Author name: CBCL

Bringing Mutual Funds under PIT Regulations: SEBI’s slip on Front-running

Capital Markets and Securities Law /

[By Praveen Sharma & Sakshi Nalawade] The authors are students of Maharashtra National Law University, Mumbai. On 8th July 2022, the Securities Exchange Board of India (SEBI) released a consultation paper seeking the opinion & comments of the public on its desire to extend the scope of SEBI Prohibition of Insider Trading (PIT Regulations), 2015 to include the dealings in the units of mutual funds. It is vital to take note of the fact that this move has come after the  Axis Mutual Fund Front Running Controversy and  Franklin Templeton case. In this blog, the authors argue that this move by SEBI might be too hard on mutual funds. While the issue needs immediate attention, simply putting mutual funds under the umbrella of PIT Regulations could be onerous for the mutual fund industry Background Currently, the PIT Regulations regulate dealings in securities of listed companies or proposed to be listed, when in possession of Unpublished Price Sensitive Information (UPSI) and it explicitly excludes the transactions in mutual funds. The objective sought to be fulfilled is to harmonize the regulations governing trading in securities and mutual funds, while one is in possession of UPSI. There have been instances wherein officials from the mutual funds’ investment regulating the industry, for instance, employees of Asset Management Companies (AMC(s)) and Trustees of mutual funds have redeemed their holdings in mutual funds schemes being privy to Price Sensitive Information not made public i.e., information not known to the unit holders. Thus, by taking undue advantage of their position they either saved themselves from loss or incurred huge profits. In the Axis Bank Front Running controversy, two of the executives were sacked by Axis Mutual Fund on the accusation of front-running. This resulted in a huge blow to the market as the fund was 7th largest mutual fund in India and such instances at a large fund definitely bought out the lacuna in the mutual fund industry. The case of  Franklin Templeton primarily further might have triggered this harmonization by the SEBI. Vivek Kudva, head of Franklin Templeton’s Asia Pacific, an International Asset Management Company, and his wife Roopa Kudva withdrew an investment of Rs. 30.70 crores from six debt funds of the company before they were shut for redemption. This withdrawal was after it was decided to wind up these six debt schemes as they were not performing well and before the actual date of winding up. Kudva also redeemed his mother’s investment from these schemes. Accordingly, he saved himself and his family members from loss in MF by using UPSI. The Proposal by SEBI The paper has defined the terms ‘Insider’, ‘Connected Person’, and ‘Designated Persons’ concerning mutual fund transactions and has laid down conditions to which these people will be subjected while dealing in mutual fund schemes. Essentially, the person coming under the purview of ‘Designated Persons’, their ‘immediate relative’, and ‘any person from whom such designated person takes trading decisions’ must report their trading of mutual fund units to the Compliance Officer. Further, AMC will disclose their details of holdings in the units of mutual funds on an independent platform as specified by SEBI quarterly. In addition, during the ‘Closure Period,’ a period during which the above-mentioned people can reasonably be expected to have possession of UPSI will be entirely restricted from dealing in the mutual fund units. And when such a closure period is not applicable, they are to take a pre-clearance from the compliance officer to make transactions. It defines UPSI as any information about a scheme of a mutual fund that is not yet generally available and which could materially impact the Net Asset Value or materially affect the interest of unit holders, certain instances of the same have been particularly mentioned. Analysing the move While it is certain that SEBI is strengthening itself when it comes to market regulation and is being as precise as possible. With the SEBI circular already covering insider trading provisions, this move is an extra attempt by SEBI to curb insider trading. SEBI has previously imposed limitations on fund managers and staff members of AMCs for dealing in the securities market through several circulars. At first, there were only restrictions on trading listed securities, but in 2021, through a circular dated October 28, 2021, employees, AMC directors, trustee board members, and access persons (as defined in the said Circular) were also forbidden from engaging in any scheme while in possession of certain sensitive information. It is possible to argue that SEBI’s recent decision to include mutual funds under the ambit of the Insider Trading Regulations is nothing more than an effort to greatly consolidate the previously existing regulation. But this action is unprecedented and unethical (disproportionate). As correctly pointed out by Mr. Sandeep Parekh (Securities Lawyer and Ex-ED at SEBI), in ET blog, SEBI in its paper seeks to add ‘two new classes of people under the ‘connected persons’ category namely, the people working with the mutual fund executives like lawyers and research analysts and unconnected people trying to avoid insider trading allegations by dealing in mutual funds like judges and accounting firms. He correctly brings out the lacuna in this process as it further complicates the enforcement process for SEBI. For the former, just doing their jobs would make them a connected person, further, if they invest in that company’s shares having no access to any UPSI and it happens to make good quarterly numbers, this will open them to criminal charges. Accordingly, years after their association with any mutual fund deal, they might face allegations associated with it and might be put in a position where they must rebut the ‘presumption of guilt’ so formed. Additionally, the definition of UPSI includes many instances of routine changes which would make any piece of information affecting daily transactions in mutual fund sensitive information. Following this, every person who has some knowledge about the routine changes such as ‘change in accounting policy’, which are not even material and has relations with an MF

