Author name: CBCL

How effective would Pre-Packaged Insolvency Proceeding be in Saving the MSME Sector?

Leave a Comment / Insolvency Law /

[By Prarthana Gupta & Tanya Shukla]  The authors are students at the National Law Institute University Bhopal. INTRODUCTION The covid-19 pandemic has severely impacted the entire world, including financial markets. Of these financial markets, the Micro Small and Medium Enterprises (MSMEs) have taken a great hit too. Forming the backbone of the Indian economy, and contributing a whopping 29% to the nation’s GDP[i], the MSMEs constitute 60% of the Indian industry. The nationwide lockdown imposed in the wake of Covid-19 has severely impacted this industry, making it difficult for them to pay off their loans. Over the last year, the defaults in payments have risen steadily, driving a considerable number of them into insolvency. [ii] This article attempts to shed light on the problems that Indian MSMEs have been facing, particularly relating to lack of funding and liquidity, fall in creditworthiness and insufficient capitalisation. Such issues have directly affected the business of the MSMEs, leading them to bankruptcy. The authors have analysed the recent amendment to the Insolvency and Bankruptcy Code, 2016 vis-a-vis the MSME sector to show how effective would it be for these businesses. PROBLEMS FACED BY MSMES IN COVID The lack of liquidity in the financial markets has most severely affected the MSMEs. MSMEs are a major source of providing service and generating employment in the country. Various studies have repeatedly demonstrated that this sector acts as a catalyst for the country’s socio-economic growth. This becomes more essential in light of the government’s stated aim to achieve a $5 trillion economy by 2025. Within this objective, the MSME sector will play a major role, with a contribution to GDP anticipated to exceed 50%. The potential of the Indian MSME sector remains unexplored, which is one of the reasons why government policies are now more convergent on creating a robust ecosystem with more breadth and depth.[iii] Surveys have shown that the pandemic has reduced the earnings of MSMEs by 20-50%. With external funding frozen in the wake of Covid-19, the immediate challenge on MSMEs to meet their legal responsibilities becomes all the more difficult. There is a likelihood of a significant increase in default levels of loans from NBFCs (Non-Banking Financial Companies). In addition to this, there is insufficient recapitalisation and the constant fear of being shut down. A staggering 43 per cent of MSMEs will close[iv] if the COVID-19 lockdown extends beyond the effective end date. Hence, activities are urgently needed in the sector that employs more than 114 million people.[v] The credit crisis being faced by MSMEs will turn the liquidity concerns into solvency problems, create more non-performing loans and raise the sector’s vulnerability to a vicious cycle, which might hamper their actual recovery. In such a situation, seeking a protectionist approach in business before the recovery of local interest suggests a larger risk of the economy becoming caught in a low-interest cycle. Furthermore, the continued exemption of labour regulations jeopardises the revenue of labourers, slowing the repair speed of consumer demands. Support from RBI and policies like the recent exemption granted to banks to maintain cash reserve ratio to first time MSME borrowers for the period of January 1, 2021, to October 31, 2021[vi], will be significant in resisting liquidity crunch and help make more fund available for MSMEs. Nonetheless, the sector is dealing with long-standing issues such as lack of operating capital, complex regulatory and licensing mechanisms, rigorous loan disbursement rules, extensive compliance requirements, embryonic digital adoption, and, last but not the least, a convoluted taxation structure. In order to assuage these concerns, an amendment to the Insolvency Bankruptcy Code (IBC), 2016 was passed last year, raising the default limit for initiation of insolvency proceedings against a corporate debtor from 1 lakh to 1 crore. The government recently took another significant step in the same direction by promulgating the IBC (Amendment) Ordinance, 2021 (“amendment ordinance”), which has introduced the “Pre-Packaged Insolvency Resolution Process” (PRIRP) for Indian MSMEs. Let us now look into what a PRIRP is and how it works. Understanding the Pre-packaged insolvency resolution process The pre-Packaged Insolvency Resolution Process has been gaining worldwide attention and has proved to be successful in countries like the US and UK. As the nomenclature suggests, Pre- Pack is meant to provide an opportunity to the distressed company and its financial creditors to informally pre-arrange a resolution plan, before the plan can go for approval to the court or tribunal and the proceedings can be formally initiated. Pre-Package has been defined by the Association of Business Recovery Professionals as “an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on or shortly after his appointment.”[vii] Chapter IIIA of the Amendment Ordinance mandates the procedure of a PRIRP, intended for defaults ranging from 10 lacs to 1 crore. Approval of 66% (in terms of debt due by the MSME) of the total unrelated financial creditors of the MSME (and unrelated operational creditors in absence of financial creditors) is also required for the application. However, it must be noted that the corporate debtor must not be undergoing a Corporate Insolvency Resolution Process (CIRP) under the IBC, and must not have undergone either a PRIRP or a CIRP in the previous three years (from the date of application for initiating PRIRP). A PRIRP may be administered in a number of ways, including as a standalone process, as part of an Insolvency Resolution Process (IRP), or as part of a voluntary administration process. Now that we’ve gained an understanding of the process, let’s understand how is it different from the existing CIRP model under the IBC. PRIRP vs CIRP: the better option? PRIRPis a novel addition to the Indian financial market. As opposed to the CIRP model, PRIRP imposes a “debtor in control” model whereby the debtor retains control over the assets and business till the process is completed. The primary benefit of the PRIRP

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The Accredited Investor Regime in India: Challenges, Prospects and Why ‘Experience’ Matters?

