Author name: CBCL

Newly Regulated Digital Platforms and Self-regulation: Exploring the Mechanism’s Feasibility

Competition Law /

[By Vanshika Agarwal] The author is a student of the West Bengal University of Juridical Sciences.   Abstract The burgeoning growth of the gaming industry has necessitated its need for regulation. The Central Government by proposing amendments to the already contentious IT Rules, 2021, has sought to bring online gaming platforms within its ambit of regulation through a template for self-regulation. Self-regulation of industries are steps taken to supplement the rules and regulations provided by government that oversee their activities. Self-regulation of any industry can pose various challenges relating to accountability, fair competition, market integrity and privacy which may render such schemes unfeasible. The paper analyses the ambiguities and complexities in the proposed amendment for the self-regulation of gaming platforms. It examines the regulatory-proportionality theories to demonstrate the issues associated with the powers and discretion provided to self-regulatory bodies in classification of online games and online gaming intermediaries. Finally, the paper shows that by an application of these regulatory theories, the present mechanism for self-regulation is not feasible. I.          Introduction The Ministry of Electronics and Information Technology [‘MeitY’] introduced further amendments to the IT Rules, 2021 on 2nd January, 2023,[1] post its appointment as the nodal ministry for online gaming.[2] These draft amendments introduce provisions for the regulation of online gaming platforms by expanding the purview of Part II of the IT Rules, 2021.[3] These rules provide for the establishment of self-regulatory bodies (‘SRB’), which would be responsible for registering and approving games as well as providing a grievance redressal mechanism.[4] The proposed laws mandate, among other things, that gaming companies adhere to SRBs,[5] only publish games recognised by such bodies, adhere to know-your-customer (KYC) standards,[6] establish a grievance resolution system,[7] and define online gaming platforms as intermediaries.[8] The ambiguities and wide discretionary powers afforded to SRBs under this regulation must be assessed to determine the feasibility of the proposed mechanism. Part II of the paper explores the shortcomings in the proposed regulation for online gaming, specifically in relation to self-regulatory bodies. It discusses how the membership of the SRBs as envisioned in the regulation can lead to regulatory capture, allowing for competitive distortions by larger gaming firms. Part III examines the ambiguity surrounding the classification of online games by SRBs. By briefly explaining the theories of regulatory-proportionality to assess fintech regulations, the paper analyses how this ambiguity is not in conformity with regulatory principles and its potential effects on innovation and growth. Part IV concludes the discussion on this topic by holding the present self-regulation mechanism to be not feasible. II.          The risk of regulatory capture There are several concerns with the proposed mechanism relating to definitional ambiguity for ‘online game,’ the role of SRBs and the excessive powers conferred to the government for the governing of online gaming platforms.[9] In this section, the risk of regulatory capture is explored in light of the roles of the SRBs. According to the guidelines, membership in multiple SRBs is possible for online gaming intermediaries.[10] SRBs must ensure due diligence,[11] in addition to making sure that the game does not prejudice national security and public order.[12] These wide reasons of public order can be interpreted differently by each SRB.  Liberal or biased interpretation can result from conflict in interest which would be detriment to the consumers. It affords online gaming intermediaries the opportunity to forum-shop for an SRB that interprets these provisions in a manner favourable to their interests, or to construct a separate SRB in a race to the bottom.[13] Evidently, this would be deleterious, by permitting discriminatory conduct and enlarging the scope for regulatory arbitrage.[14] When a self-regulatory body is “closely” connected with the business that it oversees there exists a risk of regulatory capture.[15] Regulatory capture is the consequence or process whereby regulation, in statute or application, is steered continuously or repeatedly away from the public interest and towards the interest of the regulated industry, by the intent and activity of the industry itself.[16] Dominance by industry specialists and insiders can result in regulatory capture by well-organized groups with specialised but powerful interests.[17] SRBs with diverse stakeholders, as is likely in the gaming industry, have an even higher probability of regulatory capture. This is because the differential size and influence of gaming firms can concomitantly affect their influence in the SRB, precluding the SRB’s ability to be unbiased.[18] Due to the regulatory bodies being highly specialized and compartmentalized there can be absence of transparency in the rules followed.[19] The online gaming platform is a nascent market whereby having online gaming intermediaries approach membership in SRBs can potentially harm the common standards of the industry. As the governing body of the SRBs are constituted by comprising of individuals that are specialists,[20] lack of transparency as to their decisions poses a high risk of regulatory capture. Further, as the online gaming intermediaries themselves can become part of these SRBs, there is an extreme “close” connection. Online gaming intermediaries that are dominant can submit to SRBs whose interpretations are beneficial to them,[21] leading to questionable abilities of such bodies to ensure equal treatment for all intermediaries. SRBs have charged exponentially large registration fees offering large corporations an unfair competitive edge because startups and small businesses cannot pay such exorbitant costs.[22] Furthermore, the decision of the SRB in case of a grievance redressal is final and there is no appellate body to safeguard game publishers if SRB chooses not to register a game.[23] Without measures for transparency,[24] to show the reasons for the assessment of online gaming intermediaries for membership, not only conflict but regulatory capture can also exist. III.          AMBIGUITY IN DEFINING ‘ONLINE GAME’ Under the proposed amendments, SRBs can register an online game following conformity to certain rules which includes ensuring that an online game complies with Indian laws, including state laws on betting and gambling.[25] This can be seen as a step towards getting SRBs to certify whether the online game is one of skill or chance and what constitutes as an ‘online game. [26] In this part, the

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Resilience and Regulation: How India’s Banking System Thrives Amidst Crisis

