Author name: CBCL

India’s Digital Competition Gamble: Overreach or Oversight?

Leave a Comment / Competition Law /

[By Jainam Shah & Ayush Raj] The authors are students of Gujarat National Law University.   Introduction In the rapidly evolving market of India’s digital economy, the Digital Competition Bill of 2024 has emerged as a contentious piece of legislation. It aims to regulate Systemically Significant Digital Enterprises (‘SSDEs’) in India through ex-ante regulations and seeks to ensure fair competition while preventing anti-competitive practices in digital markets. However, the bill’s criteria for identifying SSDEs and its enforcement mechanisms have raised several concerns among legal experts and jurists. With the announcement of the Digital Competition Bill, India finds itself mirroring global debates unfolding in the EU, US, and UK. The legislative efforts of these jurisdictions, like the EU’s Digital Markets Act, have faced significant criticism for potentially stifling innovation while attempting to address competition in digital markets. This blog delves into a critical examination of the Digital Competition Bill, scrutinizing its quantitative and qualitative thresholds, enforcement mechanisms, and the broader implications for innovation and competition in India’s digital economy. It is argued that the quantitative thresholds used to identify SSDEs are overly restrictive, failing to capture the nuanced realities of digital markets. On the other hand, the qualitative criteria grant the Competition Commission of India (‘CCI’) broad discretionary powers, leading to uncertainty and ambiguity among digital businesses. The analysis aims to highlight the bill’s shortcomings and propose more nuanced approaches to fostering a competitive yet innovation-friendly digital landscape.  Critique of the criteria for identifying SSDEs As per the provisions of the Digital Competition Bill (‘DCB’), it aims to regulate companies and enterprises classified as ‘Systematically Significant Digital Enterprises’ – those having a significant presence in a ‘Core Digital Service’. The DCB employs a dual-pronged strategy to classify a business as an SSDE – Quantitative and Qualitative. On the surface, it may seem a very comprehensive approach, however, a closer examination reveals a lot of major fundamental issues. 1. Restrictive nature of quantitative thresholds. The quantitative thresholds used to identify SSDEs are – turnover, market capitalisation, and number of users. These thresholds bear a striking resemblance to those in the now-replaced ‘Monopolies and Restrictive Trade Practices Act 1969 (‘MRTP Act’)’. One of the major criticisms of the MRTP Act was its strictly mathematical criterion to determine whether a company had a dominant role or not in the market. Consider a scenario where a company with 23% or 24% market share escapes regulations, while another with 25% falls under scrutiny. The same issue lies with the one-size-fits-all quantitative thresholds that have been incorporated into the bill upon the recommendation of the Standing Committee report. The bill aims to identify companies with a significant presence in their particular digital markets, but only through a fixed figure of revenue and the number of users of that company. Instead of providing a universal figure or threshold, the Bill shall provide specific figures with respect to each digital market that it aims to cover, considering metrics such as innovations, perceived value, brand loyalty, etc. This would ensure a more nuanced and comprehensive assessment of a company’s significance within its respective digital domain. Further, another problem with the financial thresholds of DCB is that it inadvertently favours multinational companies over smaller Indian startups. As per the current scenario, an Indian startup with a turnover of 5000 crores could be classified as an SSDE, whereas, an Indian subsidiary of a global giant having a turnover of 20 million USD turnover might escape regulation if its local turnover falls below 3500 crores. This disparity contradicts the spirit of recent initiatives, such as ‘Make in India’ taken by the Government. 2.     Ambiguity and uncertainty in qualitative thresholds. While the quantitative thresholds are problematically restrictive, the qualitative criteria swing to the opposite extreme by granting the CCI sweeping discretionary powers to designate any given company or enterprise as an SSDE, regardless of whether it meets the quantitative thresholds. The CCI holds the power to label an enterprise as an SSDE on the basis of qualitative factors such as “volume of commerce”, “size and resources”, “monopoly position”, and “economic powers”, among others. While this discretion might seem to address the problem of rigidity caused by quantitative thresholds, it introduces a new problem: uncertainty. Imagine being a company that just falls short of quantitative thresholds. You are now in a continuous limbo, unable to predict whether you will be classified as an SSDE or not. This would only paralyze decision-making and stifle innovation – the very antithesis of what a thriving digital economy needs. Further, the qualitative criteria listed in the bill seem to be of an open-ended nature, which are purely subjective. The bill mentions not only 15 broad factors but also a 16th catch-all factor: “any other relevant factor not mentioned above may be considered”. Thus, CCI, in a way, has complete discretion and authority over the designation of a company as an SSDE. The Bill has tried to solve this issue half-heartedly wherein it provides for an opportunity to appeal or rebut to any company designated as an SSDE based on qualitative criteria. Recommendations Along with an expanded appeals process, in order to mitigate this issue, the DCB must incorporate a transparent and structured process of designating an SSDE. This should include: A formal, step-by-step designation procedure. A clear and strict timeline for CCI’s decision-making process, thus, it would provide much more clarity to a company on what to expect further. A mandate for the CCI to provide detailed explanations of its reasoning. This would not only help the companies in appealing against the said designation process but also act as an obstruction to otherwise discretionary powers of CCI. These measures would help alleviate the uncertainty and fear that the current subjective approach possesses. By refining the quantitative thresholds to account for market-specific nuances and implementing a more transparent qualitative assessment process, the DCB can strike a more balanced and equitable approach to regulating Systematically Significant Digital Enterprises. This, in turn, will foster a more conducive environment for the growth

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MSME Complex: Evaluating the Delayed Payments Regime

