their social and corporate responsibility efforts in light of the growing emphasis on ecologically friendly practises. As a result, Green Bonds may be used to free up previously locked-up private funds for use in environmentally friendly initiatives. It’s still unclear what counts as “green,” although sectors such as RE, reusing and reusing garbage, water conservation, and afforestation all fall under the umbrella of “green.” If the profits of the bond offering are utilised for green initiatives, investors may make an informed decision about the project’s viability. These instruments are also being defined and governed by standards such as the Green Bond Principles. Benefits of Green Bond to various stake holders The advantages of green bonds have to be viewed from the perspective of its four stake holders which include: Investors, Issuers, Lenders and the state. Benefits to the Investors To guard against the dangers of climate change, some institutional investors promote environment-friendly corporate practises, while others diversify their investment portfolios..Green assets’ long-term competitiveness, the bond market’s better liquidity, and the minimal operational risk they carry make them an appealing investment option for institutional investors. Benefits to the Issuers or project developers For the time being, project developers in India have few alternatives when it comes to contacting financial institutions (FIs)Is that provide short-term loans with high interest rates. Developers will be able to get foreign funding at competitive conditions thanks to Green Bonds. Increasing capacity without corresponding equity injection is possible via the use of longer-term bonds with bullet payment schedules. Increased annual growth rates of 30-50 percent for the same equity base may be achieved by redeploying surplus cash flow. Benefits to the lenders or financial institutions There are self-imposed constraints on FIs in India’s financial industry. By issuing RE portfolios of Green Bonds, FIs may unload holding assets while still using the revenues to fund new projects and stay within the sector restrictions. With short-term deposits, the asset-liability mismatch is a major problem for Indian banks. The absence of long-term liquidity in the system prevents banks from obtaining long-term loans for the industry. Green Bonds are a solution

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Recovery of GST dues from IBC companies — CBIC’s welcome order