Banking Law /

[By Shobhit Shukla] The author is a student of Maharashtra National Law University, Mumbai.   In an effort to stop more damage in the banking industry, US regulators on May 1, 2023 seized struggling First Republic Bank and immediately sold all of its deposits and the majority of its assets to the nation’s largest bank, JPMorgan Chase. In the past few months, this is just another example of a bank collapsing post-COVID-19, adding it to the long list of major banks around the world such as Credit Suisse, Silicon Valley Bank, and Signature Bank. India however has remained a shelter during this global financial crisis. This is not unprecedented however, a similar outcome was also seen in 2008 where India with its domestic institutions, supported by good regulatory policies, displayed resilience uncanny to any other jurisdiction. This is remarkable because in the banking sector, unlike other industries, perception affects a majority of the business. As is the case in the current crisis, customers may run on the bank and cause liquidity problems, if they think the banks are about to declare bankruptcy. This perception by the customers has been at the core of the issue regarding the recent collapse of the banking sector around the world, therefore analysing the country’s banking system, with recent regulations to contain this becomes imperative. With reference to this, the article will examine recent measures that the regulator has implemented to lessen perception-based banking in India. In the age of startups and digitization, it will also examine how secure Indian banks have historically performed, particularly in response to some specific policy and judiciary measures. The article analyses the extent to which the government and the regulator have been involved with keeping the sector in check. Lastly, the article will analyse various case laws and their effect on the sector in India, and while also appreciating the regulator for its notable achievements, the article will conclude with some recommendations for what lies ahead. Introduction The Indian banking system has shown remarkable resilience in the face of various crises, such as the 2008 global financial crisis, and the recent post-COVID-19 pandemic banking crisis around the world. This resilience is attributable to a range of factors, including strong regulatory oversight, sound risk management practices, and a conservative approach to lending.  In recent years, the Reserve Bank of India (“RBI”), government, and judiciary have taken several steps to address issues related to the resilience of the Indian banking system. The RBI has issued several circulars and master directions aimed at strengthening the banking system and improving its resilience. For instance, in February 2021, the RBI issued a circular on the ‘Resolution Framework 2.0 for COVID-19 Related Stress’, which aimed to provide relief to borrowers affected by the pandemic and prevent the build-up of Non-Performing Assets (“NPAs”) in the banking system. The RBI has also taken measures to improve the governance and accountability of banks. In August 2020, the RBI issued a ‘Governance in Commercial Banks’ circular, which outlined the roles and responsibilities of board members and senior management in ensuring effective governance and risk management in banks. In addition, the government has taken steps to strengthen the banking system through legislative reforms. In September 2020, the government passed the Banking Regulation (Amendment) Act, 2020, which aimed to improve the regulation and supervision of cooperative banks in India. Lastly, even the judiciary has also played a role in curbing issues related to the resilience of the banking system. Overall, these efforts are aimed at ensuring that the banking system remains stable and resilient, even during times of economic stress and uncertainty. Policy-Based Measures Capital Adequacy One of the key measures of a bank’s resilience is its capital adequacy. Capital adequacy refers to the ability of a bank to absorb losses and continue to operate. In India, the RBI has set minimum capital adequacy norms for banks, which are in line with the Basel III framework. The minimum capital adequacy ratio (CAR) for banks is set at 9%, with a minimum Tier I capital ratio of 6%. The RBI’s guidelines on capital adequacy require banks to maintain capital levels that are commensurate with the risks they undertake. The guidelines require banks to assess their capital needs based on their risk profile and to maintain a buffer above the minimum regulatory requirement. Banks are also required to maintain capital conservation buffers, which are designed to ensure that banks have adequate capital during periods of stress. Risk Management Sound risk management practices are critical for ensuring the resilience of banks. In India, the RBI has put in place a range of guidelines and regulations to ensure that banks adopt sound risk management practices. The RBI’s guidelines on risk management cover various aspects, including credit risk, market risk, operational risk, and liquidity risk. The guidelines require banks to conduct regular stress tests to assess the impact of adverse economic scenarios on their portfolios. The RBI’s guidelines on market risk management require banks to adopt appropriate risk management policies and practices to manage their exposure to market risk. The guidelines require banks to conduct regular stress tests to assess the impact of adverse market scenarios on their portfolios. Liquidity Risk Liquidity risk refers to the risk of not being able to meet obligations as they fall due. In India, the RBI has put in place regulations to ensure that banks have adequate liquidity buffers to manage their liquidity risk. The RBI’s guidelines on liquidity risk management require banks to maintain a liquidity coverage ratio (LCR) of at least 100%. The LCR is designed to ensure that banks have sufficient high-quality liquid assets to meet their obligations during a 30-day stress scenario. Judiciary’s Perspective The Banking Regulation Act, 1949 (“the Act”), is the primary legislation governing the banking system in India. The Act provides for the regulation and supervision of banking companies in India and is designed to ensure the stability and soundness of the banking system. The Act also provides for the regulation of the business of

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India’s Bank Licensing Flaws: Assessing The ‘Fit and Proper’ Criteria

