Author name: CBCL

Keeping it Time Bound: Resolution Plans under IBC

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Soham Chakraborty & Aaryan Wasnik]  The authors are students at the NALSAR University of Law, Hyderabad.  The 32nd Report by the Standing Committee on Finance submitted to the Parliament, has made many pertinent observations and recommendations with respect to the functioning of the Insolvency and Bankruptcy Code, 2016 (hereinafter “Code”). In the Section titled “Performance Review of the NCLT System,” the Standing Committee pointed out various reasons for delays in the resolution of insolvencies. In one such observation, the Standing Committee found that many times, prospective resolution applicants wait for the details of the highest bid to become public and only then come forward with better bids, often at the cost of adhering to the timelines provided for the submission of resolution plans. Following this observation, it made a recommendation that the Code should be amended so that no post hoc bids are allowed during the resolution process. This article first looks at the provisions under the Code which provide for a time-bound process with respect to submission of resolution plans and at judgments that have laid down authoritative points of law. Following this, the article engages with the observations made by the report of the Standing Committee and tries to offer some suggestions of its own. Sanctity of a Time-Bound Process under the Code Time-Bound Approval of a Resolution Plan: Provisions & Case Laws Regulation 40A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter “CIRP Regulations”) provides a model timeline for the corporate insolvency resolution process. According to the table provided in the regulation, the timeline for submission of the Committee of Creditors (hereinafter COC) approved resolution plan to the Adjudicating Authority is within 165 days from the commencement of CIRP. Resolution plans which are submitted to the Resolution Professional ( hereinafter RP) and which fulfil the requirements under Section 30(2) are required to be placed by the RP before the CoC for consideration. The CoC upon consideration of the resolution plans can further negotiate with the resolution applicants for better bids and can also authorize the RP to extend the deadline for submission of resolution plans in order to allow new resolution applicants to submit their resolution plans. Despite the entire process being a time-bound process, adherence to the deadlines has not been very strictly enforced under the Code. In the matter of RICOH India Limited, the RP on the authorization of the CoC had accepted two resolution plans after the expiry of the deadline for submission. Finally, the resolution plan of the consortium of Kalpraj Dharamshi & Rekha Jhunjhunwala, which was submitted after the deadline, was approved by the CoC. The NCLT allowing the actions of the RP held that the most attractive resolution plan was selected only after all the resolution applicants were granted the due opportunity by the CoC. The CoC had exercised its commercial wisdom judicially in this case and hence it did not warrant any interference by the Adjudicating Authority. Upon appeal the NCLAT, New Delhi held that the “alleged act of the Resolution Professional in accepting the Resolution Plan after the expiry of the deadline for submission of Resolution Plan is arbitrary, illegal and against the principle of natural justice and cannot be treated as an act within the commercial wisdom of the CoC.” It directed the CoC to consider the resolution plans submitted within the deadline and take a decision within 10 days from the date of the order. On further appeal, the Supreme Court held in Kalpraj Dharamshi v. Kotak Investment Advisors Limited (hereinafter “Kalpraj Dharamshi”), that the actions of the RP in accepting the resolution plans after the expiry of the deadline had the stamp of approval of the CoC. Following this observation, it went on to hold that “…that in view of the paramount importance given to the decision of CoC, which is to be taken on the basis of ‘commercial wisdom’, NCLAT was not correct in law in interfering with the commercial decision taken by CoC…”. In other words, the Supreme Court found that the decision of the CoC to accept resolution plans submitted beyond the deadline was an exercise of its commercial wisdom. After the Supreme Court judgment in the Kalpraj Dharamshi case, the NCLAT, New Delhi was faced with a similar fact scenario in Dwarkadhish Sakhar Karkhana Limited v. Pankaj Joshi. In this case, the CoC had in its 7th meeting refused to allow the resolution applicant from filing its expression of interest (hereinafter “EoI”) and resolution plan after the deadline. Following a change in the RP, the CoC in its 9th meeting decided to revisit its decision taken in the 7th meeting and allowed the resolution applicant to file its resolution plan. The NCLAT finding that the RP had misguided the CoC by suppressing material facts declined to hold that the decision of the CoC to revisit its decision taken in the 9th meeting was in the exercise of its commercial wisdom. Further, the NCLAT, differentiating this case with the decision of the Supreme Court in the Kalpraj Dharamshi, held that the actions of the RP in the latter had the required authorization of the CoC while in the present case, the RP had acted without any authorization from the CoC in allowing the resolution applicant to submit its EoI after the deadline. Striking a Balance: Time-Bound Resolution v. Value Maximisation From the case laws cited above, it is clear that the action of the RP, with the approval of the CoC, to accept resolution plans beyond the deadline for submission cannot be questioned in a Court of law as it falls within the ambit of the commercial wisdom of the Court. Considering the objective of Code of value maximization the CoC should be provided with the discretion to consider plans which are much better in comparison to existing resolution plans. However, extending the deadline of the Code indefinitely in order to consider newly submitted resolution plans, in the hope that they would provide

Keeping it Time Bound: Resolution Plans under IBC Read More »

