Author name: CBCL

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

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

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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

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,

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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

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

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

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

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Regulating the Generic Drugs Market: Eliminating the difference between Branded and Unbranded Generics

Competition Law /

[By Mansi Subramaniam & Sanigdh Budhia]  The authors are students at the Gujarat National Law University.  Introduction The Indian Pharmaceutical Industry has been transformed greatly in the past few years with the incoming of various companies and brands. It is one of the largest markets in the world, both in terms of volume and value. One of the unique features of the Indian Pharmaceutical Industry is the existence of ‘Branded Generics’. Generics are low-cost, functionally undifferentiated products with identical active components to the patented drugs whereas ‘Branded Generics’ are generic medications sold under a brand name. Branded Generics enjoy an edge over Unbranded Generics even though the chemical composition of both of them are the same because of their brand value, as well as certain anti-competitive practices. This creates a unique problem for the Indian Regulatory Authority for fair competition in the market, i.e., the Competition Commission of India (“CCI”). The latest study of the CCI on the Indian Pharmaceutical Industry highlights the existence of this problem in India and gives recommendations for the same. This article analyses the said problem and gives recommendations to ensure fair competition in the market in the presence of Branded Generics. Branded Generics Market Quandary India is the biggest supplier of generics globally. India’s pharmaceutical business is dominated by generics, which account for 97 per cent of the country’s drug consumption in terms of value. Around 10 per cent of these medications are unbranded generics. Branded Generics account for the rest of 87 per cent of all the drugs prescribed. Even though unbranded generics and branded generics are homogenous in nature, there is a significant price differentiation between the two. The price difference between them ranges from 1 to 200 per cent, making Branded Generics very expensive for the population at large. The companies selling Branded Generics increase their market share by selling in large volumes and by adopting certain uncompetitive practices. Since these branded generics are priced higher, they earn a huge profit, resulting in them becoming a market leader in the pharmaceutical sector. These market leaders often determine the prices in the market. Causes of high-priced Generic Drugs The prevalence of branded generics is one of the main causes of highly-priced generic drugs. Branded generic drugs are priced higher owing to the high trade margins maintained by the drug manufacturers. Higher trade margins are offered to traders by these companies to prioritize or only stock their drugs in trade and retail stores over other manufacturers. The general public perception that branded generic drugs are of higher quality in comparison to unbranded generics, is a major reason why the former is preferred, despite the latter being a cheaper option. The CCI study reveals that the market is usually dominated by the highest-priced brand. However, these findings are contradictory to an ideal competitive market. Ironically, studies have even shown that there exists no difference in quality and efficacy between branded and unbranded generics drugs. The demand for branded generics is further spurred by arrangements between drug companies and hospitals/medical practitioners. Patients are prescribed specific branded drugs, despite the availability of lower-cost options. Private hospitals often have a compulsory tying of consumables (patients are mandated to purchase drugs from the hospital itself), thus leading them to purchase specific brands irrespective of the cost. This issue is further exacerbated by information asymmetry in the market and the fact that consumers are generally unaware of lower-priced options. Proposed Recommendations The CCI in its study has recommended that in order to assuage the concerns about the quality of drugs in the minds of people, the quality of drugs should be maintained at a pre-determined standard. It has recommended the implementation of existing quality standards and periodic and scientific testing of drugs. When all the drugs are obligated to satisfy the same specifications and regulations, it is entirely incorrect to presume that a more expensive brand is of higher quality than a less expensive brand or unbranded generics. Even branded generics can fail the quality test if companies do not comply with existing standards. Thus, Branded Generics cannot justify their higher prices based on quality perceptions. Reducing Doctor- Pharmaceutical company nexus In order to ensure fair competition among all types of generics in the market, the doctor-pharma company nexus should be restrained. The government should mandate the Uniform Code for Pharmaceutical Marketing Practices (UCPMP) and actively implement it. The UCPMP is India’s version of the US’ Physicians Payment of Sunshine Act (Sunshine Act). Sunshine Act has resulted in fines of millions of dollars for some pharmaceutical corporations. However, in India, the implementation of UCPMP remains voluntary till date. The UCPMP restricts pharmaceutical companies from giving any kind of financial or pecuniary benefits to doctors and their family members, wholesalers, retailers, etc. The pharmaceutical companies often employ such incentivization tactics to persuade doctors to prescribe their high-priced brands over others (and in some cases, doctors have asked for incentives in exchange for prescriptions). Implementing UCPMP mandatorily will curb such practices. The Essential Commodities (Control of Unethical Practices in the Marketing of Drugs) Order, 2017 (“CUPMD Order”) was released by the government in 2018 and was proposed to be passed as a law under the Essential Commodities Act, 1955. The order noted that doctors are often lured to recommend a particular drug in exchange for incentives. This order outlawed such transactions and proposed the creation of a new authority known as the Ethics Compliance Officer, who would be in charge of investigating any alleged violation of the CUPMD Order. This order needs to be converted into a law and implemented effectively. In 2017, the government proposed to bring in a law ensuring that doctors prescribegeneric drugs only. The Medical Council of India has already recommended the same. However, this law was never enacted. The government should actively take steps to enact and implement the said law in order to ensure that doctors do not favour one company over another. Price Control Mechanism for Generic Medicines The Government needs to revisit

