Author name: CBCL

BoJ’s Rate Hikes: Impact on Indian Financial & Regulatory Landscape

Leave a Comment / Contemporary Issues /

[By Shriyansh Singhal] The author is a student of National Law University Odisha.   Background  In a landmark decision, the Bank of Japan (BoJ) raised its interest rates for the first time in 17 years, triggering notable ripple effects across global markets, including India. After years of a negative interest rate policy, the BoJ raised its short-term rates from -0.1% to 0.1% in April 2024, followed by an increase to 0.25% in July. BoJ came forth with a negative interest rate policy to combat deflation and stimulate economic growth but its recent shift away from this policy has marked a significant change in global financial dynamics. This decision not only impacts the finance world but also affects the legal and regulatory challenges for markets like India, which are closely related to foreign capital flows as all the market regulators have recently been pushing investment facilitation and ease-of-doing business guidelines.   India’s response to BoJ’s Interest rate hikes  The Indian equity markets reacted to this policy change by witnessing significant drops in the indices such as BSE Sensex and Nifty, with increased volatility propelled by the destressing of the popular yen carry trade strategy where traders borrow in yen at low interest rates and invest in higher-yielding assets globally, to enjoy lucrative profits. Lured by the now higher domestic interest rates, Japanese investors have begun to repatriate funds back to their home country which was a reason for the noticeable outflow of Foreign Portfolio Investments (‘FPIs’) from Indian markets. The BoJ’s actions indicate a robust legal and regulatory framework to manage the intertwined global finance horizon and mitigate economic risks.   At present, Indian Regulatory Authorities such as the Securities Exchange Board of India (‘SEBI’) and the Reserve Bank of India (‘RBI’) are in the position of determining the stability of the financial system in the world turmoil. There emerges the need to reform the cross-border financial regulations with the increased market fluctuations, for instance in currency exchange and capital transfer for protection of the markets against manipulations and speculations.  Implications for India’s Financial Laws and Compliance  The BoJ’s rate hikes could significantly affect the Foreign Exchange Management Act (FEMA), 1999. The fluctuation in the exchange rate of the Indian rupee against the yen may cause the RBI to implement more stringent policies & strategies to bring changes in the laws on the exchange control system. In addition, SEBI may have to strengthen its FPI monitoring systems to ensure that such outflows do not cause fluctuations in the markets. Thereafter, some of the domestic corporates engaged in cross-border transactions may have to meet the stringent FEMA reporting requirements because of increased regulatory scrutiny of Foreign Direct Investors (‘FDIs’) and Foreign Institutional Investors (‘FIIs’) and their repatriation. It could also result in higher complexity of compliance with regulations concerning foreign exchange derivatives due to the necessity of hedging against currency risks.   The global shift in interest rates which is more likely to be initiated by the BoJ’s action is most likely going to exert pressure on the Indian debt markets. The Companies Act, 2013, which governs the issuance of corporate bonds and other debt securities, may see increased application if BoJ’s rate hikes lead to higher interest expenses for Indian firms, prompting them to rely more heavily on debt financing. Consequently, amendments to the provisions of the Companies Act concerning the issue of securities, including the regulatory approval, disclosure requirements and investors’ protection. This is especially important to maintain the competitiveness of corporate bond rules and protect investors’ rights, which may require SEBI to reconsider its rules in this regard. To make Indian bonds nearer to the reach of international investors, legal requirements related to the pricing and distribution of debt securities may also be looked into and aligned with international standards.  It could also make SEBI introduce stricter disclosure norms and more stringent rules regarding the repatriation of profits by FPIs, which could potentially require making amendments to the SEBI (Foreign Portfolio Investors) Regulations, 2019, especially in the registration and compliance obligations of FPIs. Enhanced scrutiny of market conduct related to insider trading and market manipulating activities could also be taken up by SEBI due to increased volatility. In periods of high volatility, there is a possibility to increase measures of SEBI (Prohibition of Insider Trading) Regulations, 2015 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 to prevent unfair practices. The impact on foreign investment in India will directly affect the taxes collected from these investments.   To address the issues concerning the taxation of capital gains and withholding taxes of foreign investors, the Government of India may contemplate changing the tax treaties or including the Income Tax Act, 1961. The exchange and interest rates may make those involved in cross-border transactions be subjected to a higher level of scrutiny under the transfer pricing regulations. To curb the multinational conglomerates from engaging in profit shifting or any other method of tax evasion, an even higher level of compliance with the provision of the Income Tax Act will be boosted.  It is also important to note that some of the Indian banks that have operations in the global markets may be affected by changes in the global interest rates including those occasioned by the BoJ. The Banking Regulation Act, 1949 may also have to be amended to ensure that the Indian banks are well-capitalized and in a state to meet the prudential Regulations in the face of Global Risks. The RBI may make new regulations on how to address the interest rate risks and foreign currency translation impacting statutory provisions of India’s banks under this Act.  Contractual and Financial Strain on Indian Companies  The rate increases by the BoJ can have severe contractual implications for Indian companies engaged in international business or having foreign currency debt linked to international benchmarks like the London Interbank Offered Rate (‘LIBOR’) or the Tokyo Interbank Offered Rate (‘TIBOR’). Foreign debt may be repaid at a higher cost because of the changes

