Author name: CBCL

Boardroom Gender Diversity: Are Mandatory Quotas Effective In India?

Company Law, Contemporary Issues /

[By Swetha Somu]   The author is a student at Gujarat National Law University.  INTRODUCTION “Women Hold Up Half the Sky.”- Mao Zedong Analogous to this article is the proclamation made by Mao Zedong– to bring out women from domestic work to the professional field. Even today, if you walk inside a boardroom, it’s most likely that you’ll see more men like the Ambanis and Elon Musks than women like Kiran Mazumdar and Indra Nooyi. Through the lens of the law, the initial step was to empower women in corporate settings by imparting gender diversity in boardrooms. This article dives deep into the present scenarios in Indian companies and analyses the drawbacks and deficiencies of the mandatory quotas by discussing various other mandatory quotas imposed by countries around the world. The article seeks to bridge the gap in law so that the intention of the legislators, which is- diversity and inclusivity, is truly achieved. THE START: NORWEGIAN QUOTA The first-ever mandatory quota (40% for women in all listed companies) was legislated by the Scandinavian country- Norway, way back in the year 2006. The percentages jumped from 6% in 2002 to 40% in 2008 after its implementation. Although the percentage change pronounces the success of the law, various researchers have recorded negative effects and adverse changes in companies that had to comply with the quota. Shortly after the quota’s implementation, many companies had delisted from the stock exchange to avoid appointing a woman director. Some companies reduced their board size to easily comply with the quota and the women appointed were mostly for non-executive positions hence there was still no strong decision-making authority. Another research found that although the representation of women increased it didn’t mean many individual women in numbers rather the same woman being appointed in different boards. This is known as the “golden skirt” phenomenon. At the same time, researchers noted that more companies in Norway registered themselves in the UK and not their home country, hence pointing out that they were circumventing the regulations. Countries like France, Italy, and Germany followed Norway’s footsteps in implementing gender quotas in the boardroom. INDIA Since the patriarchal notions in the society are also seen to prevail inside the four walls of Indian boardrooms, the need for breaking this glass ceiling was acknowledged. A hindrance to women’s advancement is the existing gender stereotypes which diminish the scope of taking up high-positions in their professional lives. Hence to tackle this, the government introduced the Companies Act, 2013 in which under Section 149(1)(b) of Chapter XI makes it mandatory for the companies (listed companies, public companies with a minimum paid-up share capital of Rs.100 crores or minimum turnover of 300 crores) to appoint at least one woman director in their boardroom which failing to do so will attract penalties. This is known as a ‘hard quota’ where not following the quota will attract strict punishments