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The Widening Ambit of Moratorium Under the IBC

Insolvency Law /

[By Gayathri Balasubramanian] The author is a student at the Christ (Deemed to be) University, Bangalore. Introduction: The concept of moratorium is one of the Insolvency and Bankruptcy Code’s (the Code) most fundamental aspects. It is provided for under section 14 of the Code and is considered as a crucial concept which effectively brings to halt any simultaneous proceedings brought against the corporate debtor during the corporate insolvency resolution process. This is done in order to prevent any further legal and financial hurdles to the distressed corporate debtor and to ensure its survival during the insolvency proceedings. Since the enactment of the Insolvency and Bankruptcy Code in 2016, the courts have expanded the scope of the provision by bringing different types of legal proceedings under the ambit of the provision. Several such notable judgments and the implications on the scope of the provision will be dealt with in this article to analyse whether they have a positive or negative impact on the corporate insolvency resolution process. Judicial interpretation of the scope of Section 14: Section 14 can be understood as a vast shield that protects the corporate debtor during the Corporate Insolvency Resolution Process from further legal and financial hurdles. Its because of this broad ambit of the provision that the Courts have time and again decided on the ambit of the provision to ensure that moratorium does not unduly favour the corporate debtor. In the landmark judgment of P. Mohanraj V. Shah Bros. Ispat (P) Ltd., the court addressed a crucial legal conundrum i.e., whether the declaration of moratorium would extend to institution of criminal proceedings against the corporate debtor under section 138 of the Negotiable Instruments Act, 1881. The court began with addressing the issue by laying out the nature of the broad scope of the provision. Given that the terms provided under the provisions are to be interpreted in a broad manner, it was held that the term “proceedings” under section 14 would indeed include a section 138 proceeding under the Negotiable Instruments Act, 1881. It further added that drawing a technical difference between a civil suit and a section 138 proceeding would prove futile since the impact of both on the corporate debtor during the resolution process remain the same. It however pointed out that this protection would not extend to the personal liability of natural persons who are liable under the Negotiable Instruments Act, 1881. Although the judgment would be a step in the right direction, in the event the persons-in-charge or directors of the corporate debtor are directed to deposit money in the form of interim compensation, it would give rise to a new legal conundrum and result in more legal battles. The court followed the aforementioned ratio in Shah’s case in the case of Anjali Rathi V. Today Homes & Infrastructure Private Limited, where it reiterated that moratorium under section 14 does not extend to promoters of the corporate debtor. This principle of extending the protection to the corporate debtor yet at the same time not absolving the personal liability of natural persons lies at the core of the rule of separate corporate personality, and balances the interests of the corporate debtor as well as the party seeking relief under the Negotiable Instruments Act, 1881. Based on the same principle, the court in Alpha and Omega Diagnostics (India)Ltd. V Asset Reconstruction Company of India held that the personal property of the promoters given as bank security would not fall within the purview of section 14, thus drawing a clear line between the corporate debtor and its promoters. The same was reiterated in the case of Schweitzer Systemtek India Pvt. Ltd v. Phoenix ARC Pvt. Ltd. & Ors., where the applicability of section 14 was not extended to the property of the personal guarantor. On the contrary, the court gave a different ruling in State Bank of India v. V Ramakrishnan and Veesons Energy Limited, where it held that the moratorium under section 14 would not just apply for the corporate debtor, but also on the personal guarantor. The court based this rule on the reasoning that the personal guarantor being involved in the resolution process and bound by the order of the court, would also be included under the ambit of section 14. This judgment re-created the ambiguity regarding the liability of the personal guarantor. However, on appeal, the Supreme Court set aside the NCLAT order and reiterated the principle of co-extensiveness of the liability of the personal guarantor and the corporate debtor. These minor inconsistencies are rather inevitable, given the extensively broad scope of section 14; Although, a bare reading and a strict interpretation of the provision would clearly indicate that the moratorium applies only in the context of any proceedings of the corporate debtor and no other body/person. Perhaps, these judicial interpretations were required given that the Code was in its nascent stage and still is, constantly evolving and such judicial reiterations give more clarity to the stakeholders. Moratorium vis-à-vis Writ Jurisdiction and Arbitral Proceedings: In Canara Bank vs. Deccan Chronicle Holdings Limited, it was laid down that the power of the Hon’ble Supreme Court under Articles 32 and 136 of the Constitution of India, as well as the power of the Hon’ble High Courts under Articles 226 and 227 of the Constitution of India, shall be unaffected by the moratorium. Rightly so, this decision emphasised the supremacy of constitutional provision over the Code. However, it was laid down by the Hon’ble NCLAT that a suit for recovery filed against a corporate debtor before the the High Courts having original jurisdiction would be barred by section 14. As regards arbitral proceedings, it is fairly settled that arbitral proceedings, including a petition under section 34 of the Arbitration and Conciliation Act, 1996 would be hit by section 14. Even a section 37 petition is barred upon declaration of moratorium, as was laid down in the case of Alchemist Asset Reconstruction Co. Ltd. V. Hotel Gaudavan P. Ltd.Interestingly, a peculiar question on