Leave a Comment / Insolvency Law /

[By Shalin Ghosh] The author is a student of Maharashtra National Law University (MNLU), Mumbai. Introduction The recovery and treatment of statutory dues has always been a vexatious issue for stakeholders in cases involving a distressed entity facing proceedings under the Insolvency and Bankruptcy Code (“IBC”). The absence of clear guidelines coupled with judicial uncertainty muddied the waters, affecting the adjudication of disputes and hampering the efficiency of the resolution process envisaged under the IBC. A recent circular released by the Central Board of Indirect Taxes and Customs (“CBIC”), directing tax officials to recover a reduced amount under the Central Goods and Service Act, 2017 (“CGST Act”) from companies against whom insolvency proceedings have been initiated, resolves the quandary surrounding the quantum and the treatment of outstanding GST dues from distressed companies undergoing resolution under the IBC. This article aims to discuss the CBIC’s directive and analyse its legal and commercial significance. IBC proceedings within the ambit of the CGST Act The primary concern addressed by the circular mainly hinged on the interpretation of a broad phrase in a provision, Section 84 of the CGST Act, governing the validity and continuation of recovery proceedings regarding outstanding tax obligations. The specific segment of the provision in question, Section 84, stipulates the following: “any recovery proceedings initiated on the basis of the demand served upon them prior to the disposal of such appeal, revision or other proceedings may be continued in relation to the amount so reduced from the stage at which such proceedings stood immediately before such disposal.” This clause suggests that the government dues pending against any entity are reduced due to an appeal, revision or other proceedings connected with such dues, then the quantum of dues to be recovered from that entity shall be reduced. Moreover, the recovery proceedings initiated against such an entity shall be restricted only to the extent of the reduced amount. The CGST Act does not define the contours of the phrase “other proceedings” as mentioned in Section 84. This legislative ambiguity made it difficult for courts to resolve disputes involving recovery actions initiated by the tax department against companies facing insolvency proceedings. A recent example of this conundrum was the ruling given in the Ultratech Nathdwara Cement Ltd case where the Ahmedabad branch of the Central Excise and Service Tax Appellate Tribunal (“CESTAT”) directed CBIC to frame guidelines regarding the treatment of pending tax liabilities from companies facing IBC proceedings. In its ruling, the tribunal observed that while the assessee had approached it to quash the appeals considering the orders of the National Company Law Tribunal (“NCLT”), the revenue department (the respondent in the case) was unaware of the future course of action due to the absence of any guidelines by the CBIC. Constituted under the Customs Act, the CESTAT cannot decide whether a pending tax liability can be recovered due to the absence of corresponding provisions in the Customs Act or the Central Excise Act. This problem is not cured despite the non-obstante clause, Section 238, in the IBC which is otherwise applicable in cases of conflict. The ‘Adjudicating Authority’ dealing with disputes under IBC is NCLT. It is trite law that the tribunal along with its appellate body, the National Company Law Appellate Tribunal (“NCLAT”) are quasi-judicial institutions. Apart from dealing with cases regarding insolvency and the resolution of companies in the red, both NCLT and NCLAT have also adjudicated on several matters concerning the payment of pending government dues under the CGST Act or any other applicable law by the corporate debtor. Since proceedings involving the treatment of statutory dues have been an important part of the NCLT/NCLAT’s scope of adjudication, it may be inferred that they fall within the purview of “other proceedings” as used in Section 84 of the CGST Act. This interpretation has plugged the prevailing legislative ambiguity thereby preventing the unnecessary litigation saddling the concerned stakeholders. It can provide greater clarity to indirect tax officials in dealing with cases involving the interplay of IBC and other indirect tax laws like the CGST Act. Aligns with established precedents It can be argued that the CBIC’s circular implicitly suggests that once the NCLT admits an insolvency resolution application, the tax department cannot take any coercive measures to recover pending statutory dues against the corporate debtor for the period prior to the initiation of the Corporate Insolvency Resolution Process (“CIRP”) under IBC. The scope of recovery action is only limited to the reduced amount of statutory dues payable. In restraining the tax department from forcing a corporate debtor to cough up dues in excess of the reduced amount, the circular appears to be consistent with the Supreme Court’s landmark judgment in Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.(2019), where it held that due to the sacrosanct nature of the Resolution Plan which makes it legally binding on every stakeholder having a skin in the CIRP process (the government not being an exception), tax recoveries must also strictly conform to a Plan that has received the legal sanction and approval of the NCLT. Moreover, the circular’s attempt to curtail the coercive powers of the tax officials is harmonious with the emerging judicial trend of preventing the recovery of statutory dues from a company facing proceedings under the IBC. The closest parallel is the Supreme Court’s recent judgment in Sundaresh Bhat v. Central Board of Indirect Taxes and Customs(2022) where the Court, while ratifying the primacy of IBC over the Customs Act in case of a clash, precluded the custom authorities (CBIC) from initiating actions to recover outstanding dues under the Customs Act against the distressed corporate debtor undergoing CIRP. It may also be inferred that the circular could potentially allay the confusion stirred up by the recent decision of the Supreme Court in the contentious Rainbow Papers judgment (2022) which, in holding the government as a secured creditor, elevated the status of statutory dues in the liquidation waterfall, resultantly giving the tax department greater powers

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Permitting “Variable Capital Companies” at IFSC: A new avenue for Fund formation in India.

