Author name: CBCL

Are Pre-closing Covenants Anti-Competitive?: Separating Gun Jumping from Pre-closing Covenants

Competition Law /

[By Pranay Agarwal] The author is a student at the Gujarat National Law University. Introduction The process of merger and acquisition is not consolidated in India and still remains a practical aspect influenced more by the business practices and the consensus between the entities. One of the important aspects of this process is the Share Purchase Agreements (SPAs) where the shares of the seller are legally transferred to the buyer to give effective control to the buyer over the target. Though the practice of drafting an SPA before any takeover is common in the country, the threat of gun jumping always prevails due to the exercise of control over the target before the transaction is complete. The threat of gun jumping becomes even larger from the inclusion of pre-closing covenants in the SPAs in which the buyer entity has decisive control over the various aspects of the operations of the target entity in the ordinary course of business before the merger transaction is completed. However,  at the same time, such pre-closing covenants ensure fair competition in the market balancing the rights of both the target and the buyer. In this article, the pre-closing covenants are given a legal explanation in light of the existing competition laws of the country and it is tried to separate them from the gun jumping and necessitates the need to understand the fine line between them to safeguard the interests of the entities and ensure healthy competition in the market. What are Pre-closing Covenants? Pre-closing covenants are signed during the time period ranging from the execution of the SPA to the actual transfer of the shares or closing of the takeover transaction in order to confer some control to the buyer over the actions and conduct of the target entity. In other words, the pre-closing covenants set out those actions which the seller entity is permitted to carry out in the ordinary course of business. The ordinary course of business, in this case, should be ascertained from the commercial perspective and not from a general perspective. Therefore, it is pertinent to look into the objects clause of the Memorandum of Association of the entity to get a clear picture of the activities conducted by the entity in the ordinary course of business. However, the Memorandum of Association should not only be the criteria to decide such activities and the term should be given a purposive construction depending on the policy or transactions of the entity with related parties. Nevertheless, due to the prevailing business practices on the pre-closing covenants, buyers are given rights on fixing the actions which can be freely carried on by the target entity, and such control is even extended to capping the monetary value of the transactions of the target. While this may seem to be giving effective control to the buyer over the conduct of the target before the actual takeover, the pre-closing covenants are included with the sole purpose of ensuring the position or image of the target entity in the market in the interim period does not differ from that at the time of the agreement in order to prevent unjust losses to the buyer due to conduct of the target meanwhile. Decisive influence in Pre-closing covenants The apprehension of gun jumping due to the pre-closing covenants is majorly influenced by the excessive control that it gives to the buyer over the conduct of the target. If seen from one perspective, the pre-closing covenants through conferring extensive control to the buyer over the target, at times transcend its boundaries to significantly influence the actions of the target entity before the closing of a merger or takeover transaction. ‘Decisive influence’ in this context has to be construed in the light of the gun jumping laws of the country. The test of ‘decisive influence’ was given in Hindustan Colas v. CCI, where the Competition Commission of India (CCI) held that the decisive influence by the buyer over the target constitutes the implementation of the combination, violative of section 43A of the Competition Act, 2002 (the Act). While the decisive influence test as was also reiterated in the Etihad Airways case properly defines the practice of gun jumping, the test has to be seen more from the perspective of ‘effective control’ than the decisive influence to practically fulfill the test. The term has been given a proper definition from the mergers and acquisitions perspective in Regulation 2(1)(c) of the SEBI Regulations, 1997 where the control has been given a broad definition of not only relating to the voting of the directors but also management or policy decisions of the entity. The definition though gives an enlarged view of the control of the company, it is possible that the pre-closing covenants are misused under the guise of preservation of the value of the target to exercise excessive control and thus, decisively influence the actions of the target; thus effecting the combination before the completion of stipulated time and procedure. Nonetheless, such presumption may do more harm than good by damaging the sacrosanct line between gun jumping and pre-closing covenants, making it necessary to clearly distinguish between them. The Dissonance between Gun Jumping and Pre-closing Covenants Gun jumping has been a major concern during the merger process. While the term has got its origins in the European competition laws, the CCI in Ultratech Cement case tried to give an indigenous view on the same. The important factor which has to be taken into account is the conduct of the parties to the combination which results in the consummation of the combination before the orders of CCI under section 31 of the Act or when the standstill obligation is still in force. The pre-closing covenants inherently confer powers to the buyer to exercise some control over the seller’s conduct, thus hinting toward the high chances of gun jumping in such agreements. However, the incidences of gun jumping have to be recognized in matters of pre-closing covenants on a case-to-case basis by the Indian watchdog in order

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‘Vidarbha Industries’- A Problematic Interpretation

