Author name: CBCL

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

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

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

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

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

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

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RBI Consultative Document on Microfinance: Transforming the Landscape

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

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Amazon & Flipkart v. CCI: Validity of CCI’s order under Section 26(1) of the Competition Act, 2002

Competition Law, Contemporary Issues /

[By Ishu Gupta]  The author is a student at Symbiosis Law School, Noida.  Recently, the Karnataka High Court (‘HC’) pronounced its judgement in Amazon Seller Services Pvt. Ltd. & Anr. v. CCI and Ors. (‘Amazon/Flipkart v. CCI’), a writ petition filed under Articles 226 and 227 of the Constitution of India, 1950 seeking to set aside an order of the CCI under Section 26(1), Competition Act, 2002 (‘CA’02’) against Amazon and Flipkart. Amazon/Flipkart v. CCI involved the questions of 1) non-application of mind by the CCI for its prima facie satisfaction under Section 26(1); 2) the order of the CCI being ultra vires the objects and purposes of the CA’02; 3) bar on the CCI’s jurisdiction on account of a pending investigation by the Enforcement Directorate (‘ED’) under Foreign Exchange Management Act, 1993 (‘FEMA’). In this post, the author shall be discussing the judgement of the Karnataka HC in Amazon/Flipkart v. CCI while gazing at the requirement of prima facie satisfaction under Section 26(1) of the CA’02. Further, the challenge to the CCI’s jurisdiction to order an investigation under Section 26(1) of the CA’02 shall be discussed. Finally, the author maps out a three-fold test for satisfying the prima facie case requirement and the jurisdiction issue to edict an investigation under Section 26(1) of the CA’02. Factual Background- Delhi Vyapar Mahasangh (‘informant’) had filed an information with the CCI under Section 19(1) of the CA’02 alleging the violation of Section 3(4) read with Section 3(1) and Section 4 of the CA’02 by Amazon and Flipkart, owing to the existence of preferred sellers and preferential listing on the online market places of Amazon and Flipkart. Given the information supplied by the informant and having regard to the provisions of the CA’02, the CCI passed an order under Section 26(1), thereby instructing the DG to investigate the contravention of Section 3(4) read with Section 3(1) of the CA’02 and not under Section 4, since the CA’02 does not envisage an investigation in cases of collective dominance. The order of the CCI was thereafter challenged before the Karnataka HC in two writ petitions filed by Amazon and Flipkart, separately. The Karnataka HC, while disposing off the writ petitions of Amazon and Flipkart by a common judgement, refused to quash the order of the CCI. Decision- Based on the arguments of the petitioners, the Karnataka HC framed the following questions: What is the nature of the order of the CCI under Section 26 of the CA’02? Whether a prior notice and opportunity of hearing are mandatory at the stage of issuing direction to the DG to hold an inquiry under Section 26(1) of the CA’02? Whether the order of the CCI calls for interference? In respect of questions (a) and (b), the HC decided that an order under Section 26(1) of the CA’02 is an administrative order and is not a part of the adjudicatory process. Additionally, Section 26(1) of the CA’02 does not prescribe the CCI to issue any notice to any party at the time of forming prima facie opinion. Hence, there is no requirement of serving a notice on the opposite parties. While answering question (c), the Karnataka HC relied on Competition Commission of India v. Steel Authority of India Ltd. and Ors. (‘CCI v. SAIL’) and held that the order of the CCI does not call for interference and as such the requirement of giving a reasoned order has been fulfilled by the CCI. Analysis- Prima facie satisfaction of the CCI- In Amazon/Flipkart v. CCI, it was argued by the petitioners that there was no application of mind by the CCI as the CCI had not opined on appreciable adverse effect on competition (‘AAEC’) in its order. Accordingly, the prima facie case requirement under Section 26(1) was not satisfied. In various decisions of the SC and different HCs, it has been held that the CCI’s order under Section 26(1) of the CA’02 is an administrative direction to one of its own administrative wings. It is only a direction simpliciter to investigate and does not form part of the adjudicatory process. The said position is well cemented by the landmark judgements of the SCI in CCI V. SAIL and Excel Corp Care Ltd. v. CCI& Ors. Accordingly, there is no requirement to issue a notice to the opposite party or strict compliance with the principles of natural justice while ordering an investigation under Section 26(1). The sole prerequisite for an investigation order Section 26(1) is the application of mind by the CCI in determining where the facts at hand transmit any contraventions of the provisions under Sections 3 and 4 of the CA’02. Whilst it’s true that for a contravention of Section 3(4) there must be an AAEC, which has to be proven by a market analysis based on the factors given under Section 19(3), it is incorrect to surmise that the CCI has to supply detailed reasons for its decision under Section 26(1) owing to the fact that the same can only happen after an investigation by the DG. Hence, the Karnataka HC was correct in holding that the order of the CCI does not entail an interference as the CCI had looked into the information and applied its mind in deciding the existence of a prima facie case. Jurisdictional challenge against an order under Section 26(1)- The petitioners had argued that the jurisdiction of the CCI was barred because of a pending investigation by the ED under FEMA. It is to be noted that Section 60 of the CA’02 provides for an overriding effect of the CA’02 over any other law in India. Furthermore, the provisions of CA’02 are in addition to and not in derogation of the provisions of other laws, according to Section 62. The Supreme Court of India (‘SC’) has conclusively decided on the issue of the ouster of the CCI’s jurisdiction in presence of sectoral regulators in CCI v. Bharti Airtel Ltd. & Ors. The SC had held that whilst the jurisdiction of the