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Constructing parent company liability in the Indian Competition Jurisprudence

Competition Law /

[By Rahul Taneja] The author is a student of Hidayatullah National Law University. Introduction ‘Parent company liability’ refers to the liability of the parent or the holding company for illegal acts of its subsidiary. In the context of the Indian competition law, such illegal acts can be the act of an anti-competitive agreement, abuse of dominance or the formation of a cartel. However, when examining jurisdictions with advanced antitrust laws, it is observed that this issue has been a source of contention for both researchers and industry professionals. The author’s goal is to assess the jurisprudence in India, contrast it with established precedents in other jurisdictions, and offer a path forward from this inevitable dilemma that the regulating body must confront itself with. The doctrine of parent company liability in India is still at a nascent stage and there is a dearth of case laws surrounding this jurisprudence. The developing jurisprudence in India Owing to its nascency, the Competition Commission of India (“CCI”) has faced comparatively lesser cases involving the claims of parent company liability under the Competition Act of 2002. The definition of an enterprise under the Competition Act, 2002 under Section 2(h) read with the proviso clause to section 27 gives the prima facie impression that the statute has empowered the tribunal to embark on a fact-based finding to impute liability upon the parent company in case of its contribution to an anti-competitive agreement or an abuse of dominance proceeding. It is notable that the CCI is yet to come up with a straitjacket formula for assessing the liability of the parent company, there is also a dearth of cases surrounding this particular jurisprudence. However, it is not appropriate to say that this question has no relevance to contemporary competition jurisprudence. Recently, in the Re: Updated Terms of Service and Privacy Policy for WhatsApp Users (“WhatsApp Privacy Policy case”), Facebook (parent entity) was attached as an appropriate party to the antitrust proceeding initiated against WhatsApp based on its 2021 Privacy Policy in the prima facie order under Section 26(1) of the Competition Act. The CCI commented that since Facebook was a direct beneficiary of the policy, it is a proper party to the proceedings along with WhatsApp. This stand taken by the tribunal comes with a lot of accompanying disastrous consequences, fixation of liability only on this sole ground would lead to every company under the sun being held accountable for the subsidiary’s actions. This stand is all the more problematic in cases where the subsidiary’s economic activities are independent of interference from the parent company Apart from the WhatsApp case, the question of parent company liability has come up before in the case of Kapoor Glass v. Schott Glass India Private Limited. In this case, the Director General (“DG”) recommended that the fine for anti-competitive discounts offered by the subsidiary must also lie upon the holding company, the CCI refused to pass any order to this effect and limited the liability to the contravening subsidiary without delving on to this point in detail. The European Experience In the European Union, competition law is governed by the provisions of the Treaty of the European Union (“TFEU”). As per Article 101 of the aforementioned treaty, liability for infringements falls upon ‘undertakings’, which is a startling contrast from other jurisdictions wherein liability is imposed upon legal entities. The concept of an undertaking is distinct from the concept of a legal entity. The former focuses more on the economic functions whereas, the latter focuses more on the legal or corporate status. This means that multiple legal entities can form part of the same economic undertaking.  This is also known as the ‘single economic entity doctrine’, it entails that multiple entities form part of the same undertaking wherein a parent can be held liable for the infringing actions of the subsidiary and according to recent decisions of the court, even vice versa. The landmark decision where liability was imputed upon the parent company is the case of Akzo Nobel NV v Commission, wherein, the ECJ affixed joint and several liability upon Akzo Nobel NV for the illegal price-fixing agreements of its subsidiary. In this case, the court read the concept of a single economic entity viś-a-viś what is now known as the ‘doctrine of decisive influence’ and reasoned that the parent and subsidiary form part of the same economic undertaking wherein the former exercises considerable influence over the latter’s decisions and thus the onus of liability can be affixed upon the holding company without proving the direct liability of the same. The doctrine of decisive influence works on a rebuttable presumption that the two entities forming part of a single undertaking are liable and it is upon the entities to adduce any additional economic or legal evidence to prove the contrary. The doctrine of decisive influence, first articulated in the Akzo Nobel Case, has since been applied in numerous subsequent cases in the EU as well as in other jurisdictions such as Singapore. The European Court of Justice’s (ECJ) strict reading of the presumption has resulted in the culpability of the parent firm in the majority of cases, despite the corporations presenting extensive evidence to avoid liability. In the Arkema case of ECJ, the parent company argued that it is a purely financial holding that does not intervene in the subsidiary’s commercial policies; similarly, in the Legris Industries case, an argument was advanced that the subsidiary company was only a small part of the conglomerate and that Legris had no say in its commercial policies. The ECJ flatly rejected the arguments in both cases. This archaic practice of the ECJ has made it seem like an almost quasi-irrebuttable presumption. US Jurisprudence As opposed to the EU wherein parent company liability is the norm, the general rule in the United States is that the parent company will not be held liable for the actions of the subsidiary, this difference is all the more surprising because of the normally converging nature of the

