Author name: CBCL

Scarcely Regulated Family Investment Funds: Lessons from the Archegos Capital Wipe-Out

Capital Markets and Securities Law /

[By Sanchit Singh]  The author is a student at Vivekananda School of Law and Legal Studies, GGSIPU, Delhi.  The Dodd-Frank Wall Street Reforms and Consumer Protection Act, which came in response to the 2008 financial crisis, removed a historic exemption enabling the Securities and Exchange Commission (SEC) to regulate hedge funds and private fund, advisors. However, this included a new provision that required the SEC to define family offices in order to exclude them under Section 202(a)(11)(G) of the Investment Advisers Act, 1940. Among other aspects, family offices were not required to disclose their size or leverage as a result of this exemption. The family office, Archegos Capital Management’s extreme leverage led to a reported $10 Billion loss to some of the biggest banks globally in March 2021. This has attracted a great deal of discourse regarding the lack of transparency of family offices, especially the ability of these invisible whales to hurt the U.S. economy. The March 2021 Meltdown The losses resulted from the family office’s inability to meet margin calls relating to total return swap agreements and such positions that were financed by prime brokers. The U.S. Federal Reserve had raised attention to such practices in its May 2020 Financial Stability Report, noting that the concentration for hedge fund leverage had “increased markedly”where the top 25 hedge funds accounted for 50 per cent of industry borrowing. The reason for this concentration the report mentions “dealers have reportedly given preferential terms to their most-favoured hedge fund clients” and that “hedge funds with disproportionately high leverage can have outsized effects”. Despite this, the price decline in Archegos’ concentrated positions led to margin calls which prompted the sale of positions which further led to the decline of affected stocks, finally leading to the losses for the banks to bear. Japan’s largest investment bank, Nomura and Credit Suisse have been hit the hardest with them collectively facing losses close to $6 Billion alone. Other banks like JP Morgan, Goldman Sachs and Deutsche Bank were prompt to avert significant financial impact by de-risking their exposure to Archegos Capital. Were Disclosure Standards the Real Problem? As previously discussed, family offices are exempted from any registration with the SEC due to its exclusion under the Investment Advisors Act. Consequently, hedge funds like Archegos Capital do not need to file quarterly financial reports on their performance or the size of equity holdings including the types of assets. This hampers the ability for prime brokers of banks to evaluate risk and oversight by market regulators including the Federal Reserve and SEC. Despite this, many believe that adequate disclosure standards were not the main problem resulting to collapse. There has indeed been an evolution in the relationship between family offices and these banks. Deutsche Bank v. Sebastian Holdings Inc. (2013) was consequential for banks to realise that family offices were not significant institutional players, where the Deutsche was sued for $8 Billion in 2008 over margin calls arising from trades with the prime brokerage division. The court dismissed the entire claim and ordered the payment of $240 Million in dues. Thereafter, family offices were treated more like private clients which meant less leverage and higher trading costs. The preferential relationship with Archegos depicts a major change in attitude ever since. Clearly, banks with prime brokerages had loosened up restrictions in search of lucrative clients by providing high leverage, especially considering the staggering increase in the number of family offices where assets under management stood at $5.9 Trillion as of 2019, significantly larger than all U.S. private equity firms put together. In an independent review conducted by a law firm at the behest of Credit Suisse, there was enough evidence to suggest that the bank slept on multiple warning signals that could have prevented their burden of losses. Archegos Capital had begun frequently breaching its PE limit and by April 2020 it was ten times more than its $200 million limits. This evidently indicates highly volatile and under-margined swap positions of significant risk to the Bank. There does not seem to be any sign of fraudulent activities or corruption but rather rises questions on the Bank’s competence to identify and appreciate the scale and urgency of Archegos’ risk. While typically most family offices are risk-averse and their main objective is to preserve wealth but a different breed of such offices have come out that demonstrate speculative aggression much similar to some of the most competitive hedge funds. It becomes difficult to truly categorise Archegos Capital as a family office or a hedge fund outrightly, considering the scale of leveraging. The industry has come to refer to them as “invisible whales” equipped with great capabilities to move and influence the markets. With Credit Suisse’s specific example, one can imagine the systemic problem in the manner in which these large banks conduct business and manage risk. Potential Legislative Correction and the Exclusive Grandfather Clause HR 4620, the Family Office Regulation Act of 2021 was introduced in the House Financial Services Committee on 22 July 2021. The Bill has sought to reflect on the Archegos Capital meltdown and address the exemptive and exclusive clauses. As amended, HR 4620 would limit family office exclusion from “investment adviser” to a more comprehensively defined “covered family office” which includes family offices with less than $750 Million in assets under management. Offices with more than $750 Million under management would be exempted from registration with the SEC under the new legislation but will be required to submit reports in accordance with the Commission as exempted reporting advisors (ERA). Further, Section 409 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that allowed clients who were not members of the family to be eligible for the family office exclusion would be repealed. Lastly, the Bill would authorize the Commission to exclude a family office from the “covered family office” definition when the family office is highly leveraged and/or engages in high-risk activities in the interest to protect investors. While the legislative expectation for HR 4620

