Author name: CBCL

Vallal Rck v. Siva Industries: Decision in the right direction?

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Avik Sarkar] The author is a student at K.L.E. Society’s Law college, Bengaluru. Introduction In order to boost the investment regime in the country, the Government of India has introduced various enactments and amendments. Among them, the Insolvency and Bankruptcy Code, 2016 (‘the Code’) was one such enactment. It was introduced in order to bring the insolvency regime under one umbrella so that the investors could salvage their invested amount without much delay in case of any defaults. The code brought about a paradigm shift in the regime from the existing ‘debtor-in-possession’ to a ‘creditor-in -control’ model. However, the key highlights of this particular code were the fact that it had come with a promise of minimal judicial intervention. In its recent decision of Vallal Rck V M/s Siva Industries and Holdings Limited, the apex court of the country has reaffirmed its already crystallized position with regards to the sanctity of the Committee of creditors’ (‘CoC’) wisdom. The court in the present case held that NCLT and NCLAT cannot sit in appeals over the commercial wisdom of the CoC. Factual Matrix In the present matter, IDBI bank limited had filed a Section 7 application under the code for the initiation of the Corporate Insolvency Resolution Process (‘CIRP’) against Siva Industries (Corporate Debtor). And consequently, the application was admitted and the CIRP process was initiated.  During the resolution process, a bid of M/s Royal PartnersInvestment Fund Limited was submitted by the resolution professional. However, due to inadequacy in sufficient number of votes by the CoC, the plan could not be passed. Following this, the resolution professional filed for liquidation before the National Company Law Tribunal (‘NCLT’) under section 33(1)(a) of the Code. It was during this time when the Vallal Rck (‘Promoter’) of Siva Industries filed an application under section 60(5) of the Code for the proposal of a one-time settlement plan (‘OTS’). After a series of discussions and meetings by the CoC, it was decided to accept the OTS offer of the promoter by a sweeping majority of 94.23%. Therefore, once the OTS deal was accepted, the resolution professional filed to the NCLT for withdrawal of CIRP under Section 12A of the Code. However, NCLT rejected the OTS deal based on the reasoning that it seemed more like a Business Restructuring Plan than a settlement plan. Aggrieved by the decision of the NCLT, an appeal was filed to the National Company Appellate Tribunal (‘NCLAT’) by the promoter. However, NCLAT dismissed the appeal. Consequently, miffed by the decision of NCLAT, the promoter further appealed to the Supreme Court of India. Apex Court Dictum Firstly, the court referred to Section 12A of the Code which allowed the withdrawal of insolvency application filed under Sections 7, 9 and 10, provided that, 90 percent of the CoC members through voting agree to withdraw the insolvency application. Further, on perusing regulation 30A of the Code, one would get a succinct idea of the procedure for filing a withdrawal application under section 12A of the Code. Therefore, in order to have a complete understanding of section 12A, it should always be read in juxtaposition with Section 30A Secondly, the court referred to paragraph 29 of the Insolvency Committee Report (March 2018) where it has been clearly  stated that there is nothing in the Code that allows withdrawing insolvency application post-admission. However, the report refers to the objective of the Code enshrined under the BLRC report which states that all stakeholders shall participate and assess the viability of the proposed plan in order to withdraw the insolvency application. Also, it must be ensured that the stakeholders are actively willing to restructure their liabilities. Thirdly, the court referred to Swiss Ribbon Private Ltd Vs Union Of India which upholds the validity of section 12A of the Code. Based on the above deliberation the court held that if 90 percent of the CoC members after due deliberations, “find that it will be in the interest of all the stake­holders to permit settlement and withdraw CIRP, in our view, the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of CoC.” Conclusion This particular judgment by the apex court has reaffirmed its already crystallized position that CoC’s wisdom cannot be meddled with and therefore NCLAT/NCLT cannot sit over appeals from it. This decision of the apex court is said to be in the right direction considering the fact that it is in line with the ‘least judicial interference’ principle. However, the author would like to posit a different view. In the recent past, there has been clamour concerning the conduct of the CoC. The author is of the view that giving such plenary power to the CoCs can have detrimental effects in the future which can affect the efficiency of the Code. Now, the latest report released by the Insolvency Bankruptcy Board of India (‘IBBI’) for the quarter of January to March has come up with harrowing revelations.  It has been found that the value of the assets that are with creditors against which they have granted loans to various entities are lesser than the liquidation value of the entities themselves. This means that during the insolvency process, the creditors will tend to opt for liquidation than passing a resolution plan as it would help them salvage the majority of their borrowings. Therefore, in such scenarios, if the CoC is granted plenary powers, the majority of insolvency proceedings would lead to liquidation which would be against the objective of the Code i.e., to revive a distressed entity from its current state. Further, in the past, there have been various instances where the conduct of the CoC has been highly contentious.  During the resolution process of Bhushan Steel Pvt Limited, the resolution professional had paid Rs 12 crore towards the fees of the legal counsel of the lender. However, as per a circular released by IBBI on 12.02.2018, the inclusion of legal fees has been clearly prohibited. It can be easily construed that

Vallal Rck v. Siva Industries: Decision in the right direction? Read More »