Banking Law /

[By Naman Kothari] The author is a student of Government Law College, Mumbai.   Introduction This assessment delves into the flaws surrounding the issuance of bank licenses in India, with a focus on two crucial aspects. Firstly, it examines the shortcomings of the ‘fit and proper’ criteria, which lack precise guidelines and introduce subjectivity, potentially leading to favoritism and arbitrary decision-making. Secondly, it scrutinizes the refusal of licenses by the Reserve Bank of India (RBI) and the existing redressal mechanism. Specifically, it explores the need for transparency and fairness in the licensing process under the guidelines for ‘on tap’ licensing of universal and small finance banks in the private sector. The “Fit and Proper” Criteria: The “fit and proper” criteria entail various requirements, such as the eligible promoters (both individuals and entities/non-banking financial companies) having a minimum of 10 years of experience in banking and finance at a senior level. Additionally, they should possess a track record of sound credentials, integrity, financial soundness, and a successful professional history of at least 10 years. For entities, preference is given to those with a diversified portfolio in the case of Universal Banks. Furthermore, for Small Finance Banks, applicants must exhibit a record of sound credentials, integrity, financial soundness, and a successful track record of professional experience or running their businesses for a minimum period of five years. However, it is noteworthy that these criteria remain highly ambiguous, leaving significant room for subjective discretion by the RBI. The lack of precise guidelines in these areas introduces a potential for arbitrariness and invites allegations of favoritism. Despite revisions to the previous guidelines, this aspect has not been effectively addressed, perpetuating the concerns surrounding the subjective nature of the “fit and proper” criteria. To effectively assess whether a promoter meets the criteria of being “fit and proper” under the aforementioned guidelines, the RBI exercises its authority to conduct a comprehensive multi-layer scrutiny process. This includes the ability to request additional information from the promoter at any stage of the examination process, ensuring a thorough evaluation. Furthermore, the RBI has the power to collaborate with other regulatory bodies, as well as enforcement and investigative agencies such as the Income Tax Department, Enforcement Directorate, and the Central Bureau of Investigation (CBI), to review the promoter’s history and obtain relevant information. This level of scrutiny provides the RBI with a detailed understanding of the promoter’s background and financial standing. Though this level of discretion also allows a window for potential corruption or undue influence, where applicants may seek to manipulate or circumvent the scrutiny through illicit means. The subjective nature of assessing a promoter’s history, credentials, and financial standing introduces an additional challenge, as it allows for varying interpretations in the decision-making process. This subjectivity opens the door to apprehensions of bias, favoritism, or arbitrary decision-making, thereby eroding stakeholder and public confidence in the integrity of the licensing process. Refusal of License by RBI and Redressal Mechanism: Vide its press release dated April 15, August 30, and December 31 2021 the RBI announced names of Applicants under the Guidelines for ‘on tap’ Licensing of Universal Banks and Small Finance Banks in the Private Sector. A) The applicants under Guidelines for ‘on tap’ Licensing of Universal Banks: UAE Exchange and Financial Services Limited. The Repatriates Cooperative Finance and Development Bank Limited (REPCO Bank). Chaitanya India Fin Credit Private Limited. Shri Pankaj Vaish and others. B) The applicants under Guidelines for ‘on tap’ Licensing of Small Finance Banks: VSoft Technologies Private Limited. Calicut City Service Co-operative Bank Limited. Shri Akhil Kumar Gupta. Dvara Kshetriya Gramin Financial Services Private Limited. Cosmea Financial Holdings Private Limited. Tally Solutions Private Limited. West End Housing Finance Limited. On May 17, 2022, the RBI issued its decision regarding the 6 applications out of the 11 names provided earlier. The RBI declared that all applications submitted for the establishment of universal banks, specifically VSoft Technologies Private Limited, and Calicut City Service Co-operative Bank Limited under the category of Small Finance Banks, have been rejected. However, the applications of the remaining candidates are still under examination by the RBI. It is noteworthy that the RBI did not provide any specific reasons other than deeming the rejected entities unsuitable to receive a banking license. According to the guidelines set forth in 2016 and 2019, the RBI has the authority to reject applications if they fail to meet the “fit and proper” criteria and is not obligated to provide any reason for rejection. The applicants are also required to submit their business plans along with applications, which should be realistic and viable. The RBI holds the authority to assess the business plan and may impose penalties or restrictions if there is a deviation from the stated plan even after the issuance of a license. The business plan should address key aspects such as achieving financial inclusion, including the underlying assumptions, existing infrastructure, product lines, target clientele, target locations, utilization of technology, risk management, human resources, branch network, presence in unbanked rural areas, compliance with priority sector requirements, and financial projections for a period of five years. It is evident that, alongside the “fit and proper” criteria, the submission of a meticulously detailed business plan plays a pivotal role. It should be noted that any deviations or provision of incorrect information/objectives in the business plan may serve as grounds for rejection. The process for obtaining a banking license under the 2016 and 2019 guidelines is the same and it involves several stages. Initially, the applications are screened based on eligibility criteria provided in the guidelines, with the possibility of applying additional criteria beyond the prescribed “fit and proper” requirements. Subsequently, the RBI establishes a Standing External Advisory Committee (SEAC), comprising experienced individuals from the banking, financial sector, and relevant fields. The SEAC develops its screening procedures, periodically convenes meetings, and has the authority to request more information, hold discussions, and seek clarifications from applicants. The SEAC then presents its recommendations to the RBI for consideration. Further in the process,

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Relevant Market Access Denial: Challenges in Data-Driven Competition