unlike ‘soft quota’ which merely is a recommendation which if not followed, the company will only face warnings and negative reports. The second proviso to sub-section (1) Section 149 was inserted to increase the participation of women in key decision-making roles inching closer to the women empowerment goal that India wishes to achieve under the United Nation’s 5th Sustainable Development Goal of Gender equality by empowering women through strong enforcement of various policies and laws like this. After the implementation of the Companies Act, 2013 many companies started to comply with the mandatory quota as per the law. Subsequently, in 2015, the Securities and Exchange Board of India (SEBI) made all its top-500 NSE-listed companies compulsorily appoint at least one independent woman to their board by the year 2019, and the same for the top 1000 NSE-listed companies by the year 2020. According to the research article from the All India Management Association, out of the top NIFTY 500 companies in 2013, 303 of these firms did not have a single woman director on their board- which is roughly 60.6% of the companies that need to comply with the new quota immediately. Across these 303 firms, 82.8% had appointed one woman as one of their board of directors and 13.6% had appointed more than one woman in their boardroom going an extra mile! These huge percentages certainly seem to be promising and good going until we consider the scenario of efficiency after the appointment of the so-called women-in-power. Flaws and failures Though it was an overall success, there were some unpredicted drawbacks to the mandatory quota that India saw. Firstly, the imposed quota prompted ‘tokenism’ where companies appoint a woman director from their own family for the sake of complying with the law and to avoid the penalties. The NSE reported that 1667 of 1723 listed companies had fulfilled the mandatory quota but 425 of the complying companies appointed a woman from their family or promoters’ group. Illustration: Reliance Industries Limited has only one woman director (non-executive)- Mrs Nita Ambani, the CEO of the CEO, Mr Mukesh Ambani. Another company is JSW Steels, which has appointed Mrs Savitri Devi Jindal, the wife of the founder of Jindal Organization. The Raymond Group has appointed Mrs Nawaz Modi Singhania (non-executive director) who is the wife of the chairman. Secondly, there is a lack of skilled women willing to take up challenging positions, such as board members, making it hard for the companies to appoint and retain women at that position. This resulted in India being at the bottom of the table according to Egon Zehnder’s 2020 Global Board Diversity Tracker. Only 17% of the women held senior positions in companies and only 11% in leadership roles. Thirdly, the quota fails to meet what is known as the ‘critical mass’. With the minimum requirement of one woman on the board, the underrepresented gender does not have enough representation nor could make any substantial contribution to the boardroom discussions. A single woman on a boardroom meeting is likely to have a lower voice and is often neglected as it takes at least three