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Section 29A(h) of IBC : SC Resolves Conundrum.

Insolvency Law /

[By Vaishnavi Patel & Himangini Mishra]  The authors are students at the Gujarat National Law University, Gandhinagar.  Introduction On 18th January 2022, the Supreme Court in its landmark judgment, Bank of Baroda and Anr. v. MBL infrastructures Limited clarified the scope of ineligibility of a personal guarantor as a Resolution Applicant (“RA”) under section 29A(h) of the Insolvency and Bankruptcy Code, 2016 (“Code”) . The court held that guarantee invoked by a creditor will operate in rem in relation to all the similarly placed Creditors.  Section 29A of the Code enumerates ineligibility criteria to prohibit RA to participate in a Corporate Insolvency Resolution Process (“CIRP”). Sub-section (h) of section 29A of the Code provides for disqualification of a guarantor who has executed a guarantee in favour of a creditor. The provision has been fraught with lacunas in terms of its scope, and needs clarification. In this article, the authors will discuss the jurisprudence surrounding Section 29A of the Code and critically analyze the recent Supreme Court decision. The authors will then discuss the implications of the judgment on a guarantor’s liability under the Code. Factual background RBL Bank and a few of the financial creditors invoked the guarantee of the personal guarantor and issued a notice under section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002. Subsequently, RBL Bank filed a petition under section 7 of the Code to initiate CIRP against MBL Infrastructures Limited. Thereafter, the Resolution Professional received two resolution plans, one of which was submitted by the personal guarantor. The resolution plan was submitted prior to the insertion of section 29A of the Code. However, before the Committee of Creditors (“CoC”) could take any decision on the resolution plan submitted by the personal guarantor, section 29A of the Code was introduced. In view of this development, the personal guarantor filed an application in NCLT for an order to the effect that it does not attract any disqualification under sub-section (c) and (h) of 29A of the Code. NCLT also held that as per section 29A (h) of the Code, RA will not be disqualified for merely extending personal guarantee, if such guarantee has not been invoked. It also went on to note that such disqualification will not be attracted even when certain creditors have invoked the guarantee extended by RA. CoC, thus, voted on the resolution plan of RA. However, the plan did not receive the requisite votes. Thereafter, RA filed an application under section 60 of the Code for directing the dissenting creditors to support the resolution plan. Consequently, the resolution plan was approved by CoC. Meanwhile, another amendment to section 29A(h) of the Code took effect in 2018 (supra), looming disqualification on RA. However, NCLT held that the issue in relation to section 29A(h) of the Code has already been concluded. It, thereby, directed that the resolution plan approved by CoC shall come into effect. This order was then challenged in the Supreme Court. Ever-evolving