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From Concept to Reality: Asset Tokenization’s Emergence in India

Leave a Comment / Technology Law /

[By Yash Tiwari] The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.   Introduction: Asset Tokenisation One of the most exciting applications of blockchain technology is digital asset tokenization, which is the act of representing an asset’s ownership rights into digital tokens and storing them on a blockchain. Tokens can serve as digital certificates of ownership in these situations, representing nearly any kind of asset, including digital, physical, fungible, and non-fungible ones. Because assets are kept on a blockchain, owners are able to keep custody of them.  Through increased asset utility and composability, this approach has the potential to completely change the global financial landscape. Recognising the potential advantages of asset tokenization, regulators worldwide are putting effort into creating frameworks that would safeguard investors from harm while encouraging innovation and industry expansion. The article covers India’s early steps in asset tokenization. It highlights initiatives taken by entities like RBI, SEBI, and IFSCA. It also compares advanced global approaches and suggests a way forward for India.  Early Stages of Development in India India is only now starting to explore the world of asset tokenization, as the nation makes the first moves in utilising this innovative financial technology. Despite being in the early stages of development, India is showing signs of rising interest in incorporating tokenization and blockchain technology into its economic structure with these initiatives:  RBI-  Launched on November 1, 2022, the RBI’s wholesale Central Bank Digital Currency (CBDC) pilot project focuses more on technical testing than transaction volume as it explores asset, bond, and security tokenization, including customer-held fixed deposits. The Digital Rupee-Wholesale (e-W) program settles secondary market involving government securities. In addition, Peer-to-peer (P2P) & Peer-to-Merchant (P2M) transactions are covered by the RBI’s December 2022 retail CBDC trial, which promotes a CBDC ecosystem.  Deputy Governor T Rabi Sankar revealed during the 19th Banking Technology Conference that the RBI is considering the idea of tokenizing assets and government bonds, with a greater emphasis on technological testing than transaction volume.  SEBI’s Perspective on Security Tokens-  SEBI plans to regulate security tokens representing financial securities, promoting issuance and trading. Blockchains can democratize markets through fractional ownership. Fractional ownership is when the cost of an asset or property is split among individuals, each getting a share. It helps an individual co-own a high-value property with multiple investors. In its consultation paper titled “Regulatory Framework for Micro, Small and Medium REITs (MSM REITs),” released on May 12, 2023, SEBI addresses firms that facilitate fractional real estate ownership. In order to promote asset democratisation and market participation, SEBI established a legal framework for fractional real estate ownership at its 203rd board meeting on November 25, 2023.  International Financial Services Centres Authority (IFSCA)-  On September 12, 2023, the Indian government’s statutory authority, the International Financial Services Centres Authority (IFSCA), formed a committee to create asset tokenization regulations and assess the legality of smart contracts. Establishing a regulatory framework expressly for the tokenization of tangible, real-world assets is a major first for any authority.  GIFT City– The goal of Gift City’s Expert Committee on Asset Tokenization is to establish thorough rules for tokenizing both tangible and intangible assets, evaluate the validity of smart contracts, and provide a strong framework for managing risks associated with digital tokens. In order to ensure responsible use and integration within the Gift City framework, the committee will also investigate the role of digital custodians in the asset tokenization paradigm and develop operational guidelines to support their functions.  This broad scope emphasises the committee’s critical role in establishing Gift City’s asset tokenization regulations and operational framework. The usage of blockchain creation and tokenization of digital assets will be allowed in GIFT City, as approved by the IFSC Authority. Although real estate will be the main focus initially, comfort goods and precious metals are also planned.  Telangana Government-  The Telangana government created a Blockchain District with the goal of acting as a cooperative platform for the collaboration of industry and academia. The founding members of the Blockchain District are the Telangana government, IIIT-Hyderabad, Tech Mahindra, and the Centre for Development of Advanced Computing (CDAC). A Technical Guidance Note on Asset Tokenization has also been released by the Telangana government’s Department of Information Technology, Electronics, and Communications. The document details the technical nuances of tokenization, proposes standards, and outlines strategies for businesses or startups initiating asset tokenization.  Tokenization across key Jurisdictions While India has begun to explore asset tokenization, its progress remains in the early stages. In contrast, leading jurisdictions like Singapore, the United States, UAE, and Switzerland are actively shaping the tokenization landscape through their legislative efforts and collaborative projects.  In Singapore, the Monetary Authority of Singapore (MAS) examines the structure and features of a digital token, including its associated rights, to determine if it qualifies as a capital markets product under the Section 2(1) of the Securities and Futures Act. On June 27, 2024, MAS declared the expansion of programmes aimed at scaling asset tokenization for financial services. This involves collaborating with international trade associations and banking establishments to promote standard asset tokenization protocols in the domains of fixed income, foreign exchange, and asset & wealth management. Together with global financial institutions, MAS announced the successful conclusion of the Global Layer One (GL1) initiative’s first phase. The group also revealed plans to create market norms, rules, and guiding principles for the fundamental digital infrastructure that would support tokenized assets. Under Project Guardian, MAS has collaborated with 24 financial institutions to test out potential use cases for asset tokenization over the last two years.  When it comes to asset tokenization regulation, the US has adopted a more cautious stance. The regulatory oversight over the issuance or resale of tokens and digital assets classified as securities, is generally within the purview of the Securities Exchange Commission (SEC), although it has not released any official guidance on the subject. The regulator has been actively involved in negotiations with industry partners and has set up a sandbox environment for testing new tokenization