Now or Never: Exigency to Remedy latent Cons under the (Cons)umer Protection Act

Leave a Comment / Contemporary Issues /

[By Subodh Asthana and Madhur Bhatt] The authors are students at Hidayatullah National Law University. The definition of a “Consumer” under section 2(7) of the Consumer Protection Act (“Consumer Act”) 2019 seeks to exclude any transaction consummated for “commercial purpose” with an exception afforded to the purchase of goods for self-employment. Conversely, Section 2(1)(d) of the Consumer Act 1986 after the Amendment Act of 2002 did provide an exception of Self Employment to any person engaging in buying goods and services. The authors in the first section of this blog would argue that such exclusion of services from the exception of self-employment in the Consumer Act 2019 is devoid of any reasonable classification by the Legislature. Furthermore, in the second section of this piece, the authors would critically analyse the recent judgment of the Supreme Court (“SC”) in Shrikant G. Mantri v. Punjab National Bank (“PNB Case”). Although the SC in this case did consider buying of goods and hiring of services at the same pedestal but fallaciously held the impugned transaction for the hiring of services between the Appellant and the Respondent as a Business to Business (“B2B”) transaction, thereby ignoring the established precedents on the exception of commercial purpose under the statutory provisions of the erstwhile act (Consumer Act 1986). Making a Case against Unreasonable Exclusion Although the SC in the PNB Case applied the wrong reasoning except for the observation of treating purchase of services and goods at the same pedestal. This exclusion in the Consumer Act 2019 is clearly in clear contravention of the 2002 Amendment. It is pertinent to note that through this amendment, the legislature widened the scope of the “self-employment” exception by including hiring of services as well. Thus, the exclusion of services from the self-employment exception in the Consumer Act 2019 is devoid of any reasonable classification particularly when the Legislature did not explain its intention for such ostracism. Moreover, given the outburst of the service sector including the E-Commerce space in the contemporary era where the businesses and traders engage at a higher bandwidth sometimes at a personal level. The exclusion of these services from the self-use exception would leave a major chunk of traders without any remedy under the Consumer Act. It is pertinent to note that the legislature intended to only exclude the commercial transactions that are usually done at a large scale by the Corporations. The rigours of the same cannot be attracted to the traders carrying out the business for self-employment. The SC in the case of Internet and  Mobile  Association of India   v. Reserve Bank of India (“RBI Case”) held that no business can thrive without availing of any service by the service sector. It is not the submission of the authors that all B2B transactions must be excluded but when the SC itself has demarcated the boundaries of commercial transactions, then such exclusion by the Parliament seems baffling. Even in Australia, certain protections for businesses have been conferred under the Australian Consumer Law when buying goods or services for personal consumption. The same practice is prevalent in other common law countries as well. Therefore, we assert that hiring of such services must be included in the self-employment exception as the service sector provide a lifeline for any business, trade or profession. The Parliament must take the necessary steps to fill out the void through an amendment. In the following section, the authors would be highlighting the anomaly created by the SC in the PNB Case by giving a narrower connotation to the term “self-employment”. The Decision in the PNB Case In the present matter, the Appellant was engaged as a stockbroker. The petition was filed by the appellant before the SC alleging deficiency of services on the part of the Respondent-Bank under the Consumer Act. However, the bank objected to the maintainability of the petition by stating that the Appellant being a stockbroker is not a consumer under the provision of the Act and had availed the services of the bank for the commercial purpose. The SC in the instant matter took a hysterical view of the dispute and held that the services of the bank were availed by the Appellants to increase their business profits and therefore labelled the impugned arrangement as a B2B transaction for carrying out commercial objectives. We would be arguing that the Division Bench of SC completely disregarded the exception of “Self-Employment” and principles envisaged by the court in established precedents in the following segments of this piece thereto. Myopic View of the Dispute: The Scuffle Begins We assert that the judgement in the PNB Case suffers from the patently fallacious view taken by the SC in interpreting the exception of self-use (inclusion of goods and services). Now given the similar treatment of goods and services, as observed by the SC in the PNB Case; the principles and interpretation to the same were simply overlooked by the Court in the PNB case and therefore we would be applying the same principles established in previous precedents to supplement our case. Recently, a division bench of the SC in the case of Sunil Kohli and Ors. v. Purearth Infrastructure Ltd. held that “if the commercial exploitation of goods is being done by the purchaser of the goods himself for the exclusive purpose of earning his livelihood employing self-employment”, such a purchaser would come within the ambit of the Act and would be considered as a consumer under the Act. Although it is evident from the above proposition that the SC and parliament have carved out an exception for self-employment in the ambit of consumer purpose and therefore every transaction carried out for the motive of the profit cannot be labelled as a B2B transaction. The SC in Cheema Engineering vs Rajan Singh (“Cheema Engineering Case”) r/w Laxmi  Engineering Works vs. P.S.G. Industrial Institute, held that the test of self-employment is a matter of evidence that can be claimed by a person who is acting individually for offering personal services. Hence, if

Now or Never: Exigency to Remedy latent Cons under the (Cons)umer Protection Act Read More »

