Author name: CBCL

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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Unravelling the Zee-Sony Conundrum & Its Implications for Mergers in The Indian Media Industry

Leave a Comment / Mergers & Acquisitions /

[By Devina Somani & Manikya Manaswini] The former is a student at Jindal Global Law School and the latter is a practising lawyer.   The Merger Motive: What was Behind the Strategic Union of Zee and Sony? On 22nd December 2021, a Merger Corporation Agreement was entered into between, Zee Entertainment Enterprises Limited (“ZEEL”), Bangla Enterprises Private Limited (“BEPL”) and Sony Pictures Entertainment Networks (“SPNI”). The merger between Zee and Sony aimed to establish the second-largest media entity in India, trailing only Disney India & Star in market share.   The merger was anticipated to grant the combined entity improved access to cash flows and bolstered capital. The merger provided a redemption opportunity for Subhash Chandra & family (the promoter shareholders of Zee), whose ownership stake had diminished to just 4% owing to compelled share sales aimed at settling debts. For Zee’s creditors, the merger offered a potential avenue to recover some of their investments, especially given Zee’s precarious financial standing due to high debt levels within its holding company, Essel Group.   On the other hand, Sony’s loss of broadcasting rights to the Indian Premier League (“IPL”) had a considerable impact on its revenue stream. The merger with Zee offered Sony a chance to bounce back from these setbacks and regain momentum in the Indian market.   This Article highlights the multiple factors contributing to the merger fallout, elucidating the enforcement actions taken by the Securities Exchange Board of India (“SEBI”) against Subhash Chandra and Puneet Goenka (the promoters of Zee). Additionally, it underscores the breach of multiple conditions by Zee which were within the Merger Corporation Agreement signed by both the entities, which led to the erosion of Sony’s confidence in Zee and its subsequent withdrawal from the merger. Furthermore, the piece explores the broader implications of this debacle on mergers in the Indian Media Industry, providing a comprehensive analysis of its potential repercussions.  What led to the Merger Falling through? The collapse of the proposed $10 billion merger between Sony and Zee has exposed a labyrinth of intricate issues, from regulatory investigations to shareholder activism, shedding light on the complexities of corporate governance, financial transparency, and strategic decision-making in Cross-Border Mergers and Acquisitions in the Media and Entertainment Industry. Sony cited Zee’s failure to meet specified financial thresholds and a perceived lack of commercial prudence, deeming the breaches substantive rather than procedural. Moreover, Sony highlighted Zee’s inability to realistically assess the timeline to resolve outstanding issues, leading to the termination of their merger plans after two years of negotiations.  The heart of the issue lies with investigations by the Securities and Exchange Board of India (SEBI) into Zee which has led to allegations of fund diversion and non-disclosure of financial information. The discovery of a significant discrepancy of $241 million missing from Zee’s accounts without any traceable history raised serious concerns about the company’s financial transparency and management integrity, casting doubt on its ability to uphold regulatory compliance.   