Author name: CBCL

Reverse Mortgage Loans in India: The Need For Regulatory Reform

Banking Law /

[By Chytanya S Agarwal] The author is a student of National Law School of India University, Bangalore.   I.          Introduction The rationale behind Reverse Mortgage Loans (‘RMLs’) is to ensure adequate retirement income for senior citizens, whose wealth is majorly confined in the form of home equity, . RMLs are essentially the ‘reverse’ of conventional mortgages and entail periodic payments from the mortgagee (and not the mortgagor) for several decades. Under RMLs, the mortgagor is permitted to reside in his/her mortgaged property and there is no obligation to service the debt during one’s lifetime. When the mortgagor dies or the RML ends due to other reasons (contractual or statutory), the mortgagee has the right to recover the mortgage money by liquidating the mortgaged home. RMLs are normally provided only to senior citizens since their wealth is majorly confined in the form of home equity and, thus, is illiquid. They are the most suited for them  due to their inadequate current income, lower remaining lifetime, and tax incentives (Rajagopalan, pp.3-4). Particularly popular in developed nations with a pro-house ownership stance, RMLs ensure the release of locked private wealth for stimulating consumption and bearing old-age expenses like nursing and medical costs. In a context where RMLs are being mooted as an attractive source of retirement income (see here, here and here), in this article, the author argues that the current RML regulations in India are fraught with inconsistencies and employ a model of regulation that hightens market risks instead of mitigating them. To make this argument, firstly, I would explain the features, rationale, and risks associated with RMLs through a brief literature review; secondly, I would highlight the internal inconsistencies and ambiguities in the provisions governing RMLs in India and analyse their implications; and lastly, I espouse the ‘product governance’ model of regulation as the ideal approach for mitigating the risks intrinsic in the RML market. To make that argument, I would juxtapose Indian RML regulations with those of the US and delve into the theories of financial regulation. Kindly note that this article synonymously uses the terms ‘borrower’ and ‘mortgagor’, and ‘lender’ and ‘mortgagee’. II.          Explaining RMLs – Characteristics, Rationale, and Risks A.    Characteristics of RMLs RMLs, as explained, are the opposite of traditional mortgage loans as, in RMLs, it is the lender and not the borrower who makes periodic payments (or gives a lump-sum or line of credit) for a fixed period of time or till the latter’s death. The borrower is not bound to service such debt during his/her lifetime. The mortgage money is recovered by the sale of the property at the end of the borrower’s lifetime, although his heirs have the right to redeem the mortgaged property before its sale. It is considered extremely attractive source of income for senior citizens who are ‘house-rich’ but ‘cash-poor’. Per Syzmanoski (pp.6-10), due to the lack of periodic debt servicing, RMLs are characterised by ‘rising debt’ and ‘falling equity’ – which is the reverse of what happens in a conventional mortgage (see Figures 1 and 2). They are also non-recourse loans, implying that nothing beyond the value of the mortgaged home can be recovered by the mortgagor (see here and here). Figure-1 (Conventional loan): This graph shows that conventional mortgages have falling debt and rising equity. Figure-2 (RML): This graph shows rising debt and falling home equity in an RML.   B.    The economic rationale underlying RMLs Understanding RMLs involves delving into economic theories such as Modigliani’s Life Cycle Hypothesis (‘LCH’) and Friedman’s Permanent Income Hypothesis (‘PIH’) which argue that people tend to smoothen their consumption over the course of their lifetime. Modigliani (pp.305-306) posits that people save part of their income as wealth until retirement. After they retire, they dissave their accumulated savings (or wealth) for maintaining the same level of consumption till the end of their lifetime (see Figure-3). LCH can properly explain the purpose behind RMLs. This is because in RMLs, senior citizens subsequent to retirement follow LCH by expending their accumulated wealth or home equity (and, thus, dissaving) to source income for their remaining life (Sehgal, pp.170-171). Similar conclusion can be reached using PIH because of the income-smoothening rationale of RMLs (see Baily et al, p.24 and Bergman et al, p.27). Figure-3 (Life Cycle Hypothesis and RMLs): The graph shows how individuals maintain the same level of consumption throughout their lifetime. They save part of their income as wealth until their retirement. The triangle depicts rising wealth till retirement. Upon retirement, this wealth is expended/dissaved till the end of lifetime. RMLs work as a mechanism that gradually dissave this self-acquired wealth (in the form of home equity) to maintain a constant level of consumption. C.    Risks associated with RMLs Cross-over risk is the principal concern faced by RML lenders (Wang et al, p.346). It happens when the value of the loan exceeds the property’s value. It can happen due to three reasons (see Syzmanoski, pp.351-345): (a) the unexpected longevity of the borrower (Bank for International Settlements, pp.8-13), (b) fluctuating interest rates, and (c) when the property’s value did not rise as expected. Risk-averse lenders take mortgage insurance to avoid such losses (Syzmanoski, pp.347-349). In addition to the cross-over risk faced by lenders, borrowers also face longevity risk in fixed-term RMLs since they (and their spouses) face the risk of eviction on early loan termination. This can happen when the RMLs have a fixed period and this period does not extend till the end of the borrower’s lifetime. In addition, although most borrowers seem to favour lump-sum RMLs with fixed exchange rates, these are considered riskier than the other remaining modes of disbursing RMLs, namely, annuities and floating interest rates (Fuente et al, p.185). Moreover, the costs and interest rates of RMLs are generally higher than those of conventional loans (see Jakubowicz, p.184 and here). III.          Indian RML Regulations: Inconsistencies and Blind-spots The Central Board of Direct Taxes introduced the Reverse Mortgage Scheme (‘RMS’) through a notification under Section 47(xvi) of the Income-tax (Amendment) Act, 2008,