Contemporary Issues, Insolvency Law /

[By Shalin Ghosh] The author is a student at the Maharashtra National Law University, Mumbai. Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) contemplates the initiation of insolvency proceedings only by financial and operational creditors under Section 7 and Section 9 respectively. Section 7 (5) (a), in particular, triggers the insolvency process for financial creditors, once the Adjudicating Authority (“AA”) decides the existence of debt and default. The Supreme Court’s (“SC”) recent judgement, in Vidarbha Industries Power Ltd. v. Axis Bank Ltd (“Vidarbha Industries”), rendered the aforementioned provision discretionary. The ruling disturbs settled law and could significantly impact India’s insolvency and credit recovery mechanism. Facts The appellant, a power generating company, was contracted for implementing a Group Power Project (“GPP”) by the Maharashtra Industrial Development Corporation (“MIDC”). In 2016, the appellant filed an application before the Maharashtra Electricity Regulatory Commission (“MERC”) demanding the actual fuel costs for the Financial Years 2014-2015 and 2015-2016. MERC rejected the appellant’s request, disallowing a major proportion of the demanded fuel costs while also capping the tariffs for the Financial Years 2016-2017 to 2019-2020. This was challenged before the Appellate Tribunal for Electricity (“APTEL”). Allowing the appeal, APTEL directed MERC to allow the actual costs incurred by the appellant to purchase coal for the plant’s first unit. It also temporarily imposed a limit on the fuel costs for the second unit. According the appellant, Rs. 1,730 crores were due to it as a result of the APTEL’s order. Subsequently, the appellant filed an application before the MERC for implementing the APTEL’s order. However, MERC filed a civil appeal before the SC which remained pending. The appellant claimed that it was unable to implement the directions in the APTEL’s order due to MERC’s pending appeal before the SC and that it faced a fund shortage. An implementation of the said order, the appellant argued, would help it discharge its outstanding obligations. In 2020, Axis Bank, the financial creditor, initiated CIRP against the appellant under Section 7 of the IBC before the National Company Law Tribunal (“NCLT”), Mumbai. Upon being challenged, NCLT, Mumbai declined the appellant’s plea demanding a stay on the CIRP, ignoring the pending amount realizable by the APTEL’s order, adding that disputes between the appellant and MERC were irrelevant to the concerned issue. The National Company Law Appellate Tribunal (“NCLAT”) affirmed NCLT’s observations, also adding that if the latter is satisfied about the existence of both debt and default, that itself would be sufficient to trigger CIRP. The appellants, aggrieved by the order, approached the SC for relief. Decision Section- 7(5)(a)- Discretionary or Mandatory? While deciding the nature of the provision, the Court acknowledged that although no extraneous factor should impede a speedy insolvency resolution under the IBC, it importantly held that aspects particular to the case, such as a pending appeal and the appellant’s financial condition cannot be termed ‘extraneous. The SC categorically stated that the NCLAT incorrectly observed that it merely has to ascertain the presence of a debt and default as sufficient conditions to trigger CIRP. The Court opined that the NCLT must apply its mind and consider relevant factors and examine the corporate debtor’s arguments against admission on its own merits, before admitting a CIRP application. Notably, it pondered on the connotations of ‘may’ in Section 7 (5) (a) observing that had the legislative intent been to construe the aforementioned provision as ‘mandatory’, then it would have used ‘shall’ instead of ‘may’. The Court reasoned that the object of the IBC is not to penalise solvent companies who temporarily defaulted on their dues. Therefore, CIRP, in the Court’s opinion, does not arise unless the concerned entity is insolvent or bankrupt. These observations led the Court to hold that Section 7 (5) (a) is a discretionary provision and that the NCLT is not compelled to admit a financial creditor’s CIRP application even when the corporate debtor has defaulted on its dues. The SC noted that the admission in the cases of financial creditors may be suspended indefinitely, till the extraneous matter is sorted. However, spelling out different standards for operational creditors, the Court observed that if such a creditor files a CIRP application, then it is obligatory for the AA to admit it, provided it is satisfied about the existence of a debtor’s default. Analysis Troubling consequences for the insolvency regime This is a concerning judgment that can potentially hamper the IBC’s effective application and dilute the robustness and efficacy of the prevailing insolvency culture. Firstly, the legislative scheme prescribed by the IBC provides for a judicial ‘hands-off’ approach by strictly limiting the scope of judicial intervention. The Court clarified this legal position in the landmark Essar Steel judgment wherein it was held that the AA is merely required to ascertain whether the legal requirements under the IBC have been satisfied and that it cannot sit in judgment over the ‘commercial wisdom’ of the CoC. Other than several orders of the NCLTs and the NCLAT, this position was reiterated by the Court itself in a number of well-known precedents like  K. Sashidhar v. Indian Overseas Bank and Vallal RCK v. Siva Industries and Holdings Limited. By requiring NCLT to scrutinize the corporate debtor’s financial health and viability, generally considered to be the domains of the CoC, the judgment in Vidarbha Industries completely goes against this established and settled legal principle, distorting the clearly defined boundaries stipulated both in the IBC and in a litany of judgments. It deprives the CoC of having an authoritative say in matters crucial to their interests while paving the way for greater judicial overreach. Secondly, the Court’s opinion, that the AA is required to examine additional grounds raised by the corporate debtor on merits before admitting a CIRP application, could adversely impact both the IBC’s application and its objectives. Till now, the NCLT only had to consider the existence of a debt and the evidence proving that the corporate debtor has defaulted on honouring the said debt. Once these two elements were ascertained, a CIRP application could

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Competition (Amendment) Bill 2022- Amiss for Cartel Enforcement?