jurisprudence on section 29A Dynamic nature of the Code makes the committee reports and judicial opinions indispensable in furthering our understanding of the Code. The Insolvency Law Committee Report in 2018 while discussing Section 29A (h) of the Code questioned if the intent behind the provision was to disqualify a guarantor only where the guarantee had been invoked or if the provision sought to disqualify the guarantor even when the guarantee had not been invoked. Therefore, the ambiguities inherent in the interpretation of the provision were required to be clarified. It was observed that the provision could not have intended to disqualify a guarantor merely for issuing an “enforceable” guarantee. Accordingly, the committee recommended that the word “enforceable” ought to be removed from clause (h) and the phrase “and such guarantee has been invoked by the creditor and remains unpaid in full or part by the guarantor” should be added to the said clause. The committee, rightfully, recognised the discriminatory nature of sub-section (h). Accordingly, the said recommendations were implemented by way of an amendment in 2018. The courts have emphasised on adopting a purposive interpretation of the Code. In order to define the scope of the section, the Apex Court in Arcelormittal India Private Limited v. Satish Kumar Gupta considered the meaning of the terms “control” and “management”. Pursuantly, the court held that the intention behind the inclusion of section 29A of the Code was to prevent a backdoor entry of those in control or management who drove the corporate debtor to the doors of insolvency in the first place. The section gained another dimension in Arun Kumar Jagatramka v. Jindal Steel And Power Ltd. which laid down that a person ineligible to be RA under the Code was also ineligible from entering a compromise under the provisions of the Companies Act, 2013. Thus, section 29A of the Code was interpreted as a critical link in assuring that the Code’s objectives were not thwarted by permitting “ineligible persons” to return in a new form of RA, including but not limited to those in management. In RBL Bank Ltd. v. MBL Infrastructures Ltd., NCLT bench of Kolkata specifically looked into meaning and significance of sub-section (h) of section 29A of the Code. Guarantors who may be regarded to be excluded from sub-section (h) of section 29A of the Code only include those who have antecedents possibly jeopardizing the reliability of the processes under the Code. Thus, the sub-section doesn’t exclude the entire class of guarantors. Further, following in the footsteps of the insolvency committee, the tribunal observed that the word “enforceable” in the section should be aligned with the objectives of the Code. The phrase should not be understood in its ordinary or literal sense. As law couldn’t be allowed to operate in vacuum and penalise the guarantors who weren’t provided a chance to make good of the dues by invocation of guarantee. Another decision of NCLT in Punjab National Bank v. Concord Hospitality (P.) Ltd. is pertinent to be discussed on this aspect.

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Term Sheet: To Be (Binding) Or Not To Be?