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The Maruti Suzuki Judgment: A Slew of Missed Opportunities 

Competition Law /

[By Dharmvir Brahmbhatt & Aneeta Mathew]  Dharmvir Brahmbhatt is a student at the Gujarat National Law University and Aneeta Mathew is a student at the National University of Advanced Legal Studies. Introduction The CCI’s judgment in a Suo moto case against Maruti Suzuki India Ltd. (MSIL) grabbed eyeballs, both for the penalty of a whopping Rs. 200 Crore it imposed as well as for laying down the law that Discount Control Policies (DCP) imposed on dealers by manufacturers amounts to Retail Price Management (RPM) and hence is illegal. The CCI further flagged the appointment of Mystery Shopping Agencies (MSAs) to execute and monitor the policies and the use of such audits to penalize the dealers. This article attempts to delve deep into two aspects of the judgment where the CCI has faltered. Firstly, the authors critique the CCI’s hesitation to contribute to the larger debate on whether RPM is intrinsically anti-competitive or not. Secondly, the authors elaborate on why they view this decision as a missed opportunity to clarify the Indian legal position on MSA, which albeit having a few scattered mentions in Indian jurisprudence, is largely unexplored, compared to the international position on the same. Resale Price Maintenance – Per se illegal or rule of reason standard? Essentially RPM refers to a vertical agreement in which an upstream firm restricts the price at which a downstream firm can sell the product to the customer. DCP, which MSIL has been found guilty of employing by the CCI, is a subset of RPM. The kind of agreements that fall under the per se rule is so inherently anti-competitive that the courts condemn them without any inquiry into their effects. An example of the same would be bid-rigging among competitors. On the contrary rule of reason is the legal principle which when applied the court makes an attempt to look into and evaluate the pro-competitive effects of a prima facie restrictive trade practice.  Applying the “per se rule” courts have for a long time presumed RPM to be violative of competition disregarding any other factors in play. However, the trend has changed in the last decade. The US Supreme Court in the case of Leegin Creative Leather Products Inc. v. PSKS Inc. opined that not all RPM policies are per se illegal and must be evaluated by the standard of rule of reason. The Leegin case settled that RPM can have both pro-competitive and anti-competitive effects. In the opinion of the authors, the CCI in the MSIL judgement used the “per se rule” without considering the potential pro-competitive effects of the DCP imposed. The CCI failed to scrutinize the possible benefits of the DCP even though in the Jasper Infotech Private Limited (Snapdeal) v. KAFF Appliances (India) Pvt. Ltd. the CCI had recognized the pro-competitive effects of RPM. To analyze RPM and DCP it is necessary to compare the anti-competitive effects of RPM with the pro-competitive effects of RPM. Possible anti-competitive effects The possible anti-competitive effect that could have been caused by MSIL putting in place DCP as outlined by the CCI is that it may cause direct harm to consumers. The CCI in its order has opined that DCP has led to consumers being denied benefits as higher prices are being charged. This is an argument that is intrinsically flawed because the main purpose of imposing RPM policy is to ensure that customers are spending more despite the increased prices. In fact, the manufacturers would be wary of setting a retail price higher than the competitive prices due to inter-brand competition. The possibility of a net loss to consumer surplus is very distant. The same was pointed out by R D Blair in his paper titled The Demise of Dr. Miles: Some Troubling Consequences. Possible pro-competitive effects There are two possible pro-competitive effects of DCP which were enforced by MSIL. Firstly, it can be an effective measure against the free-rider problem plaguing the retail industry. A free rider is a person who benefits from something without paying for it. Generally, a few retailers will choose to offer pre and post-sale services including advice, demonstration, instruction, etc. Since buying an automobile needs technical knowledge these services would be essential for the customer. However, providing such services would be costly for the retailer and therefore the retailer will not be able to offer any discount. The retailers that do not provide services would want to be the free riders and offer heavy discounts to the consumer. The consumers therefore would seek services at no cost from one retailer and buy from the one offering a discount. This would cause market failure which can be understood with an example of the prisoner’s dilemma game. For example, ‘A’ and ‘B’ are two individuals who are considering a contribution of 10 units each for the larger good. The benefit would be 100 units for every 10 units contributed. P1 is the ideal scenario and P4 is the worst-case scenario as the net public benefit is 0 which would lead to market failure. In this game, both ‘A’ and ‘B’ would come to the conclusion that it is unwise to contribute anything to the public good unless both the players were assured of the fact that the other individual would also make a contribution. The DCP enforced by MSIL did exactly the same by ensuring that there was no price competition amongst retailers. When the retailers can’t compete on prices they would be forced to increase the level of services offered by them thereby increasing net public benefit. This would also promote intra-brand competition and increase consumer satisfaction. Secondly, because the DCP ensures that the services offered by the retailers are of the highest quality the consumers would be enticed to buy the products of the brand sold by those retailers and this, in turn, would promote inter-brand competition as retailers of other brands would be forced to either sell products at highly competitive rates or increase the level of services provided by them. And therefore, while the

