Author name: CBCL

Deal value threshold for combinations

Competition Law, Guest Posts /

[By Viplav Agrawal] The author is an Associate at AP & Partners. Introduction to the combination thresholds Competition law governs the combination which has the potential to hamper the competition in a relevant market. The combination, as per the Competition Act, 2002 (“the Act”), is referred to as the acquisition of one or more enterprises or merger or amalgamation of enterprises. The combinations taking place are subject to certain thresholds prescribed under the Act. It means that if the combinations taking place are beyond the thresholds, the entities involved will have to take approval from the Competition Commission of India (“CCI”) by way of giving notice. If the entities do not take approval from the CCI, they are subsequently subject to competition law proceedings and penalties. The thresholds are of two types, turnover and asset. These thresholds are in place to categorize certain companies which can have possible appreciable adverse effects on the market on combinations. The Act also provided for the de minimis exemption, wherein a transaction is exempt from the notification requirement under the Act if the target company has assets less than Rs. 350 core or a turnover of less than Rs. 1000 crore. Earlier it was till 28 March 2022 but with a recent notification dated 16 March 2022 by MCA, the exemption is extended till 28 March 2027. On account of multiple mergers and acquisitions happening between the tech companies, an enforcement gap from CCI has arisen despite the thresholds above in place. As the internet became a medium to transact and reduced the requirement of assets, the companies are becoming dominant in the market without heavy investments in the assets and focusing on data collection. Due to the presence of non-price factors in the entity i.e., data and other similar factors, there were certain combinations that did not require the approval of CCI as they were not crossing the threshold. Yet, they had potential adverse effects on the market. On the consideration of such mergers, competition authorities are likely to bring deal value threshold for the combinations. Some countries have given a clear intention to address the potential adverse effects emerging from evolving tech-driven business models. Based on the prospective change that Indian legislators may bring,  the author highlights the incidents where the deal value could have been considered for scrutiny by CCI. The author also highlights the Indian legislator’s inclination to consider the deal-value threshold and how two foreign countries have applied the deal value in their competition laws. Lastly, the author analyses the deal value threshold and makes few suggestions for the policy formation. The incident leading to the consideration of the deal-value threshold WhatsApp/Facebook merger was the spark of the controversy when the existing threshold failed to look at the combination from the competition law lens. WhatsApp’s turnover was less than the asset/turnover thresholds under the Indian Competition Law. At the time of the merger, the thresholds were Rs. 750 crores in assets or Rs. 2,250 crores in turnover. The following concerns were found even though it did not match the threshold: Reduction in competitive constraint. Since both Facebook and WhatsApp were heavy competitors in terms of instant messaging apps, their merger led to reduction in the competitive constraints in the market Increase user base. As both the apps had a large user base of consumers, it could significantly harm consumer interests. Higher entry barrier to market. By 2014, WhatsApp had already created high entry barriers for its competitor in the Indian mobile-messaging market. It was giving tough competition to mobile apps like Line and Hike as they had lesser active users in the market. Thus, the combination of Facebook and WhatsApp makes the barriers to enter into the market even higher as both of them are unpaid mobile-messaging apps. The other deals significant deals which escaped CCI scrutiny are Zomato’s acquisition of Uber Eats in 2020, Flipkart’s acquisition of Jabong.com through its subsidiary Myntra in 2016, and Ola Cab’s acquisition of TaxiForSure in 2015. These deals were significant because the entities involved were tech aggregators with dominance in the e-commerce sector where the deal value was of at least USD 70 million or more than at least Rs. 550 crores. This could be an important deal for CCI to scrutinize as the entities acquired were innovative tech aggregators which were already giving competition to the acquirers in the online food ordering, online shopping, and app-based cab services. Findings of competition law review committee The combination thresholds involve only assets and turnover under section 5 of the Act. After consulting with various experts, the Competition Law Review Committee (“CLC”) which was set up by the Government of India in 2018, made wide-ranging sets of recommendations with the objective of aligning India’s antitrust enforcement regime with the new age of the market. A recommendation on the merger threshold was allowing the Government to introduce alternate mergers and acquisitions thresholds, such as ‘deal value thresholds’. The above recommendation is reflected in the Competition (Amendment) Bill, 2020 which proposes to allow the central government to introduce other criteria for merger threshold, such as deal value, market share or other criteria to be notified. The government, thus, by way of notification can set a particular deal value as the threshold under Section 5 of the Act. Some of the countries have already set the deal value in their threshold limit for the combinations to notify the competition authorities. Countries applying the deal-value threshold The countries that have applied the deal-value threshold in their competition laws are Austria and Germany. Austria in its competition law prescribes the following threshold for the deal value: Transaction value exceeds EUR 200 million Combined aggregate turnover exceeds EUR 300 million worldwide and EUR 15 million in Austria Target company as significant domestic activities Germany, on the other hand, prescribes the following thresholds: Transaction value exceeds EUR 400 million Combined aggregate turnover exceeds EUR 500 million worldwide and EUR 25 million in Germany. As a result, the entities acquired at a high

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Validity of Recovery Actions against Guarantor Post Assignment of Debt