Leave a Comment / Capital Markets and Securities Law /

[By Muhammed Ijaz] The author is a student of Faculty of Law, University of Delhi. Introduction Bearing with success stories of thriving Asset Management Industries across countries like Singapore, Hong Kong, UK and Luxembourg and their role as engines of growth at their respective entrepreneurial promoting economies, the Government of India(“Government”) has keenly emphasized in bringing slew of measures over the time to catalyze and attract the global players into the Indian asset management/Investment fund industry. The ongoing developments and deliberations among the Government stakeholders to possibly permit the Variable Capital Companies(“VCC”), as a new vehicle for pooling of funds, in the India’s first and only International Financial Services Centre (“IFSC”), Gujarat International Finance Tec-city (‘GIFT city’), evidences the above. Pooling Vehicles for Fund formation in India       For the purpose of fund formation and its management, the legal regime emanating from the mandates of Securities and Exchange Board of India (‘SEBI’) applicable to  the Indian mainland and to IFSC through International Financial Services Centers Authority (‘IFSCA’), contemplates three types of corporate structures as permissible fund pooling vehicles. Namely, Trusts governed under the Indian Trusts Act, 1882, Companies governed under the Companies Act, 2013, and Limited Liability Partnerships (LLPs) under the Limited Liability Partnership Act. Of these, trusts are found to be predominantly used to pool funds for a variety of reasons, ranging from historical factors to pragmatic considerations such as lower compliance costs and more confidentiality. Given the benefits of the trust structure, an established legal and commercial practice has developed around its formation and operation of Investment fund industry over the years in India. However, despite being the most sought-after pooling vehicle, Trust route suffers from certain limitations including: The trustee(s), being the legal owner(s) of the trust, has/have unlimited liability; The eligibility of a trust to claim tax treaty benefits in case of overseas investments is always a contentious issue. Variable Capital Companies (“VCC”) To address above discussed limitations which has been similarly prevalent in other jurisdictions across the globe, some jurisdictions like Singapore, Hong Kong, Ireland and UK have set up a legal regime for a fourth type of corporate structure for the Investment Fund formations. A hybrid vehicle which combines the advantages across these three structures of Trust, Company and LLP. These entities are called “Variable Capital Companies” in Singapore, “Investment Company of Variable Capital” (‘ICVC’) and “Open-ended Investment Companies” (‘OEIC’) in the UK , “Open-ended Fund Company” (‘OEFC’)in Hong Kong, and “Irish Collective Asset-management Vehicle” (‘ICAV’) in Ireland. It combines the advantages of limited liability of a company with the flexibility available in a trust structure of exit and entry without alteration to the capital structure. Essentially, VCC is a collective investment scheme or pooling vehicle.  