Enforcement Period v. Claim Period: A Debate Settled by Delhi High Court

Leave a Comment / Contemporary Issues, Contract Law /

[By Ashutosh Kumar & Shambhavi Shani]  The authors are students at the Hidayatullah National Law University.  An inextricable knot between the limitation period and Exception 3 of Section 28 of the Indian Contract Act has time and again, been subjected to judicial and legislative scrutiny and is yet again in limelight after Justice Jayant Nath of Delhi High Court in the case of Larsen & Toubro Limited &Anr. V. Punjab National Bank and Anr., clarified that Exception 3 to Section 28 doesn’t deal with the “Claim Period” but with the “Enforcement Period” which was grossly misinterpreted by banks. Section 28 dictates that any contract which restricts any party from enforcing his rights under the contract or limits the period during which such recourse can be adopted is void to that extent. Exception 3 saves banks and financial institutions from getting hit by Section 28 for including a clause providing for “Enforcement Period” after which, if any suit is filed for the enforcement of guarantee will fall flat. Such enforcement period may be less than the limitation period as laid down in the Limitation Act but should not be less than one year. In this article, the authors analyze the detrimental effects of wrongful interpretation by banks, which violates rights of the principal debtors (PD) under Article 19(1)(g) of the Indian Constitution and the impacts following the course correction by the Court. BACKGROUND Under the contract of Bank Guarantee (BG), the beneficiary has the right to make the guarantor bank compensate for the default made by the PD by invoking the guarantee within the lifetime of BG i.e. the “Validity Period”. In cases of performance guarantees, it takes time to assess the performance of the PD and hence a “Claim Period” is negotiated between the PD and the creditor which provides for a grace period in addition to the validity period. Once such guarantee is invoked and if the bank dishonours the claim, the beneficiary has the right to bring an action before the relevant court/tribunal to enforce his right within the “Limitation Period/Enforcement Period” which is, by default, 3 years in case of private entities and 30 years in case of government entities. But, the 2013 Amendment to Section 28 inserted Exception 3 which shortened the minimum limitation period to one year instead of three or thirty years as the case may be. This one-year enforcement period was confused with the claim period by the Respondent, Bank Punjab National Bank (PNB) which issued a circular dated 18/08/2018 addressed to the Petitioner Larsen & Toubro (L&T) stating that a claim period of less than a year shall be void and the period will get increased to 3 years by default under the Limitation Act, 1963. Indian Banks Association (IBA) through a communication dated 05/12/2018 addressed to all the banks, fortified the above interpretation dictating that if any bank issues a BG with a claim period of less than one year, such BG will not get the benefit under Exception 3 of Section 28. Owing to this, L&T had to pay commission charges and maintain collateral security for an extended period which would have been shorter under the contract between PD and creditor. L&T contended that such an extended period affected their business as they could not enter into new contracts and hence infringed their fundamental right to do business under Article19(1)(g). OBSERVATIONS BY THE COURT The Court struck down the Circular issued by PNB to L&T and agreed with the contentions of L&T and held that PNB erroneously interpreted the minimum one year “Enforcement Period” under Exception 3 to be a one year mandatory “Claim Period”. It further observed that the one year clause under Exception 3 “deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal.” While adjudicating the matter, the Court thoroughly delved into the historical perspective to ascertain the legislative intent behind the enactment of such exception and it further dealt with the theory of relinquishment of right and remedy to conclude that such provision was grossly misused by the banks. The rationale behind the Verdict has been discussed below: Historical Perspectives Before 1997, the principle followed by the courts was that the rights and remedies accrued under a contract may be relinquished but only remedy cannot be relinquished. This was based on the reasoning that for a remedy to exist there must be rights which implied that once the rights are relinquished; the remedy would be automatically relinquished. The Law Commission observed the potential of misuse of such principle and stated in its 97th Law Commission Report that such a distinction between relinquishment of right and remedy was utopian but in practice, might lead to the misuse by parties in a dominant position who may create a law of prescription of their own by limiting the period of relinquishment of rights and in turn remedy. This resulted in the 1997 Amendment which included Clause (b) and the first two Exceptions to Section 28 which automatically increased the enforcement period to 3 or 30 years depending on the nature of the entity. Post such amendment, an expert committee headed by Sh.T.R.Andhyarujina was constituted which in its report cited the concerns of the banks who had to carry obligations, maintain liabilities and hold securities for 30 years affecting the issuance of fresh guarantees. According to the report, “this will pre-empt the available capital to meet the capital adequacy requirement and will also overstretch the exposure to the customers beyond acceptable levels.” This lead to the Amendment of 2013 which included Exception 3 to Section 28. Misinterpretation by PNB Much reliance was placed on a 2016 verdict of Union of India &Anr. v. Indusind Bank &Anr. by the Counsels appearing for PNB but the Court held that the ratio of the verdict was actually against the cause of PNB. Herein, two clauses were in question, which limited the period within which a claim may be raised by the creditor/beneficiary before the guarantor bank.

Enforcement Period v. Claim Period: A Debate Settled by Delhi High Court Read More »