Guest Posts, Insolvency Law /

[By Arjun Makuny] The author is an Insolvency and restructuring lawyer. Introduction                  The rights of creditors have been severely weakened due to a recent order of the Debts Recovery Tribunal at Ahmedabad (DRT) in State Bank of India v. Prashant Ruia.[i] The DRT ruled that a creditor cannot sue the guarantor if the principal debt is assigned by the creditor for consideration. Further, it was also held that a creditor cannot choose to reserve its rights against the guarantor during the assignment of the principal debt. In this background, the author argues on the validity of creditors’ recovery actions vis-à-vis guarantors notwithstanding any waiver of rights as against the principal borrower. The author believes that any hindrance to such a course of action of creditors has the potential to cause huge ramifications in contemporary business transactions. Facts in brief  The consortium of lenders led by the State Bank of India had filed an Original Application under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993 before the DRT against Mr. Prashant S. Ruia and other guarantors for recovery of sums due to the consortium. During the pendency of the Original Application, the principal borrower (Essar Steel India Limited) was admitted into Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016. Subsequently, the resolution plan proposed by ArcelorMittal India Private Limited (ArcelorMittal) was approved by the National Company Law Tribunal, Ahmedabad, and thereafter by the Supreme Court. Accordingly, the principal borrower was acquired by ArcelorMittal. The resolution plan provided that all debts payable by the principal borrower shall be assigned to a third-party assignee and the creditors would receive consideration for such assignment of debt. However, the resolution plan explicitly provided that the guarantees that have been created in respect of the debt would not be assigned and would continue to be retained by the creditors. Prashant S. Ruia filed an Interim Application to dismiss the Original Application as against him on the ground that no debt as defined under Section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993 exists in law due to the assignment of debt.                                                                                                            Decision Upon examining the terms of the resolution plan and the assignment deed, the DRT observed that the assignment of debt had discharged the principal debtor of its repayment obligations and the net result of such an assignment is that the debt is totally extinguished leaving nothing to be recovered from the guarantors. The DRT proceeded on the line of thought that if the creditors have nothing to recover from the principal borrower, the guarantors stand discharged of their obligations despite the clause in the Assignment Deed that specifically provides that the guarantees have been retained and not assigned. The DRT also placed emphasis on the clause in the resolution plan which stated that the payments made to the creditors as consideration for the assignment of debt will be a full and final settlement of the entire outstanding dues. In view thereof, the DRT proceeded to conclude that the debt due from the principal borrower stood discharged. The DRT held that a subsisting underlying “debt” due from the principal borrower is a precondition for creditors to proceed against the guarantors and since in the present facts and circumstances, there is no subsisting underlying debt due from the principal borrower, the creditors are precluded to invoke the guarantees in respect of the assigned debt. The need for reconsideration Pollock & Mulla’s book has recognized the right of a creditor to proceed against the guarantor, even in situations where the principal debtor stood discharged, if the creditor has reserved its rights to proceed against the guarantor in such situations: “Sometimes agreements described as guarantee may contain clauses which preserve the liability of the guarantor, even where the principal debtor has either never been liable (viz. contract is ultra vires the company as the principal debtor is a minor), or has ceased to be liable to the creditor.”[ii] The question of enforcing remedies against the guarantor notwithstanding a waiver of rights as against the principal borrower is not something that has come up for judicial consideration for the first time. Indian Courts have previously recognized that, if the creditor, while giving up its claim against the principal debtor, expressly reserves his remedies against the surety, or generally his securities and remedies against the persons other than the principal debtor, the surety is not discharged, irrespective of whether the creditor has done so with or without his consent or knowledge.[iii] Pertinently, Indian Courts have also recognized the legal validity of an agreement that provides for the release of a principal debtor, while simultaneously reserving the creditor’s rights of recourse against the surety: “Where the principal has entered into a deed of arrangement containing a release, subject to the reservation of the creditor’s rights of recourse against the surety, the latter has no right to raise objection.”[iv] The principle in English law that discharge of principal debtor will not affect the right of suit against sureties where there is a reservation to proceed against them, is applicable in India, and it is consistent with the terms of the scheme of the Indian Contract Act, 1872.[v] The rationale behind this principle is that a nominal release of the debtor, subject to a reservation of securities, is not a release destroying the debt, but operates only as a covenant not to sue the principal-debtor, who remains, however, liable to indemnify the surety. The surety’s right to indemnity against the principal debtor is a necessary result of such a reservation.[vi] It has to be understood that if a creditor agrees to discharge a principal debtor, it would be a breach of

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Interplay of Corporate Competitors and the Alternative Investment Fund Market