VCC corporate entity structure allows multiple collective investment schemes to be managed under a single corporate entity and allowing each of these to be ring-fenced. This structure is similar to multi-class fund structures such as the Protected Cell Company (‘PCC’) and Segregated Portfolio Company (‘SPC’) prevalent in other offshore fund jurisdictions such as Cayman Islands, the British Virgin Islands and Mauritius. The participants, who are the shareholders of the VCC, invest money [or any other asset / contribution] with the objective of making a return or profit from the investment. They invest in the capital of the VCC, but do not have control over the day-to-day management of the VCC. The constitution documents of a VCC should include a Memorandum of Association setting out the main objective of the VCC and other objectives ancillary to the main objective, and an Article of Association, setting out the rules for the internal management of the VCC. Krishnan Committee – Recommendations In September 2020, The IFSCA, the regulator at the India’s IFSC which contemplates the need for VCCs as a fund formation vehicle set up an Expert Committee under the chairpersonship of Dr. K. P. Krishnan (“Krishnan Committee”) to examine the feasibility of the VCC in India. In its report in May 2021, the Krishnan Committee assessed the features of a VCC or its equivalent, in other jurisdictions such as the UK, Singapore, Ireland and Luxembourg. In the background of Committee’s assessment of various jurisdictions and derived principles, The Committee recommended the introduction of VCCs in the IFSC by way of a separate law containing the substantive provisions governing the VCC structure in IFSCs for this purpose. It delineated the benefits of this structure over the traditional ones. The Committee noted that as a hybrid structure, a VCC carries the benefits of a company, limited liability partnership and trust, while avoiding their limitations. It allows access to various treaty benefits that do not typically extend to unincorporated entities. These would make a VCC a preferred entity to house funds in IFSCs. Additional recommendations of the Committee as follows: The share capital of the VCC should be variable in nature to allow for easy entry, redemption and buy-back of its shares by investors. A VCC can have multiple sub-funds, which are like schemes of a mutual fund. Sub-funds should not be separately incorporated. The VCC should issue a separate class of shares for each sub-fund. The assets and liabilities should be segregated at the sub-fund level. The assets of any one sub-fund should not be used to discharge the liabilities of the VCC or any of its other sub-funds.  VCCs should be allowed to issue, redeem or buy back the securities issued by them, or undertake capital reduction exercises, without restrictions. VCCs should be allowed to pay dividends out of their capital as well as profits. From a tax perspective, each sub-fund should be deemed to be a separate ‘person’ and all the provisions of Indian tax laws should apply to the sub-funds treating it as a separate person. Proposed Legal Framework for VCCs at IFSC    On consideration of the suggestions and recommendation to introduce VCC as an investment fund vehicle in the IFSC by way of a separate law, laid down through the Krishnan Committee report, the IFSCA in May 2022,

