Author name: CBCL

Analysing the Intricacies of Interest-free Loans within the Purview of Section 45 of IBC

Insolvency Law /

[By Tushar Krishna] The author is a student of West Bengal National University of Juridical Sciences.   Introduction Section 45 of the Insolvency and Bankruptcy Code (‘IBC’) encompasses the expunction of transactions executed at undervalue, including acts of gifting or instances wherein the consideration obtained by the corporate debtor is significantly less than the value rendered by the corporate debtor. Similar provisions also resonate throughout the international landscape, exemplified by the presence of Section 238 in the United Kingdom (‘UK’)’s Insolvency Act of 1986, wherein the annulments of transactions conducted at undervalue are addressed. Likewise, the United States Bankruptcy Code’s Section 548 embraces the avoidance of transfers that may manifest as either overtly fraudulent or covertly deceptive in nature.[1] These provisions are instituted with the express purpose of thwarting the diversion of corporate assets by the corporate debtor’s management, who possess an intricate knowledge of the abysmal financial state of the said debtor and may purposefully engage in such transactions in close proximity to insolvency. In light of the same, Section 45 also provides the Adjudicating Authority, on the application of the liquidator or Resolution Professional, the prerogative to annul the consequences of such transactions, rendering them null and void, thereby depriving any party deriving benefit from the transaction of any associated rights. Since the nascent nature of the IBC has a limited body of jurisprudence, the dearth of legal precedents pertaining to specific provisions, such as Section 45, is unsurprising. However, in the recent times, a discernible augmentation has been observed in the frequency of instances whereby Section 45 has been employed as a means to invalidate transactions deemed to be undervalued, bearing significant repercussions on the corporate assets.[2] Nevertheless, given that Section 45 is not a kind of provision invoked in every IBC matter, it becomes imperative to bestow due attention upon specific inquiries like the potential inclusion of interest-free loans within its purview. The complexity of this quandary transcends its superficial appearance, primarily owing to the fact that Section 45 predominantly employs a framework centered upon situations where the consideration involved is readily discernible. Consequently, comprehending its applicability vis-à-vis typical transactions like the granting of interest-free loans proves to be an intricate undertaking. In this regard, the present article has been meticulously organized as follows: Initially, it conducts an assessment of the potential classification of Interest-free loans as an undervalued transaction, a matter of utmost pertinence when examined within the purview of section 45. Subsequently, it engages in an intellectually stimulating exploration of the matter, delving into the profound ramifications stemming from the Oator Marketing Judgement. Finally, it culminates in a concise synthesis of the arguments, marked by a concluding remark. Interest-free loans as undervalued transactions The inquiry surrounding the inclusion of interest-free loans within the purview of Section 45 manifests as an examination into the potential categorisation of such loans as undervalued transactions. An undervalued