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Taxation Laws (Amendment) Act, 2021 In Reference to Cairn And Vodafone Dispute

Taxation Law /

[By Anshika Agarwal & Shubhi Singhal] Anshika Agarwal is a student at GGSIPU, Vivekananda Institute of professional studies, New Delhi and Shubhi Singhal is a student at the National Law Institute University, Bhopal.  Introduction Taxability of income arising from the indirect transfer of assets situated in India has been a subject matter of disputes for quite along. The issue has once again come into light with the introduction of the Taxation Laws (Amendment) Bill, 2021by the Finance Ministry on 5 August 2021. It was on 13 August 2021 that the said Bill received the President’s assent and the Taxation Laws (Amendment) Act, 2021 was notified. The said Act seeks to amend the Income Tax Act, 1961 (hereinafter “principal act”) and the Finance Act, 2012, thereby, cancelling the retrospective tax liability arising from the indirect transfer of the assets located in India. This means that all the tax demands raised for transactions relating to the transfer of Indian assets before 28 May 2012 will be nullified. The amendment can be perceived as a resolution mechanism in ending the far stretched Vodafone and CAIRN Energy tax disputes. The article aims to analyse the events leading to the introduction of the Taxation Laws (Amendment) Act and its overall impact. Laws Prior to the Finance Act 2012 and Their Repercussions  The principal Act of 1961 vide its Section 9 enlisted certain incomes, that were deemed to have arisen or accrued in India, to determine the scope of the taxability of the total income. As per Section 9(1)(i), incomes arising from or through an indirect or direct transfer of any capital asset or any property situated in India or any business having a connection in India will be deemed as income arising in India. The said transactions will be taxable for all the three categories of persons, i.e., Resident ordinarily resident (R-OR), Resident Non ordinarily resident (R-NOR) and Non-Resident (NR). The Vodafone Dispute The said provisions were, however, unclear to an extent that they failed to resolve the questions with respect to the taxability of income arising from the transfer of shares of a foreign company income. The said issue was first raised in 2006 when a foreign-based company Hutchison Telecommunications International Limited (hereinafter “HTIL”) transferred its foreign subsidiary’s share capital to Vodafone International Holdings. The said transaction entitled Vodafone to a controlling interest of 67% in Hutchison Essar Ltd., an Indian based joint venture. It was in 2007 that the cause of action arose when Vodafone failed to deduct tax from its gains arising from the indirect transfer of Indian assets to HTIL. On account of this non-compliance, a due notice was served by the Income Tax Department to Vodafone. The matter went up to the Supreme Court and was finally decided in the favour of Vodafone. Judicial Approach to the Vodafone Dispute In this case, i.e., Vodafone International Holdings B.V v. Union of India, the apex court ruled that since Section 9(1)(i) does not cover indirect