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Navigating The Essential (Interim) Relief Under the Competition Act, 2002

Competition Law /

[By Saikishan B Rathore] The author is a student at Gujarat National Law University, Gandhinagar.  It is settled law that a statutory body cannot grant interim relief unless such power has been vested by the statute. Section 33 of the Competition Act, 2002 empowers the Competition Commission of India to grant interim relief upon satisfaction that an act in contravention of Section 3(1), Section 4(1) or Section 6 is committed, continues to be committed or is likely to be committed. CCI has issued orders under this section with utmost circumspection. The most recent need arising on 9th March, 2021 as it issued an order granting interim relief to the informants (Fab Hotels and Treebo), restraining the opposite parties (MakeMyTrip and GoIbibo) in Re: Federation of Hotel & Restaurant Associations of India and Anr. v. MakeMyTrip India Pvt. Ltd. and Ors (hereafter “MMT-Go”). The three-fold test: CCI v. SAIL In CCI v. SAIL, the Supreme Court recognized CCI’s jurisdiction to grant interim relief, subject to three conditions. Firstly, CCI ought to record its satisfaction in clear terms than an act of contravention of the stipulated provisions has taken place; Secondly, if it is necessary to issue an order of restraint; Thirdly, if there is every likelihood that the party to the lis would suffer irreparable and irretrievable damage, or there is definite apprehension that it would have an adverse effect on competition in the market. Applying the 3-fold test: Road to MMT-Go As mentioned above, CCI has exercised this power very cautiously in the past. In Financial Software Pvt. Ltd. v. ACI (hereafter “ACI case”), the conduct of ACI in restricting the choice of ACI Banks for availing the services of third parties including the informant for customization and modification of a particular software appeared to be in contravention of section 4 of the Act. Thus, the CCI was compelled to grant interim relief pending enquiry subsequent to the order under Section 26(1). Further, in Fast Track Call Cab Pvt. Ltd. v. ANI Technologies Pvt. Ltd., the CCI found it essential to restrain Ola Cabs from charging way below the average variable cost as it posed an imminent threat to the competition in the market. However, in certain cases, there is no requirement for issuing such orders. For instance, in Re. National Shipowners Association v. ONGC, the informant prayed for a direction to restrain ONGC from taking any action, or threatening to terminate the ‘Charter Hire Agreement’ entered into with the member companies of the Informant till disposal of the inquiry and the matter pending before the CCI. Although the CCI noted a clear threat to competition in the market, it was satisfied with ONGC’s undertaking that it would not invoke the clause to terminate the said agreement and thus, refrained from issuing an order under Section 33. In the recent case of MMT-Go before the CCI, an enquiry was already in progress in furtherance to CCI’s order dated 28-10-2019. However, the properties of the informants were not listed on the website of MMT-Go which was clearly in a dominant position in the relevant market of online franchising services for booking hotels in India. Moreover, as per the order under Section 26(1), it was clear that there existed a confidential commercial agreement between MMT & Oyo that prioritized the listing of Oyo Hotels on the website, thereby, indicating a likelihood to cause an appreciable adverse effect on competition. Further, it was clearly stated by the informants that inquiry has been pending for more than 15 months, and any further delay would eliminate competition in the market with special reference to the informant hotels that have been delisted. Therefore, the CCI rightly responded to the urgent need for interim relief as there is a clear denial of market access which is likely to eliminate competition in the market until there is a final determination. Section 33 & 26(1): The difference in satisfaction As laid by the Supreme Court in CCI v. SAIL at para 117, there is an express obligation on CCI to record satisfaction that there has been a contravention of the provisions mentioned under Section 33. However, this satisfaction is to be understood differently from what is required while expressing a prima facie view in terms of Section 26(1) of the Act. While the former is a definite expression of the satisfaction recorded by the Commission upon due application of mind, the latter is a tentative view at that stage. Whether such ‘definite expression of satisfaction’ amounts to final determination? The order under Section 26(1) is an administrative order. It merely sets in motion the inquiry, and the final determination is subject to the judicial scrutiny of the DG’s report. It is settled that the degree of satisfaction under Section 33 is not merely tentative. Therefore, it is a legitimate concern whether the exercise of such discretion by the CCI would play a major role in the pending enquiry/matter. There cannot be a uniform degree of satisfaction in every case. As noted by the CCI in the MMT-Go case, it completely depends on the evidence and circumstances of each and every case. For instance, in the recent G-Meet case, the CCI did not find any evidence placed by the informant to order an enquiry. On the other hand, in the MMT-Go case, there was enough evidence at the preliminary stage to display a clear denial of market access and foreclosure of competition by the dominant enterprise. Another prominent example is the ACI case. When the order under Section 33 issued by the CCI (mentioned above) was appealed before the Competition Appellate Tribunal in ACI Worldwide Solutions Pvt. Ltd v. Competition Commission of India, the Comp AT refrained from expressing any opinion because it was of the view that confirmation of interim relief or otherwise would itself affect the investigation by the DG which is pending and it is also likely that it may affect the merits of the matter. Instead, it directed expeditious disposal of the matter by giving CCI a time limit