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Excessive Protection May Backfire: Analyzing Sebi’s Restrictive Amendment

Leave a Comment / Capital Markets and Securities Law /

[By Debarchita Pradhan] The author is a student of National Law School of India University, Bangalore.   Introduction Put simply, insider trading means trading by a person in a company’s securities while he/she has some secret price-sensitive information that is not generally available to the public. However, there have been substantial issues regarding whether the information is generally available to all.   In the recent case concerning allegations of insider trading in Future Retail Ltd. (FRL) scrip, the Securities Appellate Tribunal (SAT) opined that if the information is published in media, then it would cease to be unpublished and would be considered generally available. However, it was the last opportunity to form such an opinion because later, the amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereby referred to as “2015 Regulations”) excluded “unverified event or information reported in print or electronic media’ from the definition of “generally available information” (hereby referred to as GAI).   The paper argues that this amendment is too restrictive and would further disincentivize the investors rather than protect them. It would first, give a brief overview of the jurisprudence around information being generally available under insider trading law. Secondly, it would provide the repercussions that may flow from the recent amendment. Thirdly, it will provide a pragmatic alternative to the amendment. Fourthly, the paper will conclude.  Chapter I: Development of the idea of “generally available information” Presently, in the 2015 Regulations, an insider is defined to be someone who is either a connected person or one who possesses unpublished price-sensitive information (UPSI). In the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereby referred to as “1992 Regulations”), the definition of “unpublished price-sensitive information” provided that for information to be UPSI, it should not be generally known or published by the company. The use of “or” indicates that information can be generally known in ways other than the publication by the company itself. This rationale was visible in the order passed in Hindustan Lever Ltd v. SEBI1, where it was observed that expectations regarding an event, being already in the media, were considered to be generally known. Later, through an amendment in 2002, the definition of “unpublished” was given. It provided that information would be considered unpublished if it is not “published by the company or its agents. This indicates that for the information to be generally available, it needs to be made available by the company itself. So, the 2002 amendment was narrower than the 1992 Regulations with regards to the meaning of generally available information.   Later, a High-Level Committee was appointed under the chairmanship of Justice N.K. Sodhi to review the 1992 Regulations and further provide a draft for the 2015 Regulations.  In these regulations, GAI is separately defined.  It is broader than the 2002 amendment since the only condition required for information to be generally available is that it should be available to the public in a non-discriminatory manner. This broader view was recently evident in the ruling given by SAT in the Future Corporate Resources Pvt. Ltd. (FCRPL) v. SEBI. The SAT opined that the information doesn’t need to be only from the company itself to be considered as generally available. The same logic was also followed in previous cases that arose after the 2015 Regulations. However, later through an amendment to the definition of GAI on 18 May 2024, “unverified event or information reported in print or electronic media” were excluded from its ambit.   Chapter II: Repercussions That Follow [A] Ignoring the Channel When holding someone accountable for insider trading, especially if they are not directly connected but are said to have used undisclosed price-sensitive information (UPSI) for trading, it’s important to consider whether there is any evidence about how the accused received this information and from whom. In many cases where SEBI has omitted this requirement, the SAT has come down heavily on it. For instance, in Shruti Vora and Ors. v. SEBI, the question was whether a “forwarded as received” WhatsApp message regarding the quarterly financial results of a Company, before the company’s official publication, would amount to a UPSI. In this case, the SEBI admitted that despite their thorough investigation, they could not find the original leakage of the information. On such admission, the SAT rightly condemned SEBI for downplaying the requirement of establishing a linkage between the source of UPSI and the person alleged to have possession of UPSI before pinning liability on anyone. Similarly, in Samir C. Arora v. SEBI, SAT held that SEBI has the burden to provide concrete evidence showing that the accused actually received the UPSI from a source. However, the recent amendment closes the doors for inquiring whether there was any such linkage or where an un-connected person has received the UPSI from. No matter the existence of any such linkage, if a person, alleged to be an insider, trades while possessing information published only in unverified media, he may still be liable. This is particularly concerning when such liabilities require a higher degree of proof than a normal civil suit.  [B] Reducing assistance for investors: The above issue is further concerning when the conditions for information to be UPSI as well as that of disclosures of UPSI is already lowered. Nowhere in the Regulations, it is mentioned that the UPSI should be only concrete information. In the Satyam Computer case, the AO had clarified that not only concrete decisions, but any information (including proposals, etc.), which if published is likely to materially affect the price of securities of a company, would constitute price-sensitive information (PSI). Further, in the K.K. Maheswari case, the AO reiterated that PSI would include “any information”, i.e., not only a ‘final decision’ but would include the probable and most likely event. So, UPSI can include proposals or just mere possibilities of an event.  Now, as per Schedule A of the 2015 Regulations, there should be prompt public disclosure of UPSI no sooner than “credible and concrete information” comes into being to make such information generally

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All Eyes on Moore vs US: How It Effects the India Tax Regime