Competition Law /

[By Tanya Maheshwari ] The author is a student of University School of Law and Legal Studies, GGSIPU.   Introduction The digital industry has outgrown itself tremendously worldwide, which has led to the expansion of the business sector due to its ease and availability. It’s rightly said that every boon comes with a bane. In this case, as the digitalization of the business sector grew, so did the frets about how the dominant companies or big players might use the user data they possess to increase their dominance and manipulate them by allowing millions of people and companies to engage and deal with one another on daily basis. Concealed practices such as horizontal cartel agreements, anti-competitive agreements, data privacy breaches, and abuse of market dominance are promoting the “winner gets it all” philosophy. These concerns are also shared by countries like United States and European Union. President of Bundeskartellant, Andreas Mundt, also said that consumers are not misled about it, still Facebook showed its dominance worldwide after gathering user data and abused the market power. On the contrary, Facebook’s conduct of misleading the user data to have a control on market dominance was fined by the US federal trade commission of USD 5 Billion. Concerns over privacy arise when companies use user data for their own purposes. This results in the denial of new players’ access to the market and the monopolization of existing dominant players, as the latter make the most of the user data they have acquired. It’s time for an emphasis on how existing players and consumers are impacted by the accumulating consumer data, privacy concerns, market power in the event of dominance, and user data. The firms block access to the “relevant market” for new players by accumulating a tonne of valuable user data with the help of AI or in exchange for permissions in order to establish market power and leverage their market dominance. What is a relevant market? While examining the effects on company and monopolistic data dominance, it is crucial to pinpoint the market in question. The denial of relevant market access to existing and new players is a critical concern that can hinder fair market competition and stifle innovation. The facts and circumstances of the case, however, determine the relevant market. The nature of the product, the target market, and the market dynamics all vary and go beyond purely physical barriers. The concept of a “relevant market” in competition law refers to a market that offers a specific good or service with available alternatives. Defining the relevant market has a significant impact on competition scope and the market power of companies. Determining the relevant market involves considering the relevant product/services, geographical market, and mode of distribution, as illustrated in the Ashish Ahuja and Snapdeal case. The lack of synergy between companies and the presence of overlapping products or services have a significant impact on the relevant market, affecting both new entrants and established players. For instance, in the Intel Corporation case, CCI rejected section 4 claims based on Intel’s distribution agreements because the distributors were not restricted from dealing with competitors’ products, and they were even found dealing in competing products. Hence, there was no foreclosure of the market for Intel’s competitors. Regulatory authorities employ tests like SSNIP (Small but Significant Non-transitory Increase in Price) and HM (Hypothetical Monopolist) to determine the relevant market. However, these tests face challenges in digital markets and zero-pricing strategies. SSNIP struggles with its pricing-centric approach and the complexities of multi-sided platforms, making it an inadequate tool for market determination. The SSNDQ (Small but Significant Non-transitory Decrease in Quality) test serves as an alternative, but no definitive method exists due to the limitations of each approach. By denying new entrants’ access to user data, competition is hindered, making it difficult for them to enter the market. Consequently, denying relevant data access for existing and new players paves the way for market dominance, which can be exploited to abuse market power. Defining the relevant market is crucial in terms of data access and sharing, as it directly influences competition levels and the potential for new competitors to enter the market through agreements. Impact of Horizontal cartel and anti- competitive agreements on market access denial Data exchanges between companies could lead to anticompetitive agreements that leads to anti-competitive practices and pave the way for market dominance through data manipulation. The CCI has consistently taken a strong stance against such practices, imposing heavy penalties on companies found guilty of engaging in anti-competitive behavior and is banned under the act. As in the FHRAI vs. MMT case, MMT-Go utilized predatory pricing tactics, entering into concealed commercial agreements to favor OYO while denying market access to FabHotels and Treebo. This resulted in entry barriers for other industry players, limiting their market reach. Similar practices were observed in the case of HUL and Kingfisher Airlines, where market dominance and denial of market access were facilitated through agreements. Likewise, TISCO’s actions in the flat steel products market were found to deny market access. Such agreements enable data exchange, providing a competitive advantage and market dominance. Incumbents who have established dominance in multiple markets and utilize economies of scope through tie-up agreements pose significant barriers for new entrants in the digital market. In the case of Excel crop care, the involved parties engaged in an anti-competitive agreement to determine prices for their goods, thus violating section 3 of the act. A similar verdict was reached in the All India Flat Tape Manufacturers Association case, where the association participated in a horizontal cartel to fix prices, divide markets, and restrict production, leading to the determination of anti-competitive conduct. Also, it’s not necessary that actual agreements have to be in place, rather circumstantial evidence can be used to support the same argument, as was in the case of Builders associations of India. The denial of relevant market access through tie-up agreements and horizontal cartels can have far-reaching consequences for market competition and the accumulation of consumer data.

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Analyzing the Green Deposit Framework in India