SEBI’s enforcement order dated 25th April, 2023, against Shirupur Gold Refinery, where it was alleged that Mr. Subhash Chandra’s company further engaged in the diversion of funds from lenders to companies controlled by the family. Following a complaint received by SEBI in February 2021, an independent examination by the National Stock Exchange (NSE) revealed planned transactions with connected entities, nearly 100% of the company’s debtors being linked to the promoter family, and initiation of insolvency proceedings by connected entities against major debtors. In June 2023, SEBI issued an interim order barring Mr. Chandra and Mr. Goenka from holding directorship or key managerial positions in listed entities, citing allegations of fund diversion from the listed entity.   In M&A, decisions regarding leadership appointments are critical junctures that can significantly shape the future trajectory of the combined entity. Typically, these decisions are guided by various factors such as, strategic vision of the acquiring or merging entity, the distribution of majority shareholding, compatibility of leadership styles, track record and expertise of key individuals, as well as considerations of maintaining balance and harmony within the combined organization. The initial selection of Punit Goenka as CEO, despite allegations of financial impropriety and subsequent regulatory actions, suggests potential oversights in evaluating leadership suitability.   Further, Zee’s ownership of two subsidiaries in Russia prior to the merger announcement posed a challenge for Sony, as an American entity legally restricted from engaging with businesses tied to Moscow. The failure of Zee to dispose its Russian assets, despite explicit provisions in the merger agreement prohibiting dealings with entities from countries under US sanctions, throws light on challenges of strategic misalignment during cross-border mergers stemming from divergent political considerations.   The Zee-Sony merger negotiations faced another significant hurdle with Zee’s decision in 2022 to ink a substantial $1.4 billion deal with Disney, securing specific TV cricket rights for India. Sony raised objections, citing emails that detailed Zee’s plan to provide a bank guarantee and a deposit amounting to $406 million for the acquisition of these cricket rights. This move by Zee to finance the deal through debt, undertaken without prior written consent from Sony, elevated their company’s total debt to over $451 million, surpassing the threshold specified in the merger agreement. Sony’s objection to Zee’s unilateral decision to enter into the agreement and take on additional debt exceeding the limit as mentioned in the merger agreement without prior consent highlights the lack of adherence to the conditions as outlined in the Merger Agreement.   Implications of the Merger Fallout on Cross-Border Mergers & The Media Industry in India The fallout from the collapsed Sony-Zee merger has sent shockwaves through the Indian media industry, reverberating across the financial landscape and raising significant concerns for investors. The episode underscores the need for foreign investors to exercise caution when engaging in deals within the Indian market, as regulatory complexities and governance issues has resulted in substantial risks.   One of the most glaring examples cited in the aftermath of the failed merger is the cautionary tale of Daiichi Sankyo Co.’s experience with Ranbaxy Laboratories Ltd. Despite a substantial investment

