Author name: CBCL

The Taxation of Digital Goods and Services in the Global Economy

Taxation Law /

[By Arghya Sen] The author is a student of Amity University.    I. Introduction The digital economy has grown rapidly over the past few decades, and as a result, the taxation of digital goods and services has become an increasingly important issue in the global economy. In this article, we will explore the challenges and opportunities associated with taxing digital goods and services and the various ways in which countries and organizations are responding to this issue. The digital economy now represents a significant share of global economic activity, and it is expected to continue growing in the years to come. As more goods and services are delivered digitally, it becomes increasingly difficult for governments to tax them effectively. This has led to a growing concern among policymakers and tax authorities around the world about how to ensure that the tax system remains fair and effective in the face of technological change. The purpose of this article is to provide an overview of the taxation of digital goods and services in the global economy. We will examine the challenges that arise when taxing digital goods and services, the responses of different countries and organizations to these challenges, and the proposed solutions to the issue. Ultimately, this article aims to help readers gain a better understanding of the complex and rapidly evolving landscape of digital taxation and its implications for businesses, governments, and consumers. II. Background Digital goods and services are products and services that are delivered electronically or through the internet. This includes things like e-books, music and video streaming services, online advertising, software, and cloud computing.[i] The growth of the digital economy in India has been significant in recent years. In 2020, the total size of the Indian digital economy was estimated to be around $400 billion and it is projected to grow to $1 trillion by 2026.[ii] The digital economy has had a profound impact on traditional industries in India and has created new opportunities for businesses to reach customers all over the country. However, the growth of the digital economy has also posed challenges for Indian tax authorities. Traditional tax systems were designed for goods and services that are delivered in a physical location, making it difficult to apply these systems to digital goods and services. The borderless nature of the digital economy means that it is often unclear which jurisdiction has the right to tax a particular transaction, and the ease with which digital goods and services can be delivered across borders means that tax revenue can be lost if the tax system is not adapted to this new reality. Currently, the tax system for digital goods and services in India is inconsistent and fragmented. The Goods and Services Tax (GST) was introduced in 2017, which replaced the earlier tax regime and included provisions for digital goods and services. However, there are still many unresolved issues related to the taxation of digital goods and services in India. Recently, India has also introduced a digital services tax (DST) which imposes a 2% tax on the revenues of foreign e-commerce companies that provide digital services in India. However, this tax has faced criticism from some quarters for being discriminatory and potentially harmful to India’s own digital industry[iii]. Overall, the taxation of digital goods and services in India remains a complex and evolving issue, with many challenges still to be addressed. The Indian government is currently working on a number of proposals to modernize the tax system and ensure that it is able to capture revenue from the digital economy. III. The Challenges of Taxing Digital Goods and Services While the digital economy has provided many opportunities for businesses and consumers, it has also posted significant challenges for governments and tax authorities. Some of the major challenges that arise when taxing digital goods and services include: Determining the place of consumption: One of the primary challenges in taxing digital goods and services is determining the jurisdiction in which the transaction occurs. Unlike physical goods and services, which are typically delivered to a specific location, digital goods and services can be consumed anywhere in the world. This creates significant challenges for tax authorities, as they must determine which jurisdiction has the right to tax the transaction. Determining the value of digital goods and services: Another challenge in taxing digital goods and services is determining their value. Many digital goods and services are intangible, which makes it difficult to assign a monetary value to them. Additionally, the value of digital goods and services can be difficult to measure, as it is often based on factors such as usage or user engagement. Implementing and enforcing tax laws: Taxing digital goods and services can be difficult to implement and enforce. Many digital businesses are based in one jurisdiction but operate in many others, which can make it difficult for tax authorities to track and regulate their activities. Additionally, digital goods and services can be easily transferred across borders, which makes it difficult to enforce tax laws and ensure compliance. Tax avoidance and evasion: The borderless nature of the digital economy can also make it easier for businesses and consumers to avoid or evade taxes. Some businesses may choose to locate their operations in jurisdictions with lower tax rates, while others may use complex tax structures to reduce their tax liabilities. This can result in lost tax revenue for governments and an uneven playing field for businesses. Technological complexity: The digital economy is constantly evolving, which can make it difficult for tax authorities to keep up with the latest technologies and business models. This can make it difficult to design and implement effective tax policies that keep pace with technological change. Overall, the challenges of taxing digital goods and services are complex and multifaceted, requiring careful consideration and collaboration between governments, businesses, and other stakeholders. IV. The Global Response The challenges of taxing digital goods and services are not unique to India, and many countries and international organizations have been grappling with this

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Ushering Substantive Democracy into the Corporate Sphere: Expanding Shareholders’ Rights