Competition Law, Contemporary Issues /

[By Prakriti Singh] The author is a student at HNLU. The Indian Competition Law Regime is bracing for the first amendment to the Competition Act, 2002. The Competition (Amendment) Bill, 2022 has proposed substantial changes for both the arms of the Indian Competition Law Regime, i.e., merger control and cartel enforcement. Cartels are considered to be a heinous offense under the antitrust law. These twenty years of the Competition Act have witnessed a robust anti-cartel drive in India. Unlike the USA, India does not consider cartels to be a crime. However, the imposition of huge penalties is the Competition Commission of India’s (“CCI”) weapon to create a deterrent effect on the cartels. The Amendment Act has proposed several progressive changes to the Competition Act, 2002. In line with the Competition Law Review Committee Report, it has included hub and spoke cartels under the Act. The Leniency Regime goes hand in hand with the Cartel enforcement. The Amendment Act seeks to revamp the leniency provisions by permitting the withdrawal of leniency petition and dealing with the disclosure of multiple cartels. While the Amendment Act has taken an active step in recognizing different categories of cartels and advancing the leniency provisions under the Indian Competition Law Regime, it has failed to cure the existing mischief in the cartel enforcement law in India. The primary objective of cartel enforcement law is to alleviate cartel formation and thereby promote competition in the market. The statistics presented in India Chapter of Asia Pacific Antitrust Review, 2022 clearly demonstrates the failure to achieve this goal. The primary cause is the inconsistency in cartel enforcement on the part of the CCI. In order to prevent the death of enterprises in the wake of the pandemic, the CCI has abstained from imposing penalties in a number of cases. However, this soft approach might be antithetical to the antitrust regime. This article aims to present an analysis of the missing parts in the 2022 Amendment on the cartel enforcement arm. It will suggest some changes in the cartel enforcement provisions in order to strengthen the regime. Cartel enforcement in India Monopolies and Restrictive Trade Practices Act, 1969 is the predecessor of the Competition Act, 2002. One of the mischiefs pointed out in the 1969 Act by the Raghavan Committee was the absence of any provision to reduce cartel activity. The 2002 Act brought in provisions to prevent cartel activities in the economy which are extremely secretive and difficult to prosecute. The CCI (Lesser Penalty) Regulation, 2009 was notified in order to enhance the cartel detection rate which has led to the evolution of the cartel enforcement regime. As opposed to relying on mere circumstantial evidence, the CCI has now transitioned to relying on the evidence gathered from dawn raids. Analysing the inconsistency in the Cartel enforcement- Case Study of the Railway Sector The Railway market is a monopsony market prone to cartel formation. The first ever order of the leniency regime was related to cartelization in the Railway sector. In recent times, cartel detection in this market has been made possible by the exercise of the Leniency application. However, the inconsistent approach of the regulator is problematic. It even bears the threat of discouraging the leniency petitions. On 10 June 2022, the CCI released an order imposing penalties on seven firms. These seven firms were engaged in cartelization in the supply of protective tubes. The detection of this cartel was made possible by one of the member firms in the cartel. The Director General in his report had submitted evidence of cartelization relating to the polyacetal protective tube in the Indian Railways. The CCI, after a detailed analysis, concluded that the communication between the firms clearly demonstrated the existence of a cartel arrangement. The CCI took a harsh stance on the cartel arrangement. The member firms attempted to justify the presence of a cartel in the monopsony Railway market. However, the CCI strictly demonstrated an anti-cartel stance. The monopoly of the Indian Railways is no good ground to engage in cartelization and manipulate the bidding process. Except for the whistleblower, all the firms were penalized. Even in this cartel, there were MSMEs facing economic disruptions caused by the pandemic. However, the CCI, instead of issuing a stringent warning, imposed penalties on these firms. In 2021, in Eastern Railway, Kolkata v. M/S Chandra Brothers and Others, the CCI found evidence of cartel activity in the Axle Bearings market. This cartel was also detected as a result of a Lesser Penalty Application. Even the suppliers, in this case, attempted to justify a cartel in a monopoly market. This cartel also included MSME enterprises bearing the brunt of the pandemic. The CCI abstained from imposing penalty and rather issued a cease-and-desist order. In Re: Chief Materials Manager, South Eastern Railway v. Hindustan Composites Limited and Others, the CCI had found evidence of cartel in the supply of Brake Blocks to the Railways. However, it restrained from imposing any penalty as the MSMEs were adversely affected by the pandemic. In this case, the CCI, analysed the turnover of the Opposite Parties, on the basis of which, it issued a cease-and-desist order. Similar leniency towards MSMEs engaging in cartelization in the supply of cartel brushes to the Railways was demonstrated in Mr. Rizwanul Haq Khan, Dy. Chief Material Manager, Office of the Controller of Stores, Southern Railway v Mersen (India) Private Limited and Another. Thus, within a single market, the CCI’s approach has been replete with inconsistency, that too, while deciding cases with similar circumstances. This inconsistency causes mischief on two counts. Firstly, it dilutes the magnitude of deterrence originally envisioned by the cartel enforcement regime. Secondly, it also dilutes the efficacy of the Leniency Programme. If the applicant has no incentive of getting lenient treatment compared to the other cartel members, the entire process of filing a Lesser Penalty Application would seem to be futile. A stringent approach to cartels- the cure for the mischief of inconsistency? In the past two years,

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Analyzing the Competition Amendment Bill vis-a-vis Regulation of Digital Market