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To Write One’s Own Mandate: Introducing Self-Regulatory Organisations (SROs) in the FinTech Industry

Leave a Comment / Contemporary Issues /

[By Ansh Chaurasia & Mudrika Jha] The authors are students of Dr. Ram Manohar Lohiya National Law University, Lucknow. INTRODUCTION The Reserve Bank of India (hereinafter, ‘RBI’) has released the final Framework for Self-Regulatory Organisations (SROs) for FinTech Sector (hereinafter, ‘Framework’) on May 30, 2024, after releasing the draft for the same on January 15, 2024. The principle underlying the proposed Framework can be traced back to 2018 when the Report of the Working Group on FinTech and Digital Banking suggested the principles for regulatory intervention in the FinTech industry. These principles were centered on fostering healthy competition, ensuring impartial treatment, systemic stability, and user protection. The Framework issued by the RBI lays down the eligibility and membership criteria, functions, and governance norms for the proposed SRO-FT(s) and their responsibility towards the RBI. A FinTech SRO (hereinafter, ‘SRO-FT’) has been proposed to be an industry-led entity responsible for, inter alia, the establishment and enforcement of regulatory standards within the FinTech sector, dispute resolution, market intelligence and promoting transparency, ethical conduct and accountability among its members.   This blog puts forth an analysis of the idea of establishing an SRO and its desirability in the FinTech industry, a critical evaluation of the proposed framework, and the way ahead.  SROs FOR FINTECH: REGULATING ON THEIR OWN ACCORD A. The FinTech Story Globally, FinTech evolved in the aftermath of the economic crisis of 2008, which challenged the traditional banking system and paved the way for a resilient financial infrastructure. Due to its ubiquitous nature and automation of services, FinTech has lived up to its touted potential. It has been instrumental in expanding and expediting the rendering of financial services, making it an indispensable component of a developing economy. In India, FinTech has played a crucial role in revolutionizing digital payments and lending, making India the house of 22 FinTech unicorns. It has made financial services in India accessible to those who otherwise would have remained deprived of such services. B. Locating Consumer’s Interest As formidable as it may seem, the FinTech paradigm raises regulatory concerns. Processing personal data is a function of rendering services by a FinTech entity, which poses a significant risk to the user. Any uninformed choice made by the users of FinTech platforms exposes them to a potential risk of breach of privacy and data security. Several consequential risks, such as fraud and unethical usage of user data, emanate from the breach of privacy. Risks arising out of services available on FinTech platforms have already been acknowledged by RBI when unethical practices in digital lending came to the fore. The Working Group constituted by RBI reasoned that reliance on third parties by the lending entity created unethical practices such as mis-selling to unsuspecting customers, breach of data, and illegitimate operations. Consequently, RBI had to issue Guidelines to deal with this specific issue.  