Examining the taxability of the Adani-Holcim deal

Leave a Comment / Taxation Law /

[By Ashish Kumar Jha] The author is a student at Gujarat National Law University. Introduction The recent acquisition of Ambuja Cements and its subsidiary ACC cement from the Swiss company has been in the limelight for a while. According to CEO Holcim, Jan Jenisch, the transaction worth USD 6.38 billion is totally tax-free. Since then, the structure of this tax-free transaction has perplexed everyone. This article tries to uncover the probable rationale behind claiming this transaction tax-free, and analyses how DTAA is used as an avenue for tax avoidance. For that, it is necessary to understand the ownership structure of both the groups, i.e. Adani and Holcim, at the outset. Ownership Structure This transaction involves Holderfin B.V., a Netherlands based company, as the seller, and Endeavour Trade & Investment Ltd., a Mauritius based company, as the buyer. Holderfin B.V., owned by Holcim Group, has a subsidiary company Holderind Investment Ltd. incorporated in Mauritius. Holderind Investment Ltd. holds 63.20% and 4.48% shares in Ambuja Cements Ltd. (India) and ACC Ltd. (India), respectively. Ambuja Cements Ltd. holds 50.05% shares in ACC Ltd. Endeavour Trade and Investment Ltd. is owned by Acropolis Trade and Investment Ltd., which is a subsidiary of Adani Group. Taxability of the Transaction under Income Tax (IT) Act, 1961 It is being claimed that this transaction involves the acquisition of a Mauritius based Company (Holderind Investment Ltd.) by a Mauritius based company (Endeavour Trade & Investment Ltd.). However, since Holderind Investment Ltd. derives its value from Indian assets, i.e. ACC & Ambuja cement, this transaction indirectly tantamount to a transfer of ownership of the Indian companies to a Mauritius based company. Recourse is being taken of Vodafone International Holding B.V. v Union of India (UOI) and Ors. where it was held that Section 9(1)(i) covers only income arising or accruing directly or indirectly or through the transfers of a capital asset situated in India and this Section cannot, by process of “interpretation” or “construction”, be extended to cover “indirect transfers” of capital assets/property situate in India. The Court explicitly mentioned that if a foreign company transfers the ownership of its subordinate company, which holds shares in an Indian Company, to a non-resident off-shore, it does not tantamount to the transfer of shares of an Indian Company. Therefore, according to this judgment, the transaction does not involve an Indian Company, and hence there is no tax liability. However, Explanation 5 of Section 9(1)(i) of the Income Tax Act introduced by the Finance Act, 2012 reads— “It is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.” In the present case, the capital asset of Holderind Investment Ltd. derives its value substantially from the asset located in India, i.e. ACC & Ambuja Cement; hence, it should be deemed to be situated in India, and the transaction should be taxable. Section 195 of the IT Act, 1961 mandates the person responsible for paying a sum chargeable to tax in India to a non-resident to deduct tax at source. Here, it was the duty of the buyer to deduct tax at the source since the seller is deemed to be situated in India. In the present case, the India-Netherlands Double Tax Avoidance Agreement Comes into play. India-Netherlands Double Tax Avoidance Agreement India and Netherlands have signed a Double Tax Avoidance Agreement (DTAA) which has prevailing power under Section 90(2) of the Income Tax Act, 1961. Section 90(2) of the IT Act, 1961 provides that the Provisions of IT Act shall apply to the extent they are more beneficial to that assessee; otherwise, the agreement entered into the by the government will prevail. In the Union of India v Azadi Bachao Andolan and CIT v PVLK Chettiar case, it was held that the latter would prevail in the case of conflict between IT Act, 1961 and DTAA. Article 13 of the DTAA contains the provision regarding the taxing right of the income in the nature of capital gain. The case, on the hand, falls under Article 13(5) of the DTAA, which gives the power to collect tax, under certain conditions, to that state only of which the alienator is a resident. The domestic law of the Netherlands does not prescribe levying tax on capital gains. Therefore, this transaction is claimed to be tax-free. Implication of Multi-Lateral Instrument (MLI) India and Netherlands both are signatories to the MLI. MLI entered into force in India on 1st October 2019. Netherlands is one of the countries that have notified tax treaty with India and have deposited their ratification instruments with the Organisation for Economic Co-operation and Development (OECD). Paragraph 1 of Article 6 of the MLI mandates the ratifying country to modify and include the texts “Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion and avoidance.” India and Netherlands DTAA contain similar wordings in the preamble to eliminate tax avoidance and tax evasion. Paragraph 1 of Article 7 reads, “Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining benefit was one of the principal purposes of any agreement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement”. In the present acquisition process, a holding company (Adani Group) incorporated in India through its off-shore special purpose vehicle is acquiring

Examining the taxability of the Adani-Holcim deal Read More »