Leave a Comment / Commercial Law /

[By Rajnandan Gadhi & Aadithya J Nair] The authors are students of The National University of Advanced Legal Studies, Kochi.   Introduction The Micro, Small and Medium Enterprises Development Act, 2006 (‘the Act’) was envisioned by the Government of India in its quest “to make provisions for ensuring timely and smooth flow of credit to small and medium enterprises to minimise the incidence of sickness among and enhancing the competitiveness of such enterprises.” The Act replaced the erstwhile Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 as it did not provide small enterprises with a mechanism to settle disputes.  The legislative intent behind the delayed payments regime stemmed from the government’s view that insufficient working capital in small-scale or ancillary industrial enterprises leads to significant and widespread issues impacting their health. Consequently, it was deemed necessary to legally ensure timely payments by buyers and to introduce mandatory provisions for the payment of interest on overdue amounts in case of default.  Recently, the Supreme Court of India dismissed a petition where an MSME association challenged a provision under the Income Tax Act, 1961 which prohibited the assessee from claiming tax deduction if it did not pay its dues as required under the MSMED Act within the same year. The effectiveness of this regime, considering its practical implications, was questioned as it hinders business.   This piece intends to point out the glaring issues that have plagued this regime since its institution and discuss certain policy changes that may be the way forward to continued ease of business and development of Indian small businesses. Accordingly, section I of the blog briefly explains the current delayed payments regime and the issues, actual and potential, associated with it. Section II evaluates the treatment of statutory interest on delayed payments under the IBC. Section III puts forth remedies and suggests policy changes to alleviate the problems discussed.  Delayed Payments Regime Under the Act Micro, Small, and Medium Enterprises (‘MSMEs’) undertake numerous transactions involving the purchase and sale of goods. However, as with any commercial transaction, business risks such as delayed payment of consideration for the supply of goods or services are inevitable. Hence, the Act intends a scheme whereby the micro and small suppliers may recover debts due to them from buyers.  Section 15 of the Act mandates the buyer to make payment for goods or services obtained from the supplier; within 45 days from the day of acceptance of the product. Additionally, Section 16 imposes an interest on the buyer, who fails to make payment within the given period. This interest is compounded at three times the bank rate as determined by the Reserve Bank of India.  Disputes arising out of delayed payments are to be settled by Micro and Small Enterprises Facilitation Councils (‘MSEFCs’) through the multi-tiered dispute resolution mechanism provided under Section 18 which includes conciliation and arbitration.  It is pertinent to note that the definition of supplier under the Act specifically excludes medium enterprises and consequently, bars them from being eligible to claim benefits of the delayed payments scheme prescribed in chapter five of the Act, leaving them without remedy. Leniency in penal interest on delayed payments to MSMEs under the Act continues because MSMEs hesitate to demand it, fearing it might harm business relationships.  Thus, despite the 45-day limit, buyers can still significantly delay payments without consequences, as in practice, very little penal interest is paid on overdue payments. Additionally, the fear of tedious dispute proceedings and the requirement of 75% of the award to be deposited by the buyer to appeal deter big businesses from working with MSMEs.   To protect their interests, large corporations might shift their sourcing to larger firms or request that their vendors relinquish their MSME registration to continue doing business with them. Additionally, large companies are not the only players who regularly conduct transactions with MSMEs; rather, other MSMEs procure goods from MSME suppliers as well. The delayed payment regime stifles their ability to buy goods and services from other MSMEs without apprehension and intra-MSME transaction channels will continue to be seriously impacted. Compoundable interest at thrice the bank rate is a burden that has been put on enterprises that may be in the same economic standing as the suppliers. Therefore, the argument that such interest is meant to protect MSMEs is infructuous.    Effect of the IBC on Interest on Delayed Payment A situation may arise where the Corporate Insolvency Resolution Process (‘CIRP’) is initiated against the buyer and the supplier may seek to treat the principal amount and statutory interest due under Section 16 as “operational debt” under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). Still, the National Company Law Tribunal (‘NCLT’), in Melange Systems Private Limited v. PME lnfratech Private Limited, held that interest under Section 16 of the Act can be claimed before the MSEFC; not before the NCLT as an outstanding debt and that the claim of interest on operational debt at the statutory rate of interest Act, when no interest was stipulated in the invoices was unsustainable. The view taken in Govind Sales v. Gammon India, which has been misinterpreted by NCLTs and practitioners, is that if a pre-existing dispute such as a doubt regarding the enterprise’s MSE status is raised, the Section 9 petition under the IBC may be rejected. In Satish Agro Industries v. The Maharashtra Agro Industries Development Corporation Ltd., NCLT Mumbai found that where the principal amount due meets the IBC threshold, the question of interest on delayed payments under the Act need not be addressed. On the corollary, NCLT Hyderabad in Shri Shri Krishna Rail Engineers Pvt Ltd v. Madhucon Projects Ltd. held that the MSE Operational Creditor is entitled to interest despite the absence of a provision for interest on delayed payments in the Letter of Intent and even though the Operational Creditor did not approach the MSEFC as per the Act. Thus, the position of law is unsettled and open to the discretion of the courts, to say

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The Illumina & GRAIL deal: Lessons for the Indian Competition Regime