The ease and fast-paced nature of services provided by FinTech platforms jeopardise the interest of consumers who may fall prey to impulsive purchasing behaviour. Such consumers are likely to be affected by ‘bounded rationality’, a situation where an individual’s rationality for decision-making is constrained by a lack of information, the individual’s cognitive limitation, and the limited time to make the decision. Even the abundance of information about any transaction may not serve well to ensure favourable conditions for the consumer or to eliminate any potential unethical practice on the part of the service provider. India’s abysmal financial and digital literacy rates further aggravate the vulnerability to which a consumer of such platforms is already exposed. With the FinTech industry poised to expand, regulatory concerns are of much more significance than ever.  The rationale behind introducing this Framework is to attempt a balancing act between promoting innovation within the FinTech industry and minimising the risks it poses. The experience and expertise of FinTech companies underlying self-regulation can be a relatively better response to the complexities of this industry than a traditional legislative intervention. Obligations drafted by the subject of the regulation ensure a greater degree of compliance. Further, the cost of information, supervision, and enforcement gets lowered in a self-regulatory framework.  In its pursuit of increasing profits, the industry’s adherence to norms that further social interest is unlikely. Instead, they have a strong incentive to adhere to socially undesirable norms. Self-regulation is likely more effective when adherence to norms and best business practices are concomitant and when there is a concurrence in public and private interest. Therefore, to wane off the potential shortcomings of the SRO and achieve the desired outcomes, the RBI’s oversight plays an important role.  ANALYSING THE FRAMEWORK The Framework is in line with the ‘Twin Peaks Model’ of financial services regulation. As per this model, two distinct supervisory bodies should be operational in a sector, one for overseeing conduct of business activities, and the other for overseeing financial stability and prudential regulation. This is done to separate market conduct regulation (ethics and consumer protection) and prudential regulation (for management of systemic risks, monitoring capital and liquidity requirements in the sector), the rationale for the same being, risks of varying nature necessitate varying expertise and approaches to regulation. Several jurisdictions, such as Australia, Belgium, France, the Netherlands, and the United Kingdom, have adopted this model. One such example is the distribution of regulatory functions within the financial sector in England. The Bank of England’s Financial Policy Committee (FPC) is the reform regulator of England’s financial system, focused on managing systemic risks, whereas the Financial Conduct Authority (FCA) is the conduct regulator, ensuring healthy competition among market participants and consumer protection. The Framework delineates the scope of SRO’s operations, conforming to the international standard of distinguishing between prudential and conduct-based regulation. Public interest, market conduct and market intelligence, i.e. overall market conduct regulation, are the key responsibilities underpinning the SRO-FT Framework whereas RBI would continue performing prudential regulation of the FinTech sector.   However, the intended self-regulation comes with its peculiar shortcomings. When considering sectoral dynamics within the FinTech sector, the Framework encourages FinTech entities to have membership

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Revamping Real Estate Investment: Evaluating SEBI’s Amendments to REIT Regulations