Mohit Mineral v. UOI: The Make or Break for the GST Regime

Leave a Comment / Taxation Law /

[By Vaibhav Kashyap] The author is a student at the National Law University, Odisha. Background The 101st Constitution Amendment was inserted to make the necessary constitutional changes to allow the functioning of the GST regime. The GST Acts brought about a long-standing change in the indirect taxation policy of the country. The main thrust point of these changes was the uniformity in the taxation structure of the country, popularly known as the “One Nation, One Tax” system. For the last five years, this objective was fulfilled through the recommendation of the GST council which was followed by the states earnestly, almost mandatorily. In fact, all the decisions except one were taken unanimously. But with the recent decision of the court in Mohit Mineral Pvt. Ltd. v. Union of India, the Supreme Court has clarified that the recommendation of the GST council is only recommendatory. This decision can have far-reaching consequences and has the potential to destabilize the whole GST regime. Facts of the Case In the present case, the respondent, Mohit Mineral Pvt. Ltd., was engaged in the business of importing non-coking coal into the territory of India from foreign countries. Consequent to the import of the goods, the appellant supplied the same to various businesses across India. The nature of the arrangement that the appellant had with the exporters was such that the exporter was liable to bear the freight charges on the goods. This arrangement is called CIF (“Cost-Insurance-Freight”) where the exporter pays the freight and insurance charges. On the other hand, in the FOB (“Free-on-Board”)  system, the importer pays the freight and insurance charges. Nevertheless, the respondent paid two types of taxes on the value of the freight: the customs according to the Customs Act of 1962 and the applicable IGST on the value of the goods. Before the enforcement of the GST Acts in 2017, the service tax on ocean freight was non-taxable. But through Notification 08/2017 and Notification 10/2017 issued by the Central Government, it was made taxable on a Reverse Charge Basis, meaning the recipient of the service would be liable for the payment of the tax. While the appellant did not dispute the payment of IGST when the transportation of goods was done on FOB basis, it contended that it was not obliged to pay the IGST on transportation done on CIF basis since both the recipient as well as the supplier were foreign entities. This, they contended, violated Article 5(3) of the IGST Act. Consequently, the respondents challenged the Notifications dated 08/2017 and 10/2017 as being ultra vires. Analysis The Nature and Recommendation of the GST Council Since the impugned notifications were issued on the recommendation of the GST Council, a question arose before the Court whether the recommendations of the GST Council were mandatory or recommendatory in nature. The appellant (Government) contended that the recommendations were mandatory in nature since the very basis of the GST regime was maintaining the uniformity in tax slabs across states. In addition, Article 279(11) of the Constitution provided for a dispute resolution mechanism and therefore it was contended that the recommendation was intended to be mandatory. The argument was that this provision could have only been inserted if there was a possibility of a  dispute arising between the states and the center. On the other hand, the respondents submitted that the recommendations were not mandatory in nature considering the federal structure of the constitution and also because such an interpretation would undermine the supremacy of the Parliament and State Legislatures. The court held that prior to the 2016 amendment to the Constitution, the union and the state had the “exclusive” right of taxation in their respective domains. Post the 2016 amendment, this exclusive right of taxation was converted into a “simultaneous” right. The court noted that Article 246A treats the states and center equally. Similarly, Article 279A mentions that the states and center should not act independently and are interdependent on each other. Also, the decisions of the GST Council are not unanimous and the center and states have been given varying levels of voting power. The court concluded based on these grounds that the simultaneous power of taxation has to be exercised in a manner to reach a workable fiscal model through cooperation and collaboration. The court rejected the argument that federal structure in India had a centralizing effect since the states had been provided exclusive power under the constitution. The nature of the recommendation of the GST Council is non-qualified and made without any explanation. Therefore, to say that the recommendations are mandatory would be far-fetched. The court noted that the word “recommendation” was used in a number of varying contexts in the constitution.   But the court noted that the word “recommendation” only has a “persuasive” value in accordance with the Supreme Court judgement in Manohar v. State of Maharashtra and Naraindas Indurkhya v. State of Madhya Pradesh. Finally, while several articles of the CGST Act and IGST Act provide that while the GST Council recommends is binding, these provisions have to be seen in the light of the legislative purpose of the legislation, which is the creation of a uniform system of taxation. No such provision has been inserted in the Constitution. Thus, even though a few recommendations are binding, it cannot mean that all the recommendations are similarly binding. Did The Impugned Notification Suffer from Excessive Delegation? The power of identification of goods or services where tax is payable has been delegated by the IGST Act under Section 5(3). This was contended to be “excessive delegation” since too much power was entrusted to the GST Council. The legislature should make the “essential basic framework” and the minor details can be filled through the process of delegated legislation. The legislature should not refrain from doing its “essential legislative function”. The Court held that the essential legislative function with respect to the GST laws was the rate of taxation, the levy of tax, taxable person, the subject matter of tax, and the

Mohit Mineral v. UOI: The Make or Break for the GST Regime Read More »

Flexiblity of SEBI and the LIC IPO- An Analysis

Leave a Comment / Uncategorized /

[Ayush Shandilya] The author is a student of National Law University, Odisha. Introduction The Initial Public Offering (“IPO”) of Life Insurance Corporation (“LIC”) was announced during the annual budget session of 2020 but it took the Government a little over two years to finally come up with the IPO. The delay in the IPO could be attributed to the pandemic situation that had disrupted the market along with the Russia-Ukraine war. After an unprecedented delay, the government entity Life Insurance Corporation of India or LIC filed its Red Herring Prospectus (“RHP”) with the Securities and Exchange Board of India (“SEBI”) for its IPO. The IPO was launched for trading in the grey market on May 4, 2022. The issue size of the IPO is around Rs 21,000 crore making it the biggest public issue in the Indian history. The previous biggest IPO was that of Paytm with an issue size of 18,300 crores followed by Coal India, Reliance Power, and General Insurance Corporation with an issue size of 15,475 crores, 11,563 crore,s and 11,372 crores respectively. The aim of this article is to put light on the rare support shown by the SEBI for LIC IPO. The article would begin by explaining all the relaxations that SEBI has offered to LIC in order to help the corporation to come up with the IPO followed by the LIC’s performance in the grey market and the reasons for such a performance. Lastly, the article would conclude with the author’s personal remarks on the entire scenario. Relaxations Provided By SEBI The issue size of the IPO has definitely drawn the interest of the investors but at the same time, there are various legal issues in the picture as well. To start with, there is a provision in the Draft Red Herring Prospectus (“DRHP”) that allows the LIC to reserve 10% of the issued shares for the policyholders. Another provision in the RHP allows the policyholders and the employees to apply for shares at a discount to the offer price. The discount given to the policyholders is Rs 60 per share and that to the employees is Rs 45 per share. As LIC has the largest customer base amounting to 282 million, this provision would attract a lot of them to invest in the IPO. The relaxations by the way of amendments and exemptions by SEBI have been discussed below. Amendment in the  LIC Act 1956  All kinds of public offerings including the initial public offerings are governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations (ICDR) 2018 which contains provisions in regulation number 30 under Part VII of the regulation that allows any company to issue shared at discount to its employees. It is thereby not a unique practice to offer shares at discounted rates to the employees but it is for the first time that a company is giving discounts on the shares to its customers i.e. the policyholders. There is no provision in the ICDR to do so. Section 5(9) of the Life Insurance Corporation Act,1956that went through an amendment in September 2021 provides the following and the same has been mentioned on page number 253 of the RHP.  The amended section said that regarding various categories of person in favor of whom the corporation might make reservations in relation to the IPO, it may also make a reservation upto 10% at any time during the 5-year period from the date of commencement of section 131 of the Finance Act 2021. It also allowed the corporation to offer a discount up to 10% on the above-mentioned reserved class The above mentioned amendment was bought into action just a few months before the filing of the RHP which clearly suggests that the purpose of this amendment was to make sure that the investors gets attracted to the IPO. Amendment in the SCRR 1957 Another amendment that was bought ahead of the LIC IPO was made in the Securities Contract (Regulations) Rules, 1957 (“SCRR”) in 2021. Rule 19(2) mandated the companies to offer at least 10% of their post issue capital and within a span of three years, dilute the shares to 25% from the above mentioned 10%. After the amendment in 2021, a new sub-rule (sub-rule iv) came into existence under the same rule and it now allows companies that have a post issue capital of more than one lakh crore to dilute at least 5% of their shares to the public while listing. This shareholding should be increased to 10% within two years of getting listed and upto 25% within 5 years of getting listed.  This amendment allowed the LIC (whose post issue capital is more than one lakh crore) to dilute only 5% of the share and not 10% as it was earlier. Additonaly, this amendment would encourage the large companies to come up with the IPO even during unstable market conditions as now the companies need not dilute a large amount of their capital to be able to offer shares to public. For LIC, the current market conditions are not favourable owing to rising oil prices and Russia-Ukraine war and hence diluting 10% of the capital might not be a good option. Therefore this amendment would help LIC in coming out with the IPO as now it has to only dilute 5% of its capital. Exemption from the Lock-In Period SEBI in its board meeting on December 28, 2021 had announced that it would continue the existing 30 day lock in period norm for the anchor investors. The norm stated that there shall be a 30 day lock in period for 50% of the allotted shares. A new addition was done to this norm which stated that for the rest 50% of the shares, the lock in period would be of 90 days. This norm was to come into force from April 1, 2022 but later the enforcement date was changed to July 1, 2022. This change in date of enforcement of lock in period was