transfers of capital assets/property situated in India and the said transfer being an indirect one could not be charged under the head capital gains. Therefore, in the present matter, Vodafone was not liable to deduct tax from its gains arising from the purchase of a 67 per cent stake in Hutchison Whampoa for $11 billion. The Court further observed that the expression “through” in Section 9 does not mean “in consequence of”. To circumvent the implication of the above decision, the Indian government came up with The Finance Act, 2012 which amended Section 9 of the principal Act. Laws as per Finance Act, 2012 The 2012 Act inserted Explanation 4 and Explanation 5 to Section 9(1)(i). The ambiguity that arose in the Vodafone case regarding the interpretation of the expression “through” was clarified by inserting Explanation 4 to Section 9(1)(i). It stated that, the expression “through” shall mean and include, and shall be deemed to have always meant and included, “by means of”, “in consequence of” or “by reason of”. By doing so, the Act imposed a retrospective tax on the indirect transfer of capital assets. This implies that an asset or a capital asset shall be deemed to be and shall always be deemed to have been situated in India if they derived their value “substantially” from the assets located in India, either directly or indirectly. Therefore, any capital gains arising from the transfer of such assets being any share or interest of an offshore company as well as the transactions that took place between 28 May 2012 and 1962 will be taxable. The CAIRN Dispute With the commencement of the said legislation, issues with respect to the tax liability of the transactions undertaken prior to 28th May 2012 began to surface. A similar transaction was entered into by CAIRN UK Holdings Limited (hereinafter “CUHL”), a UK-based company. CAIRN India Holdings Limited (hereinafter “CIHL”), a non-Indian wholly-owned subsidiary of CUHL was established in 2006 in New Jersey, USA. Further, CUHL transferred the shares of 9 of its subsidiaries to CIHL. In the same year, another wholly-owned subsidiary named CAIRN India Limited (hereinafter “CIL”) was established in India. Eventually, CUHL sold shares of CIHL to CIL and a subsequent IPO offer was issued by CIL proposing 30% of its stocks to the Indian share market. As a result, CUHL experienced a gain of approximately Rs. 6,101 crores. Though quite late, this whiff of money being pocketed by CUHL reached the eyes, nose and ears of the Income Tax Department in January 2014 and a preliminary assessment of ₹10,247 crore as tax liability was imposed. Arbitral Proceedings in the Matter of CAIRN and Vodafone After failure on the part of Indian courts to settle the disputes, Vodafone and CAIRN approached the Permanent Court of Arbitration in Hague, Netherlands. Herein, the court granted relief in favour of Vodafone and CAIRN ruling that the retrospective tax application of the Indian government is inconsistent with the “fair and equitable” provision envisaged under Article 3(2) of Bilateral Investment Treaty (BIT), entered

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Taxability of Cryptocurrency through the GST Lens