Company Law /

[By Ankit Rao] The author is an Associate at Archer Jurists LLP.   INTRODUCTION Democracy is more than mere procedures that follow the will of the majority. Substantive democracy entails governing in the interest of all stakeholders. The concept of a holistic democracy such as this has become relevant in all spheres of life, public and private both. Thus, the corporate sector should not be exempt from democratic functioning. In a corporate democratic setup, the rule of the majority is endorsed and the will of the majority necessarily prevails. However, in the pursuit of substantive democracy, the need to balance and preserve the right of minority shareholders has been recognised and accordingly materialised by incorporating a proviso in the form of Section 241 of the Companies Act, 2013 (“Act”). As per Section 241(1)(a) of the Act, if affairs of the company are being administered in such a form so as to be deemed prejudicious to the interest of the public/company or detrimental to an individual member or all other members, it entitles the relevant member(s) to move an application before the National Company Law Tribunal (“NCLT”) seeking relief against oppression and mismanagement. In a parallel construct, under Section 241(1)(b) of the Act, relevant member(s) are also authorized to move an application before NCLT seeking relief if a material change is brought about in the company’s administration/control, which does not qualify to be in the preservation of interest of the Company, its members, creditors or any class of shareholders, and might potentially result in the affairs of the company being conducted in such a manner so as to be detrimental to the interest of company/its members. The position of being a member in a Company carries and provides for an inherent right to file an application against oppression and mismanagement and seek relief if the member duly fulfills certain statutory eligibility criteria laid down under Section 244(1) of the Act. A minimum of 100 members or 1/10th of the aggregate number of members of a company, whichever is lower, is a prerequisite to filing an application to the NCLT in case of a company having a share capital, and in case of a company not having a share capital, a minimum of 1/5th of the total number of the members is the required threshold to be entitled to move such an application. This article primarily argues for dispensing with technicalities in the pursuit of justice because rigid adherence would not be in the best interest of the company or the stakeholders. Rather, striking a balance between the procedural and substantive aspects of the law is optimal for creating an equitable environment for all stakeholders, members, and non-members both. To that end, the article will first analyse the mandatory nature of minimum shareholding criteria to move an application of oppression & mismanagement and in doing so it explores whether the right to move an application can be struck down on the basis of technical non-compliances, second it determines as to whether this right is confined to the members or it extends to potential members, third, it elaborates on the findings of Supreme Court in World Wide Agencies Pvt. Ltd. & Ors. V. Margarat T. Desor & Ors. (“World Wide Agencies”) where the Court extended the rights of deceased members to their legal representatives, even though in the register of members, the deceased member’s name exists. MANDATORY NATURE OF THE MINIMUM SHAREHOLDING ELIGIBILITY The pivotal question which arises is how rigid is the eligibility criteria for holding shares to the extent of the 10% threshold as stipulated under Section 244 of the Act. If the said threshold is not met, does it strike at the very root and viability of the application under Section 244? It does not seem inescapable and mandatory in nature, since the NCLT is empowered to waive all the requirements as specified in Section 244(1)(a) & (b) of the Act. The concerned proviso empowering the NCLT to grant waivers on Section 244 did not specify the circumstances wherein such authority can be exercised and it also does not indicate any reasoning which must be taken into account by the NCLT while granting such exemptions. To discern the obligatory nature of the minimum shareholding requirement, the object and reasoning behind prescribing a qualifying percentage of shares to entertain a petition under Section 244 need to be examined. The Supreme Court of India in J.P. Srivastava & Sons Pvt. Ltd. & Ors. V. M/s. Gwalior Sugar Co. Ltd. & Ors. [AIR 2005 SC 83] dwelled upon the said issue and held that the object of prescribing a qualifying percentage of shares to entertain petitions under Section 397 & 398 of Companies Act, 1956 which is pari materia to Section 241 & 244 of the Companies Act, 2013, was to ensure that frivolous litigation is not indulged in by persons who have no legal stake in the company. The Hon’ble Supreme Court stipulated that the guiding principle in such matters is a broad common sense approach and that there exists certain non-compliance which can be condoned or dispensed with. The Supreme Court further observed that if a Court is satisfied that the petitioner moving an application of oppression & mismanagement represents a body of Shareholders holding the requisite percentage, it can assume that involvement of the company in litigation is not lightly done and it should entertain the matter on its merit, and not reject it on a technical requirement. RIGHT TO MOVE AN APPLICATION CONFINED TO MEMBERS? Now, the material question which needs to be delved into is whether this right, specifically reserved for the members, can be enlarged and extended to include anyone who may be entitled to become a member or even just a potential member. The definition of a member as provided under Section 2(55)(a) & (b) of the Act needs to be borne in mind before probing this material question. As per Section 2(55)(a) of the Act, ‘members’ encompasses, within its domain, subscribers of a memorandum

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Settling the Dust of avoidance application: In light of Venus Recruiter v. Tata Steel