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The Intersection of Intellectual Property and Antitrust Law in the Tech Industry

Company Law /

[By Arghya Sen] The author is a student of Amity University.   Introduction The intersection of intellectual property and antitrust law is an increasingly important issue in the tech industry. On the one hand, intellectual property protection can incentivize innovation and drive economic growth. On the other hand, antitrust law is designed to promote competition and prevent monopolies. When these two legal frameworks intersect, they can have a significant impact on the tech industry’s future.[1] In this article, we will explore the intersection of intellectual property and antitrust law in the tech industry. First, we will define intellectual property and antitrust law and explain how they intersect. Next, we will examine the benefits and risks of intellectual property protection, as well as the role of antitrust law in balancing innovation and competition. We will then analyze case studies that illustrate how these legal frameworks have intersected in the tech industry and their implications for the future. Finally, we will conclude by summarizing the main points and offering insights and recommendations for policymakers and stakeholders. Understanding Intellectual Property and Antitrust Law India has a robust legal framework for intellectual property and antitrust law. Understanding these frameworks and how they intersect in the tech industry is critical to navigating legal issues and promoting innovation and competition. In India, Intellectual property refers to creations of the mind, such as inventions, literary and artistic works, and symbols, designs, and names used in commerce.[2] In India, intellectual property is protected by various laws, including: The Patents Act, which provides for the grant of patents for inventions and specifies the rights and obligations of patent holders. The Copyright Act, which protects original works of authorship, including literary, dramatic, musical, and artistic works. The Trade Marks Act, which provides for the registration and protection of trademarks, including logos, names, and symbols used to identify goods and services. The Designs Act, which provides for the registration and protection of industrial designs, such as the shape and appearance of a product. Antitrust law in India is governed by the Competition Act, 2002.  The Act aims to promote competition and prevent anti-competitive practices in the market. The Competition Commission of India (CCI) is responsible for enforcing the Act and ensuring that businesses do not engage in activities that harm competition. Examples of antitrust violations under the Competition Act include: Cartels, where businesses collude to fix prices or restrict output. Abuse of dominance, where a dominant company engages in practices that prevent or restrict competition. Anti-competitive mergers and acquisitions, where a merger or acquisition may result in a significant reduction in competition in the market.[3] In the tech industry, intellectual property and antitrust law intersect in various ways. For example, a company may hold a patent for a technology that gives it a competitive advantage in the market. However, if the company uses its patent to prevent competitors from entering the market or to charge excessive licensing fees, it may violate antitrust law. Similarly, a dominant tech company may use its market power to acquire other companies, which may harm competition in the market. To balance innovation and competition, Indian authorities have taken steps to ensure that intellectual property and antitrust law work together effectively. For example, the CCI has issued guidelines on the intersection of intellectual property and antitrust law to provide clarity to businesses and promote competition. Additionally, Indian courts have recognized that the abuse of intellectual property rights can lead to antitrust violations and have taken steps to prevent such abuse. Overall, understanding the intersection of intellectual property and antitrust law in the tech industry in India is critical to promoting innovation, competition, and economic growth.[4] The Role of Antitrust Law in Balancing Innovation and Competition Antitrust law plays a critical role in promoting competition and preventing monopolization in the tech industry. In India, the Competition Act, 2002 governs antitrust law and the Competition Commission of India (CCI) is responsible for enforcing the Act and ensuring that businesses do not engage in activities that harm competition. Antitrust law in India aims to promote competition by prohibiting anti-competitive agreements and abuse of dominance.[5] The Competition Act prohibits cartels, abuse of dominance, and anti-competitive mergers and acquisitions. The CCI can impose penalties on businesses that engage in anti-competitive behavior and may order them to cease their anti-competitive practices. Antitrust law in India also aims to prevent monopolization by ensuring that dominant companies do not use their market power to harm competition. For example, a dominant company may engage in practices that prevent or restrict competition, such as price-fixing, exclusive dealing, or tying arrangements. The Competition Act prohibits such practices and the CCI can impose penalties on businesses that engage in them. Antitrust law and intellectual property law can intersect in various ways in the tech industry. Intellectual property protection can give a company a competitive advantage, but if the company uses its intellectual property to prevent or restrict competition, it may violate antitrust law. In practice, antitrust authorities in India examine whether a company’s intellectual property rights are being used in a way that harms competition. For example, if a company holds a patent on a technology that is essential to a particular industry, it may be required to license that technology to other companies to prevent it from obtaining a monopoly. Similarly, if a dominant company uses its market power to acquire other companies that could harm competition in the market, antitrust authorities may block the acquisition or impose conditions on it to preserve competition. The reports[6] emphasize the need for a balanced approach to ensure that competition and innovation are not compromised in the tech industry. The CCI report suggests that antitrust law should be used to prevent anti-competitive conduct, including the abuse of intellectual property rights by dominant players. It recommends that competition authorities should carefully scrutinize the conduct of dominant players in the market and take appropriate remedial measures to promote competition and innovation. Similarly, research[7] has highlighted the importance of balancing the interests of

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ESG implementation in Corporate India: Progress, Challenges, and Solutions Compared to the EU Approach