Leave a Comment / Capital Markets and Securities Law /

[By Raj Shekhar & Krati Gupta]  Raj Shekhar is a student at NUSRL, Ranchi and Krati Gupta is a student at NLU, Jodhpur.  The Securities and Exchange Board of India (SEBI, hereinafter) has recently released the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2021 on August 03, 2021. The amendment seeks to introduce a new category of investors in an Alternative Investment Fund (AIF, hereinafter) called Accredited Investors (AIs, hereinafter). This move can be seen as a successor to the initial SEBI consultation paper on AIs, released in February 2021. The aim of the consultation paper was to seek comments from industry experts that were largely positive. The experts considered the introduction of AIs as a powerful tool to distinguish sophisticated investors who are capable of independently managing risk without the need to adhere to strict regulatory prescriptions, thereby making Indian regulations more aligned with capital market regulations in more mature markets.  In one of its recent board meetings, SEBI which has been deliberating on the concept of AIs for quite a while now has accepted the proposal. In furtherance of the same, it has released an amendment regulation that tries to introduce AIs as a completely new category of investors. In light of this recent notification, the article seeks to elucidate upon the concept of AIs in the Indian securities market, its advantages and disadvantages through a global comparative study. Accredited Investors: The “Experienced” Players AIs are based on the concept of a class of investors who, due to their prior experiences and other allied factors, have an understanding of various financial products and the risks- returns associated with investments that they make in the market. Thus, they are able to make an informed choice regarding their investments, unlike other investors in the market. This concept of ‘experienced’ or ‘professional’ investors is recognized by many securities and financial market regulators around the globe who have their own names for such categories of investors like Qualified Investors, Accredited Investors or Professional Investors. This class of investors is seen as one that has the capacity to deal in relatively riskier investment products due to their stable financial status and ability to bear financial losses which may be incurred. The majority of the time, investments made by such players are closely monitored by fund managers who have financial acumen or are directly overseen by the AI who is well aware of the risks involved, owing to his experience of the market. Thus, AIs are those investors who are presumed capable of making risky investments with minimal regulatory protection. The Accredited Investor Tag: Why it Matters? When we look at the functioning of SEBI or any international market regulator, we find that their function is not just limited to the smooth functioning of the market. Their other prime duty is to provide necessary protection by introducing regulatory requirements that help investors in making a more informed choice. While the idea behind disclosure requirements, filing of offer document/ prospectus, flexibility in respect of investor reporting, etc. is to ensure a safe and conducive investing environment, these are time-consuming at the same time. Further, the main aim of such stringent requirements is generally to ensure that the investors are making an informed choice. So, for experienced investors, such requirements are redundant for they are already well acquainted with the risks/prospects of their investments. The concept of AI, as per SEBI, envisages that such accreditation can lead to identifying a class of sophisticated investors who have the ability and willingness to invest in the securities market, particularly in investment products that are relatively riskier and have minimal regulatory oversight. What adds to the benefit is that the redundant restrictive practices are relaxed for this class of investors. However, the advantage that the AI tag offers is exactly the same element that forms the core of its disadvantage. The minimal intervention by the regulator means that the chances of financial losses are much higher in spite of the fact that AIs have a better understanding of investments. Thus, we can rightfully assert that the tag of AI enables the holder to enter into a trade-off between investment security and ease of investing. Accredited Investors Around the World: A Global Comparative Analysis As discussed above, the idea of AI is not new and has been operational in various global jurisdictions. The following discussion provides a brief understanding of how the concept of AIs differs in these jurisdictions from that in India. United States of America An AI in US is an investor who satisfies one or more of the conditions that the US Securities Commission has laid down. Some of them include the condition that a potential AI should have an annual income that exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and who reasonably expects to reach the same income level in the current year. Further, his net worth should exceed $1 million and other allied requirements. Singapore  In Singapore, an individual whose net personal assets exceed Singaporean $2 million; an individual whose income in the preceding 12 months exceeds Singaporean $300,000; or corporations with assets exceeding S$10 million can apply for accreditation and become an AI. The problem till 2018 in Singapore was that anyone with above-stated requirements was made an AI without the need for an explicit request. This led to a lot of controversies where investors complained that they were unaware of the risks involved as an AI in the market. This led to the introduction of the opt-in requirements where an investor can only become an AI once he has explicitly made an application in writing. European Union EU similar to the USA has tried to include the essence of experience, but unlike the USA which has kept such a requirement as an alternative path, EU has made it mandatory. For an individual to get accredited as a ‘Profession Investor’, he needs to have carried out transactions of significant size on the

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Inter se Priorities among Secured Creditors under IBC: Need for Re-Interpretation?