Capital Markets and Securities Law, Competition Law /

[By Pritika Negi and Delphina Shinglai] The authors are students at the Gujarat National Law University. Alternative Investment Funds (hereinafter AIFs) have shifted the traditional market functioning from indirect to direct, active to passive, and from public to private[i]. The availability and accessibility of alternative investment assets make it a viable option attracting investors. Significant development in securities markets has aided in the explosive growth of private markets. More capital has been raised in these private markets than in public markets each year for over a decade.[ii] Furthermore, the growing demand of investors beyond traditional equity and asset class has created a market offering excess to cater to a plethora of interests. The new economy supported by the inflow of cash has established a market with corporate competitors targeting higher returns. AIF helps the economy grow by making investments in failing businesses, start-ups, and leveraged buy-outs. Corporate competitors in the AIF market persist when the general market downsizes bringing in the profits of passive AIFs commodities at a time when commodities in the general market soar high. Corporate Competition in the AIFs Market India has huge AIF management platforms; One such management platform is Avendus Capital, which, in itself, takes ownership of thirty percent of the market share.[iii] It was achieved by focusing on private equity strategy, alternate strategies and aims at long-term strategy.[iv]The diversification of investment portfolios has been key to AIFs gaining prominence.[v] With different strategies and ideas for portfolio management, another key player in the Indian AIF Market is BlackSoil Capital. The platform in this private market has the responsibility of managing alternative credit platforms for government-regulated bodies, namely, RBI registered NBFC and SBI registered AIFs. These platforms along with some others were able to stand at length with corporate players in the general market because of their policies, transparency, and accountability. Such transparency must not be provided to just the investors under section 9 of SEBI (Alternative Investment Funds) Regulations, 2012, but also to SEBI in order to receive a certificate under section 7 of SEBI (Alternative Investment Funds) Regulations, 2012. Hence, owing to their management skill which goes in hand with laws regulating AIF, today these platforms are listed as the new evolving capitals. This competition arising from different methods of corporate governance helps prevent monopolizing and destabilizing of the market. A key for corporate competitors to survive is knowledge of risk management, product expertise, consistency in investment performance, and availability of tailor-made solutions. The lack of risk-taking by corporate competitors has left a large number of AIFs out of the options to invest. For instance, out of the availability of over 700 AIFs in the market, investors find only a few margins of 30-40 AIFs[vi]. The potential of the margined AIFs to prosper when some corporate entity invests in it becomes undervalued. This valuation of undervalued alternative assets brings corporate competitors a high margin along with high risk and high profit-making opportunities. Moreover, with digital assets (explorative trends that are not explicitly considered as a standard asset class in AIFs) gaining popularity in the current market, the scope for competition has widened. Further, cryptocurrencies have also entered the trend, gaining prominence in the new investment market. Cryptocurrency showed the top performing asset class of 2020-21. Investors can invest in cryptocurrency themselves without the need of a third-party intermediary or by investing in companies that benefit from Blockchain and crypto asset uptake. The world market is exploring the realm of digital currency assets. A 2021 BIS survey of several central banks found that 86% were actively researching the potential for Central Bank Digital Currency (CDBC), 60% were experimenting with the technology and 14% were deploying pilot projects.[vii] India will join a few other countries after the launch of the official CBDC. The RBI is exploring the impact to implement the CBDC; conversely, it would require a distinct legal framework to regulate the same. Today, through web-based stock stimulators, an investor can practice trade strategies by investing the free $100,000 in the AIF market provided through the stimulator, lessening the undertaken risk probability. Hence, it could be understood that not just the competition is rising, but also new strategies are being developed to ensure risk minimization. Such online trial platforms are a great start for competitors who are till date planning to invest in this market and get their game strong. Protection from Unfair Competition AIF platforms are private and due to volatility are highly liquid and risk-averse. Further, these are unregulated funds therefore in cases of poor portfolio management services, the probability of loss increases. To top it up with, the 2022 amendment to the AIF Regulations, 2012 now gives haven to investment committee members from any viable obligation regarding their investment decisions;[viii] Inflicting the majority burden of loss on investors and making the competition risk-free for the corporate firms acting in the capacity of agent. Irrespective of the risk involved, the competition is simply increasing. A study by Mckinsey & Company concluded that a presumed decline in hedge funds would not just have a direct impact on investment but also on the competition. [ix] In order to safeguard social morale in this economic tussle, even though highly unregulated, SEBI has mandated norms to protect the basic rights of investors through SEBI (Alternative Investment Funds) Regulations, 2012[x] and SEBI Complaint Redress System. Also, even though SEBI can at no point intervene in the AIF market, nonetheless, under section 35 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 SEBI can intervene in cases of default. Further, the establishment of the Indian Association of Alternative Investment Funds (IAAIF) ensured the promotion and protection of the AIF industry and its investors. Abiding by these regulations is a statutory duty; otherwise, consequences will have to be faced as was witnessed in the “Adjudicating order in respect of HBJ Capital Services Pvt. Ltd.”[xi] where non-compliance was leveled by order of repayment of investor fees in addition to the promised fees. In case of failure, the corporate veil

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Ratification of Breach of Duty by Shareholders – Case Analysis