Corporate Governance /

[By Basil Gupta] The author is a student of National Law University, Jodhpur.   Introduction The idea of Corporate Social Responsibility (‘CSR’) was introduced to the Indian corporate world to include social and environmental issues in their business practices. Initially, CSR was a popular topic in corporate law and governance, but recently there has been a shift towards Environmental, Social, and Governance (ESG) factors. This change occurred as “sustainability” became a major focus in corporate and financial law. Companies now aim to have portfolios that have taken the ESG factors into consideration, including environmental (such as climate change), social (such as human rights), and governance. The environmental factor refers to how a company manages its impact on the environment, such as its carbon emissions, resource consumption, and waste management practices. The social factor refers to how a company manages its impact on society, such as its labour practices, human rights record, and community engagement. The governance factor refers to how a company is managed, including its leadership structure, transparency, and accountability to shareholders. Professor MacNeil and Esser introduced the concept of the financial model of ESG, which puts emphasis on the role of capital and investors and reduces the attention on the responsibilities of directors while broadening the interests of stakeholders by focusing on sustainability. The shift from CSR to ESG can be attributed to three main reasons. First, CSR was given a prescriptive status through the Companies Act, 2013, which emphasized the stakeholder vs. shareholder debate in the context of CSR, with proponents on both sides arguing for their perspectives. However, there is growing recognition that a stakeholder-centric approach to CSR can be beneficial for both the corporation and the broader community. Second, with the amendment of CSR regulations in 2019, CSR became legally binding and turned into a form of corporate philanthropy. Finally, the CSR regime in India failed to address negative externalities due to being too broad, a lack of monitoring and enforcement mechanisms, and a reliance on philanthropy, leading to dissatisfaction with CSR, which paved the way for ESG to gain prominence. In this article, the author discusses the current framework of ESG norms in India, the ESG principles adopted in the European Union (EU), and the recommended solutions for the proper implementation of ESG in India. The author has also analysed through statistics whether corporate India is doing enough in ESG. ESG and Corporate India Although Indian companies and investors have come to recognize the significance of “sustainability” in their operations, ESG is still in its early stages in India. The government of India has implemented policies to promote sustainability reporting, such as the introduction of “Voluntary Guidelines” by the Ministry of Corporate Affairs (MCA) in 2011. This was later transitioned into a regulatory requirement by the Security and Exchange Board of India (SEBI) in 2012, which mandated “the top 100 listed companies based on market capitalization” to include Business Responsibility Reports (BRR) in their annual company reports. Then in 2020, SEBI went a step further by mandating companies to not only to report their financial compliance but also to disclose the social and environmental impact of their business operations in their annual report, replacing BRR with Business Responsibility and Sustainability Report (BRSR) for the top 1000 listed companies based on market capitalization for the financial year 2022-23. In India, where there are over 1.45 million registered companies, the requirements set by SEBI only apply to a small fraction of companies that comply with ESG norms, which is less than 0.1%. When discussing ESG in India, a question often arises: is Corporate India doing enough? While it is difficult to make generalizations about ESG compliance across all Indian businesses as it varies by company and industry, Indian businesses have been working to improve their ESG performance in recent years. For example, CRISIL, a leading analytical company in India, conducted a risk assessment across 53 sectors for the fiscal year 2021 and found that Indian companies have improved their ESG score and better disclosed ESG information compared to previous years. It has been discovered that complying with ESG standards can result in value creation for a company. Adherence to ESG norms by companies can improve their public image, attract more investment, and allow them to raise capital at a lower cost. On the other hand, investing in a company that does not follow ESG standards has been found to expose investors to 28% more risk compared to investing in a company which is ESG compliant. ESG in the European Union (EU): Comparative Analysis In India, while the BRSR requirement mandates companies to disclose information on their sustainable practices, there is no other mandatory legislation in place to ensure compliance with ESG norms, thus providing little incentive for integrating ESG factors into their operations. However, in EU they adopted a mechanism through which ESG became a central part of their economy. They did that by formulating an Action plan on “sustainable financing”. Sustainable financing is the practice of considering the impact on the environment and society in the investment decision-making process, which results in increased investment in sustainable and long-term initiatives, which also partakes ESG investing. In order to increase financial strength of the companies based on sustainability, the EU Commission developed a unified classification system known as EU taxonomy, creation of EU ECO labels and a green bond standard. Through EU Taxonomy, the investors and the stakeholders could know whether the company’s profits are from sustainable activities or not. EU ECO labels protect the companies trust in the sustainable financial market. Currently, there are no rules that mandate an issuer to clarify the reason for issuing a green bond, or any requirement for regular reporting. Therefore, the European Union Green Bond Standard (EU GBS) is a prospectus regulation that provides guidance on a standard for green bonds. Recommended Solutions for the Proper Incorporation of ESG Standards in Corporate India Whether the Indian corporate system could incorporate the above-mentioned mechanisms in order for the companies to

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Recession Slows M&A: Prosus-BillDesk Deal and Long-Term Effects