Leave a Comment / Capital Markets and Securities Law /

[By Arnav Laroia & Shashank Pandey] The authors are students of West Bengal National University of Juridical Sciences, Kolkata.   Introduction The Securities and Exchange Board of India (‘SEBI’) recently made significant changes to the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (‘Regulations’) by an amendment, signalling a watershed moment in the evolution of the Indian real estate investment landscape. The SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 (‘Amendment’) seek to improve accountability, reliability, and operational efficiency in the Real Estate Investment Trusts (‘REITs’) sector, reflecting SEBI’s commitment to creating a strong and dynamic investment environment. Furthermore, the Amendment aims to make real estate investments more accessible to retail investors, especially through Small and Medium REITs (‘SM REITs’), thereby boosting confidence in investment in commercial real estate. REITs are companies that own, operate, or finance income-generating real estate properties, allowing investors to earn dividends from real estate investments without directly owning property.   It is worth noting that these changes come at a critical time as the Indian real estate market matures and attracts a wide range of domestic and international investors. The updated Regulations, which address key areas such as regulatory compliance, disclosure requirements, and investor rights, are expected to boost the credibility and appeal of REITs in India.   This article delves into the specific changes resulting from the Amendment, their implications for stakeholders, and the overall impact on the Indian real estate investment ecosystem.  Regulatory Initiatives: Enhancing Accessibility The Regulations prior to the amendment simply defined a REIT under Regulation 2(1)(zm)  as a trust registered under the Regulations. The Amendment has expanded the definition of REIT under Explanation 1 of Regulation 2(1)(zm) to include SM REITs, as added under Chapter VIB of the regulations. An SM REIT under Regulation 26H(c) is defined as a REIT that pools investor funds into one or more schemes in accordance with sub-regulation (2) of Regulation 26P. Regulation 26P(2) allows an SM REIT scheme to make an offer of units if the proposed asset size is between Rs. 50 crores and Rs. 500 crores, and the minimum number of unitholders, excluding the investment manager, its related parties, and associates, is at least 200 investors.  The Amendment’s recognition and regulation of Small and Medium Real Estate Investments is a critical step towards protecting investments and increasing investor trust in this specialised investment industry. Furthermore, by establishing asset size requirements and a minimum number of unitholders, this regulatory measure will also stabilise the Small and Medium Real Estate Investment market, which is a high-risk market. The following will encourage investment in smaller and emerging real estate projects that might not meet the thresholds for traditional REITs, which are set at a minimum value of Rs. 500 crores under Regulation 14. This is a significant step towards increasing investment in smaller projects and cities, making it easier to invest in REITs for relatively smaller investors.   Notably, India’s small cities and towns are becoming significant regional job markets due to economic expansion and infrastructure improvements. According to reports, Tier-II and Tier-III locations offer talent and real estate costs at least 30% lower than Tier-I cities. Therefore, enterprises are increasing their presence in regional cities to meet rising consumer demand, contributing to the growth of the real estate market. Additionally, the requirement for a minimum number of 200 unitholders helps spread investment risk across a large group of investors, potentially lowering individual risk and increasing market stability. This could also possibly lead to increased diversity and inclusion of willing investors who were otherwise excluded from such REITs because of a lack of opportunity to invest.  Protection of Assets: Ensuring Accountability The Amendment under Regulation 26R mandates that the investment manager identify and provide information in a draft scheme offer document on the real estate assets or properties it intends to purchase. The document must be filed with SEBI and with the designated stock exchange. The minimum price for each unit of the SM REIT scheme is Rs. 10 lakhs, with each scheme identified by a separate name. As previously mentioned, each scheme’s real estate assets must be worth at least fifty crore rupees.  In addition, the books of accounts, bank accounts, investment or demat accounts, and assets are all required to be ring-fenced and separated by the trustee and investment manager. The trustee must ensure the property papers proving the title to the real estate assets or properties once a year and keep them in safe deposit boxes at a designated commercial bank. Furthermore, the draft scheme offer document shall be hosted on the websites of the SEBI, approved stock exchanges, and merchant bankers involved in the matter for a period of 21 days, therefore becoming publicly accessible.  These are some significant steps towards achieving the goals of the Amendment, as the inclusion of real estate assets in the draft scheme offer document and its 21-day public disclosure period increase confidence and transparency, enabling prospective investors to make well-informed decisions. In addition, including SEBI in the evaluation of the draft scheme offer document and providing feedback guarantees that the schemes comply with regulatory requirements and that any prospective issues are resolved before the scheme’s disclosure to the public. This regulatory monitoring has some resemblance to securities market norms, such as businesses’ publishing of the Draft Red Herring Prospectus, which is essential to maintaining investor confidence and the integrity of the SM REIT market.  Additionally, the minimum unit price of Rs. 10 lakhs ensures that the investments are significant and that the investors are financially capable of understanding and accepting the associated risks, given the high-risk nature of this market. Moreover, asset segregation and safekeeping safeguard investors’ funds and ensure accountable management. The explicit requirement to keep property documents secure, as well as the trustee’s annual inspection, ensures accountability and proper management of real estate assets.  Provision for Distributions: Streamlining Interests The amendment further stipulates under Regulation 26ZK that, in accordance with the Companies Act, 2013, the investment manager must transfer 95% of the Special Purpose