Insolvency Law /

[By Rituraj Singh Parmar & Devyani Mishra] The authors are students of National Law Institute University, Bhopal.   Introduction: Avoidance application is the action against preferential or fraudulent transactions made by company which has gone into insolvency. The IBC 2016 in order to reverse such transactions has developed a mechanism which is stipulated under chapter 3 of the code (Section 43-51). The avoidance application can be adjudicated at three possible stages viz., during CIRP, liquidation stage and post resolution. However, the single bench of Delhi high court ruled that Avoidance application ends with the conclusion of CIRP and therefore can’t be adjudicated once CIRP is completed. Overruling this, in the case of Tata steel v Venus recruiter (Venus Recruiters) the division bench of Delhi High court rectified the mistake made by single judge bench and held that avoidance application can be pursued post CIRP. This particular judgment by Delhi high court is landmark because it is not restricted to stage of adjudication of avoidance application but also deals with various other important fragments relating to it. In light of this ruling of Delhi High Court, the article attempts to analyse the implications of the judgement. First Section of this post will first delve into the background of the case; thereafter author will explore and discuss the different aspects of the judgement. The article will conclude by analysing the case within the broader context of IBC vis-à-vis avoidance application and the possible reasons of lower rate of adjudication of such applications. Brief background of the case: In the instant case, RP moved an avoidance application under Section 43 IBC after the submission of resolution plan to NCLT. Upon approval of Resolution Plan, Tata Steels BSL Ltd. subsumed the control of Bhushan Steel Ltd. NCLT upon the observation that avoidance application was submitted before the approval of Resolution Plan, proceeded to issue notice to the Respondent (Venus Recruiter pvt ltd). Aggrieved by the same, respondent moved petition before the Ld. Single Judge thereby, challenging the legality of avoidance application. In light of this, court upheld that avoidance application cannot be pursued post CIRP and that; RP becomes functus officio to the further proceedings. Expanding the Ambit of Section 60(5) of IBC The Single Judge bench of Delhi High Court narrowed down the jurisdiction of NCLT under Section 60(5) IBC while holding that the phrase “arising out of or in relation to the insolvency resolution” only includes matter pertaining to CIRP and NCLT becomes functus officio once CIRP is concluded.  Due to the very same reason, the single bench allowed the appellant to approach the high court for want of any other efficacious alternative remedy under IBC. Overruling this, the present court held that phrase “in relation to insolvency resolution” connotes a wider import. The court has placed reliance on report of the Bankruptcy Law Reforms Committee (BLRC), Titaghur Paper Mills v State of Odisha, Swiss Ribbons v Union of India, Gujarat Urja Vikas Nigam  v Amit Gupta to conclude that dispute arising out of any local statute has to be remedied by exhausting the remedy present under that statute first. Court also referred to Essar Steelv Satish Kumar Gupta (Essar Steel)wherein the apex court held that no other court other than NCLT has jurisdiction to deal with proceedings mentioned under 60(5).  Building upon the rationale of these authorities, the division bench has categorically held that “Ld. Single Judge erred in holding the writ petition was maintainable. An appeal ought to have been preferred by Respondent No. 1 before the NCLAT underSection 61 of the IBC and the NCLAT itself was the appropriate forum to decide the controversy posed before the Ld. Single Judge” Thus, the present court while widening the ambit of NCLT has fairly settled the law relating to adjudication of Avoidance application that any petition or application arising out of the adjudication application of a corporate person shall be dealt by NCLT first and then as a second appeal to the NCLAT. Effects of Regulation 35A and 38(2)(d) of CIRP Regulations, 2016 post the conclusion of CIRP: The Ld. Single Judge via its impugned judgement held that avoidance applications cannot continue after the conclusion of CIRP. In the present matter, the avoidance application was held to be infructuous because the same wasn’t filed within the timelines prescribed by Regulation 35A of the CIRP Regulations, 2016. The division bench overturned the impugned judgement and upheld that avoidance application can be pursued upon the conclusion of CIRP process. The bench ruledthat “The timelines prescribed under regulation 35A are merely directory and not mandatory in nature”. It further cited the case of Essar Steel,wherein, Hon’ble Supreme Court upheld that CIRP process in itself is not mandatorily bound by the prescribed timelines.Section 25(2)(j) under IBC provides that RP needs to file avoidance application before the conclusion of CIRP, the said obligation, in the present matter, had been discharged. The respondent (Venus Recruiter pvt ltd) argued that on account of Regulation 38(2)(d), earlier, avoidance application wouldn’t survive after the approval of Resolution Plan. However, the bench upheld that the said regulation has no bearing on the instant matter. Regulation 38(2)(d) mandates Resolution Plan to provide for the ways to deal with avoidance applications and the proviso further sets cut-off date for the implementation of the regulation i.e., 14 June 2022. The Resolution Plans prior to cut-off date is not required to clarify the manner in which these applications are to be dealt with. Therefore, the NCLT does have jurisdiction over the avoidance applications submitted by Resolution Professionals. Position of RP vis-à-vis CIRP on one hand and avoidance application on the other: The arguments put forth by respondent that Resolution Professional (RP) becomes functus officio upon the successful conclusion of CIRP and accordingly, cannot pursue avoidance application, holds no ground because the objective of IBC provides for intelligible demarcation between the proceedings of CIRP and avoidance application. Section 26 of IBC states that the application to avoid certain transactions i.e., preferential or fraudulent by the

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A Critique of the Pre-Packaged Insolvency: A Flawed Framework?