Leave a Comment / Taxation Law /

[By Bhavana Sree Sagili] The author is a student of Damodaram Sanjivayya National Law University.   Introduction The US Supreme Court in Moore v. United States, addressed the constitutionality of the Mandatory Repatriation Tax (MRT) implemented under the 2017 Tax Cuts and Jobs Act. This case is pivotal because it will determine whether Congress can impose taxes on the “unrealized income” of American-controlled foreign companies.  While the final judgment is crucial, the underlying rationale of the decision holds even greater significance. If the Court rules in favor of Moore, it could set a precedent affecting various aspects of income tax law, potentially leading to substantial changes in how taxes on foreign income are structured and enforced.   The United States is the third largest investor in India, with investments totalling $65.19 Bn  from April 2000 to March 2024. This investment is crucial for the growth of Indian small-scale businesses, enabling them to expand and thrive (like Moore in KisanKraft). The Supreme Court judgment on Moore v. United States could significantly impact these investments and, by extension, the Indian economy. A ruling that affects the taxation of unrealized income may influence U.S. investors’ decisions, potentially altering the flow of investment into India.   The judgment has implications for the international taxation framework, as the   OECD’s Pillar Two global minimum tax aims to ensure multinational enterprises (MNEs) pay at least a 15% tax rate on their global income, thereby reducing profit shifting and base erosion. It establishes rules for a minimum effective tax rate on large multinational groups. If the U.S. faces challenges in implementing these rules due to constitutional issues, it could complicate global efforts to standardize international tax practices, impacting countries like India that support these initiatives.  Background Historically, Congress has treated certain business entities, such as corporations and partnerships, as pass-through entities for tax purposes, meaning the entity itself does not pay taxes on its income; instead, the income is attributed to the shareholders or partners, who then pay taxes on their share of the income, regardless of distribution. Since 1962, Congress has applied a similar approach to American-controlled foreign corporations under Subpart F of the Internal Revenue Code, taxing American shareholders on certain types of income, mostly passive, that the foreign corporation earned but did not distribute. The 2017 Tax Cuts and Jobs Act introduced the Mandatory Repatriation Tax (MRT), imposing a one-time tax on the accumulated, undistributed income of these foreign corporations to address the trillions of dollars that had accumulated without U.S. taxation, applying a tax rate of 8% to 15.5% on these earnings.  Moore Vs Us Charles and Kathleen Moore invested $40,000 in KisanKraft, an American-controlled foreign corporation based in India, receiving a 13% ownership share. From 2006 to 2017, KisanKraft generated substantial income but did not distribute any of it to its American shareholders, including the Moores.  With the enactment of the MRT, the Moores faced a tax bill of $14,729 on their share of KisanKraft’s accumulated earnings from 2006 to 2017, even though they had not received any actual income from these earnings. The Moores paid the tax but then sued for a refund, arguing that the MRT was an unconstitutional direct tax because it taxed unrealized income without apportionment among the states. They claimed this violated the Direct Tax Clause of the Constitution.  Judgment The Supreme Court upheld the constitutionality of the Mandatory Repatriation Tax (MRT), emphasizing Congress’s broad authority to tax income, including undistributed income from American-controlled foreign corporations. The majority opinion, delivered by Justice Kavanaugh, reinforced this power by referencing historical precedents where similar taxes had been upheld, validating the MRT within the framework of existing tax laws. Central to the Court’s reasoning was the Sixteenth Amendment, which allows Congress to tax “income” from any source without apportionment among the states. The majority held that the MRT fits this framework, as it taxes income the Moores were deemed to have earned through their investment in KisanKraft. Historical examples, such as Subpart F provisions, supported the constitutionality of the MRT.  In his concurring opinion, Justice Jackson emphasized Congress’s “plenary power” over taxation and the long history of taxing undistributed income. Justices Barrett and Alito, while agreeing with the judgment, highlighted the need for future examination of income attribution nuances. In contrast, Justice Thomas, joined by Justice Gorsuch, dissented, arguing that the Sixteenth Amendment requires income realization before taxation, which the MRT violates. The ruling referenced cases like Burk-Waggoner Oil Assn. v. Hopkins and Burnet v. Leininger, supporting taxation of undistributed income. This decision clarifies Congress’s authority to tax undistributed income from foreign corporations, reinforcing the government’s ability to address multinational tax deferral strategies while noting potential future challenges on income definition and attribution.  Impact on India The United States, being the third-largest investor in India, has injected substantial capital into the Indian economy, with investments totaling $65.19 billion from April 2000 to March 2024. These investments have been crucial for the development of various sectors, particularly small and medium enterprises (SMEs). For instance, the investment by Charles and Kathleen Moore in KisanKraft, an American-controlled foreign corporation based in India, highlights how American capital supports the growth of Indian businesses. Kisan Kraft’s growth, fueled by foreign investment, has enabled it to enhance operations and reach broader markets, contributing significantly to the local economy.  The potential changes in U.S. tax laws, as highlighted by the Moore v. United States case, could have a profound impact on these investment dynamics. If the Supreme Court’s decision leads to broader taxation on unrealized income, U.S. investors may become more cautious about investing in foreign enterprises. This caution could result in reduced investment flows into India, potentially slowing down economic growth and innovation. The Mandatory Repatriation Tax (MRT), which imposes a one-time tax on accumulated, undistributed income of American-controlled foreign corporations, might prompt U.S. investors to repatriate their earnings more quickly. This could affect the long-term investments in Indian companies, impacting their sustainability and expansion plans.  India’s tax policy has traditionally been designed to attract foreign direct investment