Company Law /

[By Aditi Sheth] The author is a student at the National Law School of India University. This paper argues that courts must not overrule the explicit intention of parties on the binding value of their term sheet by finding intention in the performance/non-performance of the conditions precedent (“CPs”) clause. It borrows from law and economics jurisprudence to support this claim. Introduction Commercially sophisticated parties enter into term sheets that set out the material terms of the deal before entering into definitive agreements. Term sheets allow them to reach consensus on material terms and reach deal certainty before spending time and resources on due diligence and definitive agreements. Despite this key advantage, some lawyers advise against entering into term sheets because of the risk of uncertainty surrounding their binding value. Courts may find “non-binding” term sheets to be binding and vice versa. In India, the lack of a well-developed jurisprudence has increased this risk. This paper clarifies the muddles surrounding the binding value of term sheets in the context of performance of CPs detailed in the term sheet. Understanding conditions precedent CPs are conditions that must be fulfilled before closing the transaction. Parties may choose to specify these conditions in either their term sheet or their definitive agreements. For instance, the IVCA model term sheet recommends listing CPs directly in the definitive agreements. However, some parties may choose to place CPs that are material to the deal in their term sheet to ensure there is no mismatch of expectations between the parties. The binding value of a term sheet should not be affected if parties were to place CPs in the term sheet instead of definitive agreements. This is because placing CPs in a term sheet does not impact the timeline according to which parties have to perform the CPs. Parties may perform CPs any time before the closing of the transaction, even after the signing of definitive agreements. In other words, parties are free to wait for the performance of CPs till definitive agreements are signed since the only significance of placing CPs in the term sheet is of signalling materiality. However, Indian jurisprudence has viewed it differently. Tribunals have found a term sheet labelled “non-binding” to be binding due to the performance of several CPs (Zostel v. Oyo) and a term sheet labelled “binding” to be non-binding due to the presence of several CPs (GAIL v. Sravanthi). This paper argues against this jurisprudence by using the only two relevant and publicly available cases as test-suites. Zostel v Oyo – “non-binding” term sheet found binding Oyo and Zostel entered into an acquisition term sheet according to which the acquisition was conditional upon performing CPs detailed in the term sheet itself. The dispute arose when Oyo abandoned the acquisition process before the parties executed definitive agreements. Before the arbitral tribunal, Zostel sought specific performance of Oyo’s obligations under the term sheet, while Oyo claimed that the term sheet was non-binding and thus, had no obligation to pursue the transaction. Pertinently, the preamble of the term sheet explicitly stated that it was non-binding. Instead of deferring to the parties’ explicit choice, the Tribunal examined the clause on closing, which mentioned several CPs to determine whether the parties intended the term sheet to be binding. Merely because these conditions were necessary for closing the transaction, the Tribunal held that closing was the “natural and only consequence of compliance of these conditions”. Moreover, the Tribunal explicitly noted that “execution of definitive documents was not independent of the term sheet”, effectively collapsing the distinction between the two. Furthermore, the Tribunal claimed that Oyo could not conduct due diligence of a competitor in the absence of definitive agreements and that without definitive agreements, Zostel had no incentive to comply with the CPs mentioned in the term sheet.  Critical analysis The Tribunal erred on three accounts. First, it failed to realise that despite the performance of CPs, parties do not need to close a deal. They are free to walk away even after the performance of all CPs if there is no consensus on other terms considering the parties intended the term sheet to be non-binding. This understanding is also manifested in clause 7 of the term sheet, which stated that “subject to the conditions set forth in this Term Sheet, the parties shall mutually agree, execute” the definitive agreements. Thus, this term sheet was a mere agreement to agree to a binding contract.  Second, the Tribunal’s claim that Oyo could not conduct due diligence of a competitor in the absence of definitive agreements is patently erroneous. It is customary for parties to conduct due diligence after signing the term sheet and before signing the definitive agreements. The very purpose of conducting due diligence is rendered fruitless if parties have already bound themselves to a deal. This does not change despite them being competitors because all the information provided for due diligence is subjected to strict confidentiality and non-disclosure agreements. Third, it is also not true that without definitive agreements, Zostel had no incentive to comply with the CPs. Contrarily, Zostel may have complied with the CPs to signal its interest and seriousness in the deal to Oyo and consequently, push the deal forward. GAIL v. Sravanthi – “binding” term sheet found non-binding In GAIL v. Sravanthi the parties signed a term sheet for supply of natural gas but failed to later convert the term sheet into a more detailed Gas Sale Agreement. The Electricity Appellate Tribunal had to determine whether the term sheet was binding and could form the basis of restrictive trade practises on part of GAIL. While the court of first instance found that the term sheet was binding, the Appellate Tribunal disagreed with this finding, merely because the term sheet provided that none of the “rights or obligations set out in this Agreement [the term sheet] shall become effective until the date known as CP ‘Satisfaction Date’”. In the Tribunal’s understanding, since the obligations stemming from the term sheet were subject to

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Tata to Air India and Back: Analysing the Disinvestment Process