Leave a Comment / Competition Law /

[By Sunidhi Kashyap] The author is a student of Rajiv Gandhi National University of Law, Punjab.   Introduction   A failed attempt at acquiring a healthcare company involved in developing early cancer detection tests, led to an interesting take on the European Union Merger Regulation (“EUMR”). Illumina, an American biotechnology company manufacturing and selling next generation sequencing (“NGS”) systems, used in developing blood-based tests to detect cancer, wanted to acquire GRAIL, an American healthcare company engaged in developing an early multi-cancer detection test in asymptomatic patients.   Illumina had publicly announced its intention to acquire GRAIL for $8 billion in 2020. However, this acquisition embroiled Illumina in a legal battle with both, the EU and the US regulators on account of the anti-competitive nature of this deal. While the unsuccessful deal of Illumina and GRAIL is known for the unique interpretation of Article 22 of EUMR given by the General Court (“GC”), it has also paved a path for regulating combinations. The interpretation given by the GC shows that though the deal was within the threshold limit of notifying the relevant authorities, it still had the potential of stifling innovation in a constantly evolving and emerging market like healthcare.   In this context, this post will firstly shed light on the role of Article 22 of EUMR in this deal; secondly, it will discuss the importance of regulating combinations in markets of innovation and lastly, it will identify the lacunae in the Indian competition regime and would suggest a way forward.   Article 22 of EUMR and the Illumina-GRAIL deal   Illumina is the top supplier of NGS systems and GRAIL was a customer of Illumina, using its NGS systems to develop cancer detection tests. According to the investigation of the European Commission (“EC”), a vertical merger between the two could destroy competition in the market of early cancer detection tests as Illumina would be incentivized to not share its technology with GRAIL’s rivals and consequently, without the essential input from Illumina, GRAIL’s competitors would be put in a disadvantaged place. The market players were apprehensive that post the acquisition, Illumina would monopolize the emerging market of early cancer detection tests by limiting access to its NGS systems.   While both the American healthcare companies did not exceed the relevant thresholds and did not have any European dimension it was still subject to scrutiny by the EC. This was possible only because Article 22 of EUMR permits Member States to request the EC to investigate the concentration if it affects competition within the territory of the Member State. When looked closely, Article 22 plays a crucial role by regulating those combinations which fall within the turnover threshold but still carry an adverse effect on competition in a market. Especially, in cases of killer acquisitions, where the nascent firms are bought by the incumbents to prevent any future competition, provisions like Article 22 are important to maintain healthy competition in the market.   In India, however, combinations under the Competition Act, 2002 (“The Act”), are looked from an antitrust lens only when it exceeds the turnover or asset thresholds. This “safety net” or the de minimis exemption excludes many combination deals in emerging markets, especially where a tangible product may not be developed yet but its merger with an incumbent firm still poses antitrust concerns. In this context, this article will argue for treating combinations in emerging markets or markets of innovation differently, by accounting for their peculiarities.   Markets of Innovation and Antitrust Concerns  Emerging or markets of innovation refer to those markets where there is constant scientific development, inventions, technological advancements, improvements or modifications. They largely refer to the research and development (“R&D”) intensive sectors. A unique characteristic of such markets is that it may not necessarily possess a tangible good which is ready to be sold. For instance, in the case of the Illumina and GRAIL deal, the early cancer detection test being developed by GRAIL was not a ready product yet. Despite that, the merger would have stifled innovation and competition in an emerging market which could potentially lead to a reduced consumer choice.   In innovation markets, the R&D development is much more fast-paced, making it more volatile than a traditional market. For instance, the infamous IBM “debacle” presents the perfect example of how innovation markets are difficult to predict. In 1969, IBM was a major player with the highest market share in the computer manufacturer sector and was being sued under Section 1 of the Sherman Act for restraint of trade. The case went on till 10 years and towards the end, it was simply dismissed in 1982 because IBM was no longer a monopolist and had lost its dominance in the market. This case shows that R&D firms are always vulnerable to radical changes and their dominance is only temporary. However, this does not mean that antitrust analysis would be completely absent in these ever-evolving markets. Being dominant in such markets for 10-20 years takes substantial resources from the economy and stifles innovation and competition both.   Lacunae in the Indian Competition Regime  While dealing with combinations in innovation markets, the biggest roadblock is posed by the “safety net” or the thresholds specified under the Act. The thresholds prescribed under the Act are of two types- turnover and asset. Only if a combination surpasses these thresholds would the Competition Commission of India (“CCI”) undertake an investigation for ruling out any appreciable adverse effect on competition in the market. Moreover, given the recent enhancements of these limits and the de minimis exemption, a lot of combination deals fall outside the scope of the Act. Additionally, it seems that the Act has a brick-and-mortar enterprise centric approach which assumes that a firm would traditionally make large investments in assets and aim to obtain a higher turnover. However, in the current technologically advanced times where the internet is progressively reducing the requirement to acquire assets, and firms are becoming dominant without heavy investments, such an approach seems outmoded.   Another hindrance with respect to innovation markets is

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Restricting Retrospective Application Under BMA is Much Appreciable But Still a Lot Remain Undecided