The Switch of Seats between State and Corporates

Leave a Comment / Company Law /

[By Umang Agarwal & Anchal Bhatheja]  The authors are students at the National Law School of India University, Bangalore.  There has been an undesirable but convenient switch of roles of the government and corporates, which is reflected quite starkly in section 396 of the companies act 1956 (‘CA1956’) (which has now been replaced by section 237of companies Act 2013 (CA13) On one hand, this provision empowers the government to take decisions regarding the restructuring of the companies in terms of being able to order an amalgamation in “public interest” which is a right that should technically vest with the board of directors (‘BOD’) and the shareholders of the company in the interest of corporate autonomy. On the other hand, it mandates the companies to amalgamate in the public interest, when the state directs them to do so, even when the preamble vests responsibility furthering social justice and public interest with the state. In this article, we aim to discuss the effect of this switch of roles. It is submitted that section 396 of CA56 and 237 of CA13 assail the very fundamental tenets of corporate law in various ways. The macro-economic Challenge: Richard Posner suggests that the wealth of the society maximizes when the resources vest in the hands of those who value them the most. Here, value alludes to both willingness and the ability to pay. However, sections 396 CA56 and 237 CA13 are counter-intuitive when viewed from a wealth maximization perspective. S Balasubramanian, former chairperson of the Company Law Board suggests that the government often invokes section 396 of CA56 to salvage a company in distress. Even the 2016 amalgamation between FTIL and NSEL, which was eventually struck down by the SC in 63 Moons Technologies v UOI, was to salvage NSEL which was an electronic platform for buying and selling of goods and had run into losses and defaulted on payments to its 13000 investors amounting to nearly Rs. 5600 crores. The central government “jugaad” to resolve the problem was to amalgamate unhealthy NSEL with its healthy parent company FTIL so that the assets of the latter could be used to salvage the losses of the former. Herein the idea was to revive a company, which might have the willingness to recover but not the ability to do so. This transfer of wealth would have eventually led to a net loss as two companies would have become unhealthy. But such outcomes are not desirable from an economic standpoint. The motive of every business is to make profits. But every business has the inevitable downside of failing. If the online platform, NSEL was unable to avoid fraudulent transactions and ran into debt due to its mismanagement or inefficiency or in other words lost its “ability” to stay functional, it would be in the interest of wealth maximization to subject it to a resolution process or just dissolve it as per the IBC instead of affixing its liability on a healthy company. The approach adopted by the central government is economically unsustainable. For instance, over 280 companies have been declared insolvent amidst the pandemic in India. If one were to replicate the FTIL-NSEL approach of merging an unhealthy company with a healthy one to save the former from dying down, for all these 280 companies, this would result in a net of 560 unhealthy companies and would render alternatives provided under the IBC useless. The micro-economics challenge: Further, the wording of section 396 CA56 and section 237 CA13 indicates a concern for “public interest”. However, as Milton Friedman puts it, the purpose of a business is only to increase its profits. In essence, the purpose of a corporate is to further the shareholders’ interest and nothing more than that. Corporates are business vehicles for profit maximization and re-structuring them to secure public interest is contradictory to the purpose of a corporate. The preamble of the Constitution puts the onus of being “socialist” and “welfarist” on the state and not on private entities. It is better to restrict the role of corporates in ensuring shareholders’ wealth maximization, instead of making them work towards “public interest”. In this regard, it is pertinent to note that section 396 CA1956 and section 237 CA13 change the value of the shares and quite often to the detriment of the shareholders, especially when the amalgamation happens between a healthy and an unhealthy company. In such scenarios, the shareholders of the healthy company lose out as the value of the shares diminishes due to the increased liabilities of the company. The financial value of shares is a great concern for the shareholders, as it decides the prospects of selling shares to get profits as well as the dividends, they eventually get on the shares they own. Therefore, the provision is economically unsustainable. The Jurisprudential Challenge: Furthermore, since the only purpose of a corporate is to further the shareholder’s interest, CA13 provides for a regime to ensure the efficacy of this idea. Towards this end, various provisions of CA13 like section 232 and 233 envisage the role of BOD in proposing a resolution for amalgamation. At a principal level, these provisions allude to the idea of liberalism where the BOD which is elected by the shareholders gets to decide the fate of the corporate and its formal structure. Sections 396 CA56 and 237 CA13 further a more paternalistic approach, wherein the state gets to decide what is best for the companies and the society at large. In 63 Moons Technologies v UOI, the two companies were parent and subsidiary companies respectively. If they felt the need to amalgamate, CA13 gave them full autonomy to do so. And since the fundamental assumption of law and economics is that individuals and firms are rational and act in their best interest, they could have taken a decision regarding amalgamation on the basis of their own incentives and interests. Thus, there was no need for the intervention of the state to determine the companies’ best interests. Conclusion: Considering the foregoing

The Switch of Seats between State and Corporates Read More »

CCI’s Expedited Approach to tackle violations in the E-Commerce Industry: In the light of the Investigation against Amazon & Flipkart