Uncategorized /

[By Harshit Joshi] The author is a student at the Vivekananda Institute of Professional Studies. Introduction According to common law principles, a breach of duty by a director can be ratified if the shareholders pass a resolution exonerating the director from the liability arising from such breach. It is an expansion of the common law concept that states people who owe duties may be relieved from the legal obligations resulting from those duties by those to whom the duties are owed. Therefore, shareholders have the authority and power to ratify any irregularities in the company’s operations, relieving directors of personal obligations to the company. This article examines the case of Terrascope Ventures Limited v. Securities and Exchange Board of India, in which the Securities Appellate Tribunal, Mumbai (“SAT”) recently upheld the validity of shareholders’ ratification of breach of fiduciary duties by directors on June 2, 2022. Through this study, the article aims to investigate the validity and relevance of the ratification principle in regard to Indian law by tracking its prevalence in common law jurisdictions. Brief Facts According to section 166 of the Companies Act 2013, directors of companies owe a fiduciary and statutory duty to the company, its personnel, and its shareholders. The validity of any ratification by shareholders subsequent to the adoption of a special resolution is conditional on the nature of the director’s breach of duty. In order for the shareholders to make an informed choice, this ratification procedure is subject to full and open disclosure of all relevant information. Directors who are also shareholders cannot ratify their own breach of duty. Shareholders cannot approve a breach of duty resulting from an act ultra vires of the company. A special resolution enacted on October 1, 2012, in accordance with section 81(1A) of the Companies Act, 1956, authorized Terrascope Ventures Limited, formerly known as Moryo Industries Limited, to issue 63,50,000 shares as a preference. The shareholders and general public were informed at an extraordinary general meeting held the same day that the funds raised through the preferential issue would be used for the following: (1) capital expenditures, including the purchase of businesses or companies; (2) opening of offices abroad; (3) funding long-term working capital requirements; (4) marketing; and, (5) for other authorized corporate purposes. The company’s trading operations were the subject of a Securities Exchange Board of India (“SEBI”) inquiry from 15 January 2013 to 31 August 2014. According to the adjudicating authority’s order, the proceeds from the preferential issue were used to buy shares in other companies and to extend loans and advances to other businesses and entities, which was against regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. This was done in contrast to the objectives stated in the notice given at the Extraordinary General Meeting. The adjudicating officer further observed that the company had broken the terms of Section 21 of the Securities Contracts (Regulation) Act, 1956, read with Clause 43 of the Listing Agreement by failing to disclose the variation in how the proceeds were utilized to the Stock Exchange (which requires listed companies to furnish a statement to stock exchanges indicating the variations between projected and actual utilization of funds). Furthermore, the directors’ report in Moryo’s annual report for the fiscal years 2012–13 and 2013–14 did not offer an explanation for the discrepancy between intended and actual utilization. The firm’s shareholders approved a special resolution on September 29, 2017, approving all the acts, deeds, and things the company had done regarding the use of the money from the preferential issue. The adjudicating officer stated that such post-facto approval of the company’s misconduct was unlawful. The Hon’ble Tribunal has observed that penal liability is neither dependent upon the intention of parties nor gains accrued from such delay in its judgment of Akriti Global Traders Ltd. v. Securities and Exchange Board of India. The adjudicating officer noted that even though the utilization of revenues did not produce any excessive advantages, a penal liability nevertheless exists because regulations’ provisions were breached. In accordance with section 15 HA of the SEBI Act of 1992 and section 23E of the Securities Contracts (Regulation) Act of 1956, the order imposed a fine of Rs. 1 crore on the company and Rs. 25 lakhs on each of the directors. Order of the Securities Appellate Tribunal, Mumbai The SAT effectively overturned the SEBI ruling by holding that although the use of the proceeds from the preferential offer was carried out in deviation from the objects issued, the shareholders later approved the deviation. This post-facto ratification of a duty breach was recognized as legal by the tribunal. The tribunal, in its order, relied on the ruling of the Supreme Court in the case of National Institute of Technology vs Pannalal Choudhury. The Supreme Court has observed that the expression “ratification” means “the making valid of an act already done”. This principle is derived from the Latin maxim “ratihabitio mandato aequiparatur” meaning thereby “a subsequent ratification of an act is equivalent to a prior authority to perform such act.” The tribunal further ruled that because the variation in the use of the funds was ratified by the shareholders, it was no longer a “variance” that needed to be notified to the stock exchange and so did not breach clause 43 of the Listing Agreement. Provision of Ratification in Common Law Most common law countries statutorily recognize the competence of shareholders to ratify directors’ breaches of duty, absolving them of corresponding liabilities. However, Indian laws do not provide any such power to shareholders and only acknowledge the competence of the courts to acquit directors of their violation of duty after full consideration of the circumstances of the case. There is no enabling mechanism that creates the conditions under which ratification would be declared legally effective because there is no statutory mention of shareholders’ power to ratify directors’ breach of duty. Section 239 of the UK Companies Act 2006 applies where a company ratifies the action of

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FDI vis-à-vis National Security: a half-baked exercise?