Competition Law, Contemporary Issues /

[By Akrama Javed and Aditya Maheshwari] The authors are students at the Gujarat National Law University. Introduction Recently, after a coon’s age of introduction of the Draft Competition (Amendment) Bill, 2020, the legislature introduced the Competition (Amendment) Bill, 2022 (hereinafter as “Bill”), wherein certain changes in the present legal regime have been incorporated. The Bill so proposed needs to be analyzed in the context of the digital market (hereinafter as “market”) owing to two major reasons. Firstly, the complexity in the regulation of the market owing to its complex and multifaceted nature due to the involvement of data, complex algorithms, and lack of technical tools for regulation. And secondly, the effect of the anti-competitive dominant policies of these Big-Tech on new entrants, as well as the existing competitors in the market. Therefore, in this article, the authors have analyzed the upcoming legal regime pertaining to the rise of the digital market in India. Competition Bill 2.0 – amendments pertaining to Market Some of the indispensable changes in regard to regulating the market are: Inclusion of Technology Experts in the Competition Commission of India  Taking a leaf out of Indian security law wherein the special focus is being made on the expertise of the members with regard to the securities market, the legislature intending to add investigative muscle and professional expertise to intensify scrutiny of Big-Tech companies, introduced the inclusion of expression ‘technology’ under Section 8 of the Competition Act (hereinafter as “Act”) wherein it would be one of the factors for the selection of the chairperson and other members. Moreover, while complementing section 8, an amendment is also introduced in Section 9 of the Act to include ‘technology’ while forming the selection committee. Material influence as part of the control Through the amendment, the legislature intends to amend the definition of ‘control’ to include the lowest threshold of control i.e., material influence. The inclusion of this would keep the digital transactions under the Competition Commission of India’s (hereinafter, “CCI”) supervision as such transactions don’t come under the realm of quantitative criteria provided. Hub and Spoke Cartel Propelling from the traditional cartel i.e., horizontal and vertical cartel, the CCI introduced Hub and Spoke Cartel under Section 3 of the Act. Here, the CCI intends to include such transactions which are done through intermediaries. For instance, the use of price algorithms for anti-competitive activities by companies like Ola and Uber shall be scrutinized under this provision. Demystifying the existing conundrum in the market in India As mentioned earlier, the amendment is introduced keeping in mind various actions being taken by the CCI against Big-Tech and it is pertinent to discuss the same to understand the contemporary contextual issues existing within the domain. The data induced jurisdictional tussle The issue was ignited for the first time when suo-moto cognizance was taken by the CCI against WhatsApp’s Terms and Services relating to Privacy Policy which effectively asked users to accept the sharing of their data with Facebook and initiated an investigation. It should be noted that prior to this, CCI had generally avoided intervening in matters having data privacy undertones to them. However, herein, CCI had held that WhatsApp Inc., through this policy, was arbitrarily degrading the non-price parameters of competition i.e., data, to an extent that it violated Section 4(2)(a)(i) of the Act through the imposition of unfair terms and conditions. In all of this, the idea of the CCI overstepping its jurisdiction to meddle in privacy issues is concerning when there is almost a legal vacuum in the area of data privacy due to the withdrawal of the Data Protection Bill, 2021. The case of apprehensive App Store arrangements The case of apprehensive app store arrangements is exacerbated by dominant tech firms i.e., Apple Inc. and Google, and action was taken against them. Recently, an investigation was launched against Apple Inc. on grounds including App Store Review Guidelines being violative of Section 4(2)(a)(i) of the Act due to its ‘take it or leave it’ nature, the mandatory use nature of the in-app payment system and the tie-in arrangement restricting other developers to develop iOS apps. Likewise, Google has also been found guilty of abusing its dominant position by denying market access, leveraging, and restricting technology to the prejudice of consumers. The problematic allegory of the algorithms The concept of Algorithmic collusion has been addressed by the CCI in two cases. Taking a narrow approach in the case of Samir Agrawal v. ANI Technologies Pvt. Ltd, CCI held that there did not exist hub and spoke agreement because there existed no agreement to set the prices or coordinate the prices between the parties. Secondly, in the case of Re: Alleged Cartelization in the Airlines Industry where the existence of hub and spoke agreement was investigated w.r.t common software algorithm software used by airlines to determine the ticket pricing. In this, the CCI found that the revenue management team of the airline modulated the algorithm, and the role of the algorithm was limited only to aiding the team in arriving at the price which would ensure optimal revenue. Here, the question would again arise in front of the CCI in case there is an employment of a self-learning algorithm. Foreign Approaches Countries around the world getting a move on from the traditional competition laws by reconsidering the present legal regime to include safeguards against modern anti-competitive activities such as tacit collusion. Some of the best safeguards being adopted by various countries are discussed below. Digital Market Act – European Union The European Union recently enacted the Digital Market Act as a means of limiting the ability of major digital firms to respond to and head off the competitive threats posed by their business models. It is enacted to impose a stringent regulatory regime on the gatekeepers. Moreover, investigation regarding the compliance of regulations is provided to give ex-ante effect to it. Moreover, the obligations are imposed on gatekeepers to explain their algorithms and the non-compliance of the same would invite severe penalties. Open Market App

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Investors’ Confidence – An Indispensable Exigency for Securities Markets