Leave a Comment / Taxation Law /

[By Vedant Sharma] The author is a student of National Law University Odisha.   INTRODUCTION The Indian Courts have consistently aimed to protect the substantial rights of the citizens. A presumption has been adopted in the Indian Jurisprudence by courts against the retrospective legislation unless the parliament manifest a clear intention for the law to have a retrospective effect. The issue of retrospective law could be traced back to the judgement of Golak Nath vs State of Punjab where the Supreme Court ruled that parliament could not amend fundamental rights retrospectively. The significance of retrospective law was brought to light in the case of the State Bank (Madras Circle) vs Union of India where it was highlighted that retrospective could relate to a variety of things such as changing a right or changing a procedure. The Income Tax Act, of 1961 has itself had more than 60 amendments in less than 30 years of existence. Prospective amendments being those which apply in the future dates are more likely to be easily applied than retrospective law which takes effect from the past.  Recently on 6 June 2024, the Dharwad bench of the Hon’ble Karnataka High Court in the case of SMT. Dhanashree Ravindra Pandit vs The Income Tax Department gave the landmark judgement addressing the complexities around the retrospective application of section 50 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 which gives authority to revenue to initiate a criminal prosecution for wilful failure to furnish information under return of income as per sub-section (1), (4) or (5) of section 139 of the Income Tax Act, 1961. The respondent/petitioner took recourse to section 72(C) of the Black Money Act, 2015 (‘BMA’) to register a complaint invoking section 200 of the Criminal Procedure Code, 1973 that proceedings can be initiated under the act would still take place even if the assets were in existence before commencement of the act.   The court held in the instant case that section 72(C) of the BMA, 2015 being a deeming section which creates criminal liability should not be extended beyond the purpose of the act for which it is created or beyond the language of the act as per the judgement by the Hon’ble Supreme Court in the case of Kumaran vs the State of Kerala.   One of the major observations that were made by the court was the retrospective application of criminal prosecution under section 50 of the BMA, 2015 that violates the fundamental rights of the taxpayers under Article 20 of the Constitution of India who are convicted for an offence except for violation of law in force at the time of the commission of the act charged as an offence. The court referred to the Hon’ble Supreme Court judgment in the case of Rao Shiv Bahadur Singh v. State of Vindhya Pradesh which held that the retrospective application could not be in case of criminal offences being it violative of Article 20.   The Hon’ble Karnataka High Court also held that the judgement of Hon’ble Supreme Court in Union of India v. Gautam Khaitan would not be applicable in the present scenario as the judgement does not pertain to the issue of retrospective application of Sections 50 and 51 qua Article 20 of the Constitution. Thereby the court held that the prosecution cannot be made retrospectively as it does not pass the muster of Article 20 of the Constitution of India.  UNDERSTANDING THE ISSUES WITH THE PRESENT JUDGEMENT The Hon’ble High Court of Karnataka has taken a notable step in the realm of the BMA by declaring the retrospective application of Section 50 of the BMA, 2015 as not being applicable but there are still a lot of important issues that are left by the court to be decided.  AMBIGUITY IN LEGISLATIVE INTENT TO MAKE RETROSPECTIVE LAWS Legislative intent through provisions of Black Money Act   It is clearly stated in the BMA that the law shall come into force on 1st April 2016 as per Section 1(3) of the act and the charge of tax starting from Annual Year 2016-17 onwards as per Section 3. The language of the act in itself implies that the language of the act is intended for prospective application of the law.   Section 2(11) of the BMA defines “undisclosed asset located outside India”. The phrases “held by the assessee” and “he is the beneficial owner” used in Section 2(11) give an implication that the assessee should continue to hold assets.  Thereby a liberal interpretation of the provisions suggests that the assets should be held by the taxpayer even after the act has come into commencement which shows that the legislature did not intend to apply the act retrospectively (Srinidhi Karti Chidambaram v Pr CIT).   The legislation can be deemed to be retrospective if it is clarificatory or declaratory in nature as laid down by the Hon’ble Supreme Court in CIT v Vatika Township(P) Ltd. A declaratory act is one that removes doubt about common law or the meaning of a statute and an explanatory act is one that addresses obvious omissions or clarifies doubts regarding a previous act.1 The act can be deemed to be declaratory if the previous legislation, which it is trying to clarify was unclear or unambiguous.   In case of the BMA, it is nowhere mentioned that it is declaratory/clarificatory in nature it is deemed to be clarificatory/declaratory. It was not enacted to remove ambiguity or provide clarification or remove doubts of any previous legislation which shows that the legislature did not intend for retrospective application of present law.  Amendment in section 2(2) after Finance act 2019  The definition of  “assessee” was expanded by the Finance (No. 2) Act, 2019 with retrospective effect from the date of commencement of the act which is 1 July, 2015. The definition of assessee, under Section 2(2) of the BMA, 2015, which was restricted to a person as a resident within the meaning of Section 6 of the Income-tax Act. This was

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SEBI’s Circular on AML/CFT: Fortifying India’s Securities Market Against Financial Crimes 