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Recasting Indian Banking System- Hurdles faced by NEO Banks

Leave a Comment / Banking Law /

[By Aayush Panwar] The author is a student of Gujarat National Law University, Gandhinagar. Introduction Banking and financial instruments are constantly evolving to suit the changing demands of the economy and business. Core banking and digitalization have contributed to the transformation of the banking industry from a traditional money lender to a modern banking system. Fintech and blockchain technology are the two fundamental components of digital banking. NEO Bank is one such evolution. NEO Bank is similar to any other commercial bank, with the difference of no physical presence, operating solely through digital modes. This is not a payment bank or e-wallet, it includes all the features of a commercial bank, and therefore no external bank account is to be linked to NEO Banks.[i] But these banks are not yet authorized with a banking license and are dependent on a banking service partner to provide other utility services like lending loans or issuing credit cards.[ii] This article throws light on necessity of NEO Banking, issues associated with its growth and proposing the solution to deal with this as NEO Banking will help in opening up a large horizon of fintech possibilities overcoming all the limitations of payment banks. Factors Affecting growth of neo banks There are various factors that are hampering the growth of NEO banks, especially in India. One of the pillars of the banking industry is the confidence of the public in the country’s banking system. For example, in Italy, only 37% of the population trusts the banking system of their country, and in France, a mere 27% of the population.[iii] In India, where a large portion of the population is not covered by the banking system, building trust through an online presence that does not involve cash is a herculean task. The NEO Banks, in the current legal scenario of the country, do not perform the core banking functions and offer limited products, which keeps away the High-Net-worth Individuals away from them. Another hurdle faced by them is the safety and security concerns which cannot be denied in the current scenario, where it is expected that the next world war will not be fought by arms and ammunition but will be a data war. Secured digital infrastructure, as well as awareness and assurance of customers, is a worrying fact. However, NEO Banks can easily overcome these hurdles keeping in mind the growth potential for such evolution in the banking sector. Legal Analysis Currently, in India, NEO Banks are just the FinTech companies performing some of the functions that appear to be banking functions, but as such, they cannot be called a bank. RBI does not allow for the grant of virtual banking licenses. RBI, in Master Circular on Mobile Banking Transactions, has mandated the physical presence of digital banking service providers. Since they are not recognized by the RBI and are therefore required to form a strategic partnership with the existing banks to provide services like the issue of debit/credit cards etc. They are also outsourcing their core banking functions to the license holders and provide services on their behalf. In many cases, such banks and fintech companies enter into an outsourcing arrangement where the non-banks verify data for credit requests or undertake the preliminary work for opening current accounts.[iv] This arrangement is governed by RBI Guidelines on Code of Conduct in Outsourcing of Financial Services by banks and RBI Guidelines on Financial Inclusion by Extension of Banking Services. In countries like the USA and Australia, NEO banks are recognized as banks.[v] Even Singapore and UAE have recently rolled out digital licenses to such entities.[vi]  But on the other hand, it cannot be said that the NEO Banks are working in an unregulated environment or are trying to doge the regulatory framework of various regulators, especially RBI. In one way or the other, they are regulated by the various laws, regulations, or bye-laws of the regulators, e.g., since they are in strategic partnerships with banks and NBFC, certain guidelines like Guidelines for engaging Business Correspondents under Master Circular on Branch Authorisation, Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks, Framework on Outsourcing of Payment and Settlement related activities by Payment System Operators and Master Direction on Digital Payment Security Controls. Apart from that, as NEO Banks also offer services like Investment Advisories and Insurance Products, they are also regulated by their respective regulators like SEBI Guidelines on Outsourcing of Activities by Intermediaries and IRDAI (Outsourcing of activities by Indian Insurers) Regulations. These are just some of the regulatory frameworks applicable to them, and there are various other rules applicable to them. All these regulations are applicable only through the contractual relationship between NEO Banks and their partner organisations. They are not regulated independently, which is a matter of concern. Notwithstanding the above rules, NEO banks are additionally committed to consent to information security regulations since they work with various administrations between the shopper and the financial establishments by giving an internet-based stage. The Indian information protection system is set out in the Information Technology Act 2000 and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (SPDI Rules). The laws will be more stringent with the passing of the Data Protection Bill, 2022. Role in Economy In India, it is very much evident that technological advancement has led to an increase in digital banking transactions. As per PWC, digital payments have increased many folds. In 2020, the country recorded around 50 billion digital banking transactions, and was expected to rise even more. In the span of one-year, mobile banking users have increased by 13% in value and 92% in volume.[vii] A study suggests that by 2025, around 70% of the transaction will be undertaken digitally, either over internet banking or mobile banking.[viii] This shows the tilt of the population towards the new digital banking solutions, which are more efficient and cost-friendly than the traditional banking system. As per the reports of Venture Intelligence,