transaction materializes when the corporate debtor transfers one or more assets at a significantly less value compared to the consideration disbursed. Precisely defining the phrase “significantly less” proves to be an elusive task, bereft of absolute precision. In the UK, one case elucidates that even a marginal 10% variance in price remains insignificant when grounded in the genuine divergence of opinion,[3] although in a different case, it may be deemed substantially dissimilar. Thus, even when drawing upon the position adopted by the UK, whose provision for the avoidance of undervalued transactions adheres to similar language as Section 45, a measure of ambiguity persists regarding the precise delineation of “significantly less.” However, it is discernible that a heightened threshold is necessitated. Notwithstanding, it is generally explicable that the consideration attached to a transaction assumes substantially less value if it notably falls below its fair value or the consideration furnished by the debtor itself. However, the comparison of values paid or received by the company may not be an easy task in every case, especially cases like interest-free loans, where transactional consideration does not overtly manifest. In the case of an interest-free loan, the consideration tendered by the corporate debtor encompasses the opportunity cost. Even if the corporate debtor disburses funds at a markedly lower interest rate in relation to its capital’s comprehensive cost, encompassing the opportunity cost, the transaction in question may be appraised as an undervalued transaction. The opportunity cost associated with the interest accrued by the corporate debtor equates to the interest relinquished, thereby constituting the consideration offered by the company. Any detriment experienced by the corporate debtor assumes pivotal significance in the comparative evaluation of the consideration. In this milieu, one may argue that when it comes to interest-free loans, the threshold of “significantly less”, as required under section 45, may be more readily satisfied, as opposed to a scenario involving lending at a reduced rate, which presents a subjective and intricate predicament. This proposition gains particular credence in the context of the recent Insolvency and Bankruptcy Board of India (‘IBBI’) Guidance on avoidance transactions for resolution professionals, wherein it is asked to consider interest-free transactions by the corporate debtor as a “red flag”.[4] Furthermore, it is imperative to note that even if interest-free loans are deemed as undervalued transactions, as per Section 45, their avoidance can only be executed provided that the transaction was not conducted in good faith and did not adhere to the ordinary course of business. These factors can be assessed by observing the involved intention[5]to defraud the creditors using the specific material facts, as highlighted in Anuj Jain v. Axis Bank Limited and Ors. Implications of Oator Marketing Judgement In the context at hand, an intriguing avenue for analysis emerges by virtue of the recent pronouncement of the Supreme Court in Oator Marketing Pvt. Ltd. v. SamtexDesinz Pvt. Ltd. In this case, the Court expounded upon the contours of the term ‘Financial Debt’, and held that interest-free loans are unequivocally encompassed within the ambit of Financial Debt. Thus, it confers upon the creditor, who gave the interest-free loans, the capacity to initiate Corporate