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Facebook’s Antitrust Misadventures: Finale In Sight?

Competition Law, Contemporary Issues /

[By Pragya Jain & Akshita Singh]  Pragya is a student at Hidayatullah National Law University, Raipur and Akshita is a student at National Law University Odisha, Cuttack General Overview Facebook’s iconic Senate hearing in 2018, while the punchline of many jokes for years to come, brought a fact into vivid perspective. The CEO, Mr. Zuckerberg, when prompted to provide the most accurate description of Facebook’s business, quipped simply – “Senator, we run ads.” The rebuttal, though seemingly precise, is akin to Pandora’s box of essential legal questions – one of which, concerning dubious anti-competitive practices, is central to this article. This description of Facebook’s services cements a glaring fact: if the service being consumed is free, the consumer is but a misnomer. It can be fairly said that while availing a seemingly “free” service, it is the consumer’s attention that becomes the product. This is the guiding principle behind zero-price markets which are more relevant than ever in the rapidly digitising world. One of the waves brought in by digitization which seems to have patently hit the shores of BigTech is online advertising. Statistics reveal a significant share of 46% of Facebook’s income is on account of online advertising. In fact, a pointed look at the revenue models of BigTech reveals that online advertising is strategically employed by these companies, not only to generate soaring revenues but also to gain dominance in the relevant market. This inevitably puts competition regulators in a spot while demarcating the competitive boundaries for an enterprise in an arena as exponentially advancing and fragile as online advertising. Consequently, the growing dissatisfaction of competition regulators across the globe with BigTech can be evidenced by the onslaught of probes into their practices. Recently, the European Union and Britain commenced twin antitrust proceedings against Facebook. Both the proceedings have been initiated with the intention of deciphering Facebook’s conduct particularly in the online advertising segment. The Commission seeks to undertake a thorough examination of Facebook’s status in the online advertising and social networking markets and whether it’s behaviour has been antithetical to fair competitive practices.. This brings us to the primary objective of the blog which is to discuss the contested knots of the ongoing proceedings against Facebook by the EU and UK and understand the arguments put forth by the Competition regulators. The authors also intend to unravel the future course of action which may be taken by countries, especially India, as their competition regime matures. Facebook’s March to Trial A Peep into Facebook’s Ad-Revenue Model To understand the peculiar problems in the realm of online advertising services, we must first examine the stakeholders in such a scenario. As per the authors, the stakeholders are the advertisers and the consumers of such product offerings. Any platform that hosts such users acts as both the middleman and the agent tasked with enriching the user experience of the consumer. The platform thus, accumulates invaluable information and consumer attention that is further monetised. The advertisers, ranging from small firms to large conglomerates compete for  consumer attention; and as such, the value that they derive from such platforms is immeasurable; both in terms of their market presence as well as innovation. Towards the user, the platform customizes their experience by displaying personalised advertisements that allow them to peruse different product offerings and maximize the value obtained in consideration of their attention and money. The next key concept to understand in this regard is Facebook’s method of ad-auctions, a process wherein Facebook assumes the role of an agent of the user. Essentially, the auction is characterized by generation of a ‘total bid’ which denotes the approximate value that an ad being hypothetically displayed to a user can create. As the final determiner, the ads with the highest estimate of the total bid are displayed to the particular user. The key inputs taken from the advertisers in this process are their bid (the amount they are willing to pay for their desired outcome) and their target audience. These serve to create the relevant market for the advertisers where their ad relevance is determined on the basis of estimated action rates and quality. At this juncture it is key to remember that the relevance of an ad is of the utmost importance and consequently rewarded. Per Facebook’s policy, it may choose to subsidize relevant ads and reduce their costs while the advertisers get good results from the same. It is thus, practicable that in an auction, a relevant ad has a higher chance of winning against a higher bid. Rising Dissatisfaction  Facebook’s use of data over the past few years has raised eyebrows all over. Recently, its use of data collected from advertisers through its online advertising service has struck the eye of the competition regulators in the UK and EU. A probe has been launched to ascertain the potential abuse of data through its classifieds service- Facebook Marketplace. To explain briefly, Facebook Marketplace is an online platform which allows its users to sell and buy goods from one another. The potential breach in competition is in regard to Facebook’s use of commercially valuable data mined from its advertising service to get a leg up for its marketplace. In addition, the UK also geared up to put Facebook’s use of data from its single sign-on authentication service under the microscope, and its recently launched product – Facebook Dating, a service available only in select countries. Facebook Dating is being scrutinised for synthesizing data based on user preferences, groups and events attended as well as mutual friends to recommend potential matches. It also allows the use of other Facebook services such as Messenger and Instagram as add-ons to the Dating profile. Recently these dubious practices have come under fire with the European Commission (EC) and the Competition and Markets Authority (CMA) of the UK, for their alleged anti-competitive nature. A peep into the viewpoints of the two competition authorities can be traced on the following lines. To begin with, the investigation initiated by the EC