Leave a Comment / Competition Law /

[By Devashish Srivastava]  The author is a student at the National Law University, Odisha. Introduction The E-commerce industry has been on a drastic rise over the last decade, generating revenue of billions of dollars in India every year. Similar to the revenue, the e-commerce industry brings in a plethora of regulatory and compliance complexities. Owing to the business model of the e-commerce industry, multiple sector-specific laws and regulations are applicable, which results in the involvement of different regulatory and adjudicatory authorities. This often gives rise to jurisdictional issues between different sectoral regulators and statutory overlaps. Anti-trust and competition regulators, more often than not have to deal with the complexities of the e-commerce industry.  Given the reliance of consumers on the e-commerce industry, the e-commerce entities have established themselves firmly in the retail market and command a substantial market power. It wasn’t long after that this market power started detrimentally affecting the competitors in the retail business, giving rise to anti-competitive agreements and an abuse of the market power by the e-commerce entities. The Competition Commission of India (CCI), has been dealing with violations of competition law by the e-commerce entities for the past few years but failed to take any substantial action against them. The reason behind this is often claimed to be the fact that certain commercial laws like the Competition law in India are not as developed as their global counterparts and are lacking in experience and certain expertise. However, there seems to be a shift in India’s approach towards the e-commerce entities and their blatant disregard for the laws and compliances in place. CCI’s ongoing investigation against Amazon and Flipkart is a clear indicator of this adamant approach, wherein, the backing and support from the judicial setup of the country are also visible. CCI’s Probe into Allegations against Amazon and Flipkart Background of the Case In January last year, the CCI passed an order[i] initiating an investigation into the allegation brought against Flipkart Internet Services Pvt. Ltd. (Flipkart) and Amazon Seller Services Pvt. Ltd. (Amazon). These allegations were brought up in a piece of information filed before the CCI by Delhi Vyapar Mahasangh (DVM), an organisation that comprises traders from numerous Micro, Small and Medium Enterprises (MSMEs), relying on the trade of smartphones and their accessories. The allegations brought forward included predatory pricing, exclusive partnerships with smartphone brands, preferential treatment towards certain specific sellers which included the sale of their private label brands and deep discounts. The information also alleged that both Amazon and Flipkart are guilty of cross-subsidising across their platforms in order to maintain the pricing of some products below cost. The CCI was of the opinion that the evidence (screenshots of messages offering certain smartphones only on the OP’s platforms and emails stating preferential agreements with certain sellers) produced before it by the informant were sufficient enough to merit an investigation. Aggrieved by this order, Amazon filed a writ petition before the Karnataka High Court. Amazon pleaded before the court that the CCI’s order directing an investigation was passed without there being any prima facie evidence which is a prerequisite to initiating an investigation under section 26(1) of the Competition Act, 2002 (Act). It was further argued that Amazon is already under an investigation by the Enforcement Directorate for alleged violation of FDI norms under the Foreign Exchange Management Act, 1999 and CCI cannot conduct a parallel investigation. This argument was supported by the Supreme Court’s judgment in CCI vs. Bharti Airtel & Ors. in which the ED’s investigation was a result of multiple petitions filed by the Confederation of All India Traders (CAIT) before the Delhi High Court and the Rajasthan High Court. DVM (informant) being an affiliate of CAIT was said to have filed the information before the CCI out of malice and ill intention as Amazon was already under investigation by a specialized regulatory authority and a collateral investigation by CCI was unfair. The High Court stated that the CCI, in an information filed by All India Online Vendors Association (AIOVA) against Flipkart, invited Amazon for comments, but failed to do so in the present case and passed the order without allowing Amazon to be heard. Relying on the aforementioned arguments and reasoning, Karnataka High Court sided with Amazon and granted an interim stay on CCI directed DG’s investigation. Following this decision, Flipkart also filed a petition before the Karnataka High Court for a stay on the DG’s investigation which was accepted and subsequently an order staying the investigation was passed. In October of last year, the CCI approached the Supreme Court against Karnataka High Court’s order staying CCI’s investigation against Amazon and Flipkart. The Supreme Court directed the matter back to be heard by the Karnataka High Court. In January, earlier this year, Karnataka High Court listed Flipkart’s petition to be heard alongside Amazon’s petition jointly, where CCI, DVM and CAIT were made respondents. Over the course of the first half of this year, Karnataka High Court heard the arguments put forth by all the parties involved, before finally dismissing both Amazon and Flipkart’s petition allowing for CCI to go ahead with its investigation in June, 2021. Firstly, on the point of an order passed under section 26(1) of the act. Taking into account the judgement passed by the Supreme Court in Competition Commission of India v Bharti Airtel Ltd. and Ors.[ii] (Bharti Airtel case) and Competition Commission of India v. Steel Authority of India Ltd.[iii] (SAIL case), Karnataka High Court stated that such orders by CCI are administrative directions to its investigation wing under the DG and nowhere in the provision it is required for issuance of a notice to any party involved before initiating an investigation. Secondly, the court looked into the information filed by DVM along with the evidence produced which were sufficient enough to warrant a prima facie investigation. The court said that the CCI analysed the allegations in the information under separate heads in detail and applied its mind before passing the investigation order.

CCI’s Expedited Approach to tackle violations in the E-Commerce Industry: In the light of the Investigation against Amazon & Flipkart Read More »

The Oppression & Mismanagement Clause: Exploring The Need For Revision Under The Indian Law

Leave a Comment / Company Law /

[By Rishi Raj & Mehek Wadhwani]  The authors are students at MNLU, Aurangabad.  Introduction The ideal of corporate democracy envisages that a company governs its affairs based on majority voting, with the shareholders voting to decide on the course of action. Under these circumstances, the intervention of law may be required to address the possibility of the majority decision departing from the standards of fair dealing or conducting the company’s affairs in a manner contrary to the public interest or oppressive to any of its members. The Indian law acknowledges this possibility. Consequently, the minority shareholders have the statutory right to bring any action against the majority shareholders to prevent the majority from oppressing and mismanaging the company. As an integral part of corporate governance, these special provisions are contained in Part XVI of the Companies Act, 2013 (hereinafter referred to as the Act). In particular, Section 241 of the Act contains the provision for the prevention of oppression and mismanagement, whereas Section 242 of the Act grants tribunals the power to make an order for the smooth management of the company, and this power can be exercised if the oppressed member (shareholders) fulfils certain conditions. We seek to analyse how the construct of the clause under Section 242 of the Act places an undue burden through the just and equitable standard to substantiate the issue raised in the Tata Consultancy Service Ltd. v. Cyrus Investments Pvt. Ltd. and Ors. Further, we propose certain changes that may be considered while reforming the law. Invoking the oppression & mismanagement remedy: An undue burden on the shareholder The inefficiencies and perils of winding up a company have long been recognized under the company law jurisprudence, leading to the introduction of remedies such as the oppression and mismanagement clause under Section 241 of the Act. The prudent realization that such winding-up would not help the aggrieved minority shareholders led to the inclusion of this clause under the English Companies Act, 1948. Thereafter, the common law countries, including India, adopted the remedy with certain changes. 2.1. Oppression, Prejudice, and Mismanagement (Substantive elements)  ‘Oppression’ is said to be caused when the company’s conduct is opposed to the public interest as well as the principles of fair dealing, including the imposition of new and risky objects by the majority shareholders in an autocratic way. Further, the oppressed shareholder is under a persistent burden to prove the oppressive act, which makes redressal under Section 241  wrongful, harsh, and burdensome. The scope of ‘oppression’ was outlined in  V.S. Krishnan v. Westfort Hi-tech Hospital Ltd., and adopted verbatim in several judgments that followed under the Act. Accordingly, ‘oppression’ entails the absence of probity, good conduct, or an act that is mala fide or for a collateral purpose.  Further, while making winding-up orders, the court may follow rational principles to decide if the conduct is unjust, inequitable or unfair.  Ultimately, this is a question of fact, and accordingly, we have seen several unique positions taken by the courts. Adding to the jurisprudence on the scope of ‘oppression’, in a very recent judgment of Tata Consultancy (Supra) wherein the Apex Court held that the mere removal of a person from the post of Executive Chairman cannot be termed as oppressive and cannot trigger the provisions of Section 242 of the Act. Any single act of oppression cannot enable a Company Law Board (CLB) to intervene; rather,  “the oppression must be the commutative results of continuous acts,” and there must be no scope of debate in the facts of the case. We believe that the existence of undue burden on the aggrieved shareholder owing to their obligation to establish the substantive elements discussed above, along with the conditional limb discussed below, severely restricts the remedy that the law seeks to provide. In the next section, we reflect on this aspect to substantiate our argument that lawmakers must reform the clause in a well-balanced manner to avoid deadlocks. 2.2. Just & Equitable Clause (Conditional Limb) The remedy that the shareholder seeks, requires more than establishing the substantive elements. Section 242 of the Act, which is the conditional limb of this remedy, places a heavy burden on the oppressed members to satisfy the following two conditions: firstly, the affairs of the company must have been conducted in a manner that is prejudicial or oppressive to the members of the company, or prejudicial to the public interests; secondly, even if the winding-up order would unfairly prejudice some members, it would be fair to wind up the company if it is justifiable under the ‘just and equitable clause. In Ebrahimi v. Westbourne Galleries Ltd., the Court ordered the winding up of a company, as the majority was guilty of abuse of power. However, the House of Lords, while reversing the decision, applied the test of (i) bona fide use of power in the interest of the company and (ii) whether a reasonable man could think that the removal was done in the interest of the company. Further, under the “just and equitable” clause, the winding-up order may be made if there is an entire “functional deadlock” or an irretrievable breakdown of “trust and confidence”  raised in the management of the company. For a better understanding of the term ‘just and equitable clause, the Scottish Court of Session in Baird v. Lee observed that the shareholders invest their money on certain conditions which are mentioned in the Memorandum of Association of the company, including that the business shall be conducted in accordance with the principles of commercial administration that assures commercial probity and efficiency. It is noteworthy that only if these conditions are intentionally violated that it would be justifiable to wind up the company. Further, as opined by the Apex court while considering whether to admit an application, the interests of the company’s shareholders as a whole have to be kept in mind. This, however, means that the tribunal can make an order to bring an end to the oppression or prejudice complained of,  only if