Analysing the Intricacies of Interest-free Loans within the Purview of Section 45 of IBC Read More »

Dilemma Over Voting Share: Insolvency And Bankruptcy Code, 2016

Insolvency Law /

[By Samriddh Bindal] The author is an associate at Saikrishna & Associates.   Introduction The Insolvency and Bankruptcy Code, 2016 (‘IBC’) is regarded as one of the most significant economic legislations implemented in recent times. Unlike previous legislations, the IBC introduces a creditor-centric framework for restructuring the assets of the Debtor. It aims to expedite the process of creditors recovering funds from the Debtor and also seeks to enhance India’s ranking in the ‘ease of doing business’ index. In the present article, the author emphasizes the necessity of allocating differential voting rights to the allottees of a real estate project based on the established principle of debt that is due and payable. The author argues that such an approach is crucial for ensuring fairness and equity among the allottees, taking into consideration their individual claims and obligations. By implementing this principle, the author suggests that the voting rights can be allocated in a manner that aligns with the financial positions and interests of the allottees, thereby promoting a more just and balanced resolution process. As per the provisions of IBC when the National Company Law Tribunal (‘NCLT’) initiates CIRP and appoints IRP, The IRP collates the claims of the creditors, constitutes the Committee of Creditors (‘CoC’), and also assigns the voting share to each creditor within the CoC. The CoC plays a significant role in making key decisions regarding the CIRP process, including the appointment of the Resolution Professional (‘RP’), CIRP costs, interim finance, Form G, and approval of the Resolution Plan, among others. Additionally, as per Section 21(6A) of the IBC, an Authorized Representative (‘AR’) is also appointed to represent the financial creditors- in class before the CoC. In the case of CIRP for a real estate project, it is often observed that a majority of the creditors are financial creditors- in class, which is also in line with the Pioneer Urban Land and Infrastructure Limited and Anr. Vs. Union of India & Ors, [WP (C) No. 43/2019]. It is trite that the Insolvency Professionals as a matter of practice, admit the claims of the allottees, without acknowledging the fact that such allottee(s) have received possession of their respective units or what is the stage of the buyer-builder agreement(s) executed between the allottee(s) and the Corporate Debtor. Need for differential voting rights In a real estate project, the allottees/financial creditors in class can be categorized into different segments based on the amount due and payable as on the insolvency commencement date. The following segments can be considered: Allottees who are yet to receive possession of their units. Allottees who have received possession of their units but are yet to receive the completion certificate and/or have pending execution of the registration deed for their units, etc. Allottees who have received possession of their units without fit-outs or without basic amenities such as electricity, water supply, connecting roads, etc. In view of the above, each segment of the allottees as mentioned above will have different claims against the Corporate Debtor on the basis of what is due from the Corporate Debtor. This disparity arises due to variations in the progress of the buyer-builder agreements across different segments. As a result, the RP will be required to admit the claims of these allottees based on the remaining performance obligations, i.e., the outstanding debt in terms of the agreement yet to be fulfilled. Consequently, each segment of the allottees will hold a different voting share. The above classification is indeed justified, considering the varying amounts of debt due for each segment. When a Resolution Applicant invests in the Corporate Debtor through its Resolution Plan, each segment of the allottees is treated differently, since it requires different amount of investment. This means that the Resolution Applicant will need to allocate more funds towards the segment of allottees where the units are yet to be constructed. On the other hand, in cases where the allottees are only seeking fit-outs and/or the execution of their respective documents, the Resolution Applicant will have to invest a significantly lower amount. It is pertinent to mention that the Hon’ble Apex Court in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors., [W.P. (C.) 37 of 2019] has held that a creditor can file its ‘claim’ when the ‘debt’ is ‘due’. Hence, it seems unjustified that the total claim of the allottees is admitted even though they have received possession of their respective units. Against the above backdrop, it is relevant to mention the judgment passed by the Hon’ble NCLAT in the matter of Gajraj Jain & Ors. Vs. Shivgyan Developers Pvt. Ltd., [Company Appeal (AT) (Ins.) No. 1265 of 2019], wherein the allottees of a real estate project had filed a Section 7 application contending that ‘legal possession’ has not been received by the allottees in the absence of Occupancy Certificate/ Completion Certificate, registration cannot be completed. The Hon’ble NCLAT held that the Ld. NCLT has rightly dismissed the application filed under Section 7 of the IBC since the construction of the said project stands complete. Therefore, admission of the complete claims of the allottees who have received possession by the Corporate Debtor, seems unjustified and hence a mechanism should be introduced for accepting such claims. It is seen that there has been a divergent view of the Insolvency Professionals regarding the admission of claims of the allottees. However, it is pertinent to mention that in the CIRP of Supertech Limited, the Resolution Professional has made classifications amongst the allottees on the basis of (a)Allottees who are yet to receive possession of their respective unit(s); (b) Possession given however sub -lease deed or registry is pending of the respective allottees is pending; and (c) Sub Lease deed or Registry is executed, however, delay compensation is yet to be given to the allottees. Accordingly, the Insolvency Professional has not admitted the total claims of the allottees who have received possession of their respective units. The list of creditors as available on the website

Dilemma Over Voting Share: Insolvency And Bankruptcy Code, 2016 Read More »