Leave a Comment / Competition Law /

[By Anubhav Patidar] The author is a student at Narsee Monjee Institute of Management Studies.   Introduction In an era of increasingly sophisticated financial crimes, regulatory bodies worldwide are intensifying their efforts to combat money laundering and terrorist financing. On 06 June 2024, the Securities and Exchange Board of India (SEBI), proposed a comprehensive Master Circular (Circular) on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT). This circular, aimed at securities market intermediaries, seeks to consolidate and update existing guidelines under the Prevention of Money Laundering Act, 2002 (PMLA) and its associated rules.   The proposed Master Circular comes at a crucial time when India is strengthening its financial regulatory framework to align with global best practices. According to a 2022 report, India’s Financial Intelligence Unit (FIU-IND) processed over 1.42 Lakh Suspicious Transaction Reports (STRs) in the fiscal year 2021-22, highlighting the increasing vigilance in the financial sector. This blog post aims to unravel the key elements of SEBI’s proposed Master Circular, examine its implications for various stakeholders, and understand how it fits into the broader landscape of India’s fight against financial crimes.    Decoding AML/CFT and SEBI’s Circular Anti-Money Laundering encompasses the legal and regulatory framework aimed at preventing the transformation of illicitly gained funds into legitimate assets. Closely related, Combating the Financing of Terrorism focuses on preventing the funding of terrorist activities. In India, these efforts are primarily governed by the PMLA and its associated rules. Section 4 of the PMLA criminalizes money laundering related to property derived from offences listed in the Act’s Schedule, termed as “proceeds of crime.”    The Master Circular on AML/CFT is a detailed document designed to unify and update the earlier existing guidelines on anti-money laundering and Standards and Combating the Financing of Terrorism for securities market intermediaries. It establishes the key principles for combating money laundering and terrorist financing, providing detailed procedures and responsibilities that has to adhered by registered intermediaries.  Client Due Diligence Client Due Diligence (CDD) forms the cornerstone of the circular’s provisions. The circular mandates that intermediaries must conduct thorough due diligence procedures for all clients, with a special underlining on identifying beneficial owners. The process extends beyond merely verifying the immediate client but also understanding the entire ownership and control structure, especially for non-individual clients. For example, the circular requires registered intermediaries to identify the natural persons who ultimately own or control a company client, using thresholds like ownership of more than 25% of shares, capital, or profits. This level of scrutiny aims to prevent the use of complex corporate structures to mask the true beneficiaries of financial transactions.   Risk Based Approach The circular introduces a risk-based approach to AML/CFT measures, recognizing that not all clients and transactions pose the same level of risk. Intermediaries are required to categorize their clients into low, medium, and high-risk categories based on various factors such as the client’s background, country of origin, nature of business, and transaction patterns. This approach allows for more efficient allocation of resources, with enhanced due diligence measures applied to higher-risk clients. For the First Time, “Clients of Special Category” (CSC) are specifically defined by the circular and also provided  elaborated list who will be considered as CSCs which include the non-resident clients, high net-worth individuals, trusts, charities, NGOs, politically exposed persons (PEP), and clients from high-risk countries. These CSCs are subject to enhanced scrutiny and continuous monitoring.   Monitoring and Reporting Monitoring and reporting form another crucial pillar of the circular. Intermediaries are required to have robust systems in place to detect and report suspicious transactions. The circular provided a detailed definition of suspicious transactions, including those that seem to lack any economic or lawful purpose, unusually complex, or show patterns inconsistent with the client’s normal activity. It mandates that intermediaries should not only monitor individual transactions but also pay attention to the overall financial behaviour of their clients. The circular sets specific timelines for reporting of different types of transactions such as Cash Transaction Reports, Suspicious Transaction Reports, and Non-Profit Organization Transaction Reports to the Director, FIU-IND.   Record Keeping The Circular imposes obligation on intermediaries to maintain detailed records of transactions, client identification and account files for a five years after the business relationship has ended or the account has been winded-up. The retention of data is a pivotal step for securing the data for future audit and investigations. The circular specifies the exact nature of the information to be maintained, including the nature of transactions, amount and currency, date of transaction, and parties involved. This meticulous record-keeping not only aids in investigations but also helps intermediaries in their ongoing monitoring efforts.   Compliance Structure The circular places significant emphasis on the compliance structure within intermediaries. It mandates the appointment of a Principal Officer who will act as a central point of contact for all AML/CFT related matters. Additionally, a Designated Director must be appointed to ensure overall compliance with AML/CFT obligations. These appointments underscore the importance of top-level commitment to AML/CFT efforts within organizations. The circular provides specific definitions and responsibilities for these roles, ensuring that there is clear accountability and a structured approach to compliance.   Employee Training and Investor Education Lastly, the circular recognizes the importance of ongoing education and awareness in the fight against financial crimes. It requires intermediaries to have comprehensive and ongoing training programs for their employees. These programs should cover various aspects of AML/CFT measures, including the latest techniques and trends in money laundering and terrorist financing. Moreover, the circular emphasizes the need for investor education. The requirements of AML/CFT measures and the rationale behind requesting certain personal information shall be explained to clients by intermediaries. This two-pronged approach of employee training and investor education aims to create a more informed and vigilant ecosystem that can effectively combat financial crimes.   Analysis and implications of the Circular The proposed Master Circular has far-reaching implications for various stakeholders in the Indian securities market. For registered intermediaries, the circular represents a significant enhancement of their AML/CFT responsibilities. The emphasis on a risk-based

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Breaking down SEBI’s Approval for Equity Encumbrance by AIF

Leave a Comment / Capital Markets and Securities Law /

[By Paavanta & Samriddhi Mishra] The authors are students at National Law University Odisha.   INTRODUCTION Securities and Exchange Board of India (SEBI) recently amended the SEBI (Alternative Investment Funds) Regulations 2012 (AIF Regulations) regulation to enhance ease of doing business. To provide more flexibility to Category I and II Alternative Investment Funds (AIFs), SEBI has allowed to create encumbrance on their holding in certain infrastructure companies. This was done to facilitate the raising of debt in the infrastructure companies as it acts as a backbone for all other sectors. The Budget Announcement for financial year 2023-24 identifies “Infrastructure & Investment” as one of seven priorities, and emphasizes the need for private money in supporting infrastructure investment. Thus, a resilient and inclusive infrastructure is necessary for growth in a developing economy and therefore it is necessary to find multiple sources of funding including private investment for infrastructure. This significant amendment can allow infrastructure companies to raise debt against equity which is a common industry practice to raise funds for companies in the infrastructure sector. This can both amplify returns and losses for the investor. Thus, the amendment brings along itself potential risks for both the investor and investee companies. This article thus, analyses the implications and effectiveness of the amendment from the perspective of the investor and investee company while considering the potential to expand the amendment’s scope to other business sectors.   SEBI GREENLIGHTS EQUITY ENCUMBRANC BY AIFs In a bold stride towards improving transparency and ease of doing business for Category I and II AIFs, SEBI amended AIF Regulations to allow the creation of encumbrance on the holding of equity in investee companies. The term “encumbrance” is broadly defined in Regulation 28(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 as “any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly; pledge, lien, negative lien, non-disposal undertaking; or any  covenant, transaction, condition  or  arrangement  in  the  nature  of encumbrance,  by  whatever  name  called,  whether  executed  directly  or indirectly.” Accordingly, the encumbrance can be created on the equity of the investee company which operates in the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure (HMLI) issued by the Central Government.   Additionally, a disclosure in the Private Placement Memorandum (PPM) is mandatory to continue an encumbrance created before 25 April 2024. SEBI discourages all encumbrances that were created for the investee companies other than those mentioned in the HMLI that too without the appropriate disclosure in the PPM. However, the regulatory watchdog allows the creation of encumbrance that was not disclosed in the PPM but created for the companies mentioned in HMLI with a condition of obtaining mandatory consent of all the investors in the scheme of the AIF.   Moreover, the encumbrance on equity is permitted solely for borrowing by the investee company of which duration shall not be greater than the residual tenure of the scheme. Thus, the funds raised through this borrowing can only be used for the specific purpose for which they were borrowed.   It is important to note that the creation of encumbrance is prohibited for investments in foreign investee companies. Additionally, SEBI mandates Category I and II AIFs with significant foreign involvement (with more than 50% investment) to comply with the Reserve Bank of India’s master direction related to foreign investments for pledging shares of Indian investee companies by non-residents.   CRITICAL ANALYSIS Investor perspective This change has been done to give a boost to the financing of infrastructure companies in India. While this can help raise debt for the infrastructure company, it can also increase risk for the investor. In case of default of the company, the investor can lose all of their equity resulting in the investor’s loss. Furthermore, availing loans by investee companies on the pledge of the AIF’s equity holdings might result in indirect and extra leverage. To mitigate these concerns there is a strong emphasis on the twin pillars of consent and disclosure.  Large quantities of extra leverage, especially if it is layered and piled across several firms, can pose a systemic danger to the financial services industry. Global securities market authorities (such as the SEC and FCA in the United States and the United Kingdom, respectively), as well as IOSCO, have warned of the potential of systemic financial sector leverage resulting from private capital investments.  Infrastructure is a wide expression that umbrellas various kinds of businesses, including power, roads, trains, ports, airports, telecommunications, and urban development allowing investors to have diversified portfolios. But infrastructure is a high-risk high-return investment, with low liquidity. There is a higher risk of loss in the case of infrastructure companies owing to the long gestation period and its vulnerability to external factors like changes in policies, cost overruns, and long delays.   Investee Company Perspective Infrastructure companies’ dynamic and vulnerable nature to external as well as internal changes such as policy changes, delays in clearance, inflation, interest rate sensitivity, leverage, and environmental, social, and governance considerations make it difficult to raise funds via traditional methods. Therefore, infrastructure industries raise the majority of funds through “project finance” to share the potential risk associated with other stakeholders. Project financing offers a strategic advantage by keeping debt off- companies’ balance sheets, safeguarding credit capacity for diverse purposes. This off-balance sheet approach is particularly advantageous for firms seeking financial agility. Since infrastructure funds deal with long-term finance, with a significant gap in the creation of the project’s assets, it thus becomes difficult for the lenders to source the collateral or mortgage for the loans at the time of investment. Therefore, it is an industry practice where via project finance infrastructure sector or funds pledge their equity in exchange for the cash. This is also done via the creation of a Special Purpose Vehicle (SPV) by the company for the execution of the project and pledging the SPV’s shares to the lender. This technique firstly provides a security cushion to the lender in the case of default by the company and secondly, it improves the borrowing capacity