Contemporary Issues /

[By Medha Nagpal & Anushka Agarwal]  The authors are students at the Jindal Global Law School.  The quest to privatize Air India has come to an end with its takeover by Talace Private Limited, a wholly owned subsidiary of Tata Sons (“Talace”) after years of unsuccessful attempts. The third and final attempt to disinvest the national carrier airline was completed with the sale of 100% equity shares of Air India and Air India Express in addition to a 50% stake in Air India and Singapore airport terminal services (“AISATS”) on January 27, 2022. Out of the total debt of INR 61,560 crore attached to the loss-making airline, Talace will take over the amount of INR 15,300 crore while the rest will be allocated to Air India Assets Holding Ltd. (“AIAHL”), a special purpose vehicle created as per the disinvestment plan. This article aims to briefly discuss the umpteen number of unsuccessful efforts made by the government while analysing potential implications of this acquisition by Talace on the aviation industry, as well as taxpayers, amongst other stakeholders. Background The first effort to sell stakes in the airline began in 2001 when the NDA led cabinet aimed to sell 60% of its shares due to losses driven by competing low-cost carriers and poor hospitality. This attempt, however, was not a success and had to be withdrawn within two years. As per the 2013 report by the Centre for Aviation, the airline suffered from “low productivity, high costs, poor staff morale, significant unresolved human resource issues and an unviable business model” making it more pertinent than ever, to privatize. The second initiative to divest that took place in the year 2017-18 also failed due to the government’s proposal to retain a minority stake of 26%, while at the same time requiring the acquirer to take charge of a larger portion of the carrier’s debts. This combination of partial control and high debts did not bode well with the prospective bidders looking to make substantial changes in the working of the airline while towards profitability in a highly competitive market. The latest attempt which involves Talace has been predicted to be a successful one for various reasons, one of which being that the government has completely parted away with the control in the airline and has given the acquirer the flexibility to decide the level of debt they wish to take along with the airline. Understanding the nuances and impact of the disinvestment process With the successful completion of the disinvestment, the new owners will have to adhere to the new directions provided on Foreign Direct Investment, according to which, the stake of foreign investments (including that of foreign airlines) in Air India has been capped at 49%, via direct or indirect means. However, Non-Resident Indians who are Indian Nationals are allowed foreign investments under automatic route up to 100% stake as opposed to the 49% earlier. This exception was carved out to make the disinvestment process more attractive than its previous attempts. A press note by the Department for Promotion of Industry and Internal Trade has categorically stated that the “substantial ownership and effective control of M/s Air India Ltd. shall continue to be vested in Indian Nationals as stipulated in Aircraft Rules, 1937” which is to mean that while foreign investments are welcome, however, the airline can never be subsumed into a foreign entity. It can be argued that the handover of the loss-making airline to the Tatas who have prior airline management experience is a step in the right direction. At the end of March 2021, Air India’s accumulated losses stood at INR 83,916 crores, an amount which could have been invested in welfare and other economy boosting activities. With the prompt sale of the airline to Talace, further bleeding of taxpayer’s money is being prevented by the government which had been spending INR 20 crore daily to keep it afloat. The takeover, in its essence, highlights the faith reposed by the government in the private sector in addition to furthering the disinvestment goals highlighted in the 2021 budget. Disinvestment of the national carrier had become necessary due to the rate of return on the employed capital was running in negative numbers for years now. Further, in 2020-21, the nation’s widening fiscal deficit standing at 9.5% of the Gross Domestic Product can be financed by disinvestment of such public sector undertakings. In terms of benefits to the Tata Group, the transaction can add value to the company by providing lucrative flying routes which are not accessible to most competitors. It provides them with a push to be a substantial player as the airline offers its bilateral flying rights, hangars and trained personnel allowing the Tatas to undertake operations immediately. The merger of Air Asia with Air India Express would increase their market share to 27% which makes it the second largest in the domestic sector after Indigo which holds a market share of 52%. However, as one may assume scrutiny from the Competition Commission of India (“CCI”), the anti-monopoly watchdog has approved the acquisition. The CCI seems to have given approval as this acquisition does not have an appreciable adverse effect on competition. Furthermore, CCI usually adopts the point of origin/point of destination approach, similarly done in the Jet- Etihad acquisition, to examine airline mergers. In such instances, every combination of point of origin and point of destination is seen as a separate relevant market for the customer. If the CCI were to find competition concerns, it can impose a set of remedies. Though providing formidable benefits, the road ahead for the Tatas is fraught with challenges with many trying to quash this acquisition. Recently, a Public Interest Litigation (“PIL”) was filed by Member of Parliament, namely, Subramanian Swamy, seeking to quash the Air India disinvestment process on the grounds that the bidding process was “arbitrary, corrupt, against public interest and rigged in favor of Tata Group”. Swamy’s contention stated that there existed only one bidder since the second bidder consisted

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