The Oppression & Mismanagement Clause: Exploring The Need For Revision Under The Indian Law Read More »

Surfing The Waves Of Change: Has The Concept Of Promotors Come Of Age In India?

Leave a Comment / Capital Markets and Securities Law /

 [By Aashirwa Baburaj]  The author is a student at NMIMS Kirit P. Mehta School of Law, Mumbai.  With the rise of unicorns, such as PayTM, in the fintech industry and the emergence of a new shareholding pattern comprising of private equity (“PE”) and institutional investors; the controlling powers that were long vested in the hands of promoters in India, have begun to steadily slip through the fading Indian concentrated ownership structure. In light of this shift, and at a time when many new-age companies from the startup world are making their way to the Indian IPO market, the Securities and Exchange Board of India (“SEBI”) has issued a consultation paper proposing a transition from the concept of a “promoter” to that of a “person in control”. The aforementioned proposal merits a thorough examination on account of multiple reasons. To begin with; if this proposal were to come to life, it would result in a substantial reform of the Indian corporate regime as the idea and notion of promoters runs very deep in the Indian regulatory framework. Consequently, this move may have severe repercussions on laws administered by other regulators such as the Ministry of Corporate Affairs, the Competition Commission of India, and the Reserve Bank of India. Furthermore, while the proposal also contemplates reducing and minimizing the lock-in obligations for promoters and shareholders investing in an IPO and SEBI is clearly in favour of these reforms, it is important to assess whether the Indian corporate market is ready to adopt them. Preface: Current Legal Framework & Proposed Changes At the outset, it is pertinent to note that the changes proposed by SEBI presently are restricted to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”).  Thus, while SEBI has highlighted that some of these recommendations may affect other legislations, it has not explicitly evaluated the implications of the same. As per the current legal framework, promoters play a key role in the listing process since the ICDR regulations impose significant obligations on promoters to ensure their involvement in the company. The consultation paper proposes 4 major changes: Shifting from the concept of ‘promoter’ to the concept of ‘person in control’. A ‘promoter,’ according to Regulation 2(1)(za) of the ICDR, is a person named in the offer document who is instrumental in the formulation of the plan on the basis of which securities are offered,      or promotes or sponsors mutual funds in the case of financial institutions, scheduled banks, and foreign institutional investors. The proposed change from ‘promoters’ to ‘persons in control’ by eliminating references to promoters and promoter groups, whilst adding the terminology of the person in control or controlling shareholders in numerous SEBI Regulations, is the centrepiece of SEBI’s proposal. Reduction in lock-in periods Presently, as per Regulation 16 of the ICDR, a minimum shareholding of 20% in the company’s post-issue share capital is required, as is a three-year lock-in period on such shareholding. Additionally, a lock-in requirement of one year from the IPO has been listed for persons other than promoters under Regulation 17 of the ICDR. If SEBI’s proposal is adopted, then the lock-in period for persons other than promoters will be reduced to six months from the date of allotment in IPO; the current three-year threshold for promoters will be whittled down to one year. Further,  the Promoters’ holding in excess of minimum promoters’ contribution will only be locked in for a period of six months as opposed to the current requirement for one year. Streamlining the disclosures of group companies Currently, a ‘group company’ intending to list its shares must disclose comprehensive details of the previous three years for its five largest listed group companies or five largest unlisted group companies based on the turnover where no listed group companies are involved. This includes information such as date of incorporation,  nature of activities,  equity capital,  reserves,  sales,  profit after tax, earnings per share and diluted earnings per share,  net asset value,  pending litigation involving the group company which has a material impact on the issuer etc. SEBI has proposed that the detailed disclosure requirement be eliminated and the IPO Offer Document merely includes the names and registered office addresses of all Group Companies. However, these disclosures — slated to be eliminated — may continue to be made available on the websites of the listed companies. Rationalization of the definition of ‘Promoter Group’. Regulation 2(1)(pp)(iii)(c) of the ICDR stipulates  ‘promoter group’ to include “[a]ny   body corporate  in  which  a  group  of  individuals  or  companies  or  combinations  thereof acting in concert, which hold twenty per cent or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds twenty per cent or more of the equity share capital of the issuer and are also acting in concert.” In order to rationalize the disclosure burdens upon companies, SEBI has suggested eliminating the norm of mentioning the aforementioned corporate bodies as part of the promoter group vide the deletion of the aforementioned regulation, thereby diluting this concept. Addressing This Wave Of Reform Is The Promoter Landscape Changing in India? As stated earlier, this proposed transition from ‘promoters’ to ‘persons-in-control’ lies at the heart of SEBI’s proposal. It is worth noting that the existence of a promoter-driven regulatory mechanism across the Indian legal framework is largely attributable to the prevalence of ‘family’ held companies in the Indian market, formerly. Due to this, promoters or founders ended up retaining a majority of the shares in a company. However, with a large number of institutional investors (both foreign and Indian) penetrating the Indian market, numerous enterprises, particularly new age and tech companies, are now embracing a rather diversified shareholding pattern. These institutional investors are made up of thousands and thousands of investors who amass money from individual investors and invest it in companies with the sole purpose of maximizing returns. As a result, there has been a      paradigm shift in the ownership structure as these companies are not family-owned and/or lack a distinctly identifiable promoter/ promoter group. This suggested change can