Capital Markets and Securities Law /

[By Aditya Maheshwari and Kaushlendra Pratap Singh] The authors are students at the Gujarat National Law University, Gandhinagar. Introduction The securities market (“market”) is a gravitating concept modulated by various controllable and uncontrollable factors. One of the significant aspects of the flourishment and progression of the market is the role of investors’ confidence in the market and the regulatory body. On various occasions, an accentuation is being made on the part of transparency in economic and regulatory policies for perpetuating the Investors’ Confidence in the market. The term investors’ confidence in its generic sense can be understood as investors’ readiness to capitalize on the investment possibilities and intermediation channels that are accessible to them based on their assessment of risk and reward. To make it possible for investors to access information related to various securities and regulations, the role of the Security Exchange Board of India (“Board”) has become prominent. This article intends to crack wide open the efforts being made by Board to protect investors’ interests, the comparison being made to other foreign legal regimes, and the aperture in the present legal regime related to it. The mutuality between investors’ confidence and transparency in the policies regulating investors The relationship between Investors’ Confidence and Transparency has been impregnable when it comes to the legal or the financial aspect. Investors consider the legal and regulatory environment along with political and economic aspects before making any kind of investment in the market. As per the Global Investment Competitiveness (GIC) survey in the years 2017 and 2019, two-thirds of the investors in the market, study policy uncertainty as a significant factor in their investment decision. When it comes to transparency, systematic publication of the rules and regulations,  clarity and specificity of the legal provisions of the administrative procedure, and the availability of the portals and other mechanisms are some of the criteria to be considered by the regulatory body. There is an inverse relationship between  the regulatory risk and the investment by the foreign investors as the lack of certainty holds the investors back from investing in such market While it has already been discussed the mutuality between the transparency in the regulation and the investors’ confidence, the upcoming sections would discuss the present regulatory framework in India to enhance investors’ confidence and how changes can be made in the present legal regime. For instance, European Union enacted separate legislation to bring transparency to increase investors’ confidence. Investors’ confidence – present legal regime and recent amendments As discussed above, the mutuality between investors’ confidence and transparency in the policies regulating investors in the market, the Board, since its inception in the year 1992, has undertaken specific measures and further made amendments for the protection of the investors’ interest as well as bringing transparency in the process regulating them. Existing legal framework for the protection of investors’ interest in India Since the inception of the Security Exchange Board of India Act, 1992 (“Act”), the legislature’s intention and objective were clear behind enacting this statute which can be determined through the preamble of the statute. The preamble uses the expression “protect the interests of investors in securities” in the preamble which upfront clears the role of the regulatory board. Moreover, to make it an obligation, the same is enshrined under Section 11(1) of the Act. Further, in regarding initiating an investigation as well as passing orders by the Board, one of the significant reasons is to protect the interest of the investors and against transactions that are detrimental to the investors. Initially, the investors’ grievances redressal procedure under this Act was incorporeal, however, with the introduction of the Investor Grievance Redressal Mechanism, the investors’ confidence in the market increased significantly. To add extra cushion to investors’ protection in the market, the penalty is being imposed on the listed company and person acting as an intermediary that fails to address the grievances of the investors. Consolidating the present legal framework for the protection of investors’ interest in India While in the initial legislation, certain statutory remedies were available to the investors in India however, to consolidate the existing legal framework, the Board over the last decade made substantial amendments to the Act as well as issued circulars to further substantiate the position of investors in India. Starting with the introduction of the Investors Protection and Education Fund in the year 2009 which is used to educate the investors about the current market situation as well as provide restitution to eligible and identifiable investors who have suffered losses resulting from a violation of securities laws under regulation 5(1) and 5(3) of the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009. As discussed in detail earlier about the role of transparency in policies regulating investors and investors’ confidence, the Board to provide clarity and transparency regarding revealing the shareholding pattern to the investors amended in the initial circular issued in the year 2015. Moreover, the Board to enhance the investors’ grievances mechanism, put forwarded various measures such as – Arbitration Mechanism at Stock Exchanges To vitalize the investors’ grievance mechanism, the Board introduced the arbitration mechanism to resolve investors’ grievances. The measure was taken regarding the speedy disposal of the grievances. Moreover, to further enhance this mechanism, the Board brought transparency to the process of arbitration by providing public dissemination of profiles of arbitrators. SEBI Complaints Redress System The SEBI Complaints Redress System (“SCORES”) is an online mechanism to assist investors’ to lodge compliant and further track the process of such complaints virtually. Moreover, the Board made it a devoir for the recognized stock exchanges to design and implement an online web-based complaints redressal system of their own. Analysis – shortcomings in the present legal regime Now that it has been discussed in detail the regulatory regime concerning investors’ protection in India, this section aims to compare the grievances redressal mechanism prevailing in India and other countries along with the challenges in the present regime. Comparison of investors’ grievances redressal mechanism in India

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Understanding the Mystification of Appointed Date versus Effective Date in a Scheme: Decoding the Impact of MCA’s Clarificatory Circular

Mergers & Acquisitions /

[By Aastha Bhandari] The author is a student at the OP Jindal Global University. Introduction The conundrum between the two significant concepts of Appointed Date (“AD”) vis-a-vis the Effective Date (“ED”) within a scheme of amalgamation/merger or demerger filed before the National Company Law Tribunal (“NCLT”) has been a contested subject-matter. It was left obscure, with contrasting judgments from the NCLT, up until the Ministry of Corporate Affairs (“MCA”) released its clarificatory circular on the matter in 2019. (“the Circular”) The two concepts form a substantial part of any scheme on account of the fact that section 232(6) of the Indian Companies Act of 2013 (“CA”) makes it mandatory for every scheme to “clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.” Put simply, the ED refers to the date when the scheme receives the sanction of approval from the NCLT and AD refers to the date when the parties record the financial values of all the assets, liabilities and other parameters that are to be transferred from the transferor company to the transferee company, as a part of the scheme. As such, the scheme is deemed to be effective on the AD.  In line with this, it is the aim of this article to map the impact and influence of the Circular on the decisions of the NCLT on the validity of an AD vis-à-vis the ED. In particular, this article will focus on the MCA’s clarification regarding the validity of an AD, being a calendar date, which is set at a date that precedes the date of filing of the Scheme before the NCLT beyond one year. Understanding the Background and Content of Clarifications Contained in MCA’s Circular The following clarification that is relevant to the scope of this article is reproduced below: When AD Precedes Date of Application of Filing the Scheme before NCLT: In its Circular, the MCA issued a significant clarification stating that where the AD is chosen as a specific calendar date, it may precede the date of filing of the application for the scheme of merger/amalgamation in NCLT. However, if the AD is significantly ante-dated beyond a year from the date of filing, the justification for the same would have to be specifically brought out in the scheme and it should not be against the public interest. Decoding the Impact of the Circular on Decisions of the NCLT vis-à-vis sanctioning Schemes In Avanthi Warehousing Services Private Limited v. Awaze Logistics Private Limited (2022), the Regional Director of the MCA (“RD”) made an observation to the effect that the Petitioner Companies had defined the AD in such a manner that it was approximately two years old from the date of filing of the Company Application (“CA”) for the scheme and thereby, the RD recommended a revision of the AD from 1.04.2020 to 1.04.2021. In line with the Circular, the Petitioner Companies justified the AD of this particular scheme by arguing that it had been approved by all the relevant stakeholders including the shareholders, secured creditors, and unsecured creditors. Further, the employees had also taken 1.04.2020 as the AD on record. Therefore, the Petitioners prayed for an acceptance of their AD by further relying on the Suo-moto order of the Supreme Court of India (“SC order”) dated 2021 on cognizance of the extension of limitation on account of the Covid-19 pandemic. In this case, the NCLT sanctioned the scheme on the grounds that it was not opposed to: i) public interest and ii) interests of the relevant stakeholders. In Re: Murli Industries Limited (2022), the RD objected to the AD set by the parties to the scheme on the ground that it was non-compliant with the Circular as it outdated the year of the filing of the CA by more than a year. However, this represents a case wherein the Petitioner’s justification relied on the fact that the AD was not outdated and well within the one-year time period permitted by the Circular. This was because the scheme was approved by the Board of Directors on 23.03.2021 shortly after which the CA was filed on 28.03.2021. This response was accepted by both the RD as well as the NCLT, the final implication being that the time taken to undertake the scheme was elongated sizably. This represents one of the numerous cases in which the RD has objected to the scheme on the grounds of the scheme being outdated for over a year when the same is not factually correct. This trend has especially seen an increase during the Covid-19 pandemic. In Vaiduriya Hotels Private Limited v. Ratnaa Lakshmi Hotels Private Limited (2022), the RD objected to the scheme on the ground that the AD was “non-acceptable” as it was ante-dated beyond a year from the date of filing of CA, thereby not being compliant with section 232(6) of the CA. In reply, the Petitioners argued that the date of filing was well within one year from the AD, with the AD being 1.03.2019 and the date of filing being 20.02.2020. It was only due to the peculiar and inevitable circumstances of the pandemic lockdown that all applications were numbered and listed for the first hearing on 14.20.2020. Therefore, the period from 15.3.2020 to 28.02.2022 shall stand excluded on account of the SC order. Further, in the matter of Subhas Impex Private Limited and Others (2022), the RD objected to a particular AD in this case by stating that it lacked any relevance to the scheme because the AD had been set as 1.04.2019 however simultaneously the Petitioner Companies had submitted their financial statements to the NCLT up to the financial year ended 31.03.2021. In line with this, the RD found that the Petitioners had not adequately justified the setting of their AD through the production of relevant documents. The Petitioners justified the AD on two large grounds: i) that they had filed