Insolvency Law /

[By Unnati Sinha] The author is a student of Narsee Monjee Institute of Management Studies.   Introduction The Pre-Packaged Insolvency Resolution Process (“PPIRP”) was added to Chapter III of the Insolvency and Bankruptcy Code, 2016 (“Code”) in 2021. It was introduced in view of the worldwide economic downturn brought on by the lockdown prompted by the epidemic. Corporate insolvencies are on the increase because of the recession. In the latter half of the previous year, 283 companies in India were accepted into the Corporate Insolvency Resolution Process (“CIRP”). The purpose of using PPIRP is to align the needs of creditors and debtors while preserving the operations of defaulters and it becomes very crucial when the debtor is an MSME (Medium Small and Micro Enterprise). These businesses are mostly reliant on their promoters for their day-to-day management and financial needs and hence, it would be impossible to revive the company if management were transferred to a resolution professional in accordance with Section 35 of the Code. This article’s assessment of the PPIRP framework highlights the Debtor-in-Possession (“DIP”) approach’s problematic provisions, the function of operational creditors, and an examination of the lack of a tranquil time are highlighted. In order to tackle the aforementioned issues, the author also offers an analysis of the effects of such shortcomings and further investigates the potential for rebuilding the framework. PPIRP: An Overview The report of the subcommittee led by M.S. Sahoo (“Sub-committee”) served as the foundation for the PPIRP framework. A corporate debtor designated as an MSME that is also qualified to propose a resolution plan under Section 29A may apply for PPIRP in accordance with the requirements of Section 54A of the amended Code. This happens if a statement to that effect is issued by a majority of the partners and is accepted by creditors who account for 66% of the amount owed. Furthermore, according to Section 54D, the PPIRP must be finished within 120 days. This is different from the current framework, which advocates a 270-day window for the procedure’ completion, with the option to extend it by 90 days. The change in the function of the resolution professionals is a substantial modification. The new structure vests management in the existing board of directors, as contrast to CIRP, where the professional oversees the business as a subsisting concern. The separation of the resolution professional’s functions in India signifies the end of the creditors-in-control strategy. With the current strategy, the promoter lost actual control of the firm to the creditors. A shift in this strategy would mean that the debtor still had management control over the creditor, who would then have less power over them. Additionally, it denotes a decrease in the amount of responsibility placed on the resolution specialist. However, the resolution specialist still has a lot of power, particularly over the completion of the PPIRP. Inconsistencies with the DIP framework There is a substantial difference with the advent of the DIP strategy, which gives the board of directors of the defaulting firm the power to run the affairs. The model’s introduction has caused what seems to be inconsistencies in the framework. The relevant provisions show that the creditors have authority over the settlement process, even though it might appear that the Code has accepted the DIP model. The reason behind this is because under Section 54J(xii) the creditor has the authority to change the company’s management from the board to the resolution professional. When the Committee of Creditors (“CoC”) is certain that the company’s affairs have been handled fraudulently, they may exercise the provision by submitting an application. . The addition of such a clause was recommended by the Sub-committee to stop the promoters from siphoning off company assets, but it runs the risk of delaying the process if the promoters disagree with the creditors’ assessment.By submitting pointless petitions that would take up a lot of time during the resolution process, creditors might obstruct the insolvency process. Furthermore, by initiating the resolution after receiving 66% of the voting share, the CoC has also exercised its power to start the CIRP against the Debtor. By doing this, the PPIRP would be terminated beforehand. It has been codified in the Code’s Section 54-O. This clause emphasizes the incorrect terminology used to describe the DIP model, which is what the amendment aims to do. As a result, the management powers of the corporation and the settlement procedure are biased in favor of the creditors. Preclusion of Operational creditors The PPIRP does not apply to operational creditors. The Code, among other things, traditionally denied operational creditors the opportunity to participate in the CoC but gave them the ability to start a CIRP against the debtor. The modification doesn’t apply to operational creditors’ rights since only the debtor may start a PPIRP. The CoC established thus is like that established under CIRP and forbids involvement of operational creditors. The Apex Court’s justification for the exclusion in the Swiss Ribbon’s case relies on the faulty assumption that financial creditors have the knowledge to assess the sustainability of the resolution plan, while operational creditors are only interested in recovering the value of products and services. The justification is strong because it is based on the presumption that the creditors would support the plan based on its feasibility rather than on their desire to maximize their asset recovery. The policies in other jurisdictions, such as the United States, where a committee of unsecured creditors is constituted to defend the interests of such creditors who may not be given enough attention. Similarly, any corporation facing resolution in the United Kingdom must have the consent of creditors who account for 75% of the total value of each class of creditors. Since MSMEs themselves are regarded as operational creditors, the deprivation is also detrimental to their interests. Given that MSMEs would not be able to vote or express an opinion, any future PPIRP structure for larger corporations would undoubtedly be detrimental to MSMEs. Truancy of Calm Period The terms of the current CIPR procedure involve a

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Abuse of dominance: An analysis of CCI order in Google case

Competition Law /

[By Aneesh Raj & Chirantan Kashyap ] The authors are students of  National Law University and Judicial Academy, Assam.   Introduction The world’s biggest search engine has received a great shock from the country’s top court. The Supreme Court of India has rejected Google’s petition challenging the NCLAT ruling dated January 4, 2023. The Competition Commission of India (hereafter CCI) fined Google a large sum for abuse of dominance. Google sought remedy from the NCLAT initially, but once they refused, it turned to the Supreme Court of India for relief; however, this court also refused to entertain its petition. Aggrieved by the decision of the court, Google has agreed to comply with the order of CCI and to deposit the 10% penalty amount. The CCI has levied a fine of over ₹ 1337 crore on Google for abuse of its dominant position in India’s smartphone operating system market. Google, in its appeal, has termed the decision of CCI as “patently erroneous” and ignoring “the reality of competition in India, Google’s procompetitive business model, and the benefits created for all stakeholders.” The CCI order has been described as “fraught with substantive, analytical, and procedural errors, including inter alia ignoring exculpatory evidence and statements from Indian OEMs and developers.” Google has also accused the CCI’s investigating arm, namely the Director General’s Office, of mindlessly copying and pasting the order from the foreign authorities. The aim of this article is to analyse the order and also explain what it means for the general population. Facts of the case: The controversy arose following the disclosure of information by Mr. Umar Javeed, Ms. Sukarma Thapar, and Mr. Aaqib Javeed under Section 19(1)(a) of the Competition Act, 2002 (hereinafter the “Act”), alleging that Google LLC and Google India Private Limited (collectively, “Opposite Parties”/”Google”) violated Section-4 of the Act. It is believed that these informants are Android smartphone users. They had said in their submission that Android is an open-source mobile operating system that anyone may create and use freely. The Android Open-Source Project (AOSP) is the source code for Android that is subject to a basic licence. An interesting point that is stated by the informants is that the smartphones and tablets in the Indian market are being run on the Android operating system, which itself is being developed by Google. Google also offers various applications and services in the form of Google Mobile Services (GMS). Informants have described GMS as a suite of Google services that can be used to enhance a device’s performance. According to the experts, GMS includes a variety of Google services that can only be accessed through GMS and not downloaded independently by device manufacturers. These services include Google Maps, Gmail, and YouTube. Android device manufacturers must enter into certain agreements with Google before these apps and services can be installed. The informants further stated that end users would not be able to directly use these services. According to the informant, Google has been engaging in a number of anticompetitive practices, both in the core market and in peripheral areas, in order to further solidify their dominant position as the preeminent provider of online general web search services and online video hosting platforms (through YouTube). The informants made the following allegations against Google in their claims: Google requires that manufacturers of smartphones and tablets only pre-install Google’s apps or services if they want to get any part of GMS in smartphones made, sold, exported, or marketed in India. It was said that this action made it harder for rival mobile apps or services to develop or get into the market, therefore violating Sections 4 read with section 32 of the Act. Google combines or bundles various Google applications and services, such as Google Chrome, YouTube, Google Search, etc., with additional Google applications, services, and/or application programming interfaces. This conduct made it harder for people to get smart mobile devices that used different, possibly better versions of the Android operating system. Google doesn’t let smartphone and tablet makers in India make and sell “Android forks,” which are different versions of Android for other devices. This regulation made it harder for people to get access to new, smart mobile devices that might run on better versions of the Android operating system. Based on the information received, the commission forms a prima facie opinion that there is a contravention of Section 4 of the Act. So, using its power under Section 26(1) of the Act, it directed the investigating arm, which is the office of the Director General (DG), to do an investigation. Based on its investigation, the DG submitted a report addressing certain issues highlighted by Google. Investigation by the DG:  An investigation was laid out by the office of the director general in order to gather material. The office of director general contacted Google and other concerned parties. Other parties include mobile phone makers (both Indian and foreign brands), who install Android OS and Google apps and services on their phones; third parties active in the Indian market for Android OS app stores, an online general web search service, and a web browser; key players in the online video hosting platform; key Indian app developers, etc. Based on the said investigation, five relevant markets have been identified as being important to the resolution of the challenges at hand. These are the markets in India for licensable operating systems for smart mobile devices such as smartphones and tablets, the market for an app store for Android smart mobile OS, the market for general web search services, the market for non-OS-specific web browsers, and the market for an online video hosting platform (OVHP). As previously indicated, the DG has determined that Google dominates the aforementioned key markets. While compiling the investigation report, the DG also took into account the other apps and services that are considered core apps under Mobile Application Distribution Agreement (MADA). After examining the conduct of Google, the office of the director general reaches the conclusion that preinstallation of the whole GMS suite