Leave a Comment / Insolvency Law /

[By Gourav Kathuria & Awantika Yash]  The authors are students at NALSAR University of Law, Hyderabad.  Recently, the National Company Law Appellate Tribunal (“NCLAT”) in Technology Development Board v. Anil Goel & Ors. held that there can be no inter se priority among the secured creditors who relinquish their security interest at the time of liquidation under Section 53 of the Insolvency & Bankruptcy Code, 2016 (“the Code”). It further observed that secured creditors holding the first charge and subsequent changes in the security interest stand at an equal pedestal. This observation has caused confusion with respect to the preferential rights inter se secured creditors. This post aims to provide a critical evaluation of this judgment. Understanding ‘Charge’ & ‘Inter se Priority’ Section 2(16) of the Companies Act, 2013 defines “charge” as an interest created on the assets to secure the repayment of debt. Multiple charges can be created over an asset. Charges over an asset are frequently shared on a pari passu basis, placing all the charge holders at an equal pedestal. However, there can be inter se priority of charges as well, that allows first charge holders to satisfy their claim before the subsequent charge holders. Section 48 of the Transfer of Property Act, 1882 (“TOPA”) establishes the priority of the first charge holders over the subsequent charge holders in satisfying their claim. Section 52 of the Code provides two options for the secured creditors to realize their debts. Firstly, they can realize their security interest outside the liquidation process. Secondly, they can relinquish their security interest in favour of the liquidation estate and receive their share as per the waterfall mechanism laid down under Section 53 of the Code. However, Section 53 is silent on the inter se priorities among secured creditors. It does not provide whether the first charge holders will have priority over subsequent charge holders at the time of distribution of proceeds from liquidation estate. Factual Matrix In this case, the liquidator distributed the sale proceeds of the asset only among the first charge holders. Aggrieved by the liquidator’s decision, Technology Development Board (“the Appellant”), the second charge holder, filed a claim before the National Company Law Tribunal (“NCLT”). NCLT affirmed the inter se priority among the secured creditors and ruled in favour of the liquidator. The Appellant challenged this order before the NCLAT. The NCLAT held that inter se priority among secured creditors is allowed only when the security interest is realized outside the liquidation process but not during the relinquishment of security interest. It premised its order on the reasoning that in case of relinquishment, sale proceeds must be distributed as per Section 53 of the Code. The NCLAT further noted that Section 53 of the Code has a non-obstante clause and hence, overrides the application of Section 48 of the TOPA. The NCLAT concluded that there is no inter se priority among the secured creditors. Critical Analysis Overlooked judicial precedents and established principles In the present case, the respondent had relied on ICICI Bank v. Sidco Leathers Limited (“Sidco”) for one of his arguments. In Sidco, while interpreting Sections 529 and 529A of the Companies Act 1956, the Apex Court ruled that even though the debts of workmen and secured creditors are pari passu with each other, it does not nullify the inter se priority among secured creditors. To come to this conclusion, the court had relied on Section 48 of the TOPA. The Hon’ble Court observed that as the provisions of the Companies Act, 1956 are silent on inter sepriority among the secured creditors, the general law given under the TOPA must prevail. The judgment further noted that if the statute intended to take away the right to property of secured creditors, it would have explicitly stated so. However, the NCLAT disregarded this precedent. The NCLAT observed that the Sidco case was decided before the enactment of the Code. Furthermore, it noted that Section 48 of the TOPA would be inapplicable to this case as the non-obstante clause under Section 53 of the Code overrides any law enacted by the Parliament or State Legislatures. The authors submit that this interpretation given by the NCLAT is flawed. Firstly, Section 52 of the Code and Section 529 of the Companies Act, 1956 originated from the same provision, i.e., Section 47 of the Provincial Insolvency Act 1920. Section 52 of the Code states that in case of relinquishment, sale proceeds must be distributed in accordance with Section 53. Section 529 of the Companies Act, 1956 also talks about the waterfall mechanism during liquidation. As these provisions of the law have the same origin and are used in the same context of the waterfall mechanism during liquidation, their interpretation must also be alike. Therefore, if the Supreme Court in Sidco had interpreted Section 529 of the Companies Act, 1956  to be respecting inter se priority among secured creditors, then Sections 52 and 53 of the Code must also be given the same interpretation Secondly, In State of Bihar v. Bihar Rajya Mahasangh, the Hon’ble Supreme Court held, “A non-obstante clause is generally appended to a section with a view to give the enacting part of the section, in case of conflict, an overriding effect over the provision in the same or other act mentioned in the non-obstante clause.” On the reading of Section 48 of the TOPA and Section 53 of the Code, it is clear that there is no conflict between these sections as Section 53 is silent on inter se priority among secured creditors. Therefore, the NCLAT’s observation was erroneous as the non-obstante clause of Section 53 of the Code will not operate to override Section 48 of the TOPA. Incognizance of the Insolvency Law Committee Report 2018 Section 53 of the Code lays down the waterfall mechanism for distributing the proceeds of liquidation assets in a particular order of priority. Section 53(1)(b) puts the secured creditors and workmen at an equal ranking. Section 53(2) o the Code disregards all kinds

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WhatsApp Privacy Case, Competition Law and Privacy- A Comment (Part II)