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Vidarbha v. Axis Bank: A Case of Reinventing the Wheel?

Contemporary Issues /

[ By Paridhi Gaur] The author is a student at the University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University. Introduction The enactment of the Insolvency and Bankruptcy Code (hereinafter, “IBC”) was a paradigm shift in resolving debt-ridden companies expediently and without compromising on the value maximization of assets. Remarkably, it put the creditors on a pedestal by giving them decision-making powers in the Corporate Insolvency Resolution Process (hereinafter, “CIRP”). Financial creditors and operational creditors are empowered to initiate CIRP against corporate debtors under Sections 7 and 9 of the IBC, respectively. In Innoventive Industries Ltd. vs. ICICI Bank (hereinafter, “Innoventive”), the apex court had laid down that the NCLT must admit these applications if they are defect-free and upon satisfying itself on the following two grounds: whether there is an existing debt which is due, and whether the corporate debtor has defaulted in making a payment towards such debt. However, through its recent ruling in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. (hereinafter, “Vidarbha”), the Court has diluted this twin test. The NCLT now has the discretion to reject an application by a financial creditor to initiate CIRP, despite the existence of debt, by accounting for certain factors like the financial health and viability of a company. Contrastingly, an application of the operational creditor in a similar situation is mandatorily to be accepted, unless there is a pre-existing dispute between the parties about the debt. In this article, the author seeks to analyse if the apex court was right in unsettling a settled law or if the same is an attempt to reinvent the wheel. Factual Matrix Vidarbha Industries Power Limited (hereinafter, “VIPL”) is a power generating company and its business is under the regulatory control of the Maharashtra Electricity Regulatory Commission (hereinafter, “MERC”). MERC determines the tariff chargeable by electricity generating companies. As a result of certain developments between 2003-2013, a dispute arose between VIPL and MERC on the amount of the final tariff. The Appellate Tribunal for Electricity (APTEL) decided in favor of VIPL, who claims that a sum of Rs. 1,730 crores is realizable by it in terms of this order. However, MERC appealed this decision before the Supreme Court and the same is pending. As of date, the apex court has not granted a stay on the APTEL order. In 2021, Axis Bank Private Limited, a financial creditor of Vidarbha, filed an application for commencing insolvency against VIPL and claimed that Rs. 553 crores are owed to it. VIPL sought a stay on these proceedings on the ground that the appeal by MERC is pending before the SC. They argued that since the receivable due to them exceeds the claim amount, initiating CIRP is not necessary. The NCLT found no merit in this submission and reasoned that pending decisions are extraneous matters and therefore, cannot have any bearing on an application under Sections 7 or 9 of the IBC. The NCLAT, in appeal, upheld the decision of the NCLT. Aggrieved, Vidarbha approached the SC. Decision of the Supreme Court VIPL roped in the rule of literal interpretation to assert that Section 7(5)(a) of the IBC is discretionary because the legislature has used the word “may” instead of “shall” while giving the NCLT the power to admit an application. It was pointed out that if the legislature meant to impose a compulsion, the word “shall” would have been used, like in the parallel provision of Section 9(5)(a).  Therefore, the NCLT may reject an application, despite there being a debt, to meet the ends of justice. VIPL’s fleshed-out submissions before the apex court compelled a judicial interpretation of the legislative intent through the terminologies used. The Court agreed that the legislature, by making the active choice of using “may” in Section 7(5)(a) and “shall” in Section 9(5)(a), sought to provide different levels of discretion to the NCLT under the two otherwise similar provisions. As such, an application by the operational creditor under Section 9 is mandatorily required to be admitted, if- The application is complete in all respects; The application complies with the requisites of the IBC; there is no payment of unpaid operational debt; notices of payment or invoices have been delivered to the corporate debtor; no notice of dispute has been received by the operational creditor. On the other hand, the existence of debt (and default in payment thereof) only gives financial creditors the right to file an application. Under Section 7(5)(a), it is up to the NCLT to decide whether to admit it or not. To crystallize the contours of this discretion, a test of expediency has been stipulated. It requires the NCLT to adjudge the feasibility of initiating a CIRP by accounting for the overall financial health and viability of a company and applying its mind to other relevant circumstances. While the Court refrained from chalking out what these “relevant circumstances” entail, it justified the need for this change in status quo on the premise that the question of insolvency only arises if the corporate debtor is under financial duress. Analysis The twin test used as a touchstone for initiating insolvency was, in a way, the creditors’ paradise since it provided them a hassle-free path to recover their dues. However, the test was extremely rigid in its ambit and side-lined the corporate debtors’ interests. Even in a situation wherein the corporate debtor is solvent, but unable to meet its liabilities for the time being due to genuine extraneous factors (for example, a favorable arbitral award being under challenge), it would be compelled to sound its death knell by undergoing CIRP. In this regard, the ruling in Vidarbha will prove to be a game-changer if properly implemented. It can help prevent futile insolvency proceedings by providing the corporate debtors with a fair say in the process. Besides, the financial creditors are not prevented from filing a subsequent application under Section 7 if their dues remain unpaid. This way, the IBC’s objectives of reviving the corporate debtor and protecting the interests of