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Default Behaviour in Consumers – A Competitive Threat

Competition Law /

[By Pragya Dixit] The author is a student at ILS Law College, Pune.   The Competition Commission of India (CCI) in an Order dated 09.11.2020, directed an investigation against Google and its affiliates on information filed alleging violation of Section 4 of the Competition Act, 2002 (Act). The Commission ordered the aforementioned investigation in relation to three allegations leveled against Google. Amongst those three allegations, one allegation involved the issue of “pre-installation of Google Pay on Android resulting in a ‘status – quo bias’ in consumers”. This article aims to discuss how status quo bias, alternatively known as ‘default behavior in consumers’ is a problem in the competition arena and has a deeply negative impact on market competition and consumers’ interest. The allegations made by the informant in the case against Google stated that by pre-installation of Google Pay as a default payment option in Android phones at the time of initial set – up results in a status – quo bias which is detrimental to the interest of other players in the market, as it places Google Pay in the users’ devices, making it a default option already available to them. The default nature in phones drives users to make use of google pay instead of going for other alternatives present in the payment markets. It results in denial of market access to various other competitors in the same market and ultimately gains Google a significant competitive advantage over the other players, which is a contravention of Section 4(2) of the Act. Another issue similar to this had also arisen quite recently in a case before the CCI, wherein several allegations were raised in a complaint against WhatsApp and its parent company Facebook. The said complaint raised objections that WhatsApp is abusing its dominant market position in the “market of internet-based messaging apps through smartphones” by creating its own United Payments Interface (UPI) payments system i.e., ‘WhatsApp Pay’ within its messaging platform. It was visible in the WhatsApp case that by doing so, it facilitates the pre-installation of WhatsApp pay in mobile phones, which would ultimately make it more amenable to users than other options available. The CCI instead of dealing with it chose not to recognize it in the WhatsApp case. However, the same issue has arisen again in a much clearer manner before the Competition watchdog and by issuing an investigation this time CCI has taken a step in the right direction. What is the problem of Status Quo Bias or Default behavior in consumers? The default behavior in consumers was a very less discussed issue in the Competition arena until recently, wherein the Competition and Markets Authority (CMA) of the UK in its market study on Online Platforms and Digital Advertising tried to explain the issue and the associated threats. The study explained that “the default behavior in consumers while using applications and information providing websites, is something which has been encouraged by the transformation in the ways of interacting and acquiring information.” In today’s high-tech world we can all access almost every information available on a particular subject just with a single click. Online platforms are loaded with so much information that focusing on what information is relevant and what not has become a herculean task for a consumer. Adjacent to this, the availability of information in such an easy manner has made all of us impatient and has resultantly reduced our tolerance for delay. This behavioral change in the digital environment forms the backbone of the ever-increasing default behavior in the customers. To summarize it in a one-line we can say that “Default behavior on the part of consumers is a propensity to avoid wasting time by accepting the default option presented to them”. Though it sounds like that it is the best option available for a consumer, because it looks like a way by which a consumer can select the options which are more favorable to him and can get rid of the unnecessary and extraneous information, resultantly saving his time and cost. However, CMA in its guidelines while analyzing this behavior rejected this belief. It stated that the default behavior of consumers plays an enormous role in shaping the competition in social and search media. A consumer’s choice in the selection of various applications such as ‘what search engine to use is highly influenced by default options available to him. A consumer is more likely to make use of applications that are easily accessible and directly available to him on his device.  However, when consumers start using these apps on a regular basis, the power of these platforms to influence consumer choices increase manifolds. As most of these apps in one way or another are engaged in collecting consumer data. This data helps them in providing better and personalized services which ultimately helps them in creating control over their users. This control exercised over users ultimately binds them to these applications which automatically creates hurdles for the other players in gaining users and increasing their market reach. This is the sole reason why these big firms and platform owners pay extreme importance to devise ways of achieving the status of default in users’ devices. For example:- In 2019, Google paid 1.2 Billion Pounds to different parties in the UK alone, in order to appear as the default feature on their devices. This exercise helps giant companies to increase their profits. The bone of contention lies in the fact that consumers are now habituated and are not willing to shift because they are provided with what seems to them the most economical, efficient, and easy way to fulfill their needs. However, they do not realize that this exercise on the contrary is blocking their ways towards other and perhaps better available alternatives. It not only acts as a detriment to the consumers but it also harms other players in the market as their user base is being blocked, leading them to enormous losses and ultimately wiping them off the market. How does

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Critical Appraisal of Sec. 14(2a) of IBC: Essential Goods And Services