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Revisiting the MMT-Goibibo Case – Is CCI Geared Up?

Competition Law /

[By Aditya Kashyap & Arnika Dwivedi] The authors are students of Symbiosis Law School, Pune.   Introduction The Delhi HC recently pronounced a judgement in the contentious case of MakeMyTrip-GoIbibo. The 10% deposit imposed on the appellants by the NCLAT for the admission of the appeal, was upheld by the High Court with the caveat that no further request is made in respect of the remaining 90% of the penalty amount. The story starts in 2018 with a commercial agreement between MakeMyTrip-GoIbibo and OYO, which acted as a vertical agreement, which caused the delisting of two major competitors of the latter i.e., Treebo and Fab Hotels from the former’s website. This resulted in FHRAI filing an information report with the CCI, alleging anti-competitive trade practices along with the contravention of Section 3 and Section 4 of the competition Act . Along with the aforementioned commercial agreement, they also complained against the Price Parity Clause in MMT-Go agreement with hotels, listed on its website. The price parity clause prohibited hotels from offering better terms or prices on other Online Travel Agent (OTA) website or even the hotel’s own website, than what was being offered at MMT-Go’s platform. There are certain questions which need to be addressed before the merits of allegations could be determined, Firstly, whether the Opposing parties held a dominant position in the market. Secondly, whether there was an abuse of the dominant position. Thirdly, whether the agreement between the opposing parties was in nature of refusal to deal. Dominant Position in the Relevant Market  MMT-Go are mainly involved in providing Search, Compare and Booking (SCB) services for end users, the CCI observed that MMT-Go also offered services to hotels that included inventory listing, tracking potential customers, and sales. The submissions made by MMT-Go to define markets based on hotels’ accessibility to end consumers were turned down by the CCI due to the fact that different services are provided to different types of customers i.e. the hotels and the end customers. The CCI found that end users most valued the seamless integration of SCB functions on Online Travel Agents (OTA) platforms. The CCI also found that OTAs helped hotels increase demand by improving visibility and discoverability, even when rooms were booked through other channels. This was true even without OTAs. This difference led the CCI to distinguish online and offline distribution. The CCI said OTAs had their own relevant market within online distribution, further sub-segmenting it. The CCI accepted the DG’s definition for MMT-Go as “-market for online intermediation services for booking of hotels in India”. The CCI agreed with the DG that MMT-Go had a market monopoly. The CCI considered that MMT-Go had no real competition and that hotels relied on it to stay afloat and expand. CCI also considered the fact that MMT-Go was not subject to any real competitive restraints. Abuse of Dominant Position  The CCI found that exclusivity requirements, and the price and room parity requirements hampered OTA competition by limiting the competitive tools available to other OTAs. Additionally, the CCI found that these requirements had a negative impact on the sale of rooms through other platforms/channels, highlighted the reliance of hotels on MMT-Go, and may have allowed MMT-Go to negatively impact prices. As a direct consequence of this, the CCI arrived at the conclusion that MMT-Go engaged in abusive practices due to its dominant position. The Competition Commission of India (CCI) did not accept MMT-Go’s defense that enforcing parity terms was a common practice in the industry. The findings of the DG regarding predatory pricing by MMT-Go were disregarded by the CCI as a result of the DG’s failure to correctly apply the costs that were pertinent to determining the average variable cost. The CCI concurred with the DG’s conclusions regarding the misleading information that was presented on the MMT-Go platform, which prevented hotels from accessing the market. Refusal to Deal  The CCI found that MMT-Go and OYO’s agreement to remove Treebo and Fab Hotels amounted to refusal to deal. The CCI also noted that the arrangement was a win-win between two vertically related entities to eliminate competitors in their respective markets. The CCI considered how the delisting singly benefited OYO. The CCI said the agreement limited consumer choices and made entering new markets harder. The CCI ultimately arrived at the conclusion that the exclusionary and mutually beneficial agreement between MMT-Go and OYO constituted a refusal to deal in violation of Section 3(4)(d) of the Act. CCI found that the agreement was anti-competitive and had an appreciable adverse effect on competition within India. The Competition Commission of India found that the opposite parties violated Section 4(2)(a)(i) as the price parity clause prevented hotels from offering better prices or terms on other platforms or their own websites. The commercial agreement between the parties denied market access and constituted refusal to deal, violating Section 3(4)(d), 4(2)(c), and 3(1). Following this, a penalty of 5% of total average turnover was imposed on MMT-Go and OYO. Relevant Turnover The penalty imposed was another contentious issue in the case, the penalty was imposed on the total turnover of MMT-Go and, not merely the hotel segment. This can be seen as being inconsistent with the concept of “relevant turnover” as developed by the Apex Court in Excel Crop Care Limited v. Competition Commission of India, the court stated that the penalty is to be imposed on the turnover which is the “turnover in respect of the quantum of supplies made qua the product for which cartel was formed and supplies made.” So this would support the position that the penalty should only be imposed on the hotel segment of the business and not the total turnover, this is based on the doctrines of proportionality and the doctrine of purposive interpretation. The doctrine of proportionality developed by the Indian Judiciary in Arvind Mohan Sinha v. Amulya Kumar Biswas states that the penalty imposed on the person should not be unequal to the significance of the violating act committed. In Bhagat Ram v. State of Himachal Pradesh the court