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Law and Economics Analysis of the Combination regime under the Competition Act, 2002

Competition Law /

[By Manas Agrawal and Ritu Bhatia] The authors are students at the National Law School of India University, Bengaluru. Introductory Remarks The Competition Commission of India (‘CCI’) has time and again failed to harness the economic benefits of the regulatory landscape of mergers and acquisitions embodied in the Competition Act, 2002(‘the Act’). To prove this, we have used a test suite of Facebook-Jio. Through Facebook-Jio, the thesis of this paper is that ‘The duality of the fidelity towards the text of the statute and the implementation of some suggestions is required for achieving the goal of prevention of adverse effect on competition in cases of combination.’ On 24 June 2020, the CCI approved the Investment Agreement and the Master Services Agreement between enterprises related to Facebook and Jio (‘the order’).[1] This approval serves as a focal point to understand the intersection of three aspects, first, the goals of the Indian competition regime, second, the procedural requisites of combinations, and third, the substantive effects of the combination. This is the backdrop against which this article is set. Structurally, the article is divided into two parts. The article in the first part positively analyses the crystal-ball gazing procedure mentioned in sections 5 and 6 of the Act and the substantive grounds of ascertaining appreciable adverse effects on competition (‘AAEC’) mentioned under section 20 of the Act.[2] The article in the second part normatively analyses the existing – asset turnover dichotomy mentioned in section 5 and the meaning of ‘asset’ mentioned in explanation (c) to section 5. Unscrambling the egg problem: Ex-ante regulatory procedure Daniel A. Crane proposed two models of law enforcement for the antitrust landscape, regulatory (ex ante) and crime-tort (post facto).[3]India follows a hybrid system, which is crime-tort in sections 3 and 4 and regulatory in sections 5 and 6.[4] Both exclusive legal positivism (‘ELP’) and law and economics justify the regulatory nature of merger control. Firstly, section 6(2) of the Act has the requirement of pre-combination notification.[5] Hence legal validity of the ex-ante procedure is established through the source-based thesis. Secondly, both section 18 of the Act and the Preamble state that (a) promoting the interests of the consumers and (b) ensuring freedom of trade is the duty of the CCI and the goal of the Act respectively.[6]A combination of (a) and (b) proves that Blaire’s and Sokol’s conceptualization of total welfare is applicable here.[7] Here, total welfare is the summation of consumer welfare and producer welfare.[8] The rationale behind ex-ante control is to prevent unscrambling the egg problem. This is because once a combination is done, the transaction costs of undoing it are very high. Hence, consumer welfare should necessitate that ex- ante approval is required to protect against consumer harm due to AAEC. Furthermore, CCI has never passed an order under section 31(2) of the Act disallowing the combination.[9] Moreover, CCI has used its power under section 31(3) only in 2.6 percent of cases.[10]Therefore, there are insignificant/negligible transaction costs from the perspective of a producer and hence, Coase’s theorem will conclude that there is Pareto optimality.[11] Thus, ex-ante approval is conducive to producer welfare. Till now, it is established that if the CCI does not employ ELP (regulatory model) in its order, then according to law and economics, there will be insufficient outcomes. This underpinning of the importance of statutes using law and economics, better known as the Meld Model was proposed by Mr. Rahul Singh.[12] The next step is the application of this Meld Model approach to Facebook-Jio. In this vein, this paper argues that the order is erroneous in two respects. The percentage of acquisition of shares by Jhaadhu was 9.99 percent.[13] Hence, the correct approach would have been to assess whether the acquisition could have been exempted under Regulation 4 read with Item 1 of Schedule I of the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011. One might argue that proviso (B) to Item I is only applicable if the requirement of defenestration[14] (not a member of the board of directors and no intention to participate) is met. According to paragraph 6 of the order, Jaadhu has the entitlement to appoint a director on the Board of the target enterprise and hence exemption should not be granted.[15] However, the outcome should not precede the analysis and hence we are using an outcome agnostic approach to flag the error. This error can be understood by the prevention-elimination dichotomy and Meld Model. The Preamble of the Act mentions ‘prevention’ of certain activities whereas section 18 of the Act mentions ‘elimination’. The difference between the two is the extent of intrusiveness. Hence, to resolve the deadlock, we will be employing Singh’s three-fold lexical priority test.[16] The first step is to take the text of the statute seriously. Here, Section 18 starts with subject to the provisions of this Act.[17] The subsections of sections 29 and 31 of the Act are bombarded by sunset clauses for each stage of the procedure.[18] Furthermore, section 6(2A) implicitly places a ceiling period of 210 days on the CCI to give an order. These provisions prove that the intention of the Parliament is to strike a balance between the costs of enforcement and protection of competition. This is precisely why the CCI has first, the option of both modification and rejection present in section 31[19] and second, section 20(4) (n) mentions cost-benefit analysis as a factor for assessing AAEC.[20] For instance, when the costs of enforcement due to rejection exceed the benefits of protecting competition, then the CCI should not order annulment.  The second step is to follow Fuller’s advice of not restricting the assignment of meaning to a single word of the statute. This combined with the principle of noscitur socii means that the single word ‘eliminate’ should not be interpreted in isolation but according to the context in which it is used.[21] When one reads the whole paragraph of section 18, it will be evident that the Act mandates the CCI has to balance