Surfing The Waves Of Change: Has The Concept Of Promotors Come Of Age In India? Read More »

Innovation and Data Privacy: Merger Review in Digital Markets: Part II

Leave a Comment / Competition Law, Contemporary Issues /

[By Tawishi Beria]  The author is a student at the Jindal Global Law School.  With the rise in digital activity across the globe, there has been a growth in the might of a select few companies in such digital markets. This has raised several concerns, including antitrust and privacy-related issues. Consequently, there has been increased discussion and debate on the need to alter how competition authorities conduct merger assessments in digital markets. One such proposition is the use of non-price parameters in the merger review process. This is the second part of a two-part piece that seeks to analyse two specific non-price parameters, namely, innovation and data privacy in merger review considerations in digital markets. Part I of this piece (available here) assessed the need to consider the parameters of innovation and data privacy independently. It also assessed the need for striking a balance between the two and briefly deliberated on how such a balance could potentially be achieved. This part of the piece assesses the application of the factors of innovation and data privacy in two deals involving Facebook, i.e., Facebook/WhatsApp and Facebook/Instagram given that these deals have been subject to intense debate. It concludes by highlighting the need for changes in the assessment of mergers on part of competition authorities. The Facebook Saga Facebook is one of the BigTech firms that has engaged in a significant amount of M&A activity, entering into deals with not just fairly well-known companies like WhatsApp but even targeting smaller start-ups. It has also been accused of hurting innovation by copying and killing off the acquired entities. Additionally, privacy concerns with the functioning of Facebook and its allied entities (like WhatsApp’s recently updated privacy policy) are no secret. Accordingly, an analysis of its M&A deals in hindsight is warranted. 1.     Facebook/Instagram The Facebook/Instagram deal tilts towards innovation considerations in merger review generating significant debate on the issue. Concerns of privacy invasion were also raised when the deal was announced with many users removing their data (pictures) from and even quitting Instagram. In 2012, when the 1-billion-dollar deal was approved, neither the FTC, not the UK OFT raised any problems, opining that in the short run, Instagram would not be able to compete with Facebook. The harm to innovation caused by this deal was brought to the fore recently in the US congressional hearing on the dominance of BigTechs. Facebook’s internal emails revealed communications between CEO Mark Zuckerburg with CFO David Ebersman, stating that the purpose of M&A activity was the integration of products and neutralising the competitor. In terms of privacy concerns, before the acquisition, Instagram had privacy-protective policies with the company pledging to not disclose personally-identifying information, except to certain persons. However, Instagram’s privacy policy dealing with changes in ownership now allows the transfer of information of users to the new owner. Adverse impact on consumer welfare results from this. Had the innovation and data privacy parameters been considered by the authorities at the time the deal was cleared,it would have been conditionally cleared or even not approved at all owing to its evident anti-competitive purpose. The question of a balance between the two factors does not come in here since the deal essentially compromised both. However, even if the authorities did not foresee the loss of innovation at the time, the privacy concerns were largely overlooked, despite contentions that authorities paid more attention to the users’ side. 2.     Facebook/WhatsApp The Facebook/WhatsApp deal, on the other hand, tilts towards data protection and privacy considerations and has generated significant debate on the issue. Despite indications of the privacy of users being compromised if the two companies were to match and link the data collected by each of them (user’s phone numbers through WhatsApp and identity through Facebook), this aspect was taken lightly at the time of approval. The innovation aspect was fairly minor since the underlying assumption was that consumers would merely switch to other service providers if the merged entity reduced innovation, possibly underestimating the operation of network effects. While Facebook had ensured the authorities that it would not alter WhatsApp’s privacy policies which were arguably superior pre-merger, two years after the deal went through, the policies were changed. These changes were made to improve the product offerings (possibly aiming for innovation and consumer welfare), but were, in reality, a direct effect of Facebook’s attempt to monetise its investment in WhatsApp. The Commission did assess the impact of network effects in the consumer communications app market, noting that services are often offered free to reach a critical mass and exploit such effects. However, the impact of an increase in market power arising from network effects, keeping consumers locked in, and reducing the incentive to innovate was arguably overlooked. In this case, aspects of innovation and privacy in terms of the potential to gain competitive advantage through big data and operation of network effects were looked at in some more detail than the Facebook/Instagram deal. While this may reflect an increased willingness on part of the authorities to undertake robust market analysis, dismissing the concerns that came up essentially brings the assessment back to square one. Had the closer focus been placed on the balance between the factors, the deal could have been conditionally approved or not cleared at all, instead of later imposing a fine on Facebook for providing misleading information. The way ahead While a trade-off between losing out on beneficial mergers and creation of more competition post-merger is often considered, that between factors looked at for merger review also warrants discussion. The reality post-merger is much different from what was anticipated while approving the deal; conglomerates have been seen as not becoming successful innovators as apprehended and compromising on user privacy by combining data obtained from individual companies. Facebook’s acquisition of Instagram and WhatsApp particularly appear to be horizontal mergers in hindsight, which should have undergone proper scrutiny by authorities. Several authors have suggested the need for changes in enforcement, proposing a shift from ex-ante regulation to ex-post regulation