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Balancing Fairness or Encouraging Delays? SC’s take on Recall Application

Leave a Comment / Insolvency Law /

[By Anwesha Nanda & Ankit Raj] The authors are students of National Law University Odisha.   Introduction The essence of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as per its Preamble is to guarantee timely resolution and revival of the Corporate Debtor (“CD”). By adhering to its core principle, it helps build confidence in creditors and minimise undue delay in the process of resolution. However, a recent ruling of the Supreme Court (“SC”) by a three-judge bench led by the Chief Justice of India in Greater Noida Industrial Development Authority v. Prabhjit Singh Soni & Others (“GNIDA”) seemingly deviates from this objective.  The IBC has a well-defined structure for corporate insolvency resolution, which is led by resolution professionals (“RP”), a committee of creditors (“CoC”), and finally an adjudicating authority for approval of the insolvency resolution plan. Given this context, a critical point to ponder is whether any creditor or person whose interest has not been considered, with due care by the CoC, can approach the adjudicating authority to revisit the approved resolution plan?  The answer to this question was dealt with in the case of GNIDA. The SC framed the issue of whether the adjudicating authority, notably the National Company Law Tribunal (“NCLT”) has the power to revisit their judgement by recalling it. The SC ruled that the NCLT has inherent power to recall the judgement under certain circumstances. While acknowledging the potential advantage of the judgement in certain circumstances where the interests of creditors are hampered, at the same time some loopholes can be misused by unscrupulous parties to re-hear matters or cause deliberate delays. In this article, the authors undertake a critical analysis of the SC’s decision, contending that the verdict diverges from the overarching objectives and preamble of the parent statute, i.e., the IBC.  Factual Matrix In this case, GNIDA filed an appeal against an order issued by the NCLT, which was subsequently upheld by the National Company Law Appellate Tribunal (“NCLAT”), approving the resolution plan for M/s. JNC Construction Pvt. Ltd. (Corporate Debtor). GNIDA had given land on lease for 90 years for the residential project to the CD in consideration of some premium payable by it. The lease agreement was subject to payment of premium at due time which was breached by the CD. In the meantime, through a company petition, the CD was taken into insolvency under the IBC.  Following the initiation of the Corporate Insolvency Resolution Process (“CIRP”), GNIDA submitted its claim as a secured financial creditor. However, the RP classified the claim as that of an operational creditor and admitted only a portion of it. To further clarify its position, the RP sought a claim in Form B to designate it as an Operational creditor of CD. Subsequently, there was no further communication from the side of GNIDA because of which a part of the claim was acknowledged and incorporated into the resolution plan. GNIDA’s primary argument arose from the incorrect handling of its claim within the resolution plan and concerns regarding the principles of natural justice.  Understanding Recall of an Order or Judgement. The recall of an order or judgement necessitates “reversal” or “revocation” of the order or judgement owing to the defects during the procedure. In the cases of Agarwal Coal Corporation Private Limited v. Sun Paper Mill Limited and Rajendra Mulchand Varma v. K.L.J. Resources Ltd. The NCLAT held that the NCLT or NCLAT lacks the authority to review or recall its judgments due to the absence of specific provisions in IBC. However, this issue was referred to a five-member bench of the NCLAT in Union Bank of India v. Dinakar T. Vekatasubramanian. (Dinakar T. Vekatasubramanian). The bench concluded that while the NCLAT cannot review its own judgments due to the lack of statutory backing, it does possess the power to recall judgments under Rule 11 of the NCLAT Rules, 2016, which grants inherent powers to the tribunal to ensure justice. Additionally, it stated that the power to recall a judgement can be exercised only when any procedural error is committed in delivering the earlier judgement. This interpretation was later upheld by a two-judge bench of the Supreme Court in Union Bank of India v. Financial Creditors of M/s Amtek Auto Ltd. & Ors.  Furthermore, it is well established in Budhia Swain & Ors. v. Gopinath Deb & Ors. (Budhia Swain) that the criteria for recalling an order are: firstly, the proceedings leading to the order are fundamentally flawed due to a clear lack of jurisdiction; secondly, the judgement was obtained through fraud or collusion; thirdly, there was also a mistake by the court that caused prejudice to a party, and the judgement was delivered without including a necessary party; Additionally, the court clarified that the power to recall a judgement couldn’t be exercised when the pleader had an option available to reopen the proceeding in the original action or where proper remedy by way of appeal or revision was available as an alternative and was not taken into consideration.  Critical analysis The IBC was enacted to assist debt-ridden companies promptly, emphasizing the importance of time in the resolution process. In the GNIDA, it was allowed to recall the order approving the resolution plan even after more than 3 years of the commencement of the resolution process. This effectively gives a second life to the insolvent company. By recalling an order that approved the resolution plan, the SC essentially examined the plan itself and explicitly delegated similar power to the NCLT. This is evident from the SC’s scrutiny of compliance standards and deficiencies outlined in Section 30(2) of the IBC.   The SC allowed the recall application because the resolution plan did not comply with Section 30(2) of the IBC. The grounds laid down in the case of Budhia Swain, do not apply in this situation. By making this decision, the SC has effectively added non-compliance as a valid reason to file a recall application. This could enable dishonest promoters or creditors with ulterior motives to delay the resolution process