Leave a Comment / Company Law, Competition Law /

[By Sharmita Sawant]  The author is a student at King’s College, London.  3] Privacy, Antitrust, and Consumer Protection-  An Analysis of India and Beyond.: In the initial years of digital economy cases, authorities were not ready to access data-related issues under the garb of antitrust. The Vinod Kumar case, the Facebook-WhatsApp merger case in India, or the Google-Double Click case in the EU and USA are evidence of this squeamishness. A certain amount of progress was made in the EU while assessing the Facebook and WhatsApp merger wherein the Commission noted the harms that data consolidation can amass, but maintained the dichotomy between data protection norms and antitrust laws and left it to be solved by the former. The US today is still apprehensive about deciding privacy-related matters under the competition law framework. So, what has changed between then and now- both in India and abroad? With our lives completely being taken over by apps and electronic devices, even a single step registered on Fitbit can count as a collection of personal data, let alone passwords and chat history. It is not just the collection of data that poses problems but also the processing of such data.[i]Nevertheless, an understanding of the nature of data and the business modules adopted by these data piles has developed among the adjudicating authorities in the last couple of years. This development is the primary source of change in the application of laws. While antitrust laws mainly focus on price competition and what harms price-related factors can cause in the markets,[ii]digital economies bring in the challenge of non-price factors. However, though the services seem free, the price paid is not exactly free. Users are paying these platforms with their data which is then sold to the advertisers to make profits.[iii]Simply put, the trade-off is between privacy and free content. As Zuckerberg once claimed, disappearing privacy is a social norm in this new form of economy.[iv] This type of understanding of the digital business structure is reflected both in the Indian WhatsApp case and the German Facebook Privacy case.[v]Network effects can lead to the accumulation of large quantities of data that can make a player dominant in the market. The dominance is further used by the player to amass more data and entrench its position. This understanding of the business model of data companies is prominent in both decisions. It is important to note that both cases regard to breach of data protection norms as consumer harm. Breach of the data protection rules by a dominant player can itself amount to abuse is a new theory of harm developed. It puts an additional layer of responsibility on the dominant firms to adhere to the data protection norms[vi]. So, what type of privacy issues can be covered by Antitrust. Can any breach of data protection laws be tried under Antitrust? The simple answer is no. Trying every breach under antirust will unnecessarily extend competition law into unchartered territories. One size fits all approach is also misleading as privacy-related theories of harm differ from case to case and depend on various externalities.[vii] Therefore, one way to determine is by analyzing whether the market correction will combat privacy or any other issues when antitrust law steps in.[viii] Secondly, the type of harm should guide which type of laws govern the issue.[ix] The scope of the harm should be assessed and checked whether Antitrust or Consumer Protection or Data Protection is the correct forum to approach. Data Protection safeguards the fundamental rights and freedoms of a data subject. On the other hand, consumer protection laws try to safeguard the free choices of the individual consumer. At the same time, competition laws focus on the overall welfare of the economy. Though the overarching aim of protecting welfare is the same for all three laws, some differences need to be maintained. However, the new privacy antitrust cases lay down that a breach can have simultaneous problems and be parallelly tried under each law. While this may be considered a win in itself, it comes with pitfalls. Simultaneous litigations make it hard for businesses to predict circumstances, increase risk factors, and lead to additional pressure on the judiciary. Privacy issues under digital economies can certainly have antitrust issues, data protection breaches, and consumer violations all bundled up. Nevertheless, deciphering which law would formulate the best remedy is crucial. Therefore, setting down specific guidelines and cooperation between different adjudicating bodies is the need of the hour. Conclusion: Finally, can Antitrust solve privacy and data protection issues?- the answer is both “Yes” and “No”. Antitrust is well equipped to solve issues related to privacy matters that hinder the market, but it is not equally able of solving issues beyond the contours of the functioning of markets. It would be irrational to extend competition law to every privacy matter and would be wise to decipher matters based on what harm has been caused by the breach. The present laws lack imagination when understanding what harm data amassing and processing entail. What is required is the development of robust jurisprudence and guidelines to handle such complex data-related issues- for the sake of adjudicators and the firms. Antitrust analysis in digital markets have come a long way but there are still miles to go. India has followed the German footsteps in adjudicating the privacy breach issue. However, what would be interesting to see is how exactly the case follows through. WhatsApp has paused implementation of the policy and is waiting for the new Data Protection Bill to roll out. With the new Data Protection laws in place, it would be a fresh challenge for the CCI to prove jurisdiction within the contours of the Act, beyond the current reasoning of non-price factors. With the new developments, new questions regarding fairness, consent, and conditions for the consumers have emerged and new nuances in the application of laws have become a norm. [i] D Daniel Sokol, Antitrust and Regulating Big Data 23 Geo. Manson L. Rev 1129 (2016) [ii]

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WhatsApp Privacy Case, Competition Law and Privacy- A Comment (Part 1)

Leave a Comment / Competition Law, Contemporary Issues /

[By Sharmita Sawant]  The author is a student at King’s College, London.  Introduction: Digital economies have posed complicated legal questions that mandate the expansion of legal ideologies and conceptions to assimilate the changing nature of businesses. The issues that we are faced with in these economies stand at the cusp of Data Protection, Consumer Protection, and Antitrust laws. The debate around using antitrust law to solve data-related issues has been a matter of discussion for a long time-pioneers being the Google/DoubleClick merger case in the US and EU[i]. A general progression is seen in the approach of regulating agencies and academia when it comes to addressing issues related to data markets. Maybe it is the fear of false positives, chilling effect on innovation, or the cultural lag; agencies are still squeamish about applying Antitrust rules to big data companies. Nevertheless, the scene is changing as a nuanced understanding of the sector is making business behaviour and theories of harm more prominent. One of the examples of this change is the WhatsApp and Facebook privacy policy case in Germany and India.[ii] The data sharing policy of Facebook and its subsidiary WhatsApp has come under the radar of the antitrust authorities for abusing its dominant position in the market and imposing unfair privacy conditions on its consumers. The critical point of discussion in both these cases has been the jurisdictional issue- whether privacy breaches fall under the jurisdiction of Antitrust and, if so, what is the correct forum for adjudication of this issue. This article will explore the Competition Law, Data Protection, and Privacy law interplay in the context of the WhatsApp privacy litigation in India. The first part of the article will outline the jurisdictional debate in the WhatsApp case, highlighting the various arguments put forth by the opposition and the Commission. Following this, the second part is dedicated to the current legal framework, which deals with privacy issues in India, its drawbacks, and its characteristics. Finally, the author looks at whether antitrust is the correct forum to answer privacy issues in the context of the WhatsApp decision. 1] WhatsApp Privacy Case 2021- An Overview: The Competition Commission of India took suo-motu cognizance of WhatsApp’s new Privacy policy with its order dated 24th March 2021. WhatsApp’s updated privacy policy included terms and conditions which allows it to share user data across all informational categories with other Facebook Companies. It notified its users to accept the new policy on a ‘take-it-or-leave-it basis to continue using the services of the App. CCI found that the new privacy policy violates Section 4 of the Competition Act, making a prima facie case for abuse of dominant position. Both WhatsApp and Facebook are made a party to the ongoing suit. CCI held that WhatsApp is a dominant player in the market for “over-the-top messaging apps through smartphones in India.” The Commission relied on its market analysis in the In Re Harshita Chawla and WhatsApp Inc. case to reaffirm that WhatsApp works on direct network effects, wherein, increase in the usage of a particular platform leads to an increase in its value for the other users[iii]. The network effects as well as lack of interoperability between various messaging platforms work in favour of WhatsApp. This makes it difficult for the users to switch apps easily, making the service provided by WhatsApp not substitutable.CCI noted that these conditions made WhatsApp is an entrenched entity which it is leveraging to impose unfair terms on its users. CCI observed that privacy is a crucial non-price factor when it comes to competition. It held that a reduction in consumer data protection and privacy is considered as a reduction in quality under the Competition Act. Lower privacy not only impacts consumer welfare but also has exclusionary effects.CCI opined that integration of consumer data reinforces the dominant player’s position in the market which it can use in neighbouring or unrelated markets to increase entry barriers. WhatsApp challenged this decision before the Delhi High Court.[iv] WhatsApp argued that CCI lacks jurisdiction in the matter due to the pending litigation before the Supreme Court, dealing with WhatsApp’s Privacy Policy under Article 21 of the Constitution. They also relied on the In Re Shri Vinod Kumar Gupta and WhatsAppjudgement wherein CCI had declined to look into WhatsApp’s privacy policy in 2016, stating that it was outside the purview of the Competition Act.[v]The court replied by clarifying that the scope of the CCI is vaster and is not confined to the issues raised before the High Court or the Supreme Court in this matter. The High Court also upheld CCI’s observation that data sharing between WhatsApp, Facebook, Facebook allied apps, or third-party apps has led to degradation of non-price factors of competitiveness, thus causing consumer harm. Stating these reasons, the court reiterated that the matter falls within the jurisdiction of CCI. It is interesting to see how CCI’s views have changed through the years on privacy and data protection. This is a welcomed change in the right direction, but with the chaos of privacy laws in India, the jurisdictional challenge is expected to get more complicated. Especially with the new Data Protection Bill, this debate is just in its nascent stages. 2] Where are we at-Privacy and Legal Framework in India:  What happens when a data giant like Facebook or Amazon breaches its user’s privacy for monetary ends? What authorities does one approach, and what redressal does one have? Indian privacy and data protection laws at present are laid out in an overlapping patchwork fashion. Various laws, regulations, and guidelines govern a specific subset of data or a particular type of data protection breach. Privacy is a fundamental right and is a quintessential element of Article 21 of the Indian Constitution.SinceJustice K SPuttaswamyand Anr vs. Union of India, the right to privacy can be enforced by anyone as a fundamental right, irrespective of any sector-specific legislation[vi]. Besides, personal data protection is mandated under the IT Act, 2000- specifically under the Information Technology (Reasonable Security Practices and