Insolvency Law /

[By Samar Pratap] The author is a student at the Institute of Law, Nirma University.   Introduction The third parties are prohibited from terminating, stopping, or interrupting the supply of essential goods and services to the corporate debtor under Section 14(2) of the Insolvency and Bankruptcy Code (hereinafter referred as “IBC”). The Insolvency and Bankruptcy Board of India Regulations 2016 (CIRP Regulations) describe “essential goods and services” broadly, referring only to four types of supplies: (a) electricity, (b) water, (c) telecommunication services, and (d) information technology services. The four materials are considered basic necessities for any corporate debtor to stay in business, and they are not intended to be supplied in large quantities for commercial gain. In fact, NCLTs have not only restored the corporate debtor’s supply of these goods but have also gone beyond the limits of this provision to order the continuation of other supplies that were deemed essential to the corporate debtor’s operations. The Insolvency Law Committee concluded in a report reviewing problems with the IBC’s implementation that the four listed supplies might not be sufficient to keep the corporate debtor operating as a going concern, and that other important supplies, such as input supplies, may be needed. Further, the Insolvency Law Committee noted that, during the CIRP, personal negotiations with providers to extend existing contracts were not every time effective, particularly when supplies are difficult to replace and suppliers who exist seek a large sum of money to retain supply. The Insolvency Law Committee proposed that the IBC be revised to allow for more flexibility in determining the products and services that are essential for the corporate debtor’s operations. The IBC’s adoption of Section 14(2A) gives legislative effect to this viewpoint, allowing Resolution Professionals (RPs) to prohibit the termination of products and services that they consider ‘critical to protect and maintain the value of the corporate debtor and control the operations of such corporate debtor as a going concern.’ During the moratorium period, the suppliers, on the other hand, are not obligated to continue supplying if there is a default for the payment of supplies on the part of the corporate debtor. Although more information about how this amendment will be implemented is awaited. Inconsistencies in Amendment Both, the proposed CIRP Regulations or the Insolvency and Bankruptcy Code do not include any guidelines about how to assess which supplies are essential. If the corporate debtor is able to find alternative suppliers, can the supply be deemed critical? What if engaging alternative supply is inefficient in terms of time? Different stakeholders can interpret the term important in different ways. According to the Insolvency Law Committee, Resolution Professionals (RPs) should determine whether the supplies have a direct and substantial nexus with keeping the corporate debtor functional, as well as whether they can be easily replaced. These criteria, however, were not included in the revised legislation. As a result, the concept of vital supplies is vague, and its application is left to judicial discretion. Although an extensive list of critical supplies would negate the amendment’s aim. Therefore, there is a need for simple legislative conceptual frameworks for determining the scope of critical supplies. Suppliers and mediation experts would be able to decide if a specific supply can be terminated without resorting to formal adjudication processes with the help of such guidelines, such as – determining that supplies must have substantial and direct nexus with keeping the corporate debtor functional or supplies should be such, so as to maintain a balance between both the interest of supplier and the corporate debtor. This would reduce the amount of time and money spent on the resolution process, as well as the number of cases handled by insolvency tribunals. Such measures will bring uniformity and predictability to adjudication when parties approach insolvency tribunals for a formal decision. No guarantee of reward & No guarantee of payment Section 14(2A) allows the corporate debtor to pay for products and services rendered during the CIRP as a way of protecting essential suppliers. Suppliers have the right to stop providing services if the corporate debtor does not make timely payments. Although this offers a solution in the event of a payment default, suppliers are not given any specific guarantee of payment in order to maintain supplies. As a result, critical suppliers have no choice but to bear the dreadful chance of corporate debtor default. This risk is amplified if the contract calls for payment of products following delivery or performance of a service. If we see at the laws in UK and US, they have more concrete provisions for essential suppliers, such as payment assurance in the form of guarantees or other agreed-upon means and personal responsibility for payment of materials by the insolvency representative. Essential suppliers should also be granted statutory protection, according to the UNCITRAL Legislative Guide on Insolvency Law. It states that a policy in this area should consider a variety of considerations, including the value of the contract to the proceedings, the expense of providing the requisite security to the proceedings, whether the debtor would be able to fulfill the obligations under a continued contract, and the effect of requiring the counterparty to bear the risk of non-payment. These features ensure that essential suppliers are paid regardless of the corporate debtor’s insolvency, and during the resolution phase, they have protected from financial liability if the corporate debtor experiences business or operational setbacks. Incorporating essential supplier rights will not only provide the necessary comfort to those suppliers but also enable non-critical suppliers to continue doing business as normal, improving the corporate debtor’s value and efficiency. From a legal standpoint, it may be worthwhile to consider using the IBC’s creditor-driven system to pursue payment assurance. A financial creditor in the Committee of Creditors may provide security in the form of a surety, letter of credit, or other agreeable means on behalf of the corporate debtor if the COC tasked with pioneering the CIRP believes the corporate debtor is a sustainable organization. The financial creditor does not have to

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Tax Implications on SPAC: To SPAC or Not To SPAC?