Flexiblity of SEBI and the LIC IPO- An Analysis Read More »

Twitter Deal: Stakeholders’ Interest in the shadow of Shareholders’ Supremacy?

Leave a Comment / Contemporary Issues /

[Priyanshi Jain and Nehal Misra] The authors are students of Institute of Law, Nirma University.   Introduction Elon Musk, governing the tech fiefdom, has recently signed a deal to buy Twitter. The deal has been closed at $44 billion.  Since the finalization of deal a contrasting relationship has been developed between the tech mogul and Twitter. To begin with, he has criticized Twitter’s board over past performances and has even trolled its CEO and lawyers, it is evident that musk is trying to veto the deal in every possible way. Initially, Elon sent an unsolicited offer to acquire Twitter. Pursuant to this, Twitter’s board came up with one of the strongest combative strategies known as the ‘‘poison pill’’. However, the board of Twitter, in a complete reversal of its initial hesitation, has now accepted the bid.  The question which remains unvoiced is how the board of the target company, in one fell swoop accepted the bid while giving little regard, if any, to the interests of the stakeholders other than shareholders which includes employees, creditors, and the community at large. The American corporate governance regime has mainly been shareholders-oriented and thus revolved around maximizing the shareholders’ value. However, in recent years, this doctrine has faced feuds as the focal point of this doctrine is the shareholders, even at the expense of each and every other stakeholder. But the broad spectrum other than that of shareholders also have an intrinsic value and their interest cannot be neglected under the guise of shareholders’ supremacy. That said, the deal may benefit the shareholders as the target board has placed its reliance on value certainty and financing but the fate of Twitter’s other stakeholders is still riddled with ambiguity. In this post, we will examine how the stakeholders’ are not protected in the Twitter’s deal. Firstly, we will unwrap the factors that have significantly contributed to neglecting stakeholders’ interests. Secondly, we will state the possible recourse which could have been adopted along with a few recommendations. A Premier on Shortcomings of the Musk-Twitter Deal Elon Musk’s takeover of Twitter is all the rage. However, whether Musk’s takeover is, in reality, as tempting as he claims it is, is yet to be analyzed. While the board of Twitter assures the protection and promotion of the existing shareholders, the interests of the other stakeholders in the company remain neglected. Employees: The takeover of Twitter has fiercely impacted the employees. While Twitter’s current CEO, Parag Aggarwal, insists that there would be no layoffs, Musk is rumored to be cutting positions to increase Twitter’s profitability. During negotiations with banks, the Tesla CEO reportedly stated that after he takes over, he intends to slash employment at Twitter to boost the company’s bottom line. According to sources close to the company, Musk might not make any decisions on employee cutbacks until he takes control of Twitter. The Community at large: There was no mention of Twitter’s other stakeholders- users and employees, or its critical role in public discourse. Acquiring a media house is rarely about the well-being of the community but a marketing tool for the company. Twitter is no different and often used as a publicity branch. Additionally, musk’s tweets are known for disrupting the normal functioning of the market. The fluctuations observed in the case of Bitcoins, Dogecoin, etc. are evident of how markets can be move. Hence, if the Tech mogul acquires Twitter, then it will surely have a devastating effect on the community at large. The interests of the community will stand neglected due to the compromised position of the global platform in the buy-out of Twitter. Elon Musk, in a press release, supported free speech. While Musk’s actions have not always aligned with his thoughts, it is evident that Americans are willing to trust him. Musk’s detractors, on the other hand, are concerned that the billionaire’s control of the platform will silence their voices, given that he has frequently blocked opponents from his account. Although propagation of free speech is quite appealing, boundless freedom at the stake of hate speech, violent threats, or misinformation seems insignificant. Shareholders: The Tesla shareholders are an overlooked group in the enthusiasm around Musk’s Twitter takeover. Tesla shareholders seem to be stuck in a war zone devoid of any ammunition. They have no say in the Twitter deal, and it’s safe to assume that the Musk fan club, which includes the company’s non-executive directors, will remain silent. Tesla’s shares dropped 12% when Musk purchased Twitter, wiping out $126 billion in market capitalization. Meanwhile, according to Fortune, Musk issued a blanket personal guarantee on the entire $12.5 billion loans secured by his Tesla shares. This demarcates that the interests of the shareholders of Tesla have been compromised at the price of Musk’s ambition. While Musk refuses to back down from taking over Twitter, Tesla’s shareholders’ lack of trust in its executive poses a great concern for the company’s future. Easiest Expedient that could have been adopted Having stated all the above, the deal is dampening the interests of all the stakeholders. In that regard, the best possible recourse which could have been adopted is as follows: First, it is a well-established fact that when employees are doing good, then the corporation as a whole is rewarded. Employees have a fiduciary duty towards their employer, but employers are not bound by any such duty towards their employees. Similarly, corporations have an obligation towards shareholders, but such an obligation is not extended to employees. This contrasting relationship is often disputed before the Delaware Court of Chancery. In the case of Unocal vs Mesa Petroleum, the interest of the stakeholders (employees) has been placed in pari passu with that of the shareholders. However, the recent Twitter debacle justifies the contention that corporations have not exercised fiduciary duties toward their employees. Therefore, in this regard, a few recommendations are, firstly, productivity gains should be shared amongst employees and shareholders equally and, secondly, a mechanism for wealth maximization of employees as well as shareholders should be in place. Second, studies have shown that there is a need for a significant change in a corporation’s approach. A paradigm shift from short-term vision goals to long-term business and societal goals