Banking Law /

[By Mahim Raval] The author is as student of Gujarat National Law University.   Introduction Recently, on 11 April, 2023 Reserve Bank of India (RBI) issued guidelines for Green Deposit framework for Scheduled Commercial Banks (SCBs), Non-Banking Financial Companies (NBFCs), & Housing Finance Companies (HFCs) excluding Regional Rural Banks (RRBs), Local Area Banks (LABs), and Payments Banks, which have now become effective from 1st June, 2023 onwards. This comes in the backdrop of RBI’s joining the Central Banks and Supervisors Network for Greening the Financial System (NGFS) in April, 2021. NGFS is a consortium of central banks of various countries which aims to green the financial ecosystem and sharing their experience and best trade-practices. It is in line with the release of discussion paper titled, ‘Climate Risk & Sustainable Finance’ by RBI in July, 2022 and also the speech of the deputy governor wherein he emphasized upon the role of banking institutions towards national environmental commitments. Green deposits are mainly interest-bearing deposits which aims to fund green ventures and activities. This helps to channel the depositor’s funds towards green initiatives which are still in nascent developmental stage and needs external funding to survive. However, for successful implementation of such initiative in Indian Financial system which needs necessary regulatory guidelines as well as an formal green taxonomy to address the concerns and apprehensions. This move can be seen as a pioneering one to making provisions for voluntary disclosures and third-party inspections for safeguarding depositor’s interests. Green deposits are no different than regular deposits, however the primary aim of ‘green’ deposit is to fund green projects and entice individuals and corporates to venture into green projects and activities. Before this framework, the green deposits were already in existence and offered by companies like HDFC Green & Sustainable Deposits and Federal bank. The eligibility criteria to classify a particular activity or project as a green one is listed out in the framework under different heads. This will be applicable on the ‘regulated entities’, and they will have to disclose their deposits and money raised in a particular financial year annually. In this article, the author will discuss upon the existing green deposits (GD Framework), greenwashing and other concerns, and potential solution for effective implementation of it in India. Framework Financing Aspects Various eligible activities and project enumerated in Para 7 can be financed with help of funds raised through such green deposits. RBI mentions that allocation of funds shall be done on the basis of introduction of formal green taxonomy however, since it is not yet functioning, it should be utilized for reduction of carbon emissions, incorporating energy efficiency in resource utilization as well as promoting preservation of natural ecosystem and biodiversity. To ensure that funds are utilized for these activities only, allocation & distribution of funds shall be approved by Board of directors of the regulated entity (RE) only. Supervision RBI has mandated that there should be a supervisory as well as advisory role of the board of directors of the RE. Every RE shall submit a comprehensive report about the implementation to its board of director in the initial 3 months of the new financial year. The board of directors shall be held responsible for overseeing the overall apprehended risks and controls, and it shall appoint the requisite experts to ensure that financial risks posed by climate change & degradation can be mitigated. Senior management and key managerial personnel shall also be updated about national & international policy initiatives and developments. In long term, such supervision will serve as a crucial aspect in effective implementation & enforcement of policy guidelines and it shall be also responsible for hiring the necessary workforce and training them to implement green policies. Disclosures REs shall disclose the amount & details of raised funds through green deposits while submitting their annual financial statements. The policy adopted and modified as per the need of the RE, framework related to raised funds, the report and suggestions of the third-party auditor as well as impact assessment report shall be disclosed and uploaded on the website of RE. The objective of such disclosure is to keep the depositors informed about the allocation of funds and investments in green initiatives done by the RE. This disclosure will help to keep a check on greenwashing and other concerns. Although, it seems that third-party auditing and reporting will help to provide authenticity and legitimacy of channeling of funds. However, it is not a complete solution and apprehensions related to integrity and accountability of such independent auditors are raised. Further, it could lead to a false sense of complacency. There is no regulation exists as of now to monitor those aspects however, RBI as an interim measure may implement stringent auditing system for these. One potential solution can be implementation of TFCD guidelines which will help the REs to disclose information in a better way. Third Party Audits In addition to the board’s primary obligation for adhering to the GD framework, including the end-use of funds authorized for green deposits, the RBI has added an extra check by subjecting REs to an objective third-party verification/assurance, which will be performed annually. Given that effect assessment is a developing field, the RBI has taken a flexible approach, as evidenced by its prescription enabling voluntary impact assessment for the fiscal year 2023-24. However, beginning with the fiscal year 2024-25, the same will be required. Furthermore, the RBI has established specific effect metrics for each category of qualifying project, such as ‘energy savings per year’ in the case of clean transport. If REs are unable to measure the impact of their lending/investment, they must explain the causes, the problems came across, and the time-bound future plans to remedy the same. The RBI’s ‘comply and explain’, solution-oriented, flexible, and forward-thinking approach allows some flexibility to REs. However, depositors face a problem. Because their funds are ostensibly being invested in green initiatives, there will be a need to ensure alignment between the pledge and actual investment, as well as

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Notwithstanding the Non-obstante Clause: Supreme Court Extends Power to Transfer Sec.138 Cases

Banking Law /

[By Anupama Reddy Eleti] The author is a student of Gujarat National Law University.   Introduction Recently the Supreme Court in the case of Yogesh Upadhyay vs. Atlanta Limited, established the power of the court under sec.406 of CrPC to transfer cases to include cases of cheque  dishonor under sec.138 of the Negotiable Instruments Act, 1881 (hereinafter “NI Act”). The court restored this power by “notwithstanding the non-obstante clause” present in sec.142(1) of the NI act, which provides for the procedure in which cognizance of sec.138 offences must be taken, as well as the territorial jurisdiction for such offences. The judgement delved into the jurisdictional conundrum surrounding sec.138 offences by tracing the evolution of cases on the same up until The Negotiable Instruments (Amendment) Act, 2015 (hereinafter “the 2015 amendment”) and conclusively justified extension of the scope of sec.406 by analyzing the underlying object of sec.142 and of the 2015 amendment. This article seeks to analyze the consequences of this judgement upon the rights of the drawer and payee of a cheque, in light of previous judgements and reasonings of the court. Background on the jurisdictional conundrum Earlier, a lack of clarity, broadness of legislation, and contrasting position of the judiciary in different cases, created confusion and burden on courts handling claims of territorial jurisdiction. Inundated with prosecutions on this issue, the apex court in K. Bhaskaran v. Sankaran Vaidhyan Balan (hereinafter “K.Bhaskaran”), framed five actions forming the essentials of the offence and declared, “the complainant can choose any one of those courts having jurisdiction over any one of the local areas within the territorial limits of which any one of those five acts was done”. Such leniency and expansive allocation of power in the hands of the payee to establish jurisdiction in a place of his convenience caused much expected upheaval. It was not until  Dashrath Rupsingh Rathod v State of Maharashtra & Anr (hereinafter “Dashrath Rupsingh”), that the court narrowed down the scope of jurisdiction. In this landmark judgement, the court observed that an unreasonable use of the court’s ruling in K.Bhaskaran as an instrument of oppression by the payee was leading to “hardship, harassment and inconvenience to the accused persons”. An unfair manipulation of the legal system by the payee for personal collateral benefits, while hindering the accused’s exercise of his right to fair trial was highlighted. The ratio in this instance was that the jurisdiction must be limited to the location of the drawee bank. In addition, the court expanded the scope of the ruling by giving it retrospective application, thereby offering relief to all accused. However, the Dashrath Rupsingh case only held the field for one year, until a subsequent amendment came about. The Negotiable Instruments (Amendment) Act, 2015 was introduced by the legislature with retrospective effect, upholding the rights of the payee. The present position of the law clearly demarcates the jurisdiction to try such an offence, in the Court within whose jurisdiction the branch of the Bank where the cheque was delivered for collection, through the account of the payee or holder in due course, is situated. The ordinance provided a definitive resolution to this confusion. Facts of the case In the present case, Yogesh Upadhyay and his proprietary concern, M/s. Shakti Buildcon, filed transfer petitions under Section 406 Cr.P.C. seeking the transfer of two cases titled ‘Atlanta Limited Vs. M/s Shakti Buildcon & Anr.’ pending before the Civil Judges at Nagpur, Maharashtra, to be tried along with four complaint cases titled ‘Atlanta Limited Vs. Yogesh Upadhyay’ pending before the Courts at Dwarka, New Delhi. These cases involved six cheques issued by the petitioners, out of which the first cheque was honoured, but the remaining six cheques were dishonoured on the basis of ‘Stop payment’ instructions. The first two complaint cases were filed in Nagpur, Maharashtra, as the first two cheques were presented there, and the remaining four complaint cases were filed in Dwarka, New Delhi, as the remaining four cheques were presented there. The counsel representing the respondent company argued that Section 142 of the Negotiable Instruments Act, 1881 superseded Section 406 of the Criminal Procedure Code (Cr.P.C.) due to the non-obstante clause present in Section 142. Consequently, the counsel asserted that the two cases filed in Nagpur, Maharashtra could not be transferred. Judicial Reasoning and Ratio Decidendi The court’s reasoning was three-fold. Firstly, it was noted that the ‘non-obstante clause’ is not a recent addition resulting from the amendment but has been present in the original Section 142 itself. It is to be noted that the amendment inserted two new additions, Sec.142(2) and 142A which clarified the territorial jurisdiction as well as attached retrospective application to it. Secondly, the non-obstante clause is present in Sec.142(1), which provides for certain procedural requirements that need to be fulfilled for cognizance of the offense. This includes, ensuring that the complaints for Sec.138 offences are filed within one month of the cause of action, unless the complainant can provide sufficient cause for the delay, allowing the court to take cognizance of the complaint even after the prescribed period. In light of this, the reasoning of the court in the instant case is that the non-obstante clause must be understood and applied only for the purposes of the section for which it is used and therefore cannot be taken to mean an express bar on the power of the court in Sec.406. Thirdly, the court placed reliance on a previous case, (A.E. Premanand Vs. Escorts Finance Ltd. & Others), wherein the court exercised its power under Sec.406  to transfer Sec.138 petitions. Herein the court found it appropriate in the “interest of justice” to transfer all petitions to be tried in one court. Owing to the foregoing reasons, the court finetuned the understanding of the non-obstante clause to state that, “notwithstanding the non obstante clause in Section 142(1) of the Act of 1881, the power of this Court to transfer criminal cases under Section 406 Cr.P.C. remains intact in relation to offences under Section 138 of