Uncategorized /

[By Aditya Maheshwari and Dhruv Gupta] The authors are students at the Gujarat National Law University. Introduction Both global and domestic markets witnessed continuous growth post-1991’s globalization policy. One of the outcomes of this policy was Foreign Direct Investment (“FDI”). It can be understood as financial transactions between a foreign and a domestic entity where the former has a significant say in the management of the latter. Over the years, the Ministry of Corporate Affairs (“MCA”), along with the Reserve Bank of India (“RBI”), has liberalized the FDI Policy to provide an opportunity to foreign investors and Indian companies to boost access to investment opportunities. In the Consolidated Foreign Direct Investment Policy, 2017 (“Policy”), only investors from Bangladesh and Pakistan are required to take permission from the govt, while others were allowed to invest through an automatic route. However, due to the threat posed by opportunistic takeovers by investors from bordering countries, certain amendments were introduced by the MCA to strengthen national security against such investments. This article intends to take the lid off the amendments that are being brought since the inception of Covid-19, the cause and effects of such amendments, and the loopholes in the present legal regime of the FDI Policy. Press note No. 3 (2020) – a first step towards preventing opportunistic takeovers The Department of Promotion of Industry and Internal Trade (“DPIIT”) vide Press Note No. 3 (2020 Series) (“PN3”) amended para 3.1.1 of the Policy. Consequently, the restriction to take the govt route for FDI by a citizen or an entity of Bangladesh and Pakistan had been replaced with “an entity of a country which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country.” As PN3’s subject indicates, DPIIT’s sought to check opportunistic takeovers/acquisitions of Indian companies in light of the pandemic. The approach to making amendments is evident from the fact that China’s central bank has acquired a 1% stake in India’s largest mortgage lender i.e., Housing Development Finance Corporation Ltd (“HDFC”). This was the first-time efforts were made to strengthen national security by not allowing Chinese investors to go through the automatic route. Consolidating the FDI Policy against Border Sharing Countries After over two years of PN3, the MCA understood the FDI Policy 2020 to be insufficient in insulating Indian companies against opportunistic takeovers: it lacked protection regarding managerial aspects of the company. Thus, certain amendments have been made in 2022 to remedy the loophole and to insulate against managerial takeovers. Amendment related to Investment 1. Transfer of shares As of May 4, 2022, the Companies (Share Capital and Debentures) Rules, 2014 were amended. There is now a provision requiring transferees to furnish a statement regarding the application of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“NDI Rules”) to transferred assets. Thus, if shares are being transferred to a citizen or legal entity of a country sharing a land border with India, said citizen or entity must first secure government approval in accordance with the NDI Rules. This approval must be submitted alongside Form SH-4, the appropriate form for transferring shares. 2. Private Placement As of May 05, 2022, the Companies (Prospectus and Allotment of Securities) Rules, 2014 were amended. Now, in cases of private placement, if the proposed allottee is from a country sharing a land border with India, it has to attach government approval along with the private placement offer-cum-application letter- “PAS-4.” A declaration regarding the applicability of NDI rules is to be given by the proposed allottee in PAS-4. Amendment related to Management 1. Appointment of Director in a company The MCA has made it mandatory to obtain security clearance from the Ministry of Home Affairs (“MHA”) for nationals of a country sharing a land border with India before becoming a director of an Indian company. The director has to attach the approval along with the consent letter i.e., DIR-2. This amendment is brought vide Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 effective from 01 June 2022. 2. Application for Director Identification Number (“DIN”) Where a national of a country sharing a land border with India applies for DIN, he has to attach the security clearance along with the DIN application i.e.,  DIR-3. A declaration in this regard has been inserted in the e-Form DIR-3 vide Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 effective from 01 June 2022. Analysis – Impact and the shortcomings in the present FDI regime The impact and reasons behind the Amendments made by the MCA While the amendment made by the MCA was done considering national security and the prevention of opportunistic takeovers by the investors or entities of bordering countries, FDI inflow is bound to be impacted negatively. Data indicates that FDI for 2021 fell 30% in comparison to 2020. One of the reasons for this fall is the restriction being imposed by the government on the use of the automatic route by bordering countries. It must be noted that this reduction in value must not be misunderstood as arising from Covid-19. During the same period, China, the country most affected by Covid-19, had a growth rate of 21%. In the coming months, with the present restrictions becoming more rigorous, FDI in India is only going to decrease. Moreover, imposing stringent restrictions on China and Hong Kong, the largest investors in the region, won’t benefit the Indian economy in the long run. It must be highlighted that the amendment through PN3 was insufficient to prevent opportunistic takeovers. To circumvent the PN3-imposed restrictions, the affected investors created a US or Cayman-based entity, using it to route the investment without any restriction. The same is suggested by the data released by the MCA where 490 foreign nationals are registered as active directors as of Feb 2022. Thus, to prevent managerial control over Indian companies, the amendment vide Notification dated June 01, 2022, in regard to security clearance was added. Loopholes in the present FDI

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Is the Remedy of Substituted Performance truly a Novel Remedy?

Contract Law, Guest Posts /

[By Aman Sadiwala] The author is an associate at Rashmikant and Partners. The contract enforcement mechanism of India has been subject to criticism for being inefficient. This was reflected in the World Bank’s Ease of Doing Business Report 2016 where India ranked 130th overall and 178th on contract enforcement (out of 189 countries).[1] This spurred the Government of India to constitute an Expert Committee to propose reforms to the Specific Relief Act, 1963 (“SRA”). The report of the Expert Committee (“Report”) resulted in the Specific Relief (Amendment) Act, 2018 (“2018 Amendment”). Prior to 2018, the default remedy for the breach of contract was that of damages, which was governed by Sections 73 to 75 of the Indian Contract Act 1872 (“ICA”), with specific performance being the discretionary remedy.[2] The 2018 Amendment changed the position of law by giving primacy to specific performance over damages. It also introduced substituted performance as a remedy.[3] Post the 2018 Amendment, Section 20 of the SRA provides for substituted performance whereby the promisee, on the breach, has the option to obtain performance by a third party or its own agency and recover the costs and expenses of the same from the breaching promisor,[4] subject to certain conditions.[5] The promisee cannot claim the relief of specific performance after getting the contract performed through substituted performance.[6] In this piece, the author argues that while the remedy of substituted performance is not truly a novel remedy, it does go beyond what was permissible under Sections 73 to 75 of the ICA in terms of making it easier for the promisee to recover the expenses and costs associated with the substituted performance. While there are some advantages that a remedy like substituted performance has – like securing the expectation interests of parties (which damages might also secure), faster implementation of contractual terms and solidifying the claim that the promisee has, is this remedy one that did not exist before the 2018 Amendment? The possibility of obtaining substituted performance and recovering the cost for it was possible even in the pre-2018 Amendment paradigm through Section 73 of the ICA. It states that a party suffering from a breach of contract can claim “compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach”.[7] This involves compensation for the “cost of cure” which is provided for in illustrations (f), (k), and (l) to Section 73.[8] Illustrations are parts of the section and help in elucidating its underlying principle.[9] Therefore, one can conclude with relative certainty that Section 73 of the ICA does, in a way, provide for compensation for substituted performance. Even Section 41 of the ICA talks about the “effect of accepting performance from third person” whereby the promisee cannot then enforce the performance as against the promisor.[10] There are other instances where compensation for substituted performance was awarded. One situation relates to when the contractual framework allows the promisee to get the performance from a third party and recover the costs from the promisor.[11] This includes contracts with a “risk and cost” clause which allows the promisee to engage a third party to obtain performance and get compensated to that extent by the promisor.[12] One must look at the Report to see why a specific amendment was added when substituted performance as a remedy existed in the pre-2018 Amendment regime as well. The Report assumes that in cases of breach of contract, a promisee will aim to complete its business and resort to substitutes if available.[13] It goes on to state that this must be encouraged as it allows the promisee to complete its task (and fulfill the expectation interest) while leaving open the option to claim compensation in case of a substantial loss.[14] The Report opines how the option of substituted performance can nearly achieve the same result as actual specific performance.[15] It recognizes how other jurisdictions[16] have allowed for substituted performance while Indian law does not provide for compensation for substituted performance as a substantive right.[17] The explicit provision of substituted performance as a substantive right has important implications. Section 73 of the ICA provides that “[s]uch compensation is not to be given for any remote and indirect loss or damage”.[18] The award of compensation under Section 73 is governed by the principles of causation, foreseeability, and mitigation;[19] while Section 20 of the SRA does away with these factors by using the phrase “recover the expenses and other costs actually incurred, spent or suffered by him”.[20] This change was brought with the view that while a claim under Section 73 of the ICA might not give the promisee the entire extent of the amount it has spent on substituted performance, Section 20 of the SRA would do so.[21] It was also believed that this standard would give the promisee the benefit of having its contract fulfilled at the earliest, while also pushing the promisor itself to perform the contract.[22] At the same time, the Expert Committee recognized that this situation might place a heavy burden on the promisor, especially when a promisee abuses its rights.[23] It provided for safeguards in the form of prior notice to the other party,[24] and providing proof of breach of contract,[25] the costs and expenses incurred in the suit,[26] and reasonability of the amount claimed.[27] In the opinion of the author, the threshold of the safeguards was significantly weakened when the Expert Committee also proposed that the amount claimed in the notice to the other party ought to be deemed reasonable if it had been actually spent or suffered.[28] While the provision for notice has been retained by the legislature,[29] the other safeguards especially the one pertaining to the reasonableness of the amount claimed do not find mention in the 2018 Amendment. This issue has also been flagged by Professor Nilima Bhadbhade, who was a member of the Expert Committee.[30] This had led to a scenario where it is significantly easier for the promisee to recover the expenses and costs associated