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MBO As Subset Of Pre-Pack: Future Of India’s Insolvency Resolution

Uncategorized /

[By Damini Chouhan & Vinisha Jain]  The authors are students at the Institute of law, Nirma University.  Background The Covid-19 pandemic was no less than a catastrophe for economies around the world. In India, insolvency resolution process among other economic activities has suffered a huge setback. The funds invested by the creditors have remained blocked for an entire year and the delay has worsened the stress on ailing companies as they had no recourse to stress resolution during this period. To house these challenges, the government believed that it is the opportune time to introduce the pre-pack regime in India. Pre-packs are a semi-formal agreements that are designed to facilitate the restructuring of a company in a more expeditious way. The Ministry of Corporate Affairs formed the Insolvency Law Committee in May 2020 to prepare the structure of pre-packs suitable for the Indian markets. While discussing the key features of pre-packs the sub-committee of Insolvency Law Committee noted that in most countries under this regime, the promoters and management have ‘the first and exclusive right’ to buy the business of Corporate Debtor (“CD”). The Graham Review[i] was also cited by it which expressed the probability that during economic depressions, the management of the company would be the only willing candidate to buy the CD due to the lack of Resolution Applicants. Hence pre-packs inclines towards the possibility of bringing Management Buyouts  (MBOs) in India. Introduction Pre Packs can bring a breakthrough change in India’s financial market by paving the way for the much awaited (“MBOs”) transactions. MBOs are the type of acquisitions steered by the current management to acquire the ownership of the company. MBOs have the potential to streamline and revitalize the companies’ competence by unclogging the plethora of opportunities a management can avail of, in the interest of the company. Since, buyouts confer more freedom and control in the hands of management, the decision making process becomes easier. However, the journey of MBOs in India will be full of roadblocks owing to two reasons; First: the negative mind-sets and presumptions, present not only in India, but world-wide that insolvency of a CD takes place due to the failure of its management. Second: the stringent regulatory framework in India makes MBOs a rare event. Mind-sets and Presumptions The apprehensions with respect to the management of the CD can be seen in the insolvency regimes of Canada, Australia and Britain. They are structured on the belief that the management of a defaulting company should not be given the responsibility to administer the insolvency process. In their view, the management having driven the CD insolvent obviously lacks the adeptness possessed by the experts and administrators and ‘leaving them in the charge of distressed company would be like leaving the fox in charge of the henhouse”[ii] . Such reservation raises concerns regarding the credibility of the management and rears doubts with respect to its intention in bringing round the distressed company. Despite these fears, America’s insolvency regime is built on the faith that chances of the revitalizing the ailing company are higher when the same management carries out the formal process. Being based on the risk model, their insolvency regime propounds that the current management is more interested in the wealth maximization of the company’s business as they already know the business in and out. An insolvency practitioner on the other hand may be an expert, but his or her interest would be limited to paying out the creditors and keep the company going, even if as an empty shell. Legal Framework in India The management ensuing MBOs will have to go through the obstacle laid path floored by the RBI and Companies Act, 2013. Understanding the sensitivity of Indian financial market and status quo of the debt market in India, RBI has placed restrictions on banks, to give funds to the firms against the assets of the target company as it fears that investments in buyouts of ailing companies can put unnecessary strain on overall economy. In addition to the RBI regulations, SEBI (Alternative Investment Funds) Regulations 2012 are also present that regulate evolving sources such as venture capital funds, private equity funds, to keep an eye on them. Furthermore, Section 67 of Companies Act, 2013 bars the public companies to provide any financial assistance to any person for the purpose of buying any shares in the company or its holding company which pushes the management to opt for delisting of the company. Moreover, delisting process is also not hassle-free making the MBOs even more extensive procedure. Conclusion The possibility of MBOs through the Pre Packs can be a game changer. Even though, MBOs will not have a red carpet in India but the possibilities cannot be narrowed down to zero. In the current setting where there is a lack of resolution applicants it is prudent to introduce a feasible model of MBOs in India. Thus, the regulatory framework surrounding MBO transactions needs to be eased out if MBOs have to be made a viable option. The scepticism associated with MBOs is not irrational rather it is overly cautious. Since, the insolvency laws in India are continuously evolving and are being considered mature enough to introduce pre-packs it is time to introduce MBOs as well. Further, adding them as a subset of the Pre-Pack regime will also provide MBOs the necessary checks and balances under to prevent any misuse apprehended hitherto. With the advent of MBOs, the developing debt market will get a chance to grow and the distressed companies will be able to revive better in the hands of current management. [i] Ministry of Corporate Affairs, Report of the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process (October 2020), (January 08, 2021), https://ibbi.gov.in/webfront/notice_alongwith_subcommittee_report_for_public_comments.pdf. [ii] Gerard Mc Cormack, Control and Corporate Rescue: An Anglo American Evolution, 56, Intnl. & Comp. L. Q. 515, 524 (2007).