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“Short and Distort,” whether fraud under the SEBI regulations?

Capital Markets and Securities Law, Contemporary Issues /

[By Srajan Dixit & Abhijeet Malik] The authors are students of Gujrat National Law University.   The alleged overvaluation of stocks dubbed as the ‘‘Largest con in corporate history’’ by the Hindenburg Research may have sustained the scrutiny of courts over time; however, the Adani conglomerate which rose almost 2500% in last 5 years proved to be in-immune to the massive stock plunge when the 413-page report alleging “brazen stock manipulation and accounting fraud scheme over the course of decades” by the US-based infamous short seller firm took the financial markets across the world by storm. The Adani group has reportedly suffered a cumulative loss of $100 Billion post the report’s publication. However, the skeptics have termed the report as a mere financial tactic to deliberately undervalue the Adani entities for the purposes of shorting or short selling. This has prompted the serial litigant Advocate ML Sharma to file a PIL in the Supreme Court of India where he seeks to declare manipulating the stock market for ‘short-selling’ as the offense of fraud sections 420 (Cheating and dishonestly inducing delivery of property) & 120-B (Punishment for criminal conspiracy) of IPC r.w. 15 (HA) SEBI Act 1992 (Penalty for fraudulent and unfair trade practices), in addition to the investigation against the founder of the Hindenburg Group- Nathan Anderson, for “exploiting innocent investors via short selling under the garb of artificial crashing.” What is short selling? To understand ‘Short and distort,’ one must understand ‘short selling’ first. It is defined as a trading strategy where an investor borrows shares of a stock they believe will decrease in value, sells them, and then hopes to repurchase the shares at a lower price to make a profit. The investor profits from the difference between the selling and lower prices when repurchasing the shares. In layman’s terms, Suppose I, an investor, believe (by way of research and other complex tools) that the stock of the company ABC would fall in value in the near future. I will then borrow 100 shares of ABC from a broker and sell the same for Rs.100/share in the market. Suppose, the next day, the share price falls to Rs.90. I would promptly buy back the 100 shares from the market and return them to the broker. In this process, I’ll make a profit of Rs.1000. This whole process is called ‘short selling,’ which is sometimes deemed unethical but is not illegal in India. Legal Regulations Surrounding Short Selling in India The central government is reportedly awaiting a report from the Securities and Exchange Board of India (SEBI) on the use of tax havens and concerns about high debt levels by the Adani group. In India, short selling is regulated by the Securities and Exchange Board of India (SEBI) through regulations, guidelines, circulars, and notifications issued from time to time. Short selling was banned in India from September 2008 to March 2009 in response to the global financial crisis but has since been permitted with heavy restrictions under the bundle of regulations such as SEBI (Prohibition of Insider Trading) Regulations, 2015, SEBI (Issue and Listing of Debt Securities) Regulations, 2008, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. Following are the general regulations which are adjusted from time to time in order to keep up with current economic and commercial trends: Eligible securities: Only specific securities that meet defined criteria are eligible for short selling. The criteria include but are not limited to market capitalization, trading volume, and price of the security. Margin requirements: short sellers must have a margin account with their broker and meet the margin requirements set by SEBI, ensuring that they have sufficient funds to cover any potential losses. Circuit breaker: SEBI has implemented a circuit breaker mechanism for short selling to limit the potential losses from excessive short selling. If the price of a security drops by a certain percentage within a certain time frame, short selling will be restricted or temporarily banned. Reporting requirements: short sellers must report their short positions to SEBI on a regular basis aiding in to monitoring the level of short-selling activity in the market and detect any potential market stability threats. When short selling constitutes fraud? Unethical becomes illegal as per the Securities and Exchange Commission (SEC) the United States counterpart of SEBI, when an individual or group of individuals spreads false or misleading information about a publicly traded company with the intention of lowering its stock price; this market manipulation practice is called ‘short and distort’. The Indian Securities market regulator SEBI,  refers to this scheme by an alternative name, which in itself is not separately categorised as an offense under Indian laws. However, the act of spreading misinformation to gain an advantageous position for the purpose of short selling might fall under the definition of ‘fraudulent or unfair trade practices’ or simply ‘fraud’ as defined under Section 2(1)C of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, the section dictates an act intentionally deceptive or not, by an individual or by anyone else with their complicity or by their representative while engaged in securities transactions, with the goal of persuading another person or their representative to participate in securities transactions, regardless of whether there is any unjust enrichment or prevention of any loss is fraudulent.  Furthermore, the definition also attracts sub-section 2(1)(c)(1), 2(1)(c)(2) & 2(1)(c)(8), which categorically declares any acts or omissions, suggestions or false statements which might induce another to act in his detriment, the acts of fraud. Furthermore, under the regulation 9 Code of conduct for Stock Brokers Schedule II of the aforementioned SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, market manipulation is categorically prohibited. The clause A (3) states that “a stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumors to distort market equilibrium or make personal gains”. Additionally, clause A (4) dictates that spreading rumors to bring down the value of the