Taxation Law /

[By Devarsh Shah and Dharmvir Brahmbhatt] The authors are students at the Gujarat National Law University.   Introduction SPAC Listings have witnessed a massive global revival in recent times. With around 250 listings, SPACs raised nearly $ 80 billion in the United States in 2020 and has been growing since. Not just in the United States, but in India too, SPAC listings have resurged. Recently an Indian company, ReNew Power sought listing on NASDAQ through SPAC. Many others like Flipkart and Grofers are considering SPAC Listing in the near future. The sudden strong re-emergence of SPACs in India has ignited several deliberations in the legal fraternity. The biggest example of the same is the recent consultation paper issued by the International Financial Services Centre Authority (IFSCA) of India (regulator of the GIFT City International Financial Services Centre) which provides for SPAC listings in the IFSC. In essence, SPAC refers to a Special Purpose Acquisition Company which is a ‘blank cheque entity’ floated to raise capital through Initial Public Offer (IPO). It is essentially a shell corporation established with the sole purpose of acquiring an undisclosed operating company. After the IPO, a target is identified and with the approval of shareholders of the SPAC, it is acquired by way of a reverse merger, which is also called a de-SPAC transaction. A SPAC is preferred over a direct listing because it is a faster way of going public. Yet another significant reason for Indian companies is an easy access to foreign capital markets. While, at first, SPAC listings may seem to be very fascinating, the regulatory framework in India is not very conducive for the same. Restrictions contained under various FEMA regulations and RBI guidelines pose a severe threat to the viability of SPAC listings for Indian companies. To add to that, an SPAC listing entails a severe tax burden upon the Indian company and its shareholders. The present article makes an attempt to analyse tax considerations involved in an SPAC Listing.  The ensuing section deals with various tax implications for effecting a SPAC Listing of an Indian Company which is followed by a discussion regarding tax liability once a de-SPAC transaction is concluded. The concluding part of the article examines the economic viability of SPAC listings in light of the available alternatives for Indian companies. Tax Considerations in a SPAC Listing Capital Gains under Income Tax Act As noted earlier, a de-SPAC transaction in almost all cases is concluded by way of a reverse merger of the Indian Target with the SPAC entity. Since an Indian target company merges into the foreign SPAC entity, the merger is in the nature of a Cross-Border Outbound merger. While, in normal cases, mergers and amalgamations are tax neutral under the Income Tax Act, 1961, this is not the case for Outbound Mergers. Section 47 of the Act enumerates those transactions which are not regarded as a ‘transfer’ for the purpose of the levy of capital gains. Clause vi of Section 47 of the Act exempts any transfer of a capital asset by the amalgamating company to the amalgamated company provided that it is an Indian company. However, in a de-SPAC transaction, the amalgamated company in all cases would be a foreign entity and hence Section 47 will not come to the rescue of the Indian target. Furthermore, transfer of a capital asset below the stamp duty value shall attract the rigors of Section 50C of the Act. Hence capital assets ought to be transferred at a fair value, which, in almost all cases, would be higher than the cost of acquisition thereby attracting a Capital Gains tax. Even the shareholders of the Indian target are not spared. Section 47 clause vii exempts the transfer of shares in a scheme of amalgamation if the amalgamated company is an Indian company. Further, the minimum acquisition value of shares by the SPAC entity should be the fair market value of the shares of the Indian Target. If the acquisition value is less than the fair market value, then the anti-abuse provision under Section 50CA gets triggered. Fair Market Value is expected to be much higher than the cost of acquisition and hence there is a significant tax liability upon the shareholders of the Indian Target. Stamp Duty The Levy of stamp duty on mergers is perhaps another significant hurdle for a SPAC listing. As held by the Supreme Court in Hindustan Lever Ltd v. State of Maharashtra, it is the scheme effecting the merger (order of the court/tribunal) which is an instrument under the Stamp Act. It is not necessary that there is a real transfer of property. Furthermore, valuation for the purpose of stamp duty has to be determined on the basis of shares/other consideration to the transferor company (Li Taka Pharmaceuticals Ltd v. State of Maharashtra). Since a merger cannot be concluded without court approval, stamp duty is inevitably attracted. Therefore, even though, there is no real transfer of assets in a de-SPAC transaction, it is leviable to stamp duty. Tax Implications post de-SPAC transaction. Permanent Establishment and its Taxability Once the merger has been effected, the Indian target loses its legal identity and becomes a branch/permanent establishment of the SPAC which is essentially a foreign entity. The creation of a permanent establishment is one of the most critical facets of international taxation. As a general rule, the profits of a foreign company are taxable in India only if such a company has a permanent establishment in India. Further, the income attributable to only such permanent establishment is taxed. The definition of a permanent establishment can be made out by a co-joint reading of Section 92F(iiia) and 92F(iii) of the Income Tax Act which defines the term as a fixed place of business through which the business of the enterprise is wholly or partly carried on. As noted earlier, once the de-SPAC transaction is concluded, Indian Target loses its legal existence in India and hence becomes a permanent establishment of the foreign SPAC entity.