Twitter Deal: Stakeholders’ Interest in the shadow of Shareholders’ Supremacy? Read More »

Analysing the Legitimacy of Auctioning of Secured Assets in an ‘As is, Where is, Whatever is’ Manner: A Call for Adopting the Doctrine of Caveat Venditor – Part II

Leave a Comment / Uncategorized /

[Sourav Paul] The author is a student of West Bengal National University of Juridical Sciences. Tracing the Judicial Approach to Sale of Secured Assets: A Marked Shift Towards the Doctrine of Caveat Venditor Traditionally, the Indian courts have applied the caveat emptor doctrine while adjudicating the on the part of the secured creditors. The Indian courts adopted this position, i.e., to protect the secured creditors, primarily because it was a part of the larger policy plan to resolve the NPA crisis.[[i]] An ‘as is, where is, whatever is’ sale of the secured assets meant fast removal of NPAs .[[ii]] Consequently, the buyers of these secured assets in the auctions were denied relief. The courts have used caveat emptor as a ‘sword’ to deny any relief to the bonafide buyers. In United Bank of India v. Official Liquidators and Others, the buyer was not aware of the liens and encumbrances on the property. However, the SC rejected the claim of the buyer for compensation, price , or damages. The SC argued that the official liquidator did not provide any guarantee or warranty to the buyer that the asset had a marketable title, and it was the responsibility of the buyer to undertake due diligence. A similar line of reasoning was followed in Delhi Developmental Authority v. Kenneth Builders and Developers Ltd. In Babu Bindeshri Prasad v. Mahant Jairamgir, the bonafide purchaser claimed specific performance of the contract since the seller failed to guarantee a good title. The Privy Council, while dismissing the suit, held that the seller is not obligated to provide any guarantee regarding the marketability of the title. It observed that the preamble of the SARFAESI Act and the guiding principles enshrined under §55 of the Act must be read harmoniously. In essence, the SC incorporated the mandate under §55 of the Act in the scheme of the SARFAESI Act. However, gradually the judicial discourse changed in favour of the bonafide buyers when the courts started recognising that it has become an industry practice to use ‘as is, where is, whatever is’ clauses by the secured creditors. In Rekha Sahu v. UCO Bank, the Division Bench of the Allahabad High Court unequivocally held that the secured creditor is duty-bound to disclose all material information to the buyer while selling secured assets, as per §55 of the Act. Similarly, in Atishaya Construction Pvt. Ltd. v. Central Bank of India, while analysing the validity of ‘as is, where is, whatever is’ clauses, the Gujarat High Court noted that the clause could not grant immunity to the secured creditors and the buyers are liable to be compensated by the secured creditors. Formal recognition of the principle of caveat venditor in the context of auctioning of secured assets happened in Mandava Krishna Chaitanya v. UCO Bank, Asset Management Branch. The Andhra Pradesh High Court opined that the “concept of as is where is and as is what is basis has lost its significance in the current commercial milieu, and the principle of caveat venditor is more on the rise as compared to the outdated principle of caveat emptor.” In this case, the bank completely relied on this clause for immunity and did not undertake the basic due diligence on the secured asset before the auction. In this case, the bank completely relied on this clause for immunity and did not undertake the basic due diligence on the secured asset before the auction. It further ruled that the secured creditor is barred from dealing with the secured asset arbitrarily. It held that Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002 are mandatory provisions, which means that informing the purchaser of the secured asset about the nature of the property, liability, encumbrances, etc., is also mandatory. In Jai Logistic v. The Authorised Officer, Syndicate Bank, the Madras High Court while ruling that the secured creditor must be aware and inform the buyer about all the material defects in the secured asset. However, it highlighted that if the auction notice specifically adds a certain additional due diligence burden on the buyer, such auction notice shall be deemed valid. Further, it also opined that delivery of encumbrance certificate post-execution of the transfer of the secured asset would not imply compliance with the principle of caveat venditor and §55 of the Act. In Capital Hotel and Developers Ltd. v. Delhi Development Authority, the Delhi High Court ruled that the secured creditor is duty-bound to disclose all pending litigations to the bidders who are participating in the auction, and “it was the bidders to consider whether the same was a cloud on the title or not.” The Court emphasised the need for ‘informed’ consent on the part of the bonafide buyer and argued that any pending litigation pertaining to the secured asset is a material fact. The Court, while relying on §55 of the Act, opined that “[e]ven if there was no impediment to the transfer, the cloud arising from pendency of the appeal entitle the purchaser for disclosure of such information and the non-disclosure would give a right to the purchaser to back out of the transaction.” Recently, in Medineutrina (P) Ltd. v. District Industries Centre, the Bombay High Court reiterated that mere mention of ‘as is, where is, whatever is’ basis shall not absolve the secured creditor of its duty to – (a) to make adequate enquiries about the encumbrances regarding the property; (b) to disclose such information in the auction notice, thereby enabling the buyer to make a ‘conscious’ decision. Conclusion This article was a modest attempt to get the dice rolling on changing the perspective regarding the auction of secured assets from caveat emptor to caveat venditor. The primary aim of the article was to focus on the rights and liabilities of the secured creditors while transferring the secured assets to the bonafide purchaser and holding them liable for any material defect in the title of the secured assets. The author’s argument was bolstered by the recent jurisprudence on this issue,