Innovation and Data Privacy: Merger Review in Digital Markets: Part II Read More »

Innovation and Data Privacy: Merger Review in Digital Markets: Part I

Leave a Comment / Competition Law, Contemporary Issues /

[By Tawishi Beria]  The author is a student at the Jindal Global Law School.  Part I Introduction The rapid rise of digital activity across the globe, bringing with it a growth in the might of a select few companies in such digital markets, has raised several concerns, including antitrust and privacy-related issues. In light of the nature of digital markets, characterised by very strong network effects, use of big data, continuous innovation, the existence of barriers to expansion and entry and so on, regulation of any activity that seeks to augment the market power of these digital companies becomes necessary. Ex-ante regulation of digital markets has been suggested by some scholars as a way to face the challenges arising. Considering this, looking at how reviewing mergers and acquisitions (‘M&A’) warrants a change in terms of digital companies becomes pertinent, given that M&A is a tool that already entails ex-ante assessment on part of the competition authorities. BigTechs have been observed as being ‘remarkably active in M&As’ for various purposes. Even though M&A transactions are generally seen as entailing softer antitrust scrutiny, certain factors are analysed by competition authorities looking at the counterfactual. Deals involving digital companies, two factors that become important are innovation and data protection and privacy. Through this article, the author seeks to assess the interplay of conflict between these factors and understand the need for balance and where it lies. This is the first part of a two-part piece. In Part, I, the need for considering innovation and data privacy as factors during merger review in digital markets is assessed independently. This part further looks at the interplay and conflict between the two factors in terms of actual and hypothetical scenarios. Part II analyses two deals involving Facebook and concludes by highlighting the need for changes in enforcement. Considering the factors independently Competition authorities across the world use various determinants to assess the possible pro-competitive and anti-competitive effects of an M&A deal on consumers. Some factors can clearly be demarcated into these categories. However, the two factors that are the subject of this paper-innovation, and privacy, do not strictly classify as either inherently pro-competitive or anticompetitive and can take both forms on a case-to-case basis. In this part, the author briefly argues for considering these factors in merger review, given the debate. 1.     Innovation Although innovation has always been considered as a factor alongside traditional factors like price, quantity, consumer choice, and quality in merger assessment, it has recently gained more attention. Notably, evidence from digital markets on this front is still almost non-existent. However, killer acquisitions in digital markets are very common, requiring consideration of the innovation parameter. When entities with diverse products/services merge, the portfolio effect also comes into play, facilitating increased range, bundling, leveraging, and ultimately deterring innovation. In markets like digital markets, firms can safely be assumed to compete in ‘innovation spaces’ in addition to the relevant product market, mandating analysis. Even though not related to digital markets, the Dow/DuPont merger laid the ground for and provides valuable insights into the innovation theory of harm in M&A deals. In that case, the concern was that ongoing parallel innovation efforts would be disincentivised due to the merger of horizontal competitors. Likewise, the concern in digital markets is that of continued investment in innovation by merged entities. Further, in the case of digital companies, when data, especially in large amounts, comes into the equation, the focus shifts to an interest in data from one previously purely in innovation. Therefore, keeping a check to ensure innovation is necessary. 2.     Data Privacy The consideration of privacy concerns arising from an M&A deal has been debated, since it is argued by some that privacy is not a competition law-related factor, warranting no consideration. However, in digital markets where M&A activity is largely data-driven, the protection of this data and privacy is required. In terms of ensuring consumer welfare, the vulnerability of consumers has to especially be considered in countries like India where consumer protection laws are relatively insufficient and data protection laws are not in place yet. Even in other countries, data protection laws cannot block M&A deals and digital companies do attempt to comply with such laws; accordingly, the author believes that considering the privacy factor reflects the best approach. Given the merged entity’s larger user base, the potential competitive advantages that can be gained by accessing and using big data are relevant. Over the last few years in some data-driven markets, Big Techs have increased their market share, instead of being disrupted by new and innovative services. An increased market share (a direct consequence of any M&A activity) also means an increased volume of data rich in variety and value, along with an enhanced velocity of generation and processing of such data. Coupled with other characteristics of digital markets like network effects and barriers to entry and expansion, it becomes extremely essential to keep a check on the activities of entities that have such data at their disposal. Looking for the Balance Having set out the need to consider these factors, the author now seeks to assess the required balance. The possible interface between the two in certain approved deals and hypothetical situations is elaborated on, addressing questions like what if a particular deal adds to innovation but jeopardises privacy or what if a deal might result in excessive market power but increases innovation and enhances data protection, or how to determine the weight given to these factors. Looking at these factors in actual cases shows the non-consideration of privacy concerns in approving deals. In Microsoft/Yahoo Search! for instance, Yahoo’s continued incentive to innovate as well as Microsoft’s potential ability to make innovation for alternative intelligent solutions difficult was considered, but privacy was not. Google/DoubeClick is another deal that reflects complete disregard of data privacy (particularly in terms of targeted advertising) by the Commission. This is because, on assessment, the authorities found the data collected by DoubleClick to be relatively narrow in scope, whereas the