Mergers & Acquisitions /

[ByHarsh Mittal] The author is a student of Hidayatullah National Law University.   Introduction We see that recessionary fears have started impacting M&A deals and there has been a considerable slowdown in merger deals as a result of the same. There exists a huge gap between what private investors are willing to offer for different Merger deals now as compared to Pre- Recession period. The latest victim of this meltdown was the online payments gateway firm Bill Desk. On 31 August,2021 Prosus announced that an agreement has been reached between Bill Desk and Pay U, a subsidiary of Prosus to acquire Bill Desk for a staggering $4.7. However, Prosus terminated the contract one year later stating that certain conditions were not met. This sudden termination of the agreement was largely due to the huge ongoing correction in the global markets which has resulted into transactions being termed overpriced. There has been hesitation in the mind of investors before executing M&A deals after this recession. In this article, the author shall be analysing how recession has resulted in a slowdown in M&A deals. We would also try to understand whether this Recession would be having any long-term impact on the transactions or is a short-term hiccup with special reference to the Prosus and Bill desk deal. Impact of Recession on Mergers and Acquisitions While we do not have any Universal definition for Recession, we define it as “Negative Gross Domestic Product in two consecutive quarters”. Given that a significant portion of Indian IT revenue is derived from the US, worldwide recessions in general and recession in the US in particular, are a threat to India’s Merger deals in the current fiscal year. The majority of Fintech Startups operating in the US and other countries have seen their valuations decline by more than 50% in recent years.[1] Investors’ perspectives on value have even shifted as a result of the global market crash for freshly listed companies’ equities. Numerous M&A deals that were announced before the most recent market crisis are being rethought due to the disparity between what the public markets are ready to pay for the company and what private investors are paying. We see that the fear of recession is preventing people from executing M&A deals. Following the pattern of past Recessions, what one can predict is that there will be a huge downturn in mergers and acquisitions deals in this period.  But it’s clear that this recession differs from other ones. The 2008 Financial Crisis was primarily driven by debt-related excesses in the housing and internet infrastructure markets, whereas the current one is primarily driven by excess liquidity as a result of COVID-led fiscal and monetary stimulus that is fuelling inflation and encouraging speculation in financial assets . We do not need to worry about a complete collapse as it happened in previous cycles. Merger deals and the Economy does not have a tight connection due to multiple of factors existing in the market. As a consequence to which we won’t see a major impact on M&A activity even if economy has to go through long periods of Recession. Pay U and  Bill Desk Deal There have been numerous instances where the impact of the Recession is seen in Merger and Acquisition deals. We will try to analyse one such example where the acquisition was called off due to a steep fall in the valuation of the company. On 30th September when Prosus NV terminated the $4.7 billion agreement to purchase Bill Desk, every shareholder was in disbelief as no one could have dreamt this coming. M&A Agreement contains a set of conditions that   were required to be fulfilled before completion of the transaction such as regulatory approvals, business not suffering Material Adverse Effect and various Due Diligence Formalities. Prosus contended that Bill Desk was not able to satisfy some of these conditions which were precedent for execution of the contract. The deal which was announced more than a year ago had received the approval of the Competition Commission of India just days before the cancellation. Certain plausible reasons for the cancellation of the deal are- Steep fall in Valuation India markets are highly sensitive to the United States economy and they generally follow the trend of their system. Expecting a deal of this magnitude to be executed after such a huge contraction was very challenging. Though Bill Desk is one of rare profitable companies, the valuation of 4.7 Billion which is 19xof Bill desk revenue would have been a major hurdle in execution of this deal due to existing sentiments of investors for M&A deals. Approval time taken by CCI On 5th September, 2022, the wait was finally over for both the parties as the acquisition was approved by Competition Commission of India One of the reasons for the cancellation of the deal was the long period taken by CCI. Prosus was left frustrated due to the duration of time taken for the approval. Due to the time gap between the announcement and execution, we saw a dip in the valuation of Bill Desk which eventually led to the cooling-off of Pay U’s interest in executing this deal. Failure of New Age Companies To know the real reason behind the failure of such a deal, it is important to look at what is going on in the Indian Economy. Paytm’s big fall after its public listing is one event that has shaken the faith of global investors all around the world. Fintech Sector runs on very thin margins and is all about customer conversion but the Paytm debacle has led to a very conservative approach by investors. Implications of this deal – An analysis This deal was supposed to elevate the fintech sector to new heights. Prosus had already strengthened its position in the Indian payments industry through Pay-U  and the acquisition of Bill desk would have given Prosus access to a large customer base of small merchants in India. If we look at the implications of

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Analysing the Implications of Extended Equity Trading Hours in India

Capital Markets and Securities Law /

[By Modit Mendiratta and Mahak Agarwal] The authors are students of Gujarat National Law University.   Introduction The Securities and Exchange Board of India (SEBI) has recently proposed extending the trading hours for equity derivatives in India. The proposal has garnered mixed reactions from market participants and experts. Currently, the trading hours for equity derivatives on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are from 9:00 am to 3:30 pm Indian Standard Time (IST). However, the proposed change would extend the trading hours to 5:00 pm IST, allowing for an additional hour and a half of trading. The proposed extension of trading hours is aimed at aligning India’s trading hours with other global markets and catering to the needs of foreign investors who are active during these extended hours. Additionally, the extension would enable market participants to react to any global events that may have an impact on Indian markets. What does it mean for Investors? Extending trading hours in the equity segment in India could have both positive and negative impacts on investors. Increased liquidity and trading opportunities could make it easier for investors to enter and exit trades, potentially reducing bid-ask spreads and transaction costs. However, increased volatility, higher trading costs, and increased risk of errors could make the market riskier for investors, particularly for retail investors who may not have the same level of resources as institutional investors. The actual impact on investors would depend on factors such as the specific length of the extended trading hours, the reaction of market participants, and the regulatory framework in place to monitor and manage the market.[i] The extension of trading hours could attract more market participants, leading to higher trading volumes, and increased liquidity in the market. Increased liquidity could improve the efficiency of the market and reduce bid-ask spreads, making it easier for investors to enter and exit trades. Longer trading hours could allow for more time for market participants to react to news and events, leading to improved accuracy in price discovery. This could result in better pricing of securities, reducing the likelihood of mispricing’s, and reducing the overall risk of investing.[ii] Longer trading hours could provide traders with more opportunities to enter and exit trades, potentially leading to increased profitability in the market. [iii] Positive Impacts of Extended Trading Hours Extending trading hours in the Indian market could have several potential benefits. Firstly, it could lead to increased liquidity in the market by attracting more market participants, resulting in higher trading volumes. This increase in liquidity could help to improve the efficiency of the market and reduce bid-ask spreads, which could make it easier for investors to enter and exit trades. Secondly, longer trading hours could lead to improved price discovery. This could happen because market participants would have more time to react to news and events, which could lead to a more accurate pricing of securities. As a result, the likelihood of mispricing’s could decrease, reducing the overall risk of investing. Thirdly, longer trading hours could provide traders with more opportunities to enter and exit trades, potentially leading to increased profitability. Traders could also benefit from more time to adjust their positions in response to market news or events, which could reduce their overall risk exposure. Lastly, extending trading hours would align the Indian market with global norms, as many other major stock exchanges around the world already have extended trading hours. This could make the Indian market more attractive to international investors, potentially leading to increased foreign investment. Overall, extending trading hours in the Indian market could have several benefits, including increased liquidity, improved price discovery, increased trading opportunities, and alignment with global markets. Negative Impacts of Extended Trading Hours Extending trading hours in the market could have potential drawbacks. Firstly, it could lead to increased volatility, as traders would have more time to react to news and events, potentially leading to wider price swings. This increased volatility could make the market riskier for investors and create greater uncertainty. Secondly, longer trading hours could lead to higher trading costs for market participants. They would need to dedicate more time and resources to monitoring and participating in the market, which could be particularly challenging for retail investors who may not have the same level of resources as institutional investors. Thirdly, longer trading hours could increase the risk of errors, as traders and market participants may become fatigued or less attentive during extended sessions. This could lead to mistakes that could have significant consequences for both the individual and the market as a whole. Lastly, extending trading hours could have an impact on the work-life balance of employees in the financial sector. They may need to work longer hours to keep up with the extended trading schedule, which could have negative consequences for employee morale, productivity, and overall well-being. Overall, extending trading hours in the market could have potential drawbacks, including increased volatility, higher trading costs, increased risk of errors, and potential impact on employees. Comparison of Indian Trading Hours with the global markets The Indian stock market currently operates for six and a half hours, from 9:00 am to 3:30 pm Indian Standard Time. In comparison, many other major stock exchanges around the world have longer trading hours. For example, the New York Stock Exchange (NYSE) and the NASDAQ operate for 6.5 hours from 9:30 am to 4:00 pm Eastern Standard Time. The London Stock Exchange operates for 8.5 hours from 8:00 am to 4:30 pm Greenwich Mean Time. It is worth noting that while some exchanges have longer trading hours, others have shorter trading hours than the Indian market. For example, the Australian Securities Exchange operates for 6 hours from 10:00 am to 4:00 pm Australian Eastern Daylight Time. Overall, the trading hours of stock exchanges around the world vary widely, and there is no one-size-fits-all approach. The decision to extend trading hours in the equity segment in India will require careful consideration of the potential benefits and drawbacks,