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Decoding Uncertainties in Treatment of Foreign Taxes Ineligible for Relief

Taxation Law /

[By Anshika Agarwal] The author is a student at the Vivekananda Institute of Professional Studies, GGSIPU, New Delhi. Introduction In keeping up with the global trends, India has always been consolidating its financial position in international markets. With a stable tax framework and an attractive Foreign Direct Investment regime, India has enhanced its ease of doing business, thereby, attracting cross-border transactions and investors. Today, India stands as a potential hub of global investments and has attracted a high inflow of Foreign Direct Investments in recent years. With more and more investors venturing into India, the smooth flow of transactional activities has become a matter of concern. This trend has led to the problem of double taxation. Double taxation refers to a situation where the income of the company is subjected to dual taxation based on its place of residence and source of income. To resolve this impediment, Indian taxation laws provide for the provision of credits to its residents. The said credit can be granted to an Indian resident assessee irrespective of whether there exists a DTAA between his resident country and the specified country. This credit can be granted in respect of countries where there exists a Double Tax Avoidance Agreement (hereinafter, “the DTAA”) between India and the specified country or territory, and also in cases where no such agreement is negotiated by the Indian government. The credit also known as Foreign Tax Credit (hereinafter, “the FTC”) becomes available when a foreign tax is paid in respect of an income already taxable in India. The said credit is used for setting off the tax payable under the Income Tax Act, 1961 (hereinafter, “the Act”). The process remains smooth and follows an ordinary credit method. However, complexities crop up when the tax payable under the Act is less than the foreign tax paid. In such a scenario, the allowability of the unclaimed and unutilized foreign tax as a business expenditure becomes a vexed question. The article aims to decode the uncertainties in the treatment of such a tax in the light of some recent rulings pronounced by different Courts/ Tribunals. Applicable legal provisions To analyze the above question, it becomes pertinent to look into the applicable legal provisions. As propounded by Rule 128, Income Tax Rules, 1962 (hereinafter, “the Rules”), a credit termed as FTC will be allowed to a resident assessee in respect of any amount paid by him as foreign tax in earning the income which is also taxable under the Act. For this purpose, the foreign tax would mean a tax covered under the DTAA as entered into by India with any other country, and in cases where no such agreement exists, the tax payable under the law in force of that country. This allowance shall be made in the form of a deduction or relief in the year in which such tax is paid. The relief to be granted would be the lower of the two amounts: the tax payable under the Act and the foreign tax paid. Where the latter exceeds the former, the former amount becomes eligible for credit under Section 90/ 91 of the Act while the balance amount becomes ineligible for the said relief. The treatment of these unclaimed and unutilized relief forms becomes the underlying crux of disputes. With this, Section 37 comes into the picture as well. Section 37 provides that, when an expenditure is incurred wholly and exclusively for the purposes of business or profession then such expenditure can be allowed as a deduction under the head “Profits and Gains of Business or Profession” (hereinafter “PGBP”). Further, such expenditure should neither be of personal nature nor should it be of capital character. An expenditure that qualifies the said conditions would be allowed under this Section. On the other hand, Section 40 a(ii) of the Act disallows the deduction of the amount paid as tax on the income earned under PGBP. Further, the Explanation to the said Section inserted vide Finance Act 2006, includes the amount of foreign tax eligible for relief under Section 90/ 91 as the case may be, under the expression “tax” used in the Section. Issue The issue that now captivates our attention is the uncertainty in the manner of treatment of the unclaimed foreign tax, as to whether such a tax that remains ineligible under Section 90/ 91 can be allowed as business expenditure under Section 37(1) of the Act? Whether the scope of the term “tax” used in Section 40 a(ii) extends to disallow this unclaimed amount of “foreign tax”? Judicial Approach Employed  The impugned issue has time and again, been addressed by various courts and Tribunals. Divergent approaches have been employed to settle it. The recent trends as observed in these rulings are as follows: Reliance Infrastructure Ltd. V CIT-Mumbai The Bombay High Court, in the present case, while deciding upon the above issue, ruled in the favor of the taxpayers. The judgment clarified the scope of Section 40 (a)(ii), explicating the extent of the word “tax” used here. It was observed that the preceding words “in this Act” used in Section 2(43) narrow down the ambit of “tax” to tax payable under the Act, thereby precluding the foreign tax paid. This, in turn, streamlines the scope of Section 40(a)(ii), thereby, limiting it to the tax payable under the Income Tax Act, 1961. In regards to the foreign tax paid, Explanation 1 to the said Section specifically includes the amount eligible for double tax relief under the purview of Section 40(a)(ii). The legislative intent underlying the Explanation was to nullify the dual claims of benefit of credit and of deduction as expenditure, arising on the amount eligible under Section 90/ 91. Hence, in the light of the said Explanation, the Court held that the part of foreign tax that remains unclaimed would not be hit by the provisions of Section 40 (a)(ii). Thus, such an amount, being expenditure incurred to arrive at the global income which is already taxable in India, would become allowable

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