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Amazon Sellers v. CCI: Examining the Applicability of Res Judicata to Orders Passed by CCI

Leave a Comment / Competition Law /

[By Sourav Paul]  The author is a student at the National University of Juridical Sciences.  Introduction On June 11, 2021, the Karnataka High Court (‘HC’) dismissed the writ petitions filed by Flipkart Internet Pvt. Ltd. (‘Flipkart’) and Amazon Sellers Services Pvt. Ltd. (‘Amazon’), challenging the Competition Commission of India’s (‘CCI’) order issued under Section 26 (1) of the Competition Act, 2002 (‘Act’). This case dealt with the principle of res judicata and its applicability to the decisions of the CCI to a considerable extent. The doctrine of res judicata is a universal principle of law that a judicial decision given by a competent court must not be re-litigated provided the decision of the said court is final. The statutory law of res judicata is codified in Section 11 of the Code of Civil Procedure, 1908. The issue of applicability of this doctrine becomes all the more relevant now since the government intends to introduce the Draft Competition (Amendment) Bill, 2020(‘Bill’) based on the report released by the Competition Law Review Committee. The Bill proposes to include sub-section 2A under Section 26 of the Act, thereby incorporating the doctrine of res judicata in Indian competition law jurisprudence. Therefore, this article intends to examine the applicability of the doctrine of res judicata to the decisions of the CCI in light of the recent Karnataka HC’s judgment. The article also argues that the doctrine cannot be applied due to the unique character of the CCI and its functions. Analysing the Karnataka High Court’s Judgment In January 2020, the CCI passed an order under Section 26(1) of the Act directing the Director-General to investigate the allegations levelled by Delhi VyaparMahasangh (‘DVM’). The DVM alleged that these e-commerce platforms were involved in deep discounting, preferential listing, and other unfair trade practices. Flipkart, while relying on the order passed by CCI in All India Online Vendors Association v. Flipkart & Ors., (‘AIOVA case’) argued that since CCI did not initiate an investigation against them, as a result, the information filed by the DVMmust be treated in a similar manner. In the AIOVA case, AIOVA informed the CCI that Flipkart is abusing its dominant position in the relevant market, thereby violating Section 4 of the Act. The CCI found no contravention of the Act and held that “looking at the present market construct and structure of online marketplace platforms market in India, it does not appear that anyone player in the market is commanding any dominant position at this stage of evolution of market”. The HC observed that the doctrine of res judicata does not apply to orders passed by the CCI since the objective of the Act is to ensure free and fair competition in the market. While relying on Cadila Healthcare Ltd. v. CCI (‘Cadila Healthcare’), the HC opined that the “CCI or expert body should ordinarily not be crippled in their efforts by application of technical rules of procedure”. In Cadila Healthcare, the Delhi High Court (‘DHC’) held that the settlement or disposal of an individual case might not be determinative of the matter which pertains to anti-competitive conduct of an entity also because it affects the wider public, just as a crime does. Furthermore, the DHC observed that barring the CCI from taking cognisance of the same information against the same entity is similar to quashing FIRs filed by different consumers when a service provider’s malpractice is exposed by one complaint. Therefore, in essence, the DHC did not favour the applicability of the doctrine of res judicata to orders passed by the CCI since specific complaints cannot be determinative of the behaviour of an enterprise in the market as it impacts other aspects of the competition law, which may not be mentioned in such complaints. Non-Applicability of Res Judicata due to the Unique Character of CCI The test of a judicial tribunal as laid down in Copper v. Wilson presupposes the presence of a dispute between the parties. This test has been followed by the Supreme Court in a number of decisions. It is argued that the CCI’s functions do not include resolving ‘disputes’ between the parties. The informant is not even a party to the dispute but a mere source of information to the CCI, on the basis of which an enquiry is initiated. The CCI’s function is primarily investigatory in nature under Sections 3 and 4 of the Act. It also has the power to take punitive actions against any entity if found contravening any provision of the Act. The Cooper test also requires the parties to the dispute to present their case. However, as stated in the CCI v. Steel Authority of India &Anr. case, the informant is not entitled to a hearing if the CCI chooses not to go ahead with the enquiry. Furthermore, matters related to compensation are left for the Appellate Tribunal to determine under Section 53N of the Act. Therefore, it is clear that CCI is not a dispute settlement body in light of these arguments. Furthermore, the DHC in the case of Mahindra Electricity Mobility v. CCI ruled that the CCI is in part an administrative body and in part a quasi-judicial body, and therefore, it cannot be deemed to be a tribunal exclusively discharging judicial functions. The court also relied on the Raghavan Committee Report to determine the actual nature of the CCI. In Dwarka Prasad Sheokaran Das v. CIT, it was noted that the principle of res judicata is applicable to suits when there are two parties appearing before a court for resolution of their disputes. In Messrs Kamlapat Moti Lal v. CIT, it was held that since income-tax authorities are not courts and therefore, their decisions cannot operate as res judicata.In Smt. Ujjam Bai v. State of Uttar Pradesh, the court opined that the principle applies to administrative tribunals since they discharge judicial duties to a considerable extent. Therefore, in essence, the doctrine of res judicata applies only to bodies that discharge substantial judicial duties. Since the author has already established