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Quantum Voting: The Vanguard of Corporate Democracy in the Quantum Era

Leave a Comment / Technology Law /

[By Tridha Gosain] The author is a student of DNLU Jabalpur.   Introduction As the world of business continues to grow and adapt over the years, maintaining governance and ensuring the transparency, security, and fairness of decision-making has remained an issue. As fundamental as conventional voting methods are to corporate democracy, they are becoming increasingly prone to vulnerabilities that include tampering, fraud, vote coercion, and voter anonymity. However, the emergence of quantum computation, and its somewhat mysterious foundations, has opened the door for the creation – quantum vote – a new kind of solution that can dramatically revolutionalize the very foundations of business voting, bringing in a new level of shareholder confidence and solidity.  In this article, the author looks at the possibilities of quantum voting in corporate governance and highlights aspects of transparency, security and fairness, which have remained a concern in most organizations. Incorporation of quantum mechanics principles such as superposition, entanglement, and no-cloning theorem will enable quantum voting to transform the authenticity and accuracy of the corporate voting systems.   This article examines how quantum voting offers robust encryption methods to protect against quantum-based hacking attempts, thereby safeguarding the integrity of corporate decision-making as quantum computing continues to evolve. Furthermore, the article also analyses how quantum voting has flexibility in guaranteeing the voters’ identity to prevent vote bribery and coercion while at the same time maintaining anonymity in the voting process.  Quantum Principles in Corporate Voting Quantum voting relies heavily on the principles of quantum mechanics, including superposition or Schrodinger’s cat and entanglement along with no-cloning. These quantum phenomena, previously confined to theoretical physics, now offer powerful tools for securing and verifying corporate voting processes.  Another benefit of this solution is that the act of quantum voting is inherently immune to hacking or attempts at tampering. Existing electronic voting technologies based on classical cryptography are at risk due to the emergence of quantum computing which can break even the most secure encryption schemes. Quantum voting, in contrast, builds its encryption scheme based on quantum mechanics, thus making it impossible for anyone to tamper with the integrity of corporate voting in the future.  Preserving Anonymity, Preventing Coercion Another significant characteristic of quantum voting stems from the need to protect voter anonymity while preventing vote-buying and coercion. The conventional approaches to voting fail to balance the two objectives of anonymity and prevention of coercion in the voting process because measures that ensure anonymity encourage coercion whereas measures that discourage coercion interfere with the voters’ anonymity.  Quantum voting then follows this process and conveniently sidesteps the aforementioned paradox by employing quantum entanglement and the no-cloning theorem. Quantum entanglement is a procedure wherein two or more particles become correlated in such a way that the quantum state cannot be expressed in terms of individual particle quantum states, even when large distances separate these particles. This property allows for secure communication channels. On the other hand, the no-cloning theorem shows that it is impossible to make an identical copy of an unknown quantum state. It ensures that quantum information cannot be copied or stolen perfectly and thus provides a foundation for secure voting protocols. These principles combined provide a system where the votes can be securely transmitted and verified without any breach of the privacy of the voter or manipulation of the votes. Due to the features of preventing the opening of citizens’ votes or transferring them to other voters, quantum voting protocols are incorruptible and guarantee anonymity since votes are encoded into quantum states that cannot be copied or deciphered.  Transparency and Verifiability Moreover, quantum voting protocols offer unparalleled transparency and verifiability, two crucial tenets of corporate governance. In contrast to classical voting systems, where the voter has no ability to assure the trustworthiness of the voting process besides relying on the trusted third party or a central authority, quantum voting systems utilize quantum mechanics principles for decentralized verification and consensus.  Using quantum entanglement and quantum key distribution, the stakeholders can confirm the accuracy of votes and the authenticity of the voting process without violating the anonymity of the votes or disclosing any other information. This kind of decentralization reduces the chances of central control or manipulation while at the same time promoting more trust and transparency in the corporate world.  Quantum Voting Rights: A Departure from Traditional Models In its basic form, Quantum Voting Rights (QVR) are defined as a set up in which some shareholders or some classes of shares have special rights in voting that are disproportionate to their actual economic rights. This divergence from the usual ‘one share, one vote’ principle is practiced by tech titans such as Google and Facebook. This has not only sparked controversy over the balance of power on who should control the companies where shares are traded but also over the rightful owner of those shares.  The rationale for QVR can, therefore, be traced back to conventional counterintuitive theories, which inform quantum mechanics – a sphere of physics where particles can occupy several states at once but do not conform to logical reasoning. The quantum phenomenon researchers have used these to come up with a new voting system that is more secure, verifiable and anonymous as compared to the other voting systems.  Navigating Regulatory and Legal Challenges in India The two most important forms of corporate governance regulations in India are the concept of shareholder democracy and inclusiveness of stakeholders. The adoption of Quantum Voting Rights (QVR) faces regulatory and legal hurdles due to the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations, which prioritize equal voting rights and shareholder protection. But with the burgeoning startup environment in India and more foreign investors coming in, there is pressure to embrace advanced governance structures. While QVR represents a departure from traditional voting methods, it can be implemented in ways that uphold the core principles of corporate law. By integrating QVR systems with existing governance structures, maintaining transparency through robust disclosure requirements, and incorporating safeguards for minority shareholder protection,

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Closing the Loopholes: Strengthening SEBI’s Approach to Market Rumours