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A Statutory Effort to Safeguard Personal Data In India: The Digital Personal Data Protection Bill, 2022

Contemporary Issues /

[By Aayushi Choudhary & Bhanupratap Singh Rathore] The authors are students of Gujarat National Law University, Gandhinagar. Three months after the withdrawal of the Digital Personal Data Protection Bill from the Lok Sabha, the government has come up with revamped legislation. This is the fourth time the government has proposed a bill on digital data protection. The first bill was introduced in 2018 based on the recommendations of the Justice BN Srikrishna Committee. After making some modifications, the government introduced the Personal Data Protection Bill in 2019, which was referred to the Joint Parliamentary Committee. The Committee submitted its report along with a draft for 2021 titled “Data Protection Bill, 2021.” After the committee made extensive changes to the draft, the government withdrew the bill. The purpose of the upcoming bill, as mentioned in the draft, is to provide for the processing of digital personal data. This is done in a manner that recognises both the right of individuals to protect their personal data and the need to process personal data for lawful purposes. Some of the highlights of the bill are: Regulatory Body: The proposed regulatory body framework resembles the European Union’s General Data Protection Regulation. Although the functions and duties of the board are not clearly explained in the bill, the present Data Protection Board has simpler functions than the earlier bills. Child Protection: Every person below the age of 18 years will be considered as a child under the Act. The bill prohibits the tracking of children or targeting advertisements. The bill provides a penalty up to Rs 200 crore for non-fulfillment of any obligation provided under it. Penalties: In the previous draft, penalties were proportional to the company’s global turnover. It was 4% per breach and 2% per breach for non-compliance with any provision. This is done away with in the proposed draft, which provides a fine up to 500 crore instead. Many experts have expressed reservations about such a high penalty. In reality, it would be in the range of 50 to 500 crores. It would be in proportion to the kind of breach, kind of impact that it can create on the end user, and the involvement of the company. The Data Protection Authority and Board will analyse the breach and determine whether a penalty will be imposed. In fact, these penalties are low for tech giants. For example, if the Board fines Google $500 million, it is a very small sum in comparison to the penalties imposed on it by various jurisdictions around the world. If companies can justify that they have managed data well and, despite all the safeguards, a breach has happened, they will not be penalised because there is a finite probability that despite all the security provisions, a breach can happen. Twitter, for example, can be hacked despite spending billions of dollars on security and adhering to numerous security protocols. There should always be room for improvement, and any such industry should be given flexibility. Difference from previous bill: The previous bill was drawn from the EU General Data Protection Regulation (EU GDPR), whereas the present bill is drawn from Singapore’s Personal Data Protection Authority. This is a shorter version with only 30 provisions, whereas the earlier draft had 90 or more. The thirty sections cover areas that are needed for the enforcement of the right to privacy and data protection in a holistic way. It keeps the bill short and simple with simple language to make it understandable. The previous bill lost its essence as cumbersome amendments kept on happening. Data portability, which allowed users to view quotes from one platform to another, has been eliminated under the new bill. The earlier draft also included non-personal data, a concept that is not clear even at the global level, hardware certification, or algorithmic accountability. The revised proposal eliminates all of this and focuses solely on personal data regulation. The “right to be forgotten” is likewise not specifically mentioned in the present bill. Cross-border data flow: The bill eliminated previous restrictions on the flow of data from one jurisdiction to another. In any case, the flow of data is restricted to countries that the government has designated as friendly to the flow of data. Therefore, this will apply to all personal information, not just sensitive and critical data. Centre’s uncontrolled power: Placing a large portion of the important functional section of the legislation for future regulation by the national administration and some sections of the act is indicative of the administration’s unrestrained authority. For example, section 19 of the draft mentions the Data Protection Board of India. Under the bill’s rules, the regulator, which will be granted the same control and authority as a civil court, will be established by the government. Instead of that, the regulator should operate separately from the state and be capable of implementing individuals’ basic liberties while safeguarding due process. Moreover, the measure empowers the government to exclude any government institution from it that it considers appropriate. This power will blatantly contradict natural justice principles. Analysis: For the first time, the government has introduced legislation that makes the person providing the data responsible for its accuracy. It is not only the duty of the data processors or those who are keeping the data to protect it; it is also the primary duty of the individuals to provide accurate data and not file frivolous complaints. The Constitution includes a chapter on citizen responsibility, which has yet to be implemented. This bill has made those duties a part of the law. Section 30(2) of the bill proposes an amendment to Section 8(j) of the RTI Act. As per the present Act, information that relates to personal information is exempt from the Act. However, if the Central Public Information Officer finds that it would serve a larger public interest, the exemption can be revoked. If the proposed bill is approved, personal information will be completely exempt, even if the CPIO otherwise finds that disclosure to be consequential

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Extent of Judicial Intervention in IBC: Unwrapping the Conundrum around Commercial Wisdom of CoC