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Competition Foreclosure in the App Economy by Apple and Google

Competition Law /

[By Sharia Shoaib] The author is a student at the National Law University, Jodhpur. The Competition Commission of India (CCI) has recently probed into alleged abuse of the dominant position by Google for discriminately enforcing their payment systems on app developers. Google’s Play Store billing policy makes it mandatory for app developers to pay a hefty commission fee of up to 30 percent from the in-app earnings on the sale of digital goods and services. Additionally, the inability of app developers to use any third-party payment systems for marketing their digital content seems like a restrictive and unfair condition violating Section 4(2)(a)(i) of the Competition Act 2022. Around the same time, the European Commission (EC) had also begun its initial investigation into competition concerns related to iOS App Store’s conduct in the market for music streaming services, upon a complaint filed by Spotify. Similarly, the Spotify v. Apple music debacle also involves Spotify paying a 30% Commission to Apple on digital purchases made through Apple’s in-app purchase system (IAP) which raises Spotify’s costs and that of Spotify users indirectly. It is often argued that this exclusionary behavior by the twin mobile giants is capable of foreclosing effective competition, and profitable access to a market, resulting in high barriers to entry and other anticompetitive effects[i]. Are Google and Apple dominant entities? The two-sided transaction intermediary role an app store plays is essential to understand the competitive constraints for third-party app developers and app users in the relevant markets. Google Play and Apple App Store serve as sole gatekeepers for access to app-based services on mobile phones running their smartphone operating systems, Android OS and iOS respectively, by prohibiting sideloading of third-party applications. As a result, it forms a “closed ecosystem” that locks in developers as well as app users once they buy an Android or Apple device. Apple app store enjoys a prominent presence in the European Union (EU) market by virtue of ‘network effects’ and a high consumer base in the smartphone market. Moreover, the Court of Justice of the European Union (CJEU) has, in various instances, like in  NV Nederlandsche Banden Industrie Michelin v Commission and Eurofix-Bauco v Hilti used conduct that acts as a barrier of entry for new entrants or constraints to competitors’ expansion as a factor indicating dominance. This is further affirmed by EC in its preliminary view in Apple v. Spotify, wherein it concluded that Apple has distorted competition by “abusing its dominant position in the market for music streaming apps through its App Store platform.” Likewise, the judgment in Umar Javeed v. Google LLC assumes significance while determining Google’s dominant position in the relevant market using factors mentioned under Section19(4) of the Act. By exercising the powers vested in it under Section 26 of the Act, the CCI found it to be dominant in the “smartphone OS market”. What is the abusive conduct? As the primary channel for app discovery and distribution, dominant app stores have a special responsibility to maintain a healthy app ecosystem and not impair undistorted competition by engaging in conduct falling outside the competition on merits. In Fast Track Call Cab Pvt Ltd v. ANI Technologies Pvt Ltd, the CCI extended the ambit of special responsibility to include online platforms and digital markets. As a result, an important platform functionality of such app stores is to ensure equality of opportunity and a level playing field to compete for various economic operators i.e. app developers. Google and Apple’s conduct to make their own IAP a mandatory payment gateway can qualify as a “tie-in arrangement,” according to competition laws around the globe. In India, Google’s conduct would prima facie be considered violative of Sections 4(2)(d) and 4(2)(e) of the Act whereas in the European jurisdiction, abusive tying would amount to a violation of Article 102(d) of Treaty of Functioning of European Union (TFEU). Legal position of abuse of tying in India and EU In the Indian case of Sonam Sharma v. Apple, the CCI laid down the conditions that amounted to anti-competitive tying: The presence of two separate products or services capable of being tied; The seller must have sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product; and The tying arrangement must affect a “not insubstantial” amount of commerce. While the Microsoft case (2004), establishes that for tying to infringe Article 102 TFEU, there must be two separate products; dominance in the tying market; coercion of customers who have no option to obtain the tying product alone; and foreclosure of competition as a result. Upon a bare perusal of the aforementioned conditions, it can be ascertained that the elements of tying are similar in both jurisdictions. Now, the distinctness of products is established if there exists independent consumer demand for tying and tied products[ii]. By charging up to 30% commission through their own payment service, Apple and Google in an attempt to leverage their market power have unlawfully tied their payment processing service to the app distribution market, both offering different functionalities, hence, separate products. For instance, Google Pay has an independent demand in the payment services market and the existence of independent companies specializing in payment services, such as Paytm, is ‘serious evidence’ of the distinction of products. Apple and Google, disregarding the special responsibility owed to them due to their dominance in app store market, prohibit app developers from offering information about alternative payment mechanisms, which are usually cheaper, amounting to coercion and deprivation of choice. To affirm the view, an anti-circumvention rule this rigid making it difficult to profitably market services was found to be anticompetitive by the European Commission in Apple v. Epic games. The conduct of such app stores not mandating the use of their IAP for some of their own apps is discriminatory and gives a competitive edge to their own activities. In other words, app store’s fees hurt competition by raising costs for app developers and indirectly for app users, affecting a