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Mapping the Potentiality of ESG and Crypto-Regulations: A Value-Driven Approach

Capital Markets and Securities Law /

[By Simran Lunagariya & Unnati Jain]  The authors are students at the Institute of Law, Nirma University.  Introduction Covid-19 has created unprecedented and irreversible business and regulatory disruptions across the globe. At this juncture, India is in dire need to stabilize its global economic position. The Indian economy has been adversely affected, and the GDP for the year 2020-21 went down by 7.7%. Also, a job loss of 20% was witnessed in Urban India during 2020-21. The loss of jobs has attracted people to generate side income creating a greater spike in crypto trading. Additionally, the institutional investment wave is also increasing at a greater pace; in such a scenario, the Environmental, Social and Governance regime of the crypto industry must be addressed with a comprehensive approach in India. For mitigating the value-driven uncertainty from this emerging asset class. Especially when India is aspiring to become a $5 trillion economy, however, the co-existence of cryptocurrency and the ESG has often been debated globally. In the Indian scenario, this would be a nightmare in the absence of an effective regulatory framework. This blog explores the avenues of potential regulatory requirements that could address the ESG aspect of Cryptocurrency in India. Environment  The mining of cryptocurrency involves proof-of-work methods to transact and verify the transactions. This method requires high-power systems to solve the complex calculations, thereby creating a highly energy inefficient system. The amount of carbon dioxide released by such power-hungry systems is considerably high and affects the environment negatively. Although massive energy consumption of crypto-mining forms to primary environmental issue, the increasing usage of coal for this energy driven process also proves to be analogous to this issue. According to a study the annual carbon footprint of cryptocurrency is almost parallel to the carbon footprint of Mumbai. Moreover, cryptocurrencies account for 0.40% of the world’s total electricity consumption. Hence, these digital assets undoubtedly oppose the principles of Environment sustainability. Various responsible investors are withdrawing from investing in cryptos at the global level due to their catastrophic environmental effects. Recently, Elon Musk, CEO of Tesla, affirmed that the Bitcoin consumes a great amount of fossil fuels, hence making it an environmentally weak crypto. Consequently, he suspended the use of Bitcoin for trading. However, until now, India has not taken any steps to regulate cryptocurrency mining for its harmful effects on environmental sustainability. Although SEBI recently, in March 2021, had issued new guidelines on disclosure norms on sustainability-related reporting for the top 1,000 listed companies by market cap, which includes Environment-related disclosure, the regulation of crypto mining seems not to be affected by the SEBI guidelines. In India, despite the speculation of banning cryptocurrency, the trade is subsequently rising. The matured growth of crypto as an asset class in India needs strong regulation to force market players to create portfolios attracting greater environmental benefits. The regulations must include : Stricter Disclosure Regulations with respect to crypto-mining methods would foster a greater sense of responsibility in the minds of market players. For instance this can be done under the aegis of the SEBI norms on