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‘Un’Certainity on the issuance of partly paid units by AIFs

Leave a Comment / Investment Law /

[By Yash Arjariya] The author is a student of Hidayatullah National Law University, Raipur.   Introduction: The Regulatory Framework The issuance of partly paid units of Alternative Investment Funds (‘AIF’) has been a general market practice, with the same being expressly allowed by the Securities Exchange Board of India (‘SEBI’) in the AIF Regulations, 2012. Similarly, the Non-debt Instruments Rules, 2019 (‘NDI Rules’) also seemed to allow the issuance of partly paid units of AIF to Persons Resident Outside India (‘PROI’).  The definition of ‘units’ in rule 2(aq) of the NDI Rules read as “beneficial interest of an investor in an investment vehicle,” where an ‘investment vehicle’ included, amongst other things, an AIF as well. Thus, the permissible stance of the SEBI as to the issuance of partly paid units and no bar in the NDI Rules meant that, as a general trend, partly paid units were issued to PROIs in the AIF Industry.  There was a development in this regard in March 2024, where the Ministry of Finance amended the definition of ‘units’ in the NDI Rules 2019 to include partly paid-up units within the definition of ‘units. Thus, this looked like a clarification to the Industry, and it was thought that the Ministry had merely clarified that units under NDI rules always included partly paid units of the AIF. Therefore, as per the market’s understanding, this was a reiteration of the existing position by formal inclusion rather than a change in the law.   However, via its Circular dated May 21, 2024, the Reserve Bank of India (‘RBI’) introduced a new perspective on the March 2024 amendment in the NDI Rules. It interprets the amendment as enabling in nature, which means, as per the RBI’s understanding, there cannot be any issuance of partly paid units of AIFs to PROIs before the amendment in March 2024. The RBI’s Circular seeks to regularise the issuance of such units before the amendment by paying a ‘compounding fee.’ This shift in interpretation has left the Industry in a state of confusion and uncertainty, as it challenges the long-standing market practice.   This article delves into the amendment to NDI Rules and the subsequent RBI Circular, focusing on two crucial points. First, it examines the potential impact on the Industry’s legitimate expectations and the prevalent general practice. Second, it evaluates the alignment of the RBI’s interpretation with general principles of interpretation. The article concludes that the RBI’s understanding of the amendment to NDI Rules, as conveyed through the Circular, may not be viable or at least beneficial to the Industry, raising concerns about the potential negative implications on both the law and the Industry’s legitimate expectations.  Amendment to NDI Rules: Change or no Change On the point of law, it needs to be understood that the March amendment 2024 to the NDI Rules was only clarificatory in the sense that it did not substantially alter the definition of units but only clarified the existing position that partly paid units of AIF has always been included in the ambit of ‘units.’ Further, as a matter of general principles of interpretation, an explanation added to a provision always applies retrospectively unless otherwise explicitly provided [¶ 21, State of Bihar v. Ramesh Prasad Verma]. Thus, when the market had constantly been issuing partly paid units of AIFs to PROI, the explanation added by amendment can only be reasonably thought to outlay the position of law when the explanation has no explicit intent to operate prospectively. Therefore, this amendment could not be said to be a change of a substantial nature but only a clarification of what existed in law at all times.   Further, attention needs to be also paid to InVi form filings. The form InVi is filed by AIFs with Authorised Dealer Banks (‘AD’) when they issue the units of AIFs to PROIs. There has been a general and uniform practice till that ADs were accepting InVi form filings for partly paid units of AIFs to PROIs. Thus, it was not a case that the practice was not legitimised, instead the AIFs furnished the data to regulators in case of issuance of such partly paid units to PROIs.   Therefore, the RBI’s circular represents a significant and unexpected change in the market, disrupting the established trends and practices. It does so by interpreting the March 2024 amendment as a substantive change rather than a clarification, a departure from the general understanding of the amendment’s nature.  RBI Circular: Case of Interpretative perspective The amendment to NDI Rules 2024, initially perceived as a clarification by the industry, was not seen as a substantive change operating prospectively. However, when the RBI released its Circular, the nature of the amendment was altered, causing confusion. The Circular communicated that the amendment authorised the issuance of partly paid units of AIFs to PROIs, and any issuance prior to the amendment was deemed impermissible. This sudden change in interpretation has left many in the industry perplexed and in need of clear understanding.   There are three problems that arise with respect to the Circular. First, the nature of the ‘Explanation’ added to the definition of ‘units’ in NDI rules is not a substantive provision in any sense of the term. The plain meaning of the amendment brought as ‘Explanation’ itself shows that it is merely meant to explain or clarify certain ambiguities [¶ 46 (SCC Copy), S. Sundaram Pillai v. V.R. Pattabiraman]. And that such clarificatory or explanatory changes operate retrospectively, i.e., they are deemed to be there since the law (NDI Rules, in this case) was brought in place [¶ 8.1, Sree Sankaracharya University of Sanskrit v. Manu]. Thus, the RBI circular is flawed when it perceives change to NDI Rules, which is added as an explanation, as prospective without any indication of that effect in the Rules.   Second, the RBI seeks to regularise the issuance of partly paid units of AIFs to PROIs before the amendment through the payment of compounding fees. However, the regularisation needs to be clarified. The framework laid through