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SEBI’s Reforms related to Promoters – A Step in The Right Direction?

Leave a Comment / Capital Markets and Securities Law /

[By Aman Jha & Anurag Shah]  Aman Jha is a student at the National Law University, Delhi and Anurag Shah is a student at the School of Law, Christ (Deemed to be University).  The Securities and Exchange Board of India (“SEBI“), in its board meeting dated 6th of August 2021, resolved multiple changes in the regulatory framework of the capital market in India. Two of the most notable include the reduction in the minimum lock-in period that has to be observed by a promoter following an initial public offering (“IPO“) and approving the principle of ‘Person in Control’ which would replace the concept of promoters in India. These changes have been resolved in pursuance of a consultation paper rolled out in May 2021, which proposed changes related to the promoter regime in India. This article analyzes these changes and the effect they would have on the capital market of India while also drawing analysis from different jurisdictions. Reduction in mandatory promoter lock-in: At present, Regulation 16 of the SEBI (Issue of Capital and Disclosure Requirements), 2018 (” ICDR“) provides that there should be a minimum promoter’s contribution of 20%, which should be locked in for 3 (three) years. The lock-in period starts from the date of commencement of commercial production or the date of allotment of the IPO, whichever is later. Further, ICDR also prescribes that a promoter holding more than the minimum requirement of 20% should have his excess holding subject to lock-in for one year starting from the date of allotment. The rationale behind such a lock-in system can be attributed to the regulatory regime before the globalization era in India. Setting up companies before the globalization reforms required special permissions. The pre-condition for such permission was a minimum equity contribution by the founder until the money taken from the lender was paid off. This was done to ensure that the founders had their skin in the game during incorporating companies and raising money. This skin-in-the-game concept was retained even in post-globalization India in the form of mandatory promoter lock-in. However, this requirement to have promoter’s skin in the game started becoming a hindrance for the capital markets since it also made going public difficult for the promoters. In the pre-globalization era, funds were raised to finance a project or for a Greenfield project which would be a new start, and thereby there was a lack of surety of the company’s performance. Having the promoter’s skin in the game would provide surety for the lenders in such a scenario. It would act as an incentive for the promoter to ensure the performance of the company. In today’s competitive start-up ecosystem, where companies going public are matured businesses and have gone through several series of funding, the promoters already have had their skin in the game. Therefore, a further lock-in would only make going public burdensome for the promoters. In a bid to solve this issue, the SEBI decided to reduce the mandatory lock-in period for the promoter’s contribution from 3 (three) years to 18 (eighteen) months. Further, the board also resolved to reduce the lock-in for pre-IPO shareholders who were not promoters from 1 (one) year to 6 (six) months. The transition from the concept of promoters to Person in Control: Having understood the rationale behind promoters and mandatory lock-in, it becomes imperative to know why SEBI has resolved an in-principle shift from the concept of a promoter to Person in Control (“PIC“). The primary reason for this shift can be attributed to the change in the investment landscape in India. The Indian start-up market now is one of the most attractive investment markets, with multiple businesses raising huge capital from investors all across the globe. Unlike the pre-globalization era when companies raised money from family, friends, or lenders, the start-ups now focus on institutional investors such as private equity funds. This shift has also changed the dynamics in the board room of companies. Traditionally promoters used to have significant control over businesses even after listing. However, many institutional investors have considerable control over the board in today’s landscape through their representative directors. The latter is not considered promoters as a result of the definition provided under Indian law. As a result of the aforementioned, situations arise wherein persons who do not have any controlling rights or are minority shareholders are still classified as promoters. This would have a two-faceted effect. Firstly, the responsibility and liability would be placed on the wrong party who does not control the decisions. Secondly, by virtue of being considered a promoter, the person may have disproportionate influence over the board. Therefore, the shift from promoter to PIC would ensure that the regulatory regime identifies the correct person and places responsibilities and liabilities on a person who has significant control over the board. The prime benefit of this shift would be the improved and better quality of corporate governance in the Indian regulatory regime. Removing the concept of promoters would ensure that the shareholders can place trust in the board, which would constitute of PICs and independent directors to keep a check on the board. This would change the Indian regulatory regime from a promoter-based system to a professionally managed company system. Keeping up with international standards: The changes resolved by SEBI have been received positively by the stakeholders. These changes showcase how the regulator is trying to undertake progressive steps to ensure that the regulatory system is at par with international practices even in the post-pandemic economy. The concept of promoter has been unique to India as most of the other capital market regulators do not have a system of promoters, and they focus on control. A shift from a system of promoters to PIC would bring the Indian regulatory regime at par with different jurisdictions. However, at present, SEBI has retained the idea of promoter lock-in and just halved the period. International practices concerning post-IPO lock-in have been to allow the market forces to decide the lock-in period. Most of the