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Licensing Fee for Immovable Property: The Expanding Scope of Operational Debt

Contemporary Issues, Insolvency Law, Taxation Law /

[By KV Kailash Ramanathan] The author is a student at the National University of Advanced Legal Studies (NUALS), Kochi. Recently, the NCLAT in Jaipur Trade Expocentre Pvt Ltd vs M/s Metro Jet Airways examined the issue of whether claims of license fee for the use of immovable property to conduct business, falls within the ambit of ‘operational debt’ under S5(21) of the Insolvency and Bankruptcy Code (hereinafter referred to as the ‘code’). In doing so, the Appellate Tribunal also had to rule on the legal correctness of earlier decisions in M Ravindranath Reddy, and Promila Taneja which answered the question in the negative. The five-judge bench of the NCLAT, upon reference to it from a smaller bench, decided that the claim of such licence fee arising from a licence agreement for immovable properties would come within the definition of operational debt, thereby overruling earlier judgments to the contrary. The verdict paves the way for initiation of the Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP’) under section 9 by operational creditors for default of licence fee or rent on immovable properties used for a business purpose. In this piece, the author seeks to analyse the judgment by discussing the key issues dealt with and possible legislative action that can follow as a result. Factual Matrix The Appellant Jaipur Trade Expocentre Private Ltd, had entered into a licensing agreement with the respondent M/s Metro Jet Airways Private Ltd. Under the agreement, the Appellant licensor had granted the licence of a building with requisite fittings and fixtures to the respondent licensee for the purpose of running an educational establishment. The original agreement was to run for five years and the amount fixed as consideration was Rs. 4,00,000 per month lump sum plus government consideration. Initially, a part payment was made by Metro Jet Airways towards the licence fee. The contract however started running into rough weather when the corporate debtor subsequently issued two cheques on different dates in discharge of the outstanding dues, and both were dishonoured. In response to such default, the creditor Jaipur Trade Expocentre sent a demand notice under Section 8 of the Code seeking payment from Metro Jet Airways for the total sum due plus taxes and the interest thereon. No reply was received. Later civil proceedings were instituted by the corporate debtor. As a result of these developments, the creditor filed an application for initiation of CIRP under Section 9 of the Code. The corporate debtor disputed the debt. After perusing submissions from both parties, the adjudicating authority dismissed the application, holding that the claim arising out of the grant of license for the use of immovable property does not fall under the category of goods or services. Thus, the amount claimed in the Section 9 Application was held to not be an unpaid operational debt and therefore, the former was not allowed. Aggrieved by the above order, the creditor preferred an appeal and the matter was referred to a larger bench whose judgment is dealt with in this piece. Issues The crux of the issue is whether a claim of licence fee or rent over an immovable property would qualify as an ‘operational debt’ under S 5 (21) of the code. More specifically whether such an agreement can be considered under the provision of a ‘service’ as specified in the section. Ruling and Analysis Under Section 5(21) of the Code ‘operational debt’ has been defined as “a claim in respect of the provision of goods or services including employment or a debt in respect of the [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.” From the aforementioned definition, it is clear that only claims in respect of goods and services can be considered as operational debt. The Code is silent on the definition of services. Therefore, the onus was on the judiciary to interpret the term with due consideration to precedents, reports, and principles of statutory interpretation. The following are the noteworthy considerations from the judgments including but not limited to arguments advanced by the NCLAT for arriving at such a decision. Agreement Providing for Corporate Debtor to bear GST The agreement between the parties explicitly stated that the payments of GST would have to be borne by the corporate debtor. GST is a tax contemplated only on goods and services. Thus, it was evident from the agreement that the corporate debtor bearing the GST was being taxed for services. This was clear by looking at the definition of goods under Section 2(52) of the Goods and Services Tax Act which reads “goods” means “every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”. As per such definition, the agreement cannot be considered as being for goods under the GST Act making it conclusive that the levy was for a service. Therefore, the contention of the Corporate Debtor that the agreement by nature does not provide for service was dismissed. Definitions of Service presented under Other Statutes In Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India ltd. and Anr. , one of the questions the Tribunal dealt with was whether dues, if any, arising from the Leave and License agreement can be construed as an ‘Operational Debt’? Reliance was placed on Schedule II of the CGST Act 2017 which classifies lease of building as a service, and Section 2 (42) of the Consumer Protection Act, under which an inclusive definition of ‘service’ has been made out to include the provision of facilities connected to a host of commercial activities. The Tribunal held that subject lease rentals arising out of use and occupation of a cold storage unit for Commercial Purpose is an ‘Operational Debt’ as envisaged under Section 5(21) of the Code. The stated principle has