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Redefining ‘Service’: New FEMA Rules Impacting Lawyers Serving Global Clients

Leave a Comment / Contemporary Issues /

[By Anasruta Roy] The author is a student of National University of Advanced Legal Studies.   Introduction In early July 2024, the RBI published draft regulations titled “Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2024”( henceforth draft regulations), concerning foreign exchange transactions, continuing the government’s trend of policy liberalization in this area.  The proposed regulations introduce several key changes for exporters:  Expanded declaration requirement: Exporters must now declare the full export value of both goods and services to the designated authority, not just goods and software as before. Repatriation timeline: The entire export value must be received and brought back to India within nine months from the date of shipment (for goods) or invoicing (for services). Documentation process: Exporters are required to submit a specific declaration form to the designated authority and provide relevant documentation to the Authorized Dealer within 21 calendar days of shipment or invoicing. Late submissions: Authorized Dealers may accept documents submitted after the 21-day deadline, subject to their discretion and RBI guidelines. These changes aim to streamline the export process and ensure timely repatriation of foreign exchange earnings. However, the proposed regulatory changes raise a pertinent question: Would legal professionals offering consultancy services to international clients be required to provide additional documentation for each engagement under these new provisions? There exists a regulatory ambiguity due to conflicting interpretations across various legal frameworks. The Foreign Exchange Management Act (FEMA) includes legal assistance within its purview but excludes contracts of personal service. The Finance Act explicitly categorizes legal assistance as a reportable service. In contrast, consumer courts have interpreted legal services as contracts of personal service.  This inconsistency creates uncertainty regarding whether legal services provided to international clients must be reported in the draft regulations. The article in question examines this regulatory overlap and proposes potential resolutions to this ambiguity.  Service – A Finance Act Perspective The Finance Act of 2009 expanded the scope of services by introducing clause 105 (zzzzm). This amendment defined taxable services to include advice, consultancy, or assistance in any legal field provided by one business entity to another. However, it explicitly excluded appearances before courts, tribunals, or authorities from this definition.  This amendment sparked controversy, leading to a legal challenge in the case of Advocates Association of Western India v Union of India and Ors. The petitioners (Advocates Association of Western India) argued that the legal profession, traditionally viewed as an integral part of the justice system rather than a commercial enterprise, should not be subject to service tax. They contended that lawyers, as officers of the court, perform a solemn duty rather than providing a service in the conventional sense.  The opposing view held that lawyers do indeed provide a service to their clients, for which they receive compensation. This argument drew parallels between legal professionals and other service providers such as consulting engineers or doctors. It was suggested that while lawyers have unique responsibilities to the court, this does not negate the service aspect of their relationship with clients in the context of service tax applicability.  The court’s decision did not favour the petitioners, allowing for the imposition of a service tax on legal services. However, the case remained under review, and subsequent notifications provided more specific definitions of legal services for taxation purposes, with different tax treatments based on the nature of the legal work performed.  This discussion will not delve into whether such tax is payable in light of the 2012 amendment and the introduction of the negative list regime. The legal discourse and its outcome effectively established that, at least for the purposes of the Finance Act, legal consulting falls within the category of services.   The CPA’s take on Service The Consumer Protection Acts of 1986 and 2019 define “service” similarly, encompassing various services made available to potential users. However, the definition explicitly excludes services provided free of charge or under personal service contracts.  The court in President Jasbir Singh Malik & Ors v. DK Gandhi PS National Institute of Communicable Diseases and Ors noted that professionals are distinct from business people or traders, and their clients cannot be considered consumers in the traditional sense.  The court defined a profession as a vocation requiring advanced education, particularly in law, medicine, or ministry. They argued that professional services cannot be equated with commercial goods or services as defined in the Consumer Protection Act.  The bench suggested that lawmakers, presumed to be knowledgeable about existing laws, did not intend to include professional services within the Act’s scope. They highlighted the unique role of lawyers in society, emphasizing their duty to act with utmost good faith and integrity.  In examining the relationship between lawyers and clients, the court considered whether it constitutes a contract “for services” or “of service”. They concluded that clients exercise significant control over how lawyers perform their duties, indicating a contract of personal service.  Based on this reasoning, the bench determined that legal services fall under the category of personal service contracts and are therefore excluded from the definition of “service” in the Consumer Protection Act of 2019.  The ambit of services – FEMA lens To better understand the implications of the draft regulations, it is crucial to examine the definition of “service” as provided in the parent legislation, FEMA 1999. Section 2(zb) of FEMA offers a comprehensive definition that includes various activities, notably encompassing “legal assistance” within its purview. This inclusion suggests that legal services could potentially fall under the declaration requirements of the new regulations.  However, the FEMA definition also introduces a critical exclusion: services rendered under a “contract of personal service” are explicitly exempt from the definition. This exclusion creates a complex scenario, particularly when considering recent legal interpretations regarding the nature of professional services.  The crux of the issue lies in distinguishing between what constitutes “legal assistance” and what falls under a “contract of personal service” in the context of international legal consultancy. This distinction may not always be clear-cut and could vary depending on the specific nature