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Expostulating SEBI’s Endeavour to incorporate Material Events into the Definition of UPSI: Addressing the Potential Pitfalls

Capital Markets and Securities Law /

[By Mainak Mukherjee] The author is a student of National Law University and Judicial Academy, Assam.   Introduction The Securities Exchange Board of India (SEBI), through its Consultation Paper dated May 18, 2023, has proposed an amendment to the definition of Unpublished Price Sensitive Information (UPSI) as outlined in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT). This proposed amendment seeks to incorporate the term “material events” following Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) within the existing definition of UPSI as provided under Regulation 2(1)(n) of the PIT Regulations. This article explores how bringing ‘material events’ under the purview of UPSI could lead to increased confusion in the market, potentially contradicting the initial goal of implementing the amendment. Understanding UPSI and ‘material event’ under SEBI Regulations Before delving into this analysis, it is pertinent to understand the definition of UPSI and Regulation 30 of LODR. SEBI has defined UPSI in the matter of Biocon Limited. The watchdog has said that a host of factors determine if a UPSI exists; these are the nature of the transaction; progress and negotiation; increasing probability of the transaction, and so on. Therefore, for each unique matter, the entire facts and circumstances of the matter must be examined without giving any undue weightage to any one aspect before arriving at a conclusion on the existence of UPSI. On the other hand, Regulation 30 of the LODR necessitates that listed companies promptly disclose all material events to the stock exchanges within 24 hours of the occurrence of such events. Material events encompass a range of significant occurrences, including acquisitions, potential investments, changes in management, and financial results. These events have the potential to impact the company’s share price significantly. Nevertheless, despite their impact, these events are not classified as UPSI but are announced through press releases. In its Consultation Paper, SEBI refers to a study conducted between January 2021 and September 2022, wherein 1,100 press releases issued by 100 listed companies were examined. The study revealed that in 227 instances, the index experienced price movements exceeding 2%. However, out of these 227 instances, only 209 press releases were not categorized as UPSI by the respective companies. Although, this demonstrates the need for SEBI to address this issue quickly; the question remains: Can UPSI under PIT and material events under LODR go hand-in-hand? Exploring the relationship between UPSI and ‘material events’ Sub-regulation 2 of Regulation 30 of LODR states that events specified under Para A of Part A of Schedule III are deemed material events, and all listed entities must disclose such events. This indicates that the LODR has a deeming fiction in play, and one must not refer to external factors to determine the necessity of disclosure. The Hon’ble Supreme Court in Smt. Sudha Rani Garg v. Sri Jagdish Kumar[1] has ruled that the usage of the word “deemed” in legislation expresses the legislative intent of creating fiction. On the other hand, the definition of UPSI outlines two main elements; firstly, the information should not be generally available, and secondly, the information, on becoming generally available, is like to affect the price of the securities materially. Interestingly, the definition further states that UPSI shall ‘ordinarily include, but not be restricted to…’ followed by certain aspects. The presence of the term “ordinarily” indicates that the list is non-exhaustive and that there could be information not covered by the list, which may be UPSI. This shows that the concept of “deemed” is absent in the definition of UPSI. The most crucial test for UPSI is whether the information will likely affect the price if it becomes generally available materially. This test is similar to the “Vendibility Test” of marketability formulated by the Supreme Court in Union of India v. Delhi Cloth and General Mills Company Limited. In this case, the apex court, while determining the existence of a market, stated that the presence of an actual market containing buyers and sellers should not be considered; instead, it should consider the aspect: whether a market exists or not. Similarly, when it comes to UPSI, the actual focus is not on the actual impact of securities’ prices but on the likelihood of such information materially affecting the price of securities upon becoming generally available. Moving on, Regulation 30(4) of LODR states the different criteria a company should consider for determining the materiality of information and events. Further, sub-clause (b) of sub-regulation 4 states that “the omission of an event or information is likely to result in a significant market reaction if the said omission came to light at a later date”. This throws light on the fact that there is a likelihood that such information will result in a market reaction if the said omission gets disclosed at a later date. Now reading the definition of UPSI and interconnecting it with Regulation 30 tells us that there could be situations where a piece of information which is deemed material under LODR can also be considered as a UPSI if it triggers materiality based on LODR Regulations 30(4)(b) – where a failure to disclose the information can create a market reaction when later revealed. Market reaction refers to interference with the market, which affects the demand, supply, and price. Therefore, a common thread exists between SEBI’s PIT Regulations and LODR Regulations, particularly the definition of UPSI and Regulation 30. Conversely, although listed in Para A, every material information under Regulation 30 is not a UPSI because the test for UPSI is one, whereas the test in LODR, particularly Regulation 30(4)(b), is three-fold. The test for UPSI is based on likelihood; that is, there must be a likelihood of information which can materially affect the price, so if this parameter is met, the information qualifies as material information as well as UPSI. To put it in simpler terms, since every UPSI will materially impact the price and likely result in a significant market reaction, it would be considered “material” under LODR. This means that every UPSI can be called material,