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SEBI’s New Guidelines for IPOs: A Welcome Move?

Capital Markets and Securities Law /

[By Ayush Hoonka and Akarsh Singh] The authors are students at the School of Law, Christ (Deemed to be University). Introduction Over the years, the Indian capital market has undergone significant changes and has evolved over a period of time. This is especially true in regards to the equity segment of the capital market, where just the total market capitalization of the Indian equity market stood at 3.21 trillion dollars which makes it the fifth-largest equity market in the world. This has been correlated with the rise of the Indian manufacturing sector, which contributed up to 17.4% to the Indian gross domestic product in the year 2020. This has also been correlated with the massive rise of the Indian technology sector, which has been the engine driver of growth of the Indian economy, contributing 8% to the total gross domestic product in 2021 while reaching a peak of 9.5% in 2015. As a result, there has been a rise of early-stage start-up companies being incorporated in the country and ultimately going public through the traditional initial public offering or the IPO route. As a result,  81 IPOs were offered in the time frame between 2020 and 2022, raising almost 1.52 lakh crore, according to a KMPG study. The performance of most of the new-age start-ups has been less than ideal as shares of stocks such as Paytm, Zomato, Policy Bazar, and Nykaa have plunged 61%,49%,49%, and 46%, respectively, compared to their all-time highs at the time of listing according to data compiled by Bloomberg. Further, this has also correlated with the fact that these companies were primarily “growth stocks” which are yet to achieve maturity in the market regarding their cash flows and business models. This has also led to the Indian capital market regulator, i.e., the Securities and Exchange Board of India (SEBI), floating a consultation paper that proposed that the companies justify their valuation at the time of going public through an IPO, and subsequently, the auditor advising the company to verify the valuation being proposed by the company’s management through key performance indicators. Analysing the Consultation Paper The new proposed rules by the SEBI’s Primary Market Advisory Committee (PMAC) not only want start-ups to reveal their price to earnings multiples (PE ratio) and earning per share (EPS ratio). They also want disclosures and revelations in regards to key performance indicators (KPIs) which venture capital firms use, angel investors as well as private equity firms as a means and a measure to decide whether the newly found start-up is worth investing in. The KPIs are not just supposed to be traditional financial yardsticks to judge a company according to its competitors but also include metrics such as subscriber growth, market penetration since inception, and future expected growth rate. These metrics are further proposed to justify their valuation, which would further be audited by an accountant or an auditor with which the firm registers. Furthermore, SEBI also wants the companies to declare the correspondence between the venture capital firms, angel investors, and private equity firms during their fundraising in regards to these key performance indicators prior to them being listed through an IPO route. The proposal aims to disclose the key performance indicators (KPI) of the preceding three years prior to the company being listed and also wants the listed entity to compare the KPI with other new-age start-up firms across the globe in an effort to get a sense of whether the company’s valuation is justified or not. The objective of the proposed disclosure is that newly formed technological start-ups or growth stocks normally are not profiting in terms of their cash flows, especially when going public. As seen recently in the case of Delhivery being listed, these growth stocks usually prioritize gaining economies of scale, economies of scope, and competitive dominance in the marketplace as a means to achieve growth. This has been true historically for the past 20 years. One prominent example is Amazon, whose founder Jeff Bezos has always prioritized future long-term growth over short-term financial returns. This also requires good capital budgeting and investment decisions, which vary among companies in terms of their business model. Response from the Industry After the SEBI, in its recent consultation paper, has proposed that all the upcoming new-age technology companies have to justify the pricing of their shares at the IPO, the industry has not welcomed this move. The proposal aims to bring transparency so that the investors do not suffer. This idea was proposed due to the meltdown in the four recently listed stocks. However, these proposed rules will make it challenging for the new-age firms to list themselves. Another important thing that the new-age technology companies have to take care of is that the company’s auditors should have audited all the information they are providing to SEBI. The SEBI has also asked the companies to inform about the price-to-earnings ratio, how the valuation of shares is done, and how the price per share is decided. The reason behind this is that SEBI wants to understand how the price of a share is fixed. SEBI, at the moment, asks the companies to disclose their earnings per share, price-to-earnings ratio, return on capital, and return on net worth. However, the new-age technology loss-making companies do not earn any profits; therefore, it would not be possible for them to disclose these as these cannot be applied to the loss-making companies. Therefore, these companies would have to disclose KPIs additionally. These KPIs are valuation based and dependent on the past transactions done by the companies. They are not validated by the companies and are mostly tracked internally. However, if these indicators have to be submitted to SEBI, the act would not be welcomed by the industry as the valuation of these indicators is a lengthy process. If these stringent norms are applied, it will hamper the growth of the companies. Analysis and suggestions: Although the disclosures that the SEBI is discussing are being done in good faith and taking into

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