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A Smooth Buy Back Ride: SEBI’s recommendations on Open Market and Tender Offer Routes for Buyback of Shares

Leave a Comment / Company Law /

[By Mahak Saxena] The author is a student of National Law Institute University, Bhopal. Introduction The Securities Exchange Board of India (SEBI) has been receiving numerous requests from market participants and stakeholders for an overhaul and review of legal provisions and rules related to the buyback of specified securities. In light of which it floated a consultation paper on a review of existing Buy-back Regulations (“Consultation Paper”) in November 2022. The aforementioned paper is a culmination of all suggestions given by the sub-group headed by Mr. Keki Mistry which includes sweeping reforms of the current provisions and also recommends statutory amendments for some issues. The reforms are directed towards eliminating the inefficiency of certain modes of buy-back, optimization of the deadlines, changes in the statutory limits on buy-back, and discouraging the possibility of manipulation in the market. This article attempts to specifically provide a summary and an analysis of the existing recommendations with respect to the Open Market and Tender Offer Route of Buy- back. Law Governing Buy-Backs in India and Need for Reforms Buy-Backs in India are governed by Section 68 of The Companies Act, 2013 (“the Act”), and the provisions of SEBI (Buyback of Securities) Regulations, 2018. As per the regulations, the methods of Buying back shares are through a Tender offer to existing shareholders, Open market mechanism through Book building process and Stock exchange Purchase of shares from odd-lot holders. If we look at the official numbers from SEBI, Tender Offer is by far the most used method. The reason is its nature of enabling more equitable opportunity for shareholders to reap the benefits of buyback.[1] The reforms are required because the current scheme has unnecessary procedural barriers in form of limits and approvals that lead to inefficient estimation of the price of securities, delay in the overall process, disproportionate loss to the shareholders and reduces the actual benefit that might have accrued to the shareholders from the Buyback. Glide Path for Open Market Buybacks When shares under the Open Market route are brought at the current market price, there is hardly any surety that the shareholders would be able to claim the benefits, therefore, SEBI is proposing to establish a separate window for buyback of shares. Reduction in maximum limit and closure period The main need for reducing the limit stems from the fact that while using the route of stock exchange, there is a probability that one shareholder’s entire trade will get matched with the purchase order of a company, preventing other shareholders from benefitting from the buyback which goes against the fundamental idea of fair and equitable treatment. Currently, as per Regulation 4, the Buybacks through the Open Market route are only permitted if it is less than 15% of the paid up capital and free reserves of the Company. SEBI aims to reduce this limit in a phased manner to 10% and 5% in the next two years and then aims to completely remove the Open Markets route from 2025. The aforementioned 15% limit is also proposed to be applied only to open market buybacks and not to the Book Building Route. However, the open market route should not be completely phased out as it provides more flexibility for selling a higher quantum of shares over a longer period of time due to which the companies as well as investors find it easier to execute. Though the proposal for reducing the current time period of 6 months between the opening and closing of Buyback offer is rational as it addresses the concerns of artificial demand and exaggerated prices of shares and will lead to effective discovery of price. Contradiction in proposals: Utilization of Amount and Restrictions on Volume and price. On one hand, SEBI proposes that the company should achieve the minimum buyback threshold (75% of the buyback size) within a fixed time period; but at the same time, it places restrictions on the volume, price and time (No share purchases to be made in the first and last 30 minutes of the regular trading hours) at which it can buy from the market. Hence, these proposals should be revaluated. Through Tender Offer Route Permission to Revise Offer Price and Removal of SEBI Review Process: A welcome Change Since there is a considerable time gap between the approval of Buy back and the actual opening of the offer, it is a justifiable suggestion that revision be allowed. However, an increase in buyback price will lead to a decrease in the number of securities, which negatively impacts the shareholders. Hence, along with price, the companies should be permitted to increase the aggregate buyback size as well. Presently, Regulation 8 requires a draft letter of offer to be submitted to the SEBI for review. A window is provided to the SEBI to submit its comments which are later incorporated. However, in order to reduce the time and ease the procedure, the SEBI review process is proposed to be removed, though the merchant bankers will be mandatorily required to certify compliance with the regulations in the Letter and to the SEBI before the offers open. Another reasonable proposal is the specification of a time limit of 2 days within which the escrow account has to be opened after the public announcement. Other Major Recommendations Presently, the regulations allow only one Buyback in a 12-month period,[2] however, the sub group recommends reducing the cooling off period to six months for the tender offer route. This is a welcome move as the companies may need to give out surplus cash to the shareholders more than once in a year. However, it is to be noted that such exemptions have been proposed only for companies which are net debt free.[3]The phrase Net Debt Free essentially refers to a company with cash reserves and cash balances that, according to its accounts, as audited by a statutory auditor, exceed its borrowings and contingent liabilities. The reserves here include bank deposits, government securities, units of mutual funds investing in gilt funds.