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Entitlement to Dissenting Financial Creditor: Need to Revisit the Decision of DBS Bank

Leave a Comment / Insolvency Law /

[By Sparsh Srivastava] The author is a student at National Law University Odisha.   Introduction Earlier this year, the Supreme Court of India was presented with a pivotal question: Does Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code 2016 (“IBC”), as amended in 2019, entitle a dissenting financial creditor to be paid the minimum value of its security interest? The implications of this question are significant for the treatment of dissenting financial creditors and its rippling effects on the Corporate Insolvency Resolution Process (“CIRP”).  The Apex Court decided that a dissenting financial creditor (“DFC”) who did not agree with the proposed resolution plan is entitled to refrain from participating in the proceeds outlined therein unless a higher amount aligned with its security interest is approved within the resolution plan. In other words, a DFC has right to be paid a minimum amount of its security interest. It is to be noted that the amount to be paid to the DFC must adhere to the amount as prescribed in the event of the liquidation of the corporate debtor under Section 53(1). Essentially, it provided that the is entitled to a monetary value equivalent to its security interest.  It also highlighted that the conflict with section 30(2)(b)(ii) does not arise since it pertains to the minimum payment to be made to an operational creditor or a dissenting financial creditor. The idea behind such provision is to prevent jeopardizing and recognizing the rights and interests as the Dissenting financial creditors do not vote in favor of the scheme, while operational creditors do not have voting rights, therefore their interests must be secured.  The reasoning provided therein prima facie looks good in law, though it fails to look into the practical possibilities that may lead to dire consequences. The author attempts to look at the judgment through different lenses to critically appraise the judgement while drawing inspiration from other jurisdictions.   The Way to DBS Judgement By bare reading of section 30(2)(b)(ii), it is clear that the proposed resolution plan by the resolution applicant shall provide the payment to a dissenting financial creditor, which is not less than the amount payable in the event of liquidation of the corporate debtor. The Supreme Court reinstated the position and held that a dissenting financial creditor is entitled to a minimum liquidation value.  In Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd., the Supreme Court clarified that a secured financial creditor who dissents may enforce their security interest to the extent of their claim. Further, in the recent DBS Bank judgement, the Supreme Court reinstated that a dissenting financial creditor is entitled to at least the value of their security interest.  The Principle of ‘First in Time, First in Right’ The legal maxim “Qui prior est tempore potior est jure” underpins the Doctrine of Priority, which is relevant in the present context of secured transactions. Section 48 of the Transfer of Property Act stipulates that when rights are created by transfer over the same immovable property at different times, each later created right shall be subject to the rights previously created unless a special contract or reservation binding the earlier transferees is in place.  Applying this doctrine in the present scenario, it can be argued that the liability of the Corporate Debtor and the right of the Financial Creditor to a specific amount arise only when the resolution plan is approved by the CoC, creating new rights and liabilities.   Section 31 of the IBC creates a binding effect on all creditors, including dissenting financial creditors, indicating the legislative intent to prioritize the resolution process. Since the resolution plan applies uniformly, no creditor’s rights can be considered as superior to another’s. Therefore, creditors, whether assenting or dissenting, should stand on equal footing as the resolution plan supersedes previous contracts and establishes new rights and liabilities.  Expert Opinion: Looking into the ILC Report According to the Report of the Insolvency Law Committee 2018, regulation 38(1)(c) of the Corporate Insolvency Resolution Process (CIRP) Regulations mandates that dissenting financial creditors are paid at least the liquidation value in priority to other financial creditors who voted in favor of the resolution plan. The Committee suggested that prioritizing payment to dissenting creditors might not be prudent as it could incentivize financial creditors to vote against the plan, potentially hindering resolution.  The Committee recommended improving the quality of resolution plans through sustained efforts by regulatory bodies rather than altering statutory guarantees. However, this argument is flawed for several reasons. Firstly, discouraging financial creditors from voting against the resolution plan conflicts with their right to dissent and could undermine their interests. Secondly, focusing on better resolution plans does not address the core issue and instead adopts a superficial approach.  Drawing Parallels from other Common Law Countries In the United Kingdom, under Section 901G of the Companies Act 2006, which deals with the sanction for compromise or arrangement where one or more classes dissent, the court can sanction a compromise or arrangement even if a dissenting class has not agreed, provided two conditions are met. The first condition requires that the court be satisfied that dissenting class members would not be worse off than in the event of the relevant alternative, typically liquidation. The other requirement is that the compromise or arrangement has been agreed upon by a majority representing 75% in value of a class of creditors or members who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative. In case of liquidation, the secured creditors, both would have the option to realize their security interests.  The US Bankruptcy Code contains a similar provision under 11 U.S. Code § 1129, which outlines the requirements for plan confirmation. It states that each holder of an impaired claim or interest must receive or retain property under the plan of a value not less than the amount they would receive if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. This provision ensures