sustainability-related reporting released in March,2021. A guidance mechanism and up to date database displaying the on-going mining operations (for market players and investors respectively) would make crypto-mining a transperant process with respect to environment. Eventually, this would attract responsible investors towards crypto-trading/investing. A comprehensive and stringent compliance mechanism promoting environmental friendly crypto-mining would help in avoiding alarming situation in future. Inclusion of monetary penalties and prohibiting crypto-trading for the entity who performs severe non-compliance would imbibe sense of responsibility in the minds of crypto investors/traders. Promoting more intelligent methodologies like Proof-of-Stake (PoS) method would reduce the ill-effects of Proof-of-Work method. Also, a guide to PoS methodology would make it an approachable and performable method for market players. This shift would help in restricting the entry of crypto-miners and motivate more responsible and well-equipped crypto-miners. Social  On the social front swift transacting ability of the crypto has attracted the masses due to economic disruptions in recent times. The cryptocurrency network provides flawless transactions across the world along with minimal hindrance from the financial regulators. However, the conflict between private and sovereign propriety over crypto is primary to the cryptocurrency struggle in India. The lift of the RBI ban and Supreme Court verdict of 2020 has raised the hopes of Private Crypto start-ups. Almost 300 start-ups in India have created huge job opportunities for youth, boosting tech infrastructure. The Indian government’s stance to centralise the crypto in order to transfer stability to crypto investing/trading in India would make the industry more restricted. Eventually, this would keep India behind other countries and adversely affect Indian economy. The swift transacting capacity and no hinderance from intermediaries is characteristic to crypto. Centralisation of crypto would highly affect this unique feature, juxtaposing it to a car without fuel. Hence, promoting a decentralised crypto is equally important as the centralised crypto to create a balance in the industry and cope up with worldly developments in crypto regime. The wide usage of Etherium Crypto has fostered investment opportunities like Decentralised Finance (DeFi). Consequently, smart contracts have brought in the innovation-driven Non-fungible Tokens, a more secured and un-replicable asset with unique identities. DAO is another trending avenue for investment with great scope to boost the economy and shrink the externalities like inflation and depreciation. Amongst all these innovations, fintech and DeFi regimes of crypto have certain associated risks of their own. For the Indian scenario, an intact mechanism addressing investor safety, market integrity, and prevention of financial crimes to boost crypto’s social and financial credibility are vital. The mechanism must include : Guidance and infrastructure along with resources must be provided to the market participants through efficient policies. Strict enforcement regime for market players would help foster financial safety in the industry accompanied by KYC and anti-money laundering mechanisms in DeFi. Stricter capital rules regarding crypto may include minimum capital standards for private banks to maintain liquidity and prevent a shortage in the market. Similar conservative prudential

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Homebuyers Tryst with Developers: Has the IBC covered it all?