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Unleashing the Power of Large Language Models with Responsible Regulation

Contemporary Issues /

[By Yuvraj Mathur and Ayush Singh] The authors are students of Rajiv Gandhi National University of Law, Punjab.   Introduction Within the first two months of going live, AI-powered chatbots like ChatGPT and Google Bard became worldwide sensations with over 100 million users. While offering great opportunities, there is already a great deal of conjecture on how it might disrupt several industries, democracy, and our everyday lives. With AI gaining consciousness and taking decisions, users have reported that the chatbot is claiming to have feelings, gaslighting them, refusing to accept its mistakes, threatening them, and so on. As per a Fox News report, Microsoft Bing not only indulged in hostile exchanges but also wanted to steal nuclear access codes and engineer a deadly virus. These Large Language Models learn natural language sequences and patterns from vast amounts of text data culled from existing sources like websites, articles, and journals to generate intricate results from simple input. In order to achieve this, it uses a modified version of the “Generative Pre-Trained Transformer” (GPT) neural network Machine Learning (ML) model. As AI systems like ChatGPT trained by OpenAI become more advanced and sophisticated, their potential applications in the legal domain continue to expand. In order to assess the necessity of implementing an AI-centric policy in India, this article critically evaluates the potential uses of the AI system in the field of law as well as its legal ramifications. Revolutionising the Commercial Landscape In light of the buzz Generative AI creates on media platforms, it can have a wide range of use cases in the commercial sector. 1. Customer service: Conversational AI can be used to provide automated customer support via chatbots, helping customers with frequently asked questions, order tracking, and other inquiries. It can also assist in lead generation and conversion by providing personalized recommendations and engaging in conversational marketing with potential customers. 2. Legal Research: AI Chatbot ChatGPT can provide general legal information on a wide range of topics and can also help with legal research by providing relevant cases, statutes, and regulations. After feeding it 50 prompts to test the reliability of its legal assistance, Linklaters, a magic circle law firm, concluded that legal advice is often context-specific and relies upon several extrinsic elements. 3. Legal Drafting: The software might theoretically be used to produce early drafts of documents that do not entail significant creativity. Nevertheless, since it does not grasp the law, correlate facts to the law, or employ human abilities like emotional intelligence and persuasion, it is likely to be deceptive in more intricate and nuanced legal documentation. Allen & Overy (A&O), another magic circle law firm by incorporating Harvey, a cutting-edge AI platform based on a subset of Open AI’s most recent versions optimised for legal work, has made significant strides in the field of artificial intelligence. Harvey is a program that automates and optimizes several aspects of legal work, including regulatory compliance, litigation, due diligence, and contract analysis by employing data analytics, machine learning, and natural language processing. Another machine learning software, Kira, assists in precisely and effectively identifying, extracting, and analysing contract and document information. 4. Data analysis and insights: Generative AI can analyse large volumes of customer data and provide insights on consumer behaviour, preferences, and trends, helping businesses make informed decisions. It can also be used to generate content such as product descriptions, marketing copy, and social media posts, saving time and effort for businesses. 5. Personal assistants: Virtual Assistants can act as digital subordinates, helping with tasks such as scheduling, reminders, and managing emails, despite being quite generic and superficial. ChatGPT can provide employees with personalised training and development content, helping them learn and upskill in their jobs. The Liability Conundrum ChatGPT’s position in the legal diaspora has been in question since its origination. The concept of liability of AI Chatbot’s has been in news recently after the revelation of certain racially discriminating content by ChatGPT in a prompt raised by a U.C. Berkeley professor, which revealed the inherent biases within the software. Any act of discrimination fundamentally goes against the tenets of Article 14 of the Indian Constitution. For the same, the question of the ownership of the content provided by ChatGPT and these Large Language Models becomes pivotal. In a reply created by ChatGPT in response to a prompt by the authors, the AI-based Chat Box’s reply reflected that it lacked indexing of data and was unable to provide the authors with the source of the information as presented by the Chatbot. Furthermore, these Large Language Models can be observed as aggregators of the information provided by them, and the makers of such AI models can be held accountable for the same. A similar case of a platform being observed as an aggregator was visible in the case of Facebook, where the social media giant acted as an aggregator and undertook racial profiling as a method to identify the target audience for advertisements. As aggregators, these Large Language Models can be held on the same footing as Facebook, as both act as a medium of information between the content creator and content consumer The Predicament of Ownership An offshoot of the accountability dilemma is the issue of Ownership of the created content. The issue revolves around the fact that AI-generated content is created from pre-existing copyrighted data sets. Certain lawsuits, such as HiQ Labs v. LinkedIn and Warhol v. Goldsmith, and others, revolve around the issue of data harvesting from copyrighted content to train AI systems. For instance, Goldsmith established her contention in the Warhol ruling by demonstrating how Warhol’s prints violated the copyright of her images, notwithstanding Warhol’s argument that they were transformed in terms of size and colour. The U.S. authority should be used as a strong justification in this case even though Indian courts have not yet dealt with this question. Moreover, Section 43 of the IT Act, 2000 makes it illegal to retrieve data without permission. The AI models create certain data by amalgamating various sources of information but