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India’s Digital Competition Bill: Ex-Ante Regulation in a Global Context

Leave a Comment / Competition Law /

[By Nandita Karan Yadav] The author is a student of National Law Institute University, Bhopal.   Introduction  The rise of Big Tech giants has positively transformed the digital landscape. However, this revolution comes with a darker side: concerns about market dominance and privacy violations that the existing ex-post laws do not address effectively. In response, several countries have already implemented digital sector regulations. Now, India is in the midst of discussions with stakeholders about its own Digital Competition Bill. This paper intends to analyse the Digital Competition Bill and the author through this blog compares the legislation with international laws on the subject and substantiates that the current Digital Competition Bill is inadequate for India in its current state.   Big Tech and Need for Regulation   “Big Tech” refers to major United States-based technological corporations such as Google, Meta, Apple, Microsoft, and Amazon. These behemoths offer a plethora of services and boast an immense consumer base. Their substantial market capitalisation and influence enable them to leverage their dominant positions to the detriment of competitors and the privacy rights of their consumers. Google was fined €4.34 billion for imposing three types of illegal restrictions on Android, cementing its search engine’s dominance and denying rivals the opportunity to innovate and compete on the merits. Through aggressive profit-maximising strategies, they undermine the democratic rights afforded to both competitors and consumers.  The digital markets present unique challenges, primarily because these Big Tech companies utilise data as a resource, contrasting with the reliance on capital in other sectors. In traditional sectors, success often depends on access to and capital investment—like machinery, infrastructure, or financial resources.  A company’s success in the tech sector hinges on the volume of data it amasses. This data is exploited to expand their consumer base by tailoring services to consumer preferences and through targeted advertising. An increased consumer base leads to a “network effect,” where the utility derived by each consumer escalates as the user base grows. Moreover, these corporations benefit from economies of scale.  The digital market frequently encounters the “tipping effect,” wherein market power becomes concentrated in the hands of one or two corporations rather than being distributed evenly among multiple competitors. Dominant entities often engage in anti-competitive practices such as self-preferencing, tying and bundling, third-party steering, etc.  The infamous Google Shopping case exemplifies how these tech giants fail to provide an equitable platform for all businesses on their search engines. When market power is concentrated, consumers face higher prices, fewer choices, stifled innovation, and potential privacy risks due to reduced competition. In response, various jurisdictions, including the European Union, the UK, Japan, and Germany, have initiated sector-specific regulation of the tech industry.  How international jurisdictions addressed these problems  The existing ex-post laws have proven inadequate in addressing the concerns of the rapidly evolving tech sector. Remedies applied after the abuse of dominance fail to effectively undo the anti-competitive conduct. The ex-post procedure is also time-consuming; by the time the relevant authority rules against a Big Tech entity, irreversible market damage may have already occurred. Therefore, it became imperative to ensure compliance at every step in digital markets, not merely reactively when anti-competitive conduct has already transpired. It is argued that ex ante enforcement, which involves proactive regulation, is likely to complement ex-post enforcement. The report also argues that together, these approaches can secure the digital markets comprehensively.  The European Union, a pioneer in the antitrust regime, was the first jurisdiction to introduce digital market regulations through the Digital Markets Act, which came into force in 2022. This Act identifies core platform services that will be regulated and designates large tech entities as ‘Gatekeepers.’ It imposes both mandatory and prohibitory obligations on these entities. A company qualifies as a ‘Gatekeeper’ based on quantitative and qualitative thresholds. The European Commission holds the enforcement power for this legislation. The Indian Digital Competition Bill is substantially inspired by the EU law.  The UK’s Digital Markets, Competition and Consumers Bill (DMCC) of 2023 is currently awaiting approval in the UK parliament. Similar to the EU, the UK law proposes to grant corporate entities a ‘Strategic Market Status’ by the Competition and Markets Authority (CMA), and it also enforces prohibitory and mandatory obligations. The US has proposed twelve bills that are pending approval which substantially adopt a similar stance. Unlike the aforementioned jurisdictions, Japan adopts a digital platform-specific approach. It targets certain dominant entities and imposes compliance obligations regardless of the services they provide. Recently, Japan approved a law requiring Apple and Google to open their app stores to smaller app developers, aiming to promote innovation. Germany has opted for a similar approach, without specifying which services will be covered under the law which has been into force since 2023.  India’s Digital Competition Bill   India’s Digital Competition Bill was introduced in March 2024 by Competition Commission of India (CCI). A report on the bill by the Committee for Digital Competition Law (CDCL) was also propounded. The bill is a spitting image of the DMA applicable in the EU jurisdictions. The bill is based on the underlying principles of fairness, transparency and contestability advocated by the CCI. The bill, when applicable, will only take under its purview nine core services identified by the CDCL report which are online search engines, online social networking services, video-sharing platform services, interpersonal communications services, operating systems, web browsers, cloud services, advertising services, and online intermediation services. This approach is in adherence to the service specific approach adopted by EU and Australia as opposed to the platform specific approach. These include online search engines, video sharing platforms, web browsers etc. The Bill identifies Systematically Significant Digital Enterprises (SSDE), and the act will be applicable to these entities specifically. Categorisation of an entity as SSDE depends on the quantitative and qualitative thresholds. If an entity does not qualify quantitative thresholds, CCI can categorise it as SSDE based on qualitative thresholds for three years. The committee also identified ‘Associate Digital Enterprise’ (ADE); entities responsible for provision of core digital services of the