Insolvency Law /

[By Abhishek Jha & Rishi Raj]  The authors are students at the Maharashtra National Law University, Aurangabad.  Introduction The Insolvency and Bankruptcy Code 2016 (“the Code”), a milestone in the Indian Legislative journey has by far been successful in safeguarding the interests of most stakeholders, if not all. However, one such stakeholder has lagged behind, i.e., the homebuyers. Even after substantial developments in the Code, the homebuyers still remain highly risk averse owing to the host of unresolved issues in the Real Estate sector. In this article, the authors will discuss the position of the homebuyers with respect to the Code. The Real Estate Sector has been witness to a steep increase in corporate insolvency resolution processes (CIRPs) over the course of four years. Such an increase was triggered by an ever-growing liquidity crisis and accelerated by the pandemic’s effect on the Real estate sector. As a result, the Real estate now accounts for more than 20 percent of the overall CIRPs initiated. Although the homebuyers have availed certain protection through courtroom victories, the skirmish is far from being resolved. This gets even more complicated when remedies are sought against pending projects that are already under moratorium. Therefore, the above warrants a re-visit to the Code for a brief analysis of the real extent of Homebuyers’ protection. Recent Developments  Under the Code, only financial creditors[i] constitute the Committee of Creditors (“COC”) and enjoy voting rights in the COC. However, such rights are not extended to the operational creditors[ii] which was worrisome as the homebuyers were recognized as “Operational creditors” within the Code. Therefore, the Homebuyers were deprived of certain important privileges, including the right to be represented in the Committee Of Creditors (“CoC”) and a favorable treatment for payment of debts. Thus, a growing demand was felt to recognize the homebuyers as “financial creditors”. Subsequently, in  Nikhil Mehta v. AMR Infrastructure, the NCLAT classified the allottees as ‘financial creditors’. It was observed by the NCLAT that the assured return scheme in the Buyer-BuilderAgreement(“Homebuyer’s agreement”) was ultimately a transaction wherein ‘financial credit’ was raised in the nature of the loan. In  Anil Mahindroo & Anr v. Earth Organics Infrastructure, the NCLAT concluded that an effect of commercial borrowing  could be seen within the terms of the homebuyer’s agreement. The effect amounted to financial credit within the meaning of the Code. Ultimately, the IBC (Amendment) Ordinance, 2018 came into existence, placing the allottees on an equal pedestal as other financial creditors like Banks, NBFCs, etc. Such inclusion was necessary as the builders usually raise huge capital through home buyers, a primal example of this can be found in cases like Chitra Sharma v. Union of India in which, a whooping INR Fifteen Thousand Crore was owed to the Homebuyers. However, it cannot yet be concluded that an inclusion of homebuyers as Financial Creditors sufficiently equips the homebuyers to get justice. This is because the effect of inclusion was diluted by the changes in legislation discussed below. 2.1 Placing homebuyers with Financial Creditors: a relief or a patch-work? A positive yet incomplete step towards securing justice for homebuyers was to secure the status of financial creditors bestowed upon them under the Code as per Section 5(8). However, the legislature, while providing this right, has also neutralized its effects by attaching certain conditions to it. The IBC 2019 Ordinance (now replaced by the 2020 Amendment Act) sought to impose a threshold limit on the homebuyers to initiate CIRP. Section 7 of the ordinance required no less than 100 or 10% homebuyers, whichever is less, to initiate insolvency against the builder. Further, the amendment also barred a single buyer from approaching the NCLT under Section 7 of the Code. Therefore, the homebuyers’ failure in achieving such numbers would seriously cripple the pursuit of availing their home units. 2.2 Challenges to the threshold: Karvy Investor’s case The Ordinance was subsequently challenged upon its constitutional validity before the hon’ble the Supreme Court in Manish Kumar v Union of India. The Supreme Court initially imposed a stay on the ordinance, but ultimately upheld the threshold limit under the IBC 2019 ordinance stating that “the mere difficulties in given cases to comply with a law can hardly furnish a ground to strike it down”. The hon’ble Supreme court also refused to delve into the question of constitutionality with regards to the threshold requirements which according to petitioners amounted to class creation  amongst the Financial Creditors violating Article 14 of the Constitution. Meanwhile, an amendment to IBC was introduced in 2020 (the 2020 amendment) which again imposed the aforementioned threshold to initiate CIRP. Subsequently, the 2020 amendment was also challenged before the Hon’ble Supreme Court  in the Association of Karvy Investors v. Union of India & Ors. The plea stated that the 2020 Amendment has imposed a severe and almost impossible condition on the right of an individual financial creditor to file an application to initiate CIRP. . Even though a deviation from the decision in Manish Kumar (Supra) is highly unlikely, the Karvy investors case has been filed and remains pending before the SC. A setback from the Supreme Court In Shelly Lal & Ors v. Union of India & Ors, an amount of INR 49 crore was raised from the Homebuyers for real estate project in Noida Sector but the directors of the project absconded and the project was stalled. In the wake of this, the homebuyers approached the Supreme Court under Article 32 and requested the Apex Court to take a supervisory role of the project. However, the apex Court shied away from passing any relief premised upon the reasoning that managing day to day supervision of the project is outside the purview of the Judiciary and the court is not competent to do so. The apex court justified taking such a stance by highlighting that the law has improved considerably and now Homebuyers can approach alternative forums such as the consumer court or the Real Estate Regulatory Authority. On similar lines, in Upendra Choudhury v. Bulandsahar Development Authority and

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