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Standalone Ex-ante Approach: A Mirage?

Competition Law /

[By Tejaswini Sahoo] The author is a student of the West Bengal National University of Juridical Sciences (NUJS).   Introduction The rapid growth of digital conglomerates in the dynamic competitive market has prompted stakeholders from various sectors to mull over a comparative analysis of leading approaches. The regulatory frenzy race is multi-surfaced because of intricate business models, content moderation issues, and burgeoning sociocultural power. Further, because of the endowment of entrenched positions, they build conglomerate ecosystems around their core platform services, strengthening entry barriers and possibly leading to unfair actions. There is a global consensus that conventional competition law is inadequate to accommodate the panoply of the conundrum arising in digital platform markets. Therefore, regulating or not is no more a Shakespearean issue. As a result, the paradigm shift of a deliberative evidence-based approach Ex-post to a form of speculative approach Ex-ante is witnessed in other jurisdictions, including the West. The present article aims to be provocative in nature. It poses questions on three prominent emerging approaches; firstly, which approach will cure market failure, structural competition problem, and monopoly problems? Secondly, can tailored objective standards be implemented in a subjective, fluid digital market? Thirdly, would the Ex-ante approach involving specific market issues be proportionate towards large digital platforms? Moreover, whether or not these tailored remedies will stifle innovation in an emerging market like India. In the Indian context, regulations should be implemented after properly reframing them against the socioeconomic backdrop. Paradigm Shift Across Jurisdictions The perfect storm is brewing for digital platforms on all fronts. For instance, the Digital Markets Act by the EU imposes a series of negative and positive obligations on the enterprises designated “Gatekeepers” based on internal market power, strong intermediation position, large user base, or durable position as determined by the DMA. In the US, the Federal Trade Commission is prioritising Ex-ante measures by reintroducing a rule that restricts acquisitions for organisations and enterprises that pursue “anti-competitive mergers.” The 10th Amendment has already been incorporated into the German competition Act to bring pre-emptive measures thanks to swift action. Likewise, the UK created the “Digital Markets Unit” as a continuous agency oversight, whereas Japan and Australia are all actively working to implement an Ex-ante approach. In India, the Parliamentary Standing Committee tabled the 53rd report on “Anti-competitive Practices By Big Tech Companies.” The committee observed the distinction between the traditional physical market and Digital markets. It opined to form ‘Systemically Important Digital Intermediaries (SIDIS)’ by identifying leading players. Subsequently, India should create definitions for Ex-ante rules that govern the behaviour of systemically important digital intermediaries following the footsteps of other jurisdictions. Comparative Analysis of Three Emerging Approaches Over time, Policymakers have adopted several distinct approaches to regulating large digital platforms. Firstly, antitrust law: a set of flexible, judicially crafted behavioural standards. It does not forbid market power creation, maintenance, or enhancement by procompetitive means, such as innovation or gains in productive efficiency. It aims to treat the disease-causing harmful market impacts rather than just masking its symptoms (such as rising costs and declining quality) as a “palliative” treatment. However, the proponents of the Ex-ante approach will claim that it is too slow to control fast-pacing, multifaceted digital platforms. It does not provide prospective guidance and ends with monopolising the market or controlling unique traits of digital market needs. , Secondly, Ex-ante are positioned to handle the problems resulting from structural shortcomings in the framework of the digital marketplace. Additionally, to do so fast enough to avoid platforms securing and leveraging their places at the expense of users or by excluding possible competitors. It is determinative and can damage control in a fast- pacing market. However, the Hayekian knowledge issue regarding laws that apply uniformly to various digital platforms will likely worsen. A standard-based strategy customises instructions for a specific context, creating conflict with creative and constantly evolving digital marketplaces. The slightest deviation could result in legal action in the ever- changing digital marketplaces, discouraging innovation. When natural monopoly utilities are obliged to charge rates similar to those that would prevail under competitive conditions, the rules may be intended to force the outcome that would occur if the market were competitive. Such regulations are a palliative treatment for market power since they aim to reduce its symptoms, such as supra-competitive prices, without treating the underlying problem (the lack of competition). . Thirdly, an expert Oversight Agency is authorised to craft tailor-made codes of conduct for each platform with strategic market status. Further, it is supposed to ensure fair trading, freedom of choice, reliability and transparency. The UK recently adopted to launch “Digital Market Unit” within the nation’s antitrust agency, the Competition and Markets Authority (CMA). Compared to antitrust law, it might be quicker, more precise, and less prone to mistakes than Ex-ante regulation. However, the approach fosters broad discretion of interest group exploitation, susceptibility to political influences, and limited control over their subject matter, which poses serious issues concerning public choice and interest. Therefore, ensuring the fair constitution of the oversight agency plays a crucial part in this approach. Is a Speculative Blanket Restriction Necessary? An influential industry group representing Google, Meta, and Amazon, among other tech firms, hailed the Standing Committee Report of India as regressive, prescriptive, and absolutist. There are two types of regulation: Symmetric (applicable to all the firms) and Asymmetric (applicable to only a few enterprises compared to objective criteria). The question arises: Will shifting to speculative obligations cure market failure, structural competition, and monopoly conundrums? Further, whether the application of regulations asymmetrically will fix the inherent root issue? The answer depends on whether market failures are caused by monopoly issues or structural market failure. In case of a structural issue, symmetric regulation is necessary because it must handle the issues brought on by the market’s structure, regardless of the scale of the companies involved. On the contrary, if a monopoly issue is identified, Asymmetric regulation is necessary, and asymmetric regulation is required as the regulation has to address only the monopoly power of the