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Fly-by-Night Companies in Light of Companies (Incorporation) Third Amendment Rule, 2022.

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[By Arham Anwar & Akshay Tiwari] The authors are students of National Law University, Jodhpur. Introduction To fly by night is to pack up whatever you can from the dubious business that you have been carrying and leave under the cover of darkness. So people who have been observing you running your business one day see an empty address with no sign of the business the very next day, leaving behind panicked investors who have no clue about what is happening with the money they had invested into the company. The term fly-by-night is not specifically defined anywhere in the Companies Act per se but according to the Cambridge Dictionary’s definition a fly by night business is “not able to be trusted and likely to stop operating without any notice”. A fly by Night Company is essentially an unreliable or unscrupulous company which is generally short lived, and once it has raised a minimum amount of money through the market it flies away defrauding its investors. The common modus operandi that these types of companies follow to raise funds is to issue IPOs in the primary market and wait for investors. Once they reach the point where a sufficient level of funding has been extracted according to the level and scale of the operations being run, they pack up in the night leaving behind no trace, and thus it becomes difficult for the regulatory authorities to trace back these entities or held them responsible for their acts. According to the definition provided in the MCA website a company is categorised as a vanishing or fly-by-night company the following scenarios. A company fails to file returns with the Registrar of Companies (ROC) for two years. A listed company fails to file returns with the stock exchange for two years. The company doesn’t maintain its registered office at the address mentioned with the RoC. The company’s directors cannot be traced. There has been a surge in the number of these kinds of entities in recent times and the list keeps on increasing, aggravating the agony of the small investors who came in with the motive of earning returns on their investment but are now seen running from pillar to post to get justice and make these fraudulent companies liable. In light of their plight, there have been a growing number of efforts taken by the regulatory authorities in the last few years to curb this menace. In the series of various legislative and policy reforms, there has been this recent amendment of the Companies(Incorporation) Third Amendment Rules, 2022 (Henceforth “2022 Rules”).  Efforts being taken There has been a series of continuous efforts that has been taken in order to solve the problem of fly by night companies right from the beginning. In order to promote and raise the standards of good corporate governance, SEBI established a committee in 1999 Shri Kumar Mangalam Birla, a member of the SEBI Board, served as the committee’s chair. The committee’s main goals were to view corporate governance from the perspective of investors and shareholders and to create a “Code” that would suit the Indian corporate environment In the year 2006 following measures were added to the then Companies Act 1956 by Ministry of Corporate Affairs to check the incident of Vanishing companies: Sections 266A to 266G were added making it mandatory for every existing or prospective director to obtain a “Director Identification Number” so that traceability of the directors is ensured. Sections 153 to 159 of the 2013 Act contain the provisions relating to the Director Identification Number. In case of incorporation of a new company or change of address of an existing company, Ministry has made it mandatory for the professionals verifying its details to personally visit the premises and certify that the premises are indeed at the disposal of the company. Further, in such cases, proof of registered address has also been made mandatory to be furnished at the time of incorporation or change of registered address. Instructions have also been issued to the Registrars of Companies to scrutinise the Balance Sheets and other records of the Companies which raise money through public issue so as to monitor the utilisation of such frauds. Increasing instances of vanishing companies has also led to the formation of Serious Fraud investigation Office (SFIO) which was granted statutory status by the Companies Act 2013. There was a need felt for an organisation which would focus entirely on solving such complex white collar crimes. It is against this backdrop that the Government decided to set up the SFIO. Registered Office Every company is required to keep a registered office that can receive and acknowledge any government notices pursuant to Section 12 of the Companies Act 2013. During a company’s incorporation, the directors of this entity must specify their registered office in their Memorandum of Association and keep certain records there. The location of the registered office becomes significant as the Registrar of Companies to which the applicant must apply for company registration will be determined by the state in which the company’s registered office is located. Any change to the company’s address or location of the registered office must be reported to the RoC within a certain time frame. The Companies Act has been amended vide the Companies (Amendment) Act, 2019 to provide a procedure for physical checks. A Registrar of Companies (ROC ) has the authority to physically inspect a company’s registered office in accordance with Section 12 (9) of the Companies Act if they have sufficient reason to suspect that the company in question is not conducting business for which it was incorporated To further enhance the Companies (Incorporation) Rules of 2014, the Ministry of Corporate Affairs (MCA) has published the 2022 Rules on August 18, 2022. With this modification, the MCA has established a new Rule 25B which pertains to the physical verification of the company’s registered office, i.e., the primary office of the firm, to which all correspondence pertaining to it will be sent by governmental agencies. This new rule will help in curbing the problem as now it will be difficult for these dubious firms to go untraceable as

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Safeguarding Public Shareholders under CIRP: SEBI’s Astigmatic Answer to a Long-Awaited Prayer