Leave a Comment / Capital Markets and Securities Law /

[By Priya Sharma & Archisman Chaterjee] The authors are students of National Law University Odisha   Introduction  To facilitate a uniform approach for verifying market rumours by listed entities, the Securities and Exchange Board of India (SEBI) recently notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024 (the Amendments). These amendments were accompanied by a Circular on ‘Industry Standards on verification of market rumours’ (the Circular).  Effective from 17 May 2024, the Amendments provide criteria for verification of market rumours in terms of material price movement instead of materiality of event or information and the mechanism to consider unaffected price with respect to transactions related to securities. The Circular requires the Industry Standards Forum (comprising representatives from ASSOCHAM, CII and FICCI) to formulate industry standards applicable to the implementation of the requirement to verify market rumours under Regulation 30(11) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). Accordingly, the requirement to verify market rumours shall apply to the top 100 listed companies, effective June 1, and to the next 150 listed companies, effective 1 December 2024.  While the amendments are a welcome step in promoting uniformity and revamping the regulatory framework for market rumours, SEBI may have missed the opportunity to close regulatory gaps. Specifically, there is inadequate oversight on social media platforms and potential for false denial or confirmation of rumours.  ​​​The latest Amendments and accompanying developments In pursuance of the Amendments, the Industry Standards Forum has published ‘Industry Standards Note on verification of market rumours under Regulation 30(11) of LODR Regulations’ (“Guidance Note”). The Guidance Note defines ‘Mainstream Media’ and the news sources that will be included within its ambit. It shall be the responsibility of the listed entity to put in place proper technology solutions and engage social media agencies to track the news reported in Mainstream Media. The requirement under Regulation 30(11) will only be applicable to the market rumours reported in this Mainstream Media.   Criteria for Verification In order to activate the applicability of Regulation 30(11), the market rumour in question must not be vague or general in nature. Instead, it must provide specifically identifiable details of a matter/event or provide quotes or be attributed to those who are reasonably expected to be knowledgeable about the matter. Another prerequisite is that there must be ‘material price movement’ in the scrip of the listed entity, as opposed to the previous ‘materiality of event or information’ criteria. The listed entities usually avail services from agents or develop in-house teams to track such movement in their scrip. The obligation is placed on the promoters, directors, KMP and senior management of the entity to provide adequate and accurate responses to the queries raised to them. However, there are significant gaps in regulation that warrant attention.  ​​​Exclusion of Social Media: a missed opportunity The rumour verification requirement was originally introduced to avoid false narratives that may impact the price of the securities of a listed entity. Notably, the definition of Mainstream Media excludes social media, which means that social media channels/accounts, such as those run by finfluencers having lakhs of followers, fall outside its scope.   Finfluencers are known to influence their audience by providing financial education and offering investment recommendations. In many cases, these finfluencers are unregistered, and may not adhere to any disclosure requirements. Apart from advice, finfluencer channels may also contribute or give rise to market rumours, which may in turn affect the scrip of a listed entity. Such market investment scams are on the rise. SEBI, in the recent past, has been cracking down on such activities, but these actions will largely remain ineffective in dealing with the menace of finfluencers in the long run. Currently, there is no specific legal framework dealing with finfluencers who are not registered as either Investment Advisors or Research Analysts. Therefore, considering the current regulatory gap, it is crucial for SEBI to tighten its regulatory grip on social media channels as well. The regulatory mechanism could incorporate an oversight mechanism to verify compliance by social media intermediaries and finfluencers.   In the present case, Mainstream Media must also include social media within its ambit, considering the fact that investment channels run by finfluencers have become one of the most important sources of investment information and financial literacy in recent times. Such inclusion may increase compliance costs, but will ultimately further SEBI’s overarching objective of protecting interests of investors.  While broadening the scope to include social media will be a step forward, there are other notable issues that need addressing.  Regulatory Gaps As per the Guidance Note, the listed entity is required to either confirm or deny the rumour in case of material price movement. According to the price framework post confirmation of the rumour (price framework), the price would be frozen only if the said rumour is accepted to be true. In case the entity opts to deny the rumour, the price would be left to pan out in the usual course of business. Upon verification of the rumour, the price framework comes into effect. It envisages the mechanism for calculating the volume weighted average price (‘VWAP’), which dictates the price of a transaction. It is computed by deducting the variation in weighted average price (‘WAP’) from the daily WAP during the period between the date of material price movement and the trading day after rumour verification. However, there is uncertainty as to what would happen if an entity opts to deny the rumour, but later proceeds with the said rumoured transaction which specifically identifies the said entity. The present regulations which encompass both the LODR regulations as well as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) do not explicitly dictate the recourse in such a scenario.  To understand how such a situation may be dealt with, it is necessary to look at the ‘Put up or Shut up’ rule (outlined in the UK’s Takeover Code) implemented in the UK. The

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