Analysing the Legitimacy of Auctioning of Secured Assets in an ‘As is, Where is, Whatever is’ Manner: A Call for Adopting the Doctrine of Caveat Venditor – Part II Read More »

Analysing the Legitimacy of Auctioning of Secured Assets in an ‘As is, Where is, Whatever is’ Manner: A Call for Adopting the Doctrine of Caveat Venditor – Part I

Leave a Comment / Uncategorized /

[Sourav Paul] The author is a student of West Bengal National University of Juridical Sciences. Introduction The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) is one of the prominent laws in the long list of debt recovery and restructuring legislation enacted by the Indian Parliament. While introducing the Bill, the then Finance Minister said, “[t]his Bill is essentially for securitisation of financial assets so as to generate immediate liquidity, and it is also to enforce security because at the present moment, there are no powers. The commercial environment, both within the country as also globally, is changing. This results in what I would call an asset-liability mismatch as well as in mounting levels of Non-Performing Assets (NPAs). As a ratio of GDP, India’s Non-Performing Assets (NPAs) are really much lower than some of the countries. The Government is committed to constantly reviewing, constantly improving the provisions.”[[i]] In essence, the SARFAESI Act was brought in to tackle the mounting Non-Performing Asset (‘NPA’) crisis in the country, which was responsible for retarding the growth of the financial sector. The SARFAESI Act was also the sum total of the recommendations and concerns raised by the Narasimhan Committee II, the Andhyarjuna Committee, and the Reserve Bank of India (‘RBI’).[[ii]] In Mardia Chemicals v. Union of India, the Supreme Court of India (‘SC’) upheld the constitutionality of the SARFAESI Act, thereby solidifying its presence in the rich Indian debt recovery jurisprudence. Although the legislation played a pivotal role in clearing up the NPA mess created by the banks and financial institutions, it brought unique sets of problems with it. The architecture of the SARFAESI Act favours the speedy recovery of debts, which necessarily requires the relaxation of procedures and compliances in the sale of secured asset transactions. Over the years, the secured creditors have taken advantage of the loopholes of the SARFAESI Act and enjoyed impunity. The central argument of this article is that the secured of checks since the mechanism imposes an unfair obligation on the bona fide purchaser. Therefore, the author calls for adopting the principle of caveat venditor instead of caveat emptor. It also argues that ‘as is, where is, whatever is’ clauses are unenforceable in nature. In Section II of the article, the author explains the process of auctioning secured assets and the role of ‘as is, where is, whatever is’ clauses in auction notices. In Section III, the author analyses the duties of the seller in a transaction under §55 of the Transfer of Property Act, 1882 (‘Act’). In the next post, the author examines the paradigm shift in the judicial approach from caveat emptor to caveat venditor and provides recommendations. A Primer on ‘As is, Where is, Whatever is’ Clauses in Auction Notices and Sale of Secured Assets A debt gets converted into an NPA forwarded by any financial institution. . “holding any right, title or interest upon any tangible asset or intangible asset […]”, Since the property has been converted into an NPA, an auction takes place for selling these stressed assets post-issue of notice. Pursuant to §13(2) of the SARFAESI Act, the secured creditor issues notice to the borrower, which contains the details of the debt, and requests the borrower to clear all the liabilities within 60 days of receiving such notice. If the borrower fails to clear their liabilities within the deadline, the secured asset is sold in an auction. The takeover of the secured asset is executed as per the directions mandated under §13(2) and §13(4) of the SARFAESI Act. For the sake of brevity, the author shall not discuss in detail the procedure under these provisions (see here for an overview of the SARFAESI Act). Often the sale of the secured assets occurs in an ‘as is, where is, whatever is’ manner which legitimises the sale of improper title, encumbrances, or any other undisclosed information pertaining to the secured asset. ‘As is, where is, whatever is’ is a clause inserted in the auction notices by the secured creditors, i.e., the banks and the financial institutions. The clause confers complete control of the secured asset to the highest bidder, including all the pending encumbrances, improper title, pending litigations, or any other defect. Consequently, the secured creditor sheds off its liabilities. The secured creditors ignore the bona fide buyers’ claims by arguing that it is the responsibility of the buyer to undertake adequate due diligence, thereby applying the principle of caveat emptor. Post-execution of the sale, when the bonafide buyer discovers the inherent defects in the property, the secured creditors invoke the ‘as is, where is, whatever is’ clause to deny any refund or compensation. Analysing §55 of the Transfer of Property Act, 1882: Understanding the Rights and Liabilities of the Seller § 55 of the Act imposes certain rights and liabilities on the buyer and the seller with respect to the sale of immovable property. The legislative intent behind the provision is to ensure fair dealing in property, thereby minimising fraud in these transactions.[[iii]] However, it is imperative to note that the provision applies only when there is no contract to the contrary. Nevertheless, the provision is a guideline for dealing with immovable assets in good faith. This segment shall analyse the duties of the seller in a sale transaction vis-à-vis §55 of the Act. Seller’s Duty to Disclose Material Facts The basic rule governing any sale transaction is that the seller is under an obligation to disclose all the material defects to the buyer, and where the buyer, with ordinary due care, was unable to find any defect.[[iv]] , as per the standard laid down in Flight v. Booth. In B.S. Oberoi v. P.S. Oberoi, it was held that pending litigation is a material fact. It further held that the decision of a bonafide purchaser might change if pending litigation pertaining to the property is brought to light. In Surendra Maneklal Kathia v. Bai Narmada, the Gujarat High Court ruled that a claim against the seller under §55(1)(a) of

Analysing the Legitimacy of Auctioning of Secured Assets in an ‘As is, Where is, Whatever is’ Manner: A Call for Adopting the Doctrine of Caveat Venditor – Part I Read More »

RBI’s One-Cap Rule on IPO Financing – Should it be for All?