Innovation and Data Privacy: Merger Review in Digital Markets: Part I Read More »

RBI Consultative Document on Microfinance: Transforming the Landscape

Leave a Comment / Banking Law /

[By Tushar Chitlangia & Vipasha Verma]  The authors are students at the National Law University Odisha.  Introduction The Reserve Bank of India (RBI) released a Consultative Document on Regulation of Microfinance on June 14, 2021 (Document). Microfinance is a type of banking service which provides loan to small borrowers at favourable terms. Prima facie, the major policy changes the Document aims is abolishing the inconsistency of a regulatory framework and dealing with the issue of over-indebtedness of the borrowers. However, the Consultative Document presents some challenges that need to be detailed out. RBI has recommended assessment of household income, while also capping outstanding loans at 50%of household income. Additionally, the Document suggests that requirement that 50% of the loan portfolio of the Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) is to be advanced for income generation activities, should be abolished. Further, it increases the limit of minimum of Net Owned Fund (NOF)requirement, which raises certain issues for NBFC-MFIs in an economy ravaged by the pandemic. Conversely, the Consultative Document also recommends sagacious policies such as abolition of external benchmarking for NBFC-MFIs, and of the interest rate ceilings. In this post, the authors present a critical review of the key policy changes introduced by the Document and provide suggestions at the institutional level to smoothen the implementation of these policies over the years. Assessment of Household Income In the past five years, the pool of borrowers in the microfinance sector of India has doubled, to around 5.8 crore. However, roughly 1 in every 20 Indian is indebted to a lender. Default risks are substantially high due to the lenders inability to predict borrower cash-flows during and after each cycle. Take for instance, the case of Assam, where micro-lenders classified borrowers with more than five loans as eligible for another. This is typically due to dependence of lenders primarily on information furnished by the borrowers on assets, income, and expenditure. These declarations are mostly of poor quality and not necessarily the best indicators of eligibility as the target demography are low-income households, wherein income varies with seasons and in most cases, assets do not generate cash. It is therefore, essential, to institute a robust cash-flow assessment mechanism. Micro-lenders adopt the practice of “lending to the limit”, which implies that outstanding loan (including interest) will be till 50% of that household’s income. The Document further underlines a few “criterion of income assessment”, but ultimately relies on Board policies of the micro-lenders. Due to the prescriptive nature of limits and the open-endedness of the criterion, micro-lenders have no real incentive or assume liability beyond adhering to them on surface level. Therefore, RBI must consider establishing a uniform policy to mandate all micro-lenders to carry out income assessments under a legal obligation. Instead of dependence on unverifiable declarations, this policy must include adding cross-checks of primary and secondary sources of income, a consumption roster with questions broken down into relevant purchase periods, and data check points (based on cross-checks) to capture informal loans. Further, micro-lenders must adopt cash-flow based underwriting, such a process would require lenders to capture details of occupational profiles, income flows, expense flows, and debt flows of the entire household, either directly or through the use of proxies and questions and combining these with information from credit bureau records. This would allow lenders to assess sustainability of the income under adverse conditions. RBI, by enumerating assessment processes in detail will increase adherence and limit a risky customer base going into the future. Consumption Loans Microfinance is an innovation that fosters entrepreneurship. It allows recipients to develop a wide range of productive activities that generate revenues. However, in the recent years, it has been observed that customers have had little success. There are increasing levels of indebtedness owing to repayment inability. The major reasons for which have been: first, using credit loans for consumption purposes, and second, borrowing from multiple sources (mostly informal) to service debt, and the deteriorating effect of cumulative debt is worse since they earn no profit. The document has abolished the limit of minimum percentage of loans to be lent for income-generation activities, citing that most borrowers depend on micro-lenders for consumption needs. However, the Malegam Committee, in its report, had observed that the main objective of micro-credit is to move its customer base out of poverty by using the loan for income-generating activities and developing a stable income. Further, it had argued that credit used for consumption purposes might increase the financial burden on the poor due to over indebtedness. Unless customers are able to progress from lower to higher incomes, they may become permanently dependent on the bank. Therefore, there is significance in income-generation activities. The RBI, by abolishing this limitation, allows micro-lenders to forego assessments that were an essential element of providing microcredit, such as evaluation of the clients’ business model for profit-generation, and providing workshops for entrepreneurship expertise. This is because any incentive to uphold the purpose of microcredit is lost. The RBI has mentioned that microcredit as consumption loans is essential in the Indian context. But without income generation there will be minimal income sustainability. It is imperative that RBI enforces the creation of different loan products for unplanned/consumption expenses, through an appropriate mix of savings and micro-insurance products through policy and guidelines. RBI, by reinstating a limit, will ensure that the micro-lending sector does not dilute to a basic personal loans bank. NOF Requirement The document leaves the doors open to consider whether the extant minimum NOF requirement for NBFC-MFIs should be increased or not. The current minimum NOF requirement for NBFC-MFIs is Rs. 5 crores (and Rs. 2 crores for the NBFC-MFIs located in the North-East region). A Discussion Paper released by RBI on January 22, 2021,suggested that the minimum NOF requirement for all NBFCs, including NBFC-MFIs, should be increased to Rs. 20 crores. The reasons given were that there are high costs to be incurred to maintain the necessary IT infrastructure, and there is a need for the NBFCs to be

RBI Consultative Document on Microfinance: Transforming the Landscape Read More »

Scroll to Top