Taxation Law /

[By Muskaan Desai]  The author is a student at the National Academy of Legal Studies and Research, Hyderabad. Cryptocurrency in India has been an unregulated area with a lot of uncertainty. The legality and taxability of cryptocurrencies have been contentious issues. The Central Government, through its draft Cryptocurrency and Regulation of Official Digital Currency Bill, has sought to ban private digital currency and introduce a Central Bank Digital Currency which will act as a nationalized digital currency backed by the rupee. Though the bill was set to be introduced in the Lok Sabha during the Monsoon Session, it did not get listed for debate. It needs to be seen as to how the implications of GST will change with the introduction of regulation on cryptocurrency. Current Position As of today, there is no clarity as to the taxability of cryptocurrency under GST or under which category of supply it would fall. Though the SC in its judgement in Internet and Mobile Association of India v RBI reversed RBI’s order of disallowing trade of cryptocurrencies through banks, it still remains unregulated and unrecognized by RBI. Therefore, it is clear that cryptocurrency does not come under the ambit of money under CGST. The trade of cryptocurrency is akin to that of securities on stock exchanges, i.e., though it does not fall under any of the categories mentioned in the definition, the provision is an inclusive one and includes any such marketable securities of like nature, under the ambit of which cryptocurrency can be brought. However, it is decentralized and not regulated by any security market regulator, thereby not falling under S.2(h) SCRA. Therefore, it is neither money nor security and hence can be brought under the ambit of ‘goods’ under the CGST Act. Under S.2(52), CGST Act goods include movable property excluding money and securities. The movable property includes both tangible and intangible property. Assuming that there is no controversy about cryptocurrency being a movable property and an intangible asset, it could be brought under the definition of goods under CGST. In this case, the exchange between supplier and recipient can be taxed separately undersupply of goods. The CBIC has also proposed to impose a GST of 18% on overseas cryptocurrency exchanges. Cryptocurrency is made taxable under the slab of 18% which includes Capital Goods and Industrial Intermediaries among other items, hence pointing towards an intention of CBIC of bringing its trading under the ambit of supply of goods. The CBIC now seeks to regulate the cryptocurrency domestically by bringing its mining and charges paid to intermediaries for facilitating its trading under the ambit of supply of services. It is interesting to note that the cryptocurrency exchanges which act as intermediaries have already been collecting GST from their customers for the supply of services. Hence, despite cryptocurrency not being regulated either by RBI or through a statute yet, it is sought to be regulated through an indirect tax regime. Future Context With the central government seeking to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, it becomes pertinent to analyse the repercussions that it will have on the taxability of cryptocurrency through the introduction of CBDC. It is also pertinent to appreciate that despite the bill not being tabled during the current monsoon session, the RBI seeks to introduce a Central Bank Digital Currency independent of the bill. The Bill seeks to ban private cryptocurrencies and introduce a centralized digital currency backed by the rupee and regulated by the RBI. This move has received both praise and criticism but the practical repercussions of it are yet to be seen. The bill, under S.2(1)(a), defines digital currency as “Cryptocurrency, by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having an inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes”. This definition is very broad in nature and seeks to cover any digital currency, irrespective of whether it is generated through cryptographic means or shares the same concerns of cryptographic currency. In this article, the focus remains only on cryptocurrency. The bill does not have any provisions with respect to taxation of digital currency under direct or indirect tax regimes. However, the above definition of cryptocurrency under the draft bill clarifies that the currency would have an inherent value in a business transaction, i.e., its trading can be categorized as a business activity. If it is accompanied by a consideration, it falls under the definition of supply under S.7 of the CGST Act. Through analysis, CBDC could either be taxed as services or exempted from GST depending on the context of a transaction. Money– The introduction of a nationalized currency would require amendments to various acts, including the RBI Act and FEMA to bring it under the scope of a legal tender. In any case, the mere recognition of CBDC by RBI would lead to cryptocurrency being identified as ‘money’ under S.2(75) of CGST Act and hence its trading would be exempt from the scope of supply of goods nor services. However, according to S.2(102) explanation 2, a related transaction involving a consideration other than money (cryptocurrency in the current context) is still taxable as a service. Hence, if trading of cryptocurrency is facilitated by an intermediary, the consideration paid can still be brought under the scope of supply of services and taxable under CGST. Securities– The recognition of digital currency by RBI could bring it under the scope of securities under S.2(101) CGSTAct which relies on S.2(h) SCRA. As discussed above, the trade of cryptocurrency has the characteristics of trading securities under the stock exchange.

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

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?

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?

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)

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)

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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