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Golden Parachutes as a Takeover Defence in India

Company Law /

[By Vidushi Gupta] The author is a student of National Law School of India University, Bengaluru.   INTRODUCTION Hostile takeovers make up a great proportion of global deal activity and have become a well-established strategy for growth in the corporate world. Golden Parachutes (GPs) are clauses within employment contracts, that grant the key executives of corporate entities lucrative severance benefits when their services are terminated. These benefits can include long-term salary guarantees, stock options, cash bonuses, generous severance pay, ongoing insurance and pension benefits etc., and are triggered only by a change in the company’s control/management through a sale, merger, acquisition, or takeover. Interestingly, GPs are also a type of shark repellent, i.e. they may be adopted by target companies as a tool to ward off hostile takeover attempts. They have attracted much attention around the world, due to their common use and significance in takeover activities. Although GPs have not been a prominent issue in the Indian corporate governance discourse, they are fast gaining traction in India as well. This article aims to contribute to the existing discussions and jurisprudence on GPs, and seeks to analyse whether GPs are a desirable way of trying to prevent hostile takeovers, by adopting a law and economics perspective. In India, GPs are primarily dealt with under Section 202 of the Companies Act, 2013. However, since hostile takeovers are quite uncommon in India, GPs are not really used as takeover defences in the Indian context. It is argued that GPs are a weak and inefficient form of takeover defence, due to the costs associated with them. They largely help to convert hostile takeovers into friendly ones, rather than deterring hostile ones. However, it is possible to overcome some of the shortcomings of GPs, if they are treated as a reactive defence, rather than as a pro-active defence. The article also argues for a binding, disclosure-based regime as an effective means of promoting GPs which reflect shareholder interests. GAINS ASSOCIATED WITH GPs Proponents argue that GPs can prevent hostile takeovers, by threatening high transaction costs, making acquisitions more expensive, and making target companies unattractive or less profitable for the acquiring entity. Further, GPs can provide a soft landing for executives who lose their jobs, protect them against financial and career-related risks, and help to attract talented executives in industries and sectors that are takeover-prone and face talent crunch. Therefore, GPs can be said to help reduce agency cost problems between shareholders and managers of the target, by helping executives of corporations to remain objective and impartial, and preventing them from opposing takeovers that benefit shareholders. GPs can also improve the bargaining position of the target management, enabling them to negotiate better terms with the acquirer. However, the acquisition can no longer be termed to be truly hostile in such a situation. Hence, GPs are correlated with a higher likelihood of receiving an acquisition offer or of being acquired, leading to a paradox. COSTS ASSOCIATED WITH GPs GPs can lead to significant countervailing costs as well. GPs fail to thwart/deter hostile takeovers, since payments under GPs are minuscule compared to the cost of the acquisition, thereby having little impact on the outcome. A recent example of the failure of GPs to act as takeover defences can be seen in the successful hostile acquisition of Twitter by Elon Musk in a $44 billion deal and the subsequent firing of the top executives of Twitter (including CEO Parag Agrawal), despite the fact that these executives were entitled to GPs or severance pay-outs amounting to around $90 million or more upon termination of their employment. Further, GPs do not necessarily correlate the pay with the performance of the company or the value created for shareholders. Short-lived executives may get paid large sums for little work. Executives may be paid GPs, even when shareholders and the company suffer losses or the latter becomes insolvent. Hence, GPs can lead to perverse incentives for the executive officers of corporates by providing a “guaranteed bonus” to them. Moreover, GPs are essentially sunk costs, as the acquiring entity cannot expect to gain any returns on the payments made. Executives have a fiduciary responsibility to act in the best interests of the company, and should not require additional financial incentives to remain objective and fulfil their duties. Moreover, GPs can also lead to the creation of agency cost problems, since the executive has an incentive to enable the takeover to happen, which may prove detrimental in case a takeover is not wealth-enhancing for the shareholders. Further, GPs fail to serve the interests of target shareholders and investors. They are associated with lower (risk-adjusted) stock returns and erosion of firm value. This indicates that by ensuring executives of a cushy landing after an acquisition, GPs weaken the disciplinary force on executive performance exerted by the market for corporate control and lead to increased slack. GPs may be tied to the volume, not the quality, of business, but few companies may require executives to return bonuses based on inflated numbers. Hence, GPs incentivise short-term behaviour to the detriment of long-term shareholder interests. Additionally, GPs are negatively associated with the acquisition premiums earned by target shareholders. They weaken executives’ bargaining position in acquisitions that would take place regardless of a GP. GPs can’t be used to negotiate better offers, since hostile takeovers involve little negotiation. If there is serious negotiation, it in fact becomes a friendly takeover, meaning that the GP is not a defence anymore. GP’s nature as a pre-emptive defence also prevents negotiation, as they cannot be entirely eliminated due to being guaranteed and promised in the employment contract. Hence, even if negotiation happens, executives may use their bargaining power only to extract benefits for themselves. The shortcomings indicate that the costs of GPs exceed the benefits, and the gains are insufficient to offset the losses resulting from such GPs, thereby leading to inefficient outcomes. Moreover, it is evident that GPs, instead of functioning as a hostile takeover defence, are more helpful to convert hostile