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S.3 of the Competition Act: Beyond Vertical and Horizontal Agreements

Leave a Comment / Competition Law /

[By Anirud Raghav] The author is a student at NLSIU, Bangalore.   Introduction Even after two decades of competition jurisprudence, questions regarding the scope and applicability of s.3 of the Competition Act (hereinafter, “the Act”) persist. Briefly put, s.3 prohibits anti-competitive agreements, and is an indispensable feature of global competition jurisprudence (see Art.101 TFEU, s.2 of UK Competition Act, 1998 inter alia). A key unresolved issue is whether s.3(1) can apply independently, or if it must be read in conjunction with s.3(3) and 3(4) dealing specifically with horizontal and vertical agreements respectively. This piece argues that allowing Section 3(1) to have standalone applicability is necessary to address increasingly complex business arrangements, especially in digital markets, that defy simple categorization as horizontal or vertical. This post will consider the objections levelled against an expansive interpretation of s.3(1) and reject these objections as lacking any merit. It proposes that s.3(1) should be expansively interpreted and proposes potential safeguards while doing so to ensure that a balance is maintained between ease of doing business and preserving healthy competition. CCI Decisional Practice: What is the Law? While previous blogposts have provided a broad overview of the jurisprudence on the applicability of s.3(1), we will examine two seminal judgments proposing contrasting approaches to the question. In Ramakant Kini v. Hiranandani Hospital, there was an exclusive supply agreement between Hiranandani Hospital and Cryobank Ltd. in respect of stem-cell banking services. Effectively, the agreement meant that customers of Hiranandani Hospital could only avail of stem cell banking services from Cryobank; it could not be independently provided by Hiranandani Hospital. This was challenged as being anti-competitive, as a vertical exclusive supply agreement under s.3(4)(b). The relevant holding can be found in paragraph 11 of the decision: “Section 3(3) and section 3(4) are expansion of section 3(1) but are not exhaustive of the scope of section 3(1)…Section 3(3) carves out only an area of section 3(1). The scope of section 3(1) is thus vast and has to be considered keeping in view the aims and objects of the Act…This makes it abundantly clear that scope of section 3(1) is independent of provision of section 3(3) & 3(4).” From the above, it can be inferred that s.3(1) should be expansively interpreted considering the objectives of the Act, including consumer welfare and freedom of trade (see the Preamble of the Competition Act, 2002). The other case is Alkem Laboratories Ltd. v. CCIi in which the Competition Appellate Tribunal holds the following: “Section 3(1) is the general sub-section which legally intended to cover the overall principles of breach of either Section 3(3) or 3(4) of the Competition Act. Conclusion of breach of Section 3(1) in the absence of findings relatable to breach of Section 3(4)(d) in this case against Alkem is bad in law.” The decision reasons that if indeed s.3(1) were legislatively intended to be independently applied, then there would be no need for s.3(3) and s.3(4), since the former has such a catch-all phrasing that it would in any case include agreements contemplated under s.3(3) and s.3(4) rendering them superfluous. This is an objection often reiterated in existing literature. At first glance, both cases acknowledge that s.3(1) is general and vast in scope. They only differ in their theories of why s.3(1) is so broad. On the one hand, Ramakant’s take is that the breadth of s.3(1)’s scope is evidence that the legislative intent was to contemplate agreements beyond the horizontal-vertical dichotomy. On the other, Alkem Laboratories opines that s.3(1)’s breadth only means that it is a general section “legally intended to cover the overall principles” of s.3 – it is not meant to apply independently of s.3(3) and s.3(4), but rather in conjunction with them. I argue that Alkem’s reasoning is suspect for two reasons. First, if all s.3 was ever meant to contemplate was horizontal and vertical agreements, then there would be no reason for having s.3(1) in the first place. This is because s.3 would remain internally cohesive even if s.3(1) were removed, or never existed to begin with. Second, CCI’s characterization of s.3(1) as a provision that merely mentions “overall principles” related to s.3 breach is unprecedented both in statute as well as CCI’s decisional practice. In any case, it is unclear why these principles would be required to begin with – all the potentially ambiguous terms used in s.3(3) and s.3(4) are defined or otherwise clarified in the statute. For instance, “agreement” is defined under s.2(b), “cartels” under s.2(c), “appreciable adverse effect on competition” (AAEC) under s.19(3) and so on. In other words, s.3(1) does not enumerate any principles as such, without which s.3(3) and s.3(4) would become impossible or otherwise difficult to interpret. This further renders Alkem’s reasoning untenable. In the following section, I will consider the same line of objection in greater detail. Is the Alkem Laboratories Objection Sound? The objection apparent from Alkem is that if we allow a standalone interpretation of s.3(1), the provision is so broad and catch-all that it will render s.3(3) and s.3(4) redundant. Proponents of this view might also rely on an argument from parliamentary intent to argue that the intention was to categorize anti-competitive agreements into horizontal and vertical agreements only.  In this section, it is argued that it is incorrect to say that s.3(3) and s.3(4) become infructuous altogether. S.3(3) and s.3(4) do not become altogether infructuous  It is undisputed that s.3(1) is expansive in its phrasing and sets out a framework that broadly covers horizontal and vertical agreements contemplated under s.3(3) and s.3(4). However, we must not hasten to say that this would, per se, render the s.3(3) and s.3(4) infructuous, for the latter two provisions differ from s.3(1) in two salient ways. They may be considered independently. S.3(1) and s.3(3) The difference between s.3(1) and s.3(3) may be considered first. To prove a case under s.3(1), the CCI has to show that an agreement causes or is likely to cause AAEC. Typically, AAEC is established with reference to factors enumerated under s.19(3). So, under s.3(1), the