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IBC vis-a-vis the Hands-off Doctrine in the Moser Baer Case

Insolvency Law /

[By Ansruta Debnath and Shubham Singh] The authors are students of National Law University Odisha.   INTRODUCTION In the recent case of Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma and Ors. v. Union of India, the court has used the doctrine of hands-off to refuse to interfere with the waterfall mechanism in the Insolvency and Bankruptcy Code, 2016 (“IBC”) which it categorised as an economic legislation. This doctrine is a manifestation of the principle of separation of powers and has originated in the United States, essentially laying down that courts should not interfere in the executive’s work. BACKGROUND In the Moser Baer case, the constitutional validity of Section 327(7) of the Companies Act, 2013 was challenged because it was an overriding provision that cancelled the effects of Section 326 and 327 when kicked in. Section 326 and 327 would not apply at the time of liquidation, Section 53 of IBC would and that proposes a waterfall mechanism which proposes a different order of priority for distribution of proceeds. According to Sections 326 and 327, payments of worker’s dues, revenues, taxes and cesses due to the Union would have had priority but under Section 53, the order of priority is secured financial creditors, insecure financial creditors, government dues and finally, operational dues. In this case, workers’ dues come under operational creditors. This apparent dichotomy was challenged in this case because it was violative of Article 21 of the Indian Constitution. HANDS-OFF BY INDIAN COURTS IN LIGHT OF IBC Economic legislations are laws and regulations on various aspects of economic activity. These legislations aim to promote economic growth, protect consumer rights, ensure fair competition, regulate financial systems and maintain stability in the economy. While the Indian Judiciary is well known for its activist role when it comes to the rights of Indian citizens, a trend of non-interference has been seen in the case of so-called “economic legislations”. IBC is an economic legislation. The Moser Baer petition involved the validity of certain provisions of the Insolvency and Bankruptcy Code, 2016. The Supreme Court recognized that IBC is primarily economic legislation and that the judiciary should not unilaterally give judgements that would affect its intricacies without legislative consensus. The Court acknowledged IBC’s impact on secured creditors and financial institutions, stressing the importance of their economic stability for the general public and the national economy. It was stated that employment opportunities, economic growth, and investments depend on IBC’s provisions. Since the IBC was the result of an organic evolution of law and extensive consultation, the prescribed waterfall mechanism should not be interfered with. A key case which highlights the implementation of the hands-off doctrine vis-a-vis IBC is  Swiss Ribbons Private Limited and Anr. v. Union of India and Ors. This case yet again involved a challenge to IBC by operational creditors, alleging discrimination. The Court acknowledged that legislators consider practical and administrative factors and engage in experimentation when formulating such laws. Therefore, a rigid doctrinaire approach should be avoided. This principle, apart from IBC, has been used for economic policies as well. The Supreme Court of India, relying on multiple prior judgements have categorically stated that “it is neither the domain of courts nor the scope of judicial review to embark on whether a particular public policy is wise”. Courts have time and again advised caution when it comes to economic and fiscal regulatory matters since they are not experts in those matters. The only way the same can be struck is if they are manifestly arbitrary and contrary to any law. A FAIR PLAY BY THE JUDICIARY OR A MISSTEP? Adjudicating on legality instead of soundness or wise ness of a law or policy seems to be the appropriate job for the judiciary. However, this is quite a difficult line to tread upon. The judicial hands-off doctrine is a manifestation of the principle of judicial restraint, which needs to be exercised while treading that line. By limiting judicial intervention, the doctrine upholds the integrity of this separation and fosters a healthy balance of power. It is also observed whenever fundamental rights and principles are affected; the court has always intervened in the legislature. India, however, does not follow a strict separation of powers as in the United States. Instead, there is a “broad separation of powers”. The term “broad” implies that the organs are to not interfere in the core functions of each other but a general overlap among each other is permissible. The judiciary’s involvement in the structuration of laws primarily occurs to safeguard the Constitution, most importantly fundamental rights contained therein. It is, however, interesting to note that in all the above-mentioned cases there was one common argument i.e., a violation of a fundamental right. Yet, the judiciary chose to take a hands-off approach and not interfere. Concerning fundamental rights, the court has consistently opined that a legislation cannot be deemed manifestly arbitrary if it explicitly addresses certain provisions, even if it looks like a violation of some rights of an individual. This standpoint was evident in the case of Moser Baer, wherein the court held that the Preferential Payments provision in the Companies Act would no longer be applicable once the liquidation process of a company has been initiated, as the Insolvency and Bankruptcy Code of 2016 now governs the procedures related to liquidation. THE ULTIMATE CONUNDRUM Judiciary intervening in the functioning of legislations are aplenty. With respect to economic legislations like IBC specifically, the count is comparatively low as there have been incidents when the courts have given judgements that have led to negative consequences. A prominent case in this regard is State Tax Officer v. Rainbow Papers Limited, in which the courts categorised government dues as secured creditors if they have security thus, going against  the provisions of IBC and creating quite a quandary. Why a hands-off approach is warranted when it comes to statutes like IBC can be attributed to India being a growing economic market. The dynamic nature of economic activities makes the intent