Insolvency Law /

[By Prakriti Singh] The author is a student of Hidayatullah National Law University.   Introduction The Insolvency and Bankruptcy Code, 2016 was enacted to provide a speedy debt resolution mechanism and ensure value maximization of assets. The Code has provided legal recognition to the fact that business failures are normal and there should be effective remedies to rescue the Corporate Debtor. The Code brought an end to the prior existing defaulters’ paradise in India, introduced the Corporate Insolvency Resolution Process (CIRP) which provides a sound procedure for different stages from admission of default to the approval of resolution plan. The Code has brought a regime which prevents judicial intervention in commercial decisions, empowers the stakeholders and entrusts a duty upon the adjudicating authorities to uphold the spirit and procedural sanctity of the Code. The adjudicating authority is required to ensure that the Resolution Plan approved by the CoC is consistent with Section 30(2) of the Code. The Commercial Wisdom of the CoC is paramount in the CIRP. The judiciary itself has circumscribed its role in the CIRP and held that the CoC has the financial expertise to take financial decisions. However, it is the role of the adjudicating authority to ensure balance between stakeholders. The CoC, in exercise of its commercial wisdom, cannot waive off the obligations and statutory liabilities of the Corporate Debtor. In the case of Employees’ Provident Fund Organisation v. Dommeti Surya Rama Krishna Saibaba, (EPFO case) the Chennai Bench of NCLAT has set a dangerous precedent for the exercise of commercial wisdom of CoC. It refused to interfere with the approval of a Resolution Plan, which did not provide for the full payment of PF dues. This ruling failed to take note of the Jet Airways case and Rainbow Papers case. Through this article, the author intends to analyze the reasoning and impact of the recent ruling. Case Summary The Appellant was affected by the order of the Adjudicating Authority, wherein the Resolution Plan was approved on the grounds that the Resolution Plan is compliant with the procedure laid down under the Code and does not violate any provision. The Appellant challenged the order and contended that the Corporate Debtor failed to pay the ‘Employees’ Provident Fund’ (EPF) dues. The Adjudicating Authority had expressed satisfaction with the Resolution Plan. However, the exclusion of EPF dues is in contravention of Section 36 (4) (a) (iii) of the code, which prescribes that the sums owed to employee fund, including provident fund (PF) shall be excluded from the Liquidation Estate of the Corporate Debtor. Due to the approval of the Resolution Plan, the Corporate Debtor has got a waiver on the amount due to the Employees. The Appellate Authority dismissed the Appeal. It took note of the Apex Court ruling in Arun Kumar Jagatramka v. Jindal Steel and Power Limited and Another and held that the fulfilment of the objectives of the Code requires that the intervention of judiciary is kept at the minimum level. The NCLAT took note of the ruling in Vallal RCK v. M/s. Siva Industries and Holdings Limited and Others, that the CoC has the expertise to take the decisions in the CIRP and hence, circumscribing the intervention by judiciary and the authorities is justified.  