A Case for Adopting ‘Law & Economics’ in Indian Commercial Jurisprudence

Contemporary Issues /

[By Madhav Goel] The author is an Advocate, Supreme Court of India, Delhi High Court & Tribunals.   Introduction An increasing proportion of litigation happening across Indian Courts, including the Hon’ble Supreme Court of India, is commercial and economic in nature. The manner in which the Courts interpret and apply commercial and economic laws, to myriad situations, affects how India Inc. does business. Be it insolvency, arbitration, intellectual property, or tax, the list is endless. The regulatory framework in each of these areas, affected by the legislature and the executive making the law, and the judiciary interpreting and applying it, has a direct and indirect impact on the “ease of doing business”. It determines how well the free market welfare state model that India has come to adopt post-1991 works for the collective interest and economic growth of Indian society. The need for economics to infuse judicial decision making – law is no longer an autonomous discipline Given the wide-ranging impact that judicial decisions have on India’s business environment, it is important to reflect on whether judicial decision-making is approaching the practice and interpretation of commercial laws in a manner conducive to that ultimate, collective goal. What does that mean? Judicial interpretation has generally treated law to be an autonomous discipline, i.e., the legal discipline has its own set of rules for analysing and interpreting the law, and reliance on other disciplines for this exercise is unnecessary. Indian jurisprudence especially, continues to treat law as an autonomous discipline. While that has been the Indian approach, the world over, things are changing, and changing fast. Law is no longer treated as a purely autonomous discipline but is one that is considered to learn from and derive from other disciplines such as sociology, philosophy, history, and economics. While its core principles remain unchanged, it is no longer considered immune from learning from these other disciplines. In the context of commercial laws, the need for legal interpretation to learn from economics is extremely crucial, i.e., the adoption of ‘Law & Economics’ as a tool of interpretation is critical in ensuring that laws are applied in a manner that helps achieve their underlying objectives. Unfortunately, while the knowledge of economics is considered important to law practitioners and regulators and the knowledge of law is important for an economist, the relationship between law and economics has never been given the consideration it deserves. Why should it be given such importance? The aim of these laws is to further economic goals – regulation and promotion of competition in the free market, healthy business practices, and efficiency. When that is accepted, why should the interpretation of the law continue to have a siloed, technical and legalistic approach? Instances of textual interpretation ruining the legislative objective The judiciary’s legalistic approach to interpreting commercial laws has often led to problematic situations arising for India Inc. Commercial laws have often received interpretation that is textually correct but has the effect of turning the law’s intent upside down, thereby defeating its very objective. As a consequence, the legislature has often had to intervene by amending the law and revamping the entire legal framework, thus leading to greater uncertainty of the law. Let us take, for example, the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”). The Code, and the issues arising therefrom, have captured the bulk of the time and imagination of the Indian legal system in recent years. However, increasingly, there have been judgements of the Hon’ble Supreme Court, and consequently the Hon’ble National Company Law Appellate Tribunal and the Hon’ble National Company Law Tribunals that have gone against core principles of the IBC, for example, the decision to confer discretion on the Hon’ble National Company Law Tribunal to admit or reject applications by financial creditors to initiate corporate insolvency resolution processes of defaulting corporate debtors in spite of the existence of ‘debt’ and ‘default’, or the decision to give secured creditor status to the Government in respect of dues owed to it in certain cases in clear contravention of the waterfall mechanism. Each of these decisions fails to factor in and learn from basic principles of finance and insolvency economics, thus creating a framework that defeats the objectives it sought to achieve. By adopting a textual approach to statutory interpretation, rather than a purposive approach with its foundation in Law & Economics, the Hon’ble Apex Court has given greater fodder to its critics that question the judiciary’s expertise to suitably understand and interpret commercial and economic legislation. The fact that the Hon’ble Apex Court has erred in these instances is evident from the fact that industry-wide criticism has been supplemented by the Government of India’s decision to mend the Code suitably in order to undo the effect of these judicial decisions. This is not a new trend. Time and again, commercial legislation has been interpreted in India in a manner that has frustrated their purpose. Another example is the judgement of the Hon’ble Supreme Court in NAFED v. Alimenta S.A. whereby the Court refused to enforce a foreign arbitral award on the ground that it was in violation of the public policy of the country. In doing so, the Court expanded the public policy exception/defence against enforcement of foreign arbitral awards to such an extent so as to include mere violations of substantive provisions of Indian law. Consequently, the Court opened the door for arbitral award debtors to engage in speculative litigation and stave off enforcement of foreign arbitral awards by inducing the Court to engage in another review of the award on merits.The judgement, by ignoring the economic objective behind the Arbitration and Conciliation Act, 1996. The negative consequences of this approach are not limited to strictly commercial disputes, but have far reaching impact on private tort law as well. For example, rules pertaining to motor accident cases, that have otherwise proven to be efficient in the economic analysis of liability rules. However, the manner in which the Courts have interpreted the same have resulted in generating

A Case for Adopting ‘Law & Economics’ in Indian Commercial Jurisprudence Read More »

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

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

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

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

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,

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

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.

Relevant Market Access Denial: Challenges in Data-Driven Competition Read More »

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

Analyzing the Green Deposit Framework in India Read More »

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

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

Scroll to Top