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Age of Aquarius: SEBI’s New Age Reforms For AIFs

Capital Markets and Securities Law /

[By Riva Khan] The author is a student of Hidayatullah National Law University.   INTRODUCTION SEBI has unveiled its proposed regulatory reforms for Alternative Investment Funds (AIFs) in India through five consultation papers released on February 3, 2023. Seeking public feedback, these papers outline the next level of reforms SEBI is planning for AIFs. The proposed changes include enhanced regulatory norms that aim to improve investor protection and promote the growth of the AIF industry in India. If the proposals outlined in the consultation papers are adopted, they have the potential to trigger a significant transformation in the AIF industry, particularly in terms of improving transparency and facilitating greater transferability for investors. AN ANALYSIS OF THE SAME IS GIVEN BELOW Currently, according to Regulation 4(g) of SEBI AIF Regulations, at least one key managerial person of a Manager of the AIF must have “adequate experience” in managing pools of assets or wealth or portfolio management for a period of five years. However, it is being proposed that this requirement be substituted with the condition that the key investment team and the compliance officer of the Manager of the AIF must acquire relevant certification from an institution that has been notified by SEBI. The proposed alteration, which aims to replace the current prerequisite of possessing five years of experience with a certification requirement, is intended to ensure that the vital managerial personnel of an Alternative Investment Fund (AIF) possess the requisite knowledge and skills to efficiently handle the assets of the AIF. As per the proposed modification, the vital investment team and the compliance officer of the Alternative Investment Fund (AIF)’s manager would be mandated to obtain appropriate certification from an institution that has been notified by SEBI. This certification would indicate that the individuals have undergone training and have acquired the necessary knowledge and skills to manage the assets of the AIF. The advantage of this proposed change is that it would create a level playing field for all AIF managers. Currently, the requirement of five years of experience can act as a barrier to entry for new players in the market. However, with the certification requirement, new players can also enter the market, provided they meet the certification criteria. Additionally, the certification requirement would ensure that the key managerial personnel of an AIF have a standardized level of knowledge and skills, which would enhance the overall professionalism and credibility of the industry. However, there could be some concerns with this proposed change. For instance, some investors might prefer experienced managers over certified managers. Moreover, the certification process might not adequately capture the practical knowledge and experience required to manage an AIF’s assets effectively. At present, an Alternative Investment Fund (AIF) is required to seek the agreement of 75% of its investors (based on the value of their investments) prior to making any investments in the associates or units of AIFs managed or sponsored by its Manager, Sponsor, or their associates. However, SEBI has proposed to expand this requirement to cover the buying and selling of investments from or to associates, including schemes of AIFs managed or sponsored by the Manager, Sponsor, or their associates. In other words, the AIF must also seek the approval of 75% of its investors (by the value of their investments) for such transactions. The reform claims that the suggested changes to the AIF Regulations are consistent with the Regulations’ spirit and will enhance their scope in identifying and dealing with conflicts of interest in a more efficient manner. However, without further context or specific details, it is difficult to evaluate the extent to which these changes will achieve their intended goals. Additionally, it is crucial to assess whether the proposed amendments address the most significant conflicts of interest issues in the AIF industry and whether they are enforceable and practical to implement. Despite the registration of more than 1000 Alternative Investment Funds (AIFs) with SEBI, only a handful have adhered to the stipulated procedure established by CDSL and NSDL for the dematerialization of their units. To ensure compliance across the board, SEBI has suggested that all AIFs should be required to dematerialise their units. By April 01, 2024, it will be mandatory for all AIF schemes with a corpus of more than INR 500 crore to dematerialise their units. At present, despite the registration of more than 1000 Alternative Investment Funds (AIFs) with SEBI, only a small number have fulfilled the procedure for the dematerialization of their units as per the protocols established by CDSL and NSDL. To ensure consistency and conformity, SEBI is proposing to make the dematerialization of AIF units obligatory. Starting from April 01, 2024, it will be mandatory for all Alternative Investment Fund (AIF) schemes that have a fund size exceeding INR 500 crore to convert their units into dematerialized form. SEBI has identified potential issues with double payment and mis-selling in AIF investments made through intermediaries such as placement agents or distributors. To address these concerns, SEBI has proposed two solutions: (a) A new requirement has been put in place for Alternative Investment Funds (AIFs) to provide investors with the option of a direct plan that does not involve any distribution or placement fees. This direct plan will offer investors a higher number of units compared to other investment plans. It is required that all investors, irrespective of their investment mode, receive an equivalent Net Asset Value (NAV) for their units. Furthermore, Alternative Investment Funds (AIFs) are accountable for directing investors who use intermediaries that levy fees towards the direct plan. (b) All Alternative Investment Funds (AIFs) are permitted to levy a placement or distribution fee on investors on a recurring basis. Nonetheless, for Category I and II AIFs, intermediaries may be paid an upfront amount of a greater proportion of the total distribution fee (equal to one-third of the present value) in the initial year. SEBI has proposed two measures to tackle the issue of mis-selling and double payment that may occur when investors invest in Alternative

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