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isafe Notes – A Safe Tool of Investment in Indian Start-up Paradigm?

Capital Markets and Securities Law /

[By Kumar Shubham] The author is a student of the National Law University, Odisha.   INTRODUCTION Early-stage firms or startups today have a variety of fundraising options. Over the years, hybrid investment vehicles such as Convertible Compulsory Debentures (“CCD”) and Compulsory Convertible Preference Shares (“CCPS”) have grown in popularity for raising funds. However, these firms have also ventured into new investing options, which have so far proved viable for both the companies and the investors. Simple Agreement for Future Equity (“SAFE”) & India Simple Agreement for Future Equity (“iSAFE”) are two such methods that have been prevalent in the investment paradigm. This article analyses the legal landscape surrounding investments through SAFE & iSAFE in India, and draws comparisons between the two. Further, the article provides how iSAFE transactions are beneficial and outlines suggestions for proper implementation of the same. SAFE & iSAFE INVESTMENTS SAFE was first proposed by American startup incubator Y Combinator. It was introduced as a better alternative to Convertible debt. It is a financing contract between a startup and an investor that grants the investor the right to acquire equity in the firm subject to specific activating events, such as a future equity fundraising (known as a Next Equity Financing, often led by an institutional venture capital (VC) fund). No maturity date or interest is accrued for SAFEs prior to a conversion event. The Indian venture capital firm “100X.VC” introduced a significantly modified version of the SAFE concept, i.e., the iSAFE. iSAFE is recognized as Compulsorily Convertible Preference Shares (“CCPS”) in order to maintain the transaction’s legality under Indian law. It is therefore regarded as a commitment to provide investors with CCPS. When the maturity period expires or if another event specified in the terms and circumstances occurs, CCPS, which are preference shares, are converted into equity. Legality of iSAFE & SAFE in India Since SAFEs are neither equity/preference shares, debt, convertible notes, nor any other type of instrument, they are not legally recognized in India. SAFE agreements can’t be categorized as “debt” because they don’t accrue interest or have a maturity date. Likewise, it cannot be referred to as “equity” because there are no dividends or other shareholder rights. This greatly reduces the instrument’s reliability and security, which is the primary cause of its failure in India. However, iSAFE is legally recognised as Compulsorily Convertible Preference Shares since there is no particular statute for such convertibles in India. Sections 42, 55, and 62 of the Companies Act of 2013 as well as the 2014 Rules for Companies (Share Capital and Debentures) and Companies (Prospectus and Allotment of Securities) regulate CCPS in India. Moreover, given that only registered companies may issue shares, the Companies Act of 2013 requires that the start-up be formed as a company before it may issue an iSAFE. As a result, an LLP or partnership firm cannot issue iSAFE notes. For accounting iSAFE notes in India, neither the accounting standards nor the Institute of Chartered Accountants of India have provided any precise guidelines. The iSAFE notes in India must be listed under the Preference Share Capital heading nonetheless, as they bear the legal designation of CCPS. These will eventually be listed on the balance sheet under the “Shareholder Funds” heading. Moreover, there is no explicit guidance on the taxation of iSAFE Notes in India because the concept of iSAFE is still relatively new here. However, Section 47(xb) of the Income Tax, 1961 can be examined because iSAFE notes are regarded as CCPS. This provision states that any conversion of a company’s preference shares into equity is not recognized as a transfer. As a result, there is no tax due when iSAFE notes are converted to equity. Comarative Aanalysis & Suggestions A SAFE note with a valuation cap can serve as a cap for the upcoming financing round and, in essence, functions as an anti-dilution clause. Additionally, it increases risk for the business. The holders of the SAFE notes will be entitled to assume a far bigger percentage ownership of the firm upon conversion, for example, if the company is valued substantially lower in a subsequent fundraising round than when the SAFE notes were issued. Furthermore, investors find it challenging to declare a default when there is no maturity date. There may be specific circumstances in which the triggers are not activated and the SAFE is not converted, leaving the investor with nothing, depending on its terms, and notwithstanding the identified triggering events. However, given that iSAFE notes essentially take the shape of CCPS, the likelihood of this happening is extremely remote in cases of iSAFE. The iSAFE notes issued in India are classed as preference shares under the Companies Act, 2013, which categorizes all share capital as either equity or preference and entitles the holders to a minimal dividend. Unlike the SAFE notes proposed by the Y Combinator, which do not guarantee or confer preference if a liquidity event occurs prior to the conversion date, the iSAFE notes will be entitled to a portion of the proceeds, due and payable to the iSAFE noteholders immediately in preference over the equity shareholders and secured creditors. Moreover, SAFE cannot be used for inviting foreign investments since the Capital instruments permitted for receiving foreign investment in an Indian company means equity shares, debentures, preference shares and share warrants issued by the Indian company, however, SAFE being a future equity, does not suffice the criteria of capital instruments as required under RBI regulations. Therefore, since iSAFE takes the form of CCPS in India, it will help the companies in easily accruing international funding through Foreign Direct Investment routes. The company needs to fill the FCGPR form while issuing CCPS/CCD to an individual/body corporate residing out of India. The Reserve Bank of India (RBI) issues Form FC-GPR when the Company receives a foreign investment and allots shares to a foreign investor in exchange for that investment. The Company is then required to file information regarding that share allotment using Form FC-GPR. iSAFE is actually just CCPS with a different

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Squeeze-out Mergers in India: How are they different from Global Standards?