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Draft E-commerce (Amendment) Rules: Unsettling CCI’s Regulatory Mandate

Leave a Comment / Competition Law, Contemporary Issues /

[By Sanchit Khandelwal & Amritesh Anand]  The authors are students at the NALSAR University of Law, Hyderabad.  E-commerce platforms and offline retailers and sellers on the e-commerce platforms have been at loggerheads for quite some time now. Various trade unions and industry groups have not shied away from utilising all available platforms, be it through legal battles or through electoral lobbying, to further their demand of tightening the strings on the market operation of ever bourgeoning e-commerce platforms. In response, the Government of India has recently been widening its regulatory oversight on the market practices of these platforms. The proposed amendments to the Consumer Protection (E-commerce) Rules, 2020 (hereinafter referred as “Draft Amendments”) by the Department of Consumer Affairs hints towards the State’s next attempt at tightening the noose on e-commerce platforms and absorb demands of groups voicing the interests of offline retailers and sellers on these platforms. The Draft Amendments, through the introduction of newer concepts and a stricter framework, seek to usher in transparency in the e-commerce platforms and further bolster the regulatory regime to curb the perceived unfair trade practices by ensuring that domestic manufacturers and suppliers get fair and equal treatment on e-commerce platforms. However, several provisions under the Rules proposed have a noticeable overlap with the settled domain of the Competition Commission of India (hereinafter referred to as “CCI”). This overreach is mirrored both in the form of explicit reiterations of sufficiently established antitrust concepts and imposition of restrictions that exclusively fall within the Competition law realm and are pending investigation before the CCI. The authors in this article argue that this attempt to over-reach the precincts of COPRA through over-lapping provisions of law would result in legislative ambiguity, which would then lead to unintended consequences in the form of forum shopping, enforcement failures, administrative inefficiency, enforcement overlaps and regulatory arbitrage. Rules sliding in the regulatory mandate of the CCI Abuse of dominance Rule 5(17) of the Draft Amendments proscribes an e-commerce entity from abusing its dominant position. For such assessment, the factors already laid down under the Competition Act are to be considered. This proposition is at best, redundant, and at worst, counterproductive. The Competition paradigm already provides a comprehensive framework to tackle issues stemming from abuse of dominance (u/s 4), which have been enshrined keeping in mind the CCI’s expertise in investigating complex market structures and unique challenges posed by violating entities. Although currently, the exact scope and intent behind the inclusion of this proposition remain unclear, the Draft Amendments do aim to lay down a complete code for regulating the e-commerce industry, thus engendering the possibility of misuse at the hands of the very entities that the amendments seemingly intend to target. Authorities under COPRA are ill-equipped to tackle instances of abuse of dominance since they lack sufficient know-how. These authorities have been designed keeping in mind the ultimate objective of COPRA i.e. protection of consumer interests, and not to get muddled with regulating anti-competitive behaviour. Moreover, since the Rule is a verbatim repetition of the concept as it exists under the Competition law framework and does not add the law to any extent, it serves no value addition to the current jurisprudence but only causes legislative ambiguity. However, the apparent jurisdictional overlap does provide e-commerce giants with the opportunity to engage in forum shopping and regulatory arbitrage in order to either circumvent or deliberately protract investigations and defeat the purpose of such proceedings. Businesses with deep pockets would have the capacity to leverage such intersections by filing multiple legal proceedings and delaying enforcement of orders, while newer and upcoming entities would be the ones to bear the brunt of such practices, as any delay in enforcement would be tantamount to extended persistence of the alleged anti-competitive behaviour. In light of the dynamic nature of markets and the need for swift correction, the ill-effects of such practices become even more pronounced. Even though Section 19(2) of the COPRA provides for referring a matter to another regulator after a preliminary inquiry is conducted, the concomitant extension of the investigation timeframe might diminish the efficacy of the ultimate order with regards to remedying the anticompetitive conduct. Since the Competition Act is sector agnostic, the law dealing with abuse of dominance is constant for all sectors. Ergo, no valid rationale exists for the inclusion of this proposition in the draft amendments. Ex-ante vs. Ex-post facto “The ultimate goal of competition policy is to enhance consumer well-being. Competition policy towards the supply side of the market aims to ensure that consumers have adequate and affordable choices.”  Pursuant to this objective, the Competition framework in India employs a ‘rule of reason’ approach while examining alleged anti-competitive practices, wherein the assessment is undertaken on a case by case basis. This assessment takes into account anti-competitive effects emanating from the conduct under scrutiny on the one hand, and pro-competitive justifications of the restraints which enhance consumer welfare under Section 19(3)(d) of the Competition Act, on the other. The ensuing assessment aims to do a balancing act between the anti-competitive and pro-competitive effects, and the entity under scrutiny can be exonerated if the latter outweighs the former. This assessment mechanism is widely regarded as furthering the consumer’s best interest and has become a fundamental cornerstone of modern antitrust jurisprudence. In contradistinction, some of the proposed restrictions on the activities of e-commerce entities in the draft amendments have the effect of imposing ex-ante prohibitions, premised on the unfounded assumption that such activities result in consumer harm. Furthermore, no scope for rebuttal of such prohibitions has been provided. Rule 5(16) prohibits e-commerce entities from organizing ‘flash sales’. Flash sales for such purposes have been defined under Section 3(1)(e) of the COPRA as offering products at “significantly reduced prices, high discounts or any other such promotions or attractive offers for a predetermined period of time with an intent to draw large numbers to consumers”. The accompanying proviso restricts the application to instances of selling which involve “fraudulently intercepting the ordinary course of