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SEBI’s bittersweet checkmate: Curbing speculation in secondary markets

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[By Siddharth Melepurath] The author is a student of National Law University Odisha.   Introduction Recently, the Securities and Exchange Board of India (“SEBI”) released a consultation paper in which it proposed measures to curb speculative activity in Futures and Options (“F&O”) trading. Speculative trading involves taking guesses at the direction in which the market will go and trying to make money from an unexpected market volatility. SEBI note that a lot of speculative activity happens on the day of contract expiry, particularly in the last hour, which happens to be the most volatile time as compared to other days. Such speculative activity causes unnatural alterations to the actual value of companies, leading to instability in the secondary market.   There are three major objectives with which SEBI has taken this measure – first, to protect the interests of retail investors, second, to promote stability in the derivative market and third, to ensure sustained capital formation from the derivatives market. This post aims to analyse the implications of this move for the derivative market and to evaluate whether it effectively fulfils the rationale behind it or not.  Background The market regulator had conducted a study in January 2023, titled “Analysis of Profit and Loss of Individual Traders dealing in Equity F&O segment”, which showcased that over 89% of individual traders in the equity F&O segment incurred losses in 2022. Data shows that the share of volume in derivative trading has risen from 2% in 2018 to 41% in 2024. According to the Economic Survey of 2023-2024, this increase in retail participation is due to ‘gambling instincts’ among the retail traders, since it holds potential for outsized gains.   The impact of such speculative trading is two-fold. First, it may lead to large-scale price fluctuations, especially caused when speculators buy or sell large quantities of derivatives. Second, it may infuse a large number of investors into the market, creating market price bubbles, or escalation in the underlying value of assets. Consequently, it may severely impact market stability, especially due to the large volume of retail traders incurring losses.  In view of all this, SEBI had created an Expert Working Group (“EWG”) to examine and suggest measures to ensure stability in the derivatives market and to protect investors by improving risk metrics. SEBI’s Secondary Market Advisory Committee (“SMAC”) reviewed these recommendations, pursuant to which SEBI proposed these measures for the index derivatives segment. This move also comes in the backdrop of the Government hiking the Securities Transaction Tax (STT) to 0.1% in options and 0.2% in futures, up from 0.0625% and 0.0125% respectively.  Analysing the proposals: What has changed? SEBI has recommended 7 broad changes to the existing framework, some of which directly impact retail investors trading in the secondary market. Two primary changes – increasing the minimum contract size for index derivatives and rationalisation of weekly index products are aimed at reducing speculation and have a direct impact on retail traders.  Currently, the minimum contract size for index derivatives stands between 5 lakhs and 10 lakhs. SEBI has now proposed to increase this in two phases, with the first phase being 15 lakhs to 20 lakhs and the second phase subsequently being increased to 20 lakhs to 30 lakhs bracket. This measure, which SEBI terms ‘reverse sachetization’, has been done in light of the high risk that derivatives markets pose, and to reduce the leverage that retail traders currently have.   While it is definitely an effective strategy to counter speculative trading, it also impacts beginner options traders entering the market with lower amounts and also leads to an increase in margins. This will also impact in a large-scale decrease in volume, with investors moving out of the market, possibly shifting to the primary market or even outside the primary market. Dabba trading, an illegal form of trading which is executed outside SEBI-recognised stock exchanges is also expected to become popular, in view of investor exits caused by the move. However, it is pertinent to note that SEBI has maintained its position with respect to the equity cash market – stating that there will be no restrictions in the intraday equity cash market as of now.  Further, SEBI notes that due to expiry of weekly contracts almost on all 5 trading days of the week, there exists a lot of speculative trading in the secondary market. Exchange data shows that there is increased volatility on expiry day which leads to a lot of speculative activity. Therefore, as a direct measure to curb this speculation, SEBI has suggested fewer weekly expiries. While this move would counter speculative behaviour by creating a systematic secondary market, it results in the market becoming relatively less liquid. This, in turn, directly impacts discount brokers and stock exchanges catering to retail traders, who benefit from the liquidity rates in the market. Although the regulator has only aimed at reducing the hyperactive trading on the expiry day and has tried to ensure that there is no restriction on trading, market-making or hedging, it will inadvertently affect the volumes in these exchanges due to large-scale exits.   Implications of the move The earlier model of normal-price, high volume has now been replaced by a more stabilised high-price, low volume in the options segment of the derivative market. The extreme price movements, often caused by traders engaging in speculative activity are mitigated through these measures. These measures also reduce the chances of heavy losses incurred by retail investors. Therefore, there is a pressing need to have a threshold to allow investors into derivative markets, which this move has only partially done.  While this move will aid retail traders in the market, who, as per SEBI statistics are incurring losses and contributing to market instability, there are some concerns which the proposed measures pose. One may argue that SEBI has proposed to protect the interests of retail investors by flushing most of them out of the market. However, these measures are expected to have a direct impact on premiums, which will be forced to have

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India’s Digital Competition Gamble: Overreach or Oversight?

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[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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