Mergers & Acquisitions /

[By Ajith N Kale & Rupa Veena S] The authors are students of School of law, CHRIST (Deemed to be University), Bangalore.   Introduction The common law rule of the majority, as laid down in the case of Foss v. Harbottle, has been widely followed in India. It empowers the majority shareholders to make decisions related to the management of affairs of the company which is not interfered with by courts generally. However, minority shareholders always have the right to approach the National Company Law Tribunal (“NCLT”),and courts in case of fraud, mismanagement, oppression or breach of charter documents by the majority shareholders. As per the freeze-out or squeeze-out provisions under the Companies Act, 2013 (“Act”) the majority shareholders can acquire the shares held by minority shareholders and, thereby, squeeze them out of the company, and resultantly can hold the entire shareholding in a company. In light of the same, this article focuses on the legal status of freeze-out mergers in India and further makes a comparative analysis with the laws of South Korea, the United Kingdom (UK), and Australia. Legal status of freeze-out mergers in India In early 2020, section 230 of the Act was amended to include sub-sections (11) and (12)(“2020 Amendment”). Moreover, Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2020 (“CAARules”) and the National Company Law Tribunal (Amendment) Rules, 2020(“NCLT Rules”) were also notified, which were collectively known as the “Takeover Notification” as the amendments primarily were in relation to the takeover of minority shareholding by the majority. Firstly, as per section 230(11) of the Act, any compromise or arrangement includes a takeover offer. Secondly, Rule 3(5) of the CAA Rules enables majority shareholders holding at least 75% of the equity shares carrying voting rights (including depository receipts with voting rights) to file an application with the NCLT to acquire the remaining minority shares subject to a fair price. Thirdly, NCLT Rules deal with procedures related to acquiring minority shares. If the NCLT approves the application, the majority shareholders can forcibly acquire the minority shares by creating an obligation on minority shareholders to sell their shares. Section 235 of the Act allows the compulsory acquisition of shares held by dissenting shareholders if such an acquisition by a scheme or contract is approved by 90% of the shareholders within two months of notice to such dissenting shareholders unless NCLT has ordered otherwise on an application made by the dissenting shareholders. Another option available for the acquirer to acquire the minority shares is stated under section 236. The said section allows majority shareholders holding at least 90% of the equity shares to acquire minority shares by virtue of an amalgamation, share exchange, conversion of securities or for any other reason by notifying the company about the same. However, the bare reading of the section does not expressly obligate the minority shareholders to sell their shares. Moreover, section 236(9) states that in the event of failure of acquisition of all of minority shares by the majority shareholders, the residual minority shareholders will still be regulated under the relevant provisions of the Act. While also ensuring the right of acquisition to the majority shareholders, the amendments provide effective safeguards for the minority shareholders. As per section 230(12) of the Act, aggrieved minority shareholders of unlisted companies can approach the NCLT in case of grievances related to takeover offer. Additionally, the majority shareholders must compulsorily deposit at least 50% of the consideration of the takeover offer in a separate bank account. In the case of S. Gopakumar Nair v. OBO Bettermann India Private Limited, the National Company Law Appellate Tribunal (“NCLAT”)held that the 90% majority shareholders can acquire the minority shares only if any of the events stated in section 236(1) that is “amalgamation, share exchange, conversion of securities or for any other reason” has taken place. As per the rule of ejusdem generis, NCLAT held that “for any other reason” includes only events that are like amalgamation, share exchange, or conversion of securities. It also differentiated between section 235 and section 236 by stating that on one hand section 235 provides for the acquisition of shares from dissenting shareholders, on the other, section 236 allows the acquisition of shares from assenting shareholders only if any of the events mentioned in section 236(1) are triggered. Arguably, Indian laws have tried to strike a balance between rights of the majority and the interests of the minority shareholders, however, to determine whether they are as per the global standards, laws of other nations may be compared. Comparative jurisdictions South Korea Article 360-24 of the Korean Commercial Act, 2018 guarantees a majority shareholder holding at least 95% of the shares to buy out the shares held by minority shareholders. The minority shareholders must sell their shares within two months from the date of request. However, even after negotiation, if the minority shareholders are unsatisfied with the sale price, they can approach the court to determine a fair and reasonable sale price. This section can be compared to section 235 of the Act, wherein majority shareholders holding 90% of shares can acquire the shares held by dissenting shareholders within four months. Further, under Article 360-25, the minority shareholders have the right to sell their shares to the majority shareholder, and the court shall determine the sale price if the parties do not come to a consensus through negotiation. This is similar to section 236, wherein minority shareholders can sell their shares to the majority shareholder. However, while Korean law allows the minority shareholders to approach the court only to determine the reasonable sale price, Indian law empowers the minority shareholders to approach the NCLT in case of any grievances they face in relation to such an acquisition, in addition to making the submission of valuation report of the shares to NCLT mandatory. This indicates that the Indian laws emphasize more on minority shareholders’ protection than the Korean law. Furthermore, section 230 allows shareholders holding 75% of shares to acquire minority shares as opposed to the

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