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Streamlining Escrow Taxation: Identifying Inefficiencies and Proposing Solutions

Leave a Comment / Taxation Law /

[By Kushagra Dwivedi] The author is a student at Dr. Ram Manohar Lohiya National Law University.   INTRODUCTION Escrow agreements are a dominant payment mechanism for M&A transactions. Escrow agreements are a form of deferred payment where the consideration for a contract is payable at a future date rather than the date of disposal of asset. With the advent of the new Union Budget being so focused on bolstering the start-up and business sector with changes like the abolition of Angel Tax, a closer look is warranted at how payment mechanisms for such businesses are taxed.  A capital asset is any kind of property held by a person, whether tangible or intangible. Whenever a capital asset is sold, the profits or losses on the amount realised is subject to capital gains. When dealing with transactions that involve a large amount of capital like Share Purchase Agreements (‘SPAs’) where shares of a company are purchased, the tax liability of the taxpayer needs to be carefully calculated. Section 48 of the Income Tax Act (‘IT Act’) describes how the capital gains tax is supposed to be computed. It, however, proves inadequate in computing the tax liability arising from transactions that utilise methods of deferred payment like escrow. The mechanism does not account for the nuances included in transactions with deferred considerations like adjusting for the change in market value at the time. When the consideration is received or when the deferred consideration is not received in the future, calculating the adjustments in the actual value of the consideration received after inflation proves complicated.  One of the main points of contention being when the liability of paying capital gains arises on the taxpayer, in the year of accrual of the income or in the year of transfer of the income. For example, if A wants to sell his stake in XYZ Ltd. to B for 5,00,000 where 3,00,000 would be paid up front while the remaining 2,00,000 would only be paid after A meets certain obligations. In such a case, the capital gains tax would be levied on the 2,00,000 only when the amount is actually accrued to A whereas in the latter view, the entire sale of 5,00,000 would be chargeable to tax. While the judicial stance as to how deferred payment mediums are to be taxed is riddled with many seemingly contradictory judgments, a closer look at the logic behind the court’s reasoning shows the real income theory being used as a basis. This article aims to analyse its shortfalls and give suggestions to ensure efficiency for computing tax liability using real income. Firstly, it analyses cases that approved of taxing in the year of accrual. Then moving on to judgements that hold that the same should be taxed in the year of sale and further providing solutions to resolve such ambiguity.  CASE ANALYSIS Real Income Theory & Legal Right to Income  The main reasoning adopted by the courts for taxing deferred income in the year of accrual is underlined in the case of Dinesh Varzani vs. DCIT. (‘Varzani Case’). The Bombay High Court, (‘HC’) relying upon the judgement of the Supreme Court (‘SC’) in CIT Vs. Shoorji Vallabhdas and Co. says that income tax can only be levied upon the real income earned by an assessee. In a case when income does not accrue towards the assessee, no tax can be levied even though in some cases. In the case of Ajay Guliya v. ACIT (‘Ajay Guliya Case’), the Delhi HC stated that an amount can accrue or arise towards the assessee if they acquire a legal right to receive the amount; mere raising of a claim does not create a legally enforceable right to receive the same. After taking a closer look at lawsuits concerning tax liability in escrow accounts, a common essential can be gleaned, that a right towards the amount parked in escrow should never have arisen on part of the taxpayer and the income must never have been accrued in the first place. The Ajay Guliya Case underlines the right to income doctrine while the Varzani case delineates the Right to Income theory that is often used by the courts to resolve such issues. The court relied upon the case of CIT vs Bharat Petroleum Corporation Ltd., owing to an oversight by the assessee company where they failed to adhere to the accounting principles set by the government for a price stabilizations scheme, the assessee ended up with an excess claim of about INR 44,47,482 that was to be settled via a dedicated scheme account. However, the Calcutta HC held that since neither the government accepted the claim for the aforementioned amount and neither any settlement via arbitration occurred, the inclusion of the amount would be unlawful. In Modi Rubber vs ACIT, (‘Modi Rubber Case’)  the Income Tax Appellate Tribunal, Delhi (‘ITAT’) holds that because the deferred amount decided upon in their SPA was directly transferred to the escrow amount without the taxpayer ever having the legal right to claim it and the possibility of them recovering the entire amount deposited in escrow being too remote due to the terms of the SPA, taxing the entire sale consideration including the deferred payment would amount to taxing a notional income instead of the real income of the assessee. The court held that owing to special subsequent facts that led to the diminishment of the assessee’s claim towards the amount parked in escrow causing a decrease in the real income of the assessee, the same would not be taxable in the year of sale.  Contrasting Judgements – Furthering Judicial Uncertainty? The same ratio has been followed in Caborandum Universal Ltd v. ACIT, (‘Caborandum Case’) where the Madras HC states that because the SPA which was entered into by the taxpayer agreed upon the full and final sale consideration and the entire amount was paid to the taxpayer without any deductions, it will be offered to tax. The right of the taxpayer on the money was never disputed.

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