Leave a Comment / Capital Markets and Securities Law, Insolvency Law /

[By Shaurya Singh] The author is a student of Jindal Global Law School. Public equity shareholders usually have the least expectations from insolvency proceedings of a listed company, as fundamentally they are not positioned as the creditors- who are primarily protected under the Indian Bankruptcy Code, 2016 (“IBC”). To protect such non-promoter public shareholders, the Securities and Exchange Board of India (“SEBI”) recently floated a consultation paper which proposed reforms for the listed companies undergoing Corporate Insolvency Resolution Process (“CIRP”). SEBI’s suggested mends aim to provide protection to minority investors while maintaining the efficiency of the CIRP. However, it seems like a ‘pareto’ case whereby one cannot be made better off without making the other worse off. This piece summarizes the proposed framework and its impact on the rights of such public equity shareholders, while also extending to determine the practicality of these reforms. SEBI’s Framework for Protection of Public Equity Shareholders SEBI had come across several grievances regarding the companies which were delisted pursuant to the approval of the resolution plan. The major concerns were regarding the valuation of the corporate debtor and suppression of smaller stakeholders who are not renumerated fairly against their shareholding. Also, public shareholders are neither intimated nor provided with the opportunity to present their case before the Committee of Creditors (“CoC”) prior to the delisting approved by the resolution plan which brings the valuation of the company to naught overnight. Similar grievances were raised in front of the Supreme Court and the NCLT in the cases of Jaypee Kensington Boulevard Apartments Welfare Association. v. NBCC and Keshav Agrawal vs Abhijit Guhathakurta by the minority shareholders but the Court’s stance added salt to their wounds as it was held that “the grievances as suggested by these shareholders cannot be recognised as legal grievances; and do not provide them any cause of action to maintain their objections” because the IBC only entitles the CoC to structure and approve the resolution plan, not the shareholders. According to section 53 of the IBC, in the event of a liquidation, shareholders would come last in the order of priority. Therefore, even a nominal exit price for minority shareholders cannot be deemed unfair or inequitable when the promoter’s shareholding is extinguished in its entirety without any consideration. Additionally, the court stated that the ‘commercial wisdom’ of CoC and is not amenable to judicial review. Also, it was held that all stakeholders must adhere to the authorised resolution plan under section 238 of the IBC. Supreme Court’s take on the matter had put the minority shareholders in an impuissant position. Therefore, to safeguard the public equity shareholders, SEBI has broadly proposed the following measures: Providing the existing public equity shareholders of the corporate debtor an option to purchase a minimum of 5% and to the extent of up to the minimum public shareholding percentage (25%) of the new entity one the same price as agreed by the resolution applicant. The category of public equity shareholders would exclude: Promoter and Promoter Group Shares held by associate companies and subsidiaries Family members of Promoter and Promoter group not covered under definition of promoter group Trusts managed by Promoter and Promoter group Directors and Director’s Relatives KMPs of the Company Public shareholder representing (nominating) member (i.e. Director) on Board The offer will be based on the percentage of shares that the new acquirer will get as a result of the resolution plan at the same price which is being offered to the resolution applicant. Shares provided to the resolution applicant in the new entity of the corporate debtor at the same price shall also be offered in the public offering. Minimum 5% public shareholding in the fully diluted capital structure of the new entity is required for it to stay listed. In the cases where the above-mentioned minimum shareholding is not achieved then before moving further with CIRP, the firm must delist in accordance with the cancellation of the offer made to the current public equity shareholders and must return the consideration obtained from them through the said offer. Exemptions from the SEBI (Delisting of Equity Shares) Regulations, 2021 shall only be granted in the cases where: the corporate debtor has to undergo liquidation pursuant to CIRP the shareholding of public equity shareholders remains less than 5% of the fully diluted capital structure of the new entity after having exercised the option provided to them to acquire the shares of the new entity up to the MPS percentage, on the same pricing terms as is applicable to the resolution applicant. Secured Rights of the Shareholders: A Hinderance To CIRP? SEBI had twin objectives while structuring these measures: Protection of minority shareholders Maintaining the speed and efficiency of the CIRP process. The proposed framework aims to assist the shareholders largely by providing the minority stakeholders an opportunity to be a part of the resolution process on the same pricing terms as the resolution applicant. This would allow them to be proportionate shareholders post restructuring at a rather fair value, enabling them to have a standing in the new entity. Therefore, from the lens of investor protection SEBI seems to have achieved its motive, to a considerable extent. However, even fundamentally strong companies are often seen struggling to meet the MPS requirements. Therefore, mandating it in companies pursuing CIRP might not give the desirable outcome which is intended by the securities regulator. Additionally, the central government has been keen on exempting the MPS requirements for Public Sector Undertakings (PSUs). PSUs can also go through CIRP as held in Harsh Pinge v. Hindustan Antibiotics Limited if they can be identified as ‘corporate person’ under S.3(7) of IBC. Hence, PSUs can technically circumvent this framework leaving their minority shareholders vulnerable. SEBI has very little jurisdiction over CIRP proceedings and in an attempt to make the most from it, it might have sent more turbulence in the current restructuring regime. SEBI in the merits of the proposed reform has stated that such offers to public shareholder would reduce

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