Since the Adjudicating Authority was satisfied that the Resolution Plan does not contravene any provision of the Code, the Appellate Authority will not interfere in the commercial wisdom of CoC. Unsettling the Jurisprudence The Appellate Authority, in its ruling, referred to previous ruling under the Code giving paramount status to the CoC. However, it failed to take note of rulings which dealt with the payment of PF dues by a Corporate Debtor undergoing CIRP. In Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia Resolution Professional of Jet Airways (India) (Jet Airways case), the Appellant had approached the Appellate Authority on similar grounds. Although the Resolution Professional failed to make complete payment of the PF and gratuity dues, the Adjudicating Authority had approved the Resolution Plan. The rationale behind excluding the gratuity and PF dues from the liquidation estate of the Corporate Debtor is that even in case of the insolvency of the Corporate Debtor, the interests of the workmen shall be safeguarded. The CIRP cannot be a medium to escape the obligations under labour laws. Although the Respondent contended that the Commercial Wisdom of the CoC cannot be subjected to judicial review, the Appellate Authority set up a remarkable precedent by scrutinizing the Resolution Plan and ensuring that the same does not contravene the Code. In K. Sashidhar v. Indian Overseas Bank, the Apex Court stressed upon the need to minimize judicial intervention to achieve a speedy resolution. Even in Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta, the Apex Court had held circumscribing the role of Adjudicating Authority to be crucial for the Code. In Kalpraj Dharamrishi v. Kotak Investment Advisors Ltd, it was held that although the role of the Adjudicating Authority is minimal, it is bound to ensure that the procedure and spirit of the Code is upheld. In Jet Airways Case, the Appellate Authority balanced the Commercial Wisdom with its function of ensuring procedural compliance. Regulation 38(1A) of CIRP Regulations and Section 30(2) of the Code cannot be compromised due to the decisions taken in exercise of Commercial Wisdom of the CoC. As there was a statutory obligation upon the Corporate Debtor, the claim of PF dues made by the workmen were to be accepted. The Successful Resolution Applicant is bound to make the payment of the balance amount of PF. As the PF is excluded from the Liquidation Estate, the workmen are entitled to full payment of the same. The Adjudicating Authority must fulfill its role in the CIRP. Anything more or less than that would throw a spanner in the CIRP. Another case with similar facts, Tourism Finance Corporation of India v. Rainbow Papers Ltd was not referred to in the present ruling. In the Rainbow

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

Banking Law /

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

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

Competition Law /

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

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

Capital Markets and Securities Law /

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

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

Insolvency Law /

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

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

Capital Markets and Securities Law /

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

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