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Auditors’ Risk v. Reward – Analysis in Light of Recent Amendments

Leave a Comment / Company Law /

[By Ria Chaudhary & Aayush Akar]  Ria Chaudhary is a student at National Law University, Jodhpur and Aayush Akar is a student at National Law University, Odisha.  Introduction  In commonly accepted usage, auditing of books of accounts is taken to mean the verification and assessment of a company’s books and financial statements by an impartial, independent and qualified auditing professional. . It is undertaken with the primary objective of ensuring that the books of the company and transactions entered into, are in accordance with relevant regulatory frameworks as well as to form an opinion about the truth and fairness of the state of affairs reflected by these financial statements and accounts. This is done to appraise and enhance the trust of stakeholders of the organization. Need for Regulation of Auditing – The Existing Legal Framework Presentation of precise and true financial condition in the books of accounts is critical to the credence of the company and the soundness of investors’ investment decisions. As a result, it is but a necessity that preparation and audit of the financial statements maintained by the management of the company be governed by law, with legal consequences to follow for non-compliance. The Companies Act, 2013 (‘the Act’), Chapter X (S. 138 to 148) read with Companies (Audit and Auditors) Rules, 2014 (‘Audit Rules’) as well as Companies (Accounts) Rules, 2014  (‘Accounts Rules’) form part of the basic framework under which the process of auditing is regulated on aspects like appointment, remuneration, removal, powers and duties, qualifications, etc. Recent Amendments & Their Implications – An Analysis Through recent notifications in March 2021, the MCA has amended this regulatory framework, which has, at the most rudimentary level, significantly enhanced the ambit of statutory disclosure and reporting responsibilities to be complied by auditors. In furtherance of this, the following is an analysis of the Companies (Audit and Auditors) Amendment Rules, 2021 read with Companies (Accounts) Amendment Rules, 2021. Rule 11 of the Audit Rules enlist certain circumstances other than those specifically provided, that are necessary to be included in the auditor’s report. While sub-rule 11(d), relating to the company’s disclosure of specific banknotes held by it during a specified period after demonetization in 2016, has been omitted, new sub-rules have been inserted:- Rule 11(e) – It requires the Auditor’s report to contain a statement regarding whether the management has made a representation that except for those transactions mentioned in the books – pertaining to transactions which the company has entered into for an ultimate beneficiary whose identity is sought to be kept hidden, by routing of the transaction through an intermediary – the company is neither acting as nor has employed, such an intermediary entity for channelization of funds to a beneficiary identified by the company. Such lending or financing transactions, that is, where outgoing or incoming loans, advances, or investments are anticipated to be relayed through an intermediary acting on the company’s directives of channelizing financial resources are not prohibited under law. However, the MCA has enacted this amendment to maintain transparency through adequate disclosure of the ultimate real beneficiary in the books, so as to keep a check on the financing of illicit activities like terrorism, illegal trade, etc. which have a high incidence of occurring through this route. It is also pertinent to note that this amendment not only places a duty of representation upon the management but also a double verification duty upon auditors to evaluate this representation through auditing procedures and substantiate whether no material misrepresentation has been made by the directors in relation to the abovementioned transactions. In the case of the contrary, auditors may be held liable/penalized. Rule 11(f) – It requires the Auditor’s report to contain comments regarding payment or declaration of dividend by the company as to whether compliance with S. 123 of the Act has been observed. Rule 11(g) – It implies that the Auditor’s report shall contain the auditor’s observation and opinion on whether the company has, with respect to, financial years beginning from 1st April 2022 maintained its books of accounts using such accounting software which has the facility of recording the audit trail (i.e. log of every change made in the books) and whether the same has been used for all transactions recorded in the software throughout the year. Secondly, it is also required to be taken into consideration that whether the audit trail has not been tampered with and finally that it has been preserved by the company in accordance with statutory requirements to retain such records. In addition to this requirement under Rule 11(g), another pertinent change has been made by insertion of a proviso to Rule 3(1) of the Accounts Rules. It holds significance for companies that use accounting software to maintain electronic records of their books of accounts (which practically almost every company does), in as much as that such company, commencing from the financial year beginning April 1, 2021, ‘shall only’ use such accounting software that has the facility of recording audit trail and edit log of every transaction/change made in the books, along with the date of such change. It further states that it must be ensured that such edit trail facility cannot be disabled. The compulsory requirement to have an audit trail has been introduced because it is a technique to prevent book falsification, fabrication or manipulation and subsequent overwriting in the same. Any individual inspecting the books of accounts may readily follow what modifications have been made to the accounts, by verifying with the audit trail and seek an explanation from the company for any discrepancies/reasons for such change. Several additional and corresponding modifications have also been made in the entries under,  Schedule III of the Act which establishes the framework for compiling of books of accounts (e.g., manner of maintaining income statements, cash flow statements, balance sheet, etc.), making it a crucial amendment for the auditors as well. Examining the Conundrum Surrounding the Amendments vis-à-vis the Role of an Auditors in a Company While these amendments may appear to be mere additions requiring a

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