Leave a Comment / Capital Markets and Securities Law, Contemporary Issues /

[Mehak Jain and Aditi Ghosh] The authors are students of Hidayatullah National Law University, Raipur. Introduction Post Covid-19, there has been a regime shift in terms of investing in IPOs because of the frenzy created by newer investors in the market. IPO financing is a tool majorly used by High Networth Individuals (‘HNIs’) to leverage funds for a short-period of time for the purpose of investing in IPOs. The systemic risks posed by NBFCs have prominently been a concerning topic for the country’s financial regulators ever since their exponential growth in the sector. Amongst the issues, unregulated IPO financing by (‘NBFCs’)  has been viewed as a significant problem majorly due to concerns of market volatility caused by it. With the aim of regulating this practice, the RBI through its Scale Based Regulations (‘SBR’) declared a cap limiting IPO financing by NBFCs at a value of Rs. 1 crore per investor. Understanding IPO Financing In IPO financing, NBFCs take a nominal margin amount (i.e., a collateral amount that the borrower themselves put in) from the HNIs in advance in exchange for providing funding for the purposes of investing in an IPO. The borrower is the one with the highest exposure, who repays the loan by realising their allotted shares post listing gains, which happens in a span of around 6 days from the close of the IPO. In cases where the closing price is less than the listing price, thereby resulting in a loss, HNIs are nevertheless personally liable for repayment of the borrowed funds with interest. In the HNI category, there are no limits on the amount one can bid and the shares are allocated proportionately. Thus, the entire process of investing large funds into this category results in huge profits for both the investors and the NBFCs. Taking advantage of this, funds in the range of hundreds of crores are loaned per investor under IPO financing with the NBFCs contributing around 90 times the amount being invested by the investors. Evidently, this leads to concerns of market volatility and financial instability in the market, along with jeopardizing the interests of genuine long-term investors and hindering fair price discovery. Accordingly, RBI by virtue of the SBR has capped IPO financing to Rs. 1 crore per borrower with the intent of preventing abuse of the system. Benefit to the NBFC sector: Smaller NBFCs set to gain By virtue of the capping on IPO financing, smaller players are set to gain and penetrate the Rs. 80,000 crore short-term funding market. For NBFCs, the financing options for on-lending to individuals for applying to IPOs are limited. Banks are prohibited from financing NBFCs for further lending to HNIs for the purposes of IPO financing. NBFCs resort to obtaining the requisite capital either via commercial papers or via Non-Chequable Debentures. Prior to the capping, individuals have sought as much as Rs. 250 crore for applying for one IPO (such as in the case of Nykaa), and financing such a large amount is something that smaller players are not equipped with to do. Until recently, wealthy investors borrowed huge sums of money from large and established NBFCs who in return charged higher rates of interest depending on demand. With a capping of Rs. 1 crore now set in place, would not have to compete with larger NBFCs for exorbitant amounts of funding. Additionally, smaller NBFCs with expertise and dedicated focus in capital markets shall be more likely to get in and expect increased business in this regard. Concomitantly, it is relevant to note that problems of fund mobilisation and rapid increase in the number of borrowers can pose an issue. Fund raising can be a major hiccup given that the costs for raising the same shall be higher than for bigger NBFCs such as IIFL and Bajaj Finance face. Increased number of borrowers also might pose operational risks. Thus, while the capping is inclusive in nature, addressal of these concerns is pertinent for observing substantial benefit to the sector. Benefit to the HNI investor sector: Long-term genuine HNIs set to gain Just as the capping benefits a part of the NBFC sector, it also benefits a part of HNI investors. For the ones bidding genuinely for amounts less than Rs. 50 lakhs, and with an aim of generating long-term wealth, they now have a better chance of allocations in the absence of obscene values of bidding. IPO financing for HNIs works differently than for retail investors. In cases of over-subscription, while allotment for retail investors follows a lottery system ensuring allocation of at least one slot, HNI’s are allotted proportionately to the amounts they bid. This results in excessive oversubscription, where IPOs are subscribed hundreds of times of the actual IPO size. For instance, the Paras Defence IPO was over-subscribed a whopping 928 times in the NII/HNI category. Owing to the capping, genuine investors shall have better chances at availing of allotment thus leading to the creation of long-term wealth, which is something that was amiss till now given the concentration of IPO funding. Reduction of oversubscription leading to fair price discovery The objective behind IPO financing is not to “invest” per se and reap investment returns, but to book hefty short-term gains by leveraging available funds and having a quick means of “entry” and “exit”. This leads to the concentration of funds in the hands of a few, with the IPO allotment process being turned in favour of these short-term players. Such extreme concentration leads to market volatility, which hinders fair price discovery. Given that IPO financing happens in a way where the investor is funded multiple times than what (s)he is putting in, there is huge leverage which inevitably leads to huge risk that is capable of leading to a downfall of the NBFC sector. Accordingly, IPO capping by reducing the oversubscription numbers shall be beneficial in determining the actual IPO price. Recommendations The business of IPO financing is a lucrative one for both the NBFC and the investor given the short listing

RBI’s One-Cap Rule on IPO Financing – Should it be for All? Read More »

Scroll to Top