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Short-selling Laws in India: A Study in the Light of Adani-hindenburg Issue

Capital Markets and Securities Law /

[By Nirukta Krishnan and Aditi Kotecha] The authors are students of Hidayatullah National Law University.   OVERVIEW: In light of the Public Interest Litigations filed by four social activists after the recent shorting of the Adani Group Stocks, questions are being raised once again concerning the ban on short selling and whether the regulatory authority is adequately equipped to deal with the potential negative consequences of short selling on the market. Short selling has for a long time been the subject of polarising opinions. On one hand, supporters consider it a fundamental practice of the market which keeps the market alive while critics believe that it is a highly volatile practice.  This article thus presents a critical analysis of the short selling laws in India operating at present and also attempts to provide certain recommendations with respect to changes that can be made to the existing regime keeping in view the recent Hindenburg report and the short selling of Adani stocks. MEANING- In simple terms, short selling is a practice where the short seller borrows the stock in terms of derivatives from a broker at a certain price and sells it in the market. When the price of the stock goes down, they proceed to buy it back at the lowered price and keep the difference. SEBI thus defines it as “a sale of a security that the seller does not own”. On a purely technical ground, there is nothing wrong with the practice. Buying and selling stocks in this manner through derivatives like futures and options is not wrong per se but the issue arises when this shorting is done to manipulate stock prices. In this case speculations are being made by experts that Anderson purposely partook in short selling because he knew the instability that would be caused by his report, which would jeopardize investor confidence and cause mass panic thus also leading to a sharp decline in price. This, according to them, is a clear attempt at manipulation. This is precisely the matter surrounding the Adani-Hindenburg debacle. NATHAN ANDERSON- MANIPULATION OR COINCIDENCE? The biggest reason why short selling came into question again is because of the report published by the Hindenburg Research group which caused complete mayhem amongst investors of the Adani Group amid allegations of fraud and manipulation among other things. After the dust settled with regard to the contents of the report itself, eyes turned to the person at the very center of it all – Nathan Anderson– who founded the organization and had previously conducted similar crusades against many large entities. While the report refused to publish the specifics of how they pulled it all off, they mentioned that they had obtained a “short position through US-traded bonds and non-Indian traded derivative instruments”. In direct terms, Anderson purchased and shorted US bonds of Adani after which he proceeded to release his report. With the magnitude of allegations contained in the report, the credit went down which then adversely affected the value of the bonds and securities of Adani. During this time when the market was distressed, he then purchased the bonds again at a lower price thus making a profit from the difference in the purchase and sale. The other method is mainly speculative, but many critics who have been trying to analyze how Anderson achieved this result, have suggested that he probably approached entities like global banks that trade in India and entered into a stock futures contract with them, who then entered the Indian market and shorted the stocks. WHAT DO INDIAN LAWS SAY ABOUT SHORT-SELLING? The discussion on short-selling first took place in 1996 when SEBI constituted a committee under Shri BD Shah. The committee suggested rules and regulations be put in place to regulate the trading practice in India. It was temporarily banned in 1998 and 2001. However, it was finally reviewed in 2003 by the Secondary Market Advisory Committee (SMAC) which took into consideration the practices followed in other states and permitted it on certain conditions. Short-selling poses a potential risk to the market and may lead to a rampant decline, if not regulated. SEBI and the stock exchanges in India have collectively released specific rules and guidelines to be followed while short-selling a stock. India and several other developed countries have not banned short-selling, and the International Organization of Securities Commissions (IOSCO) has also suggested that the practice be regulated rather than prohibited. Currently, in India, retail investors and institutional investors (such as mutual funds, FIIs, banks, insurance companies, etc.) are free to short-sell, provided derivative products are available of that stock. They (institutional investors) are required to disclose at the time of placement itself whether the stock is a short sale and their ability to borrow those stocks to the satisfaction of the broker, the same is not the case with retail investors. They can disclose this at the end of the trading hours on the day of the transaction. In addition to this, naked short-selling and day trading is prohibited. The present lending and borrowing scheme in India operates on clearing corporations/houses (CC/CH) of the stock exchanges, leaving very little scope for the investors to capitalize on the demand for securities. A  lending and borrowing system with CC/CH acting as Approved Intermediaries can be brought in. . However, appointing AIs must be done carefully, starting with appointing Banks as custodians in the first stage and so on. FPIs and Foreign Institutional Investors are explicitly prohibited from short selling as per the guidelines. However, foreign entities still trade in India through some other corporations or organizations which are still allowed to trade. The regulations do not go up to the source and limit themselves to regulating the direct intermediaries which do not solve the problem. Internationally, it is mostly seen that the securities market does not directly regulate the lending and borrowing processes because they are essentially held over the counter. The custodians and depositors run these lending and borrowing institutions. So, if India goes for

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