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The Whatsapp Privacy Policy & Abuse of Dominance

Competition Law, Contemporary Issues /

[By Tavashya Kumar] The author is a student at National Law University, Delhi. Introduction WhatsApp, one of the largest online messaging services in India and across the world, recently updated its privacy policy for users across the world which introduced changes to the manner in which a user’s data is stored and utilised when interacting with a business account on WhatsApp. It also seeks to enhance Whatsapp’s integration with Facebook, its parent company, by increasing the sharing of certain types of information such as account and transaction data. However, it has claimed that personal information such as private messages and videos will not be shared and that end-to-end encryption will prevail. The catch, however, lies in two facts- firstly, the privacy update is mandatory for users to accept. If they fail to agree to the terms within a stipulated deadline or refuse to do so, their accounts shall be deactivated. The second crucial factor is that WhatAapp has been discriminatory in the nature of its updates rolled out across the world. In fact, as pointed out by the Govt. of India in a letter to WhatAapp, it has rolled out a relatively less stringent update in Europe owing to the protections enshrined in the EU General Data Protection Regulations. The blog intends to examine this recent update in light of the provisions of the Competition Act, 2002 (Section 4 & Section 19) to ascertain whether this privacy update, and its mandatory and discriminatory nature, constitute an ‘abuse of dominant position’ on behalf of WhatsApp. Existence of Dominant Position According to Section 4 of the Act, abuse of dominance is established when an enterprise imposes unfair and discriminatory conditions on the purchase of goods and/or creates conditions that result in denial of market access. However, before determining whether the actions taken by a corporation amount to an abuse of its dominant position, it is first essential to establish that it enjoys a dominant position in the relevant market, failing which it cannot be scrutinised for abusive behaviour. This is because what may be commercially justified behaviour for non-dominant firms, may become exploitative or exclusionary in the case of dominant firms. There is a simple rationale for such a distinction- since non-dominant firms are bound by market forces, consumers can simply elect not to purchase their products and instead purchase from a competitor, which is not the case when the firm is in a dominant position. Accordingly, an enterprise is said to be dominant if it enjoys a position of strength in the market which enables it to operate independently of competitive forces in the market or affect its competitors or consumers in a manner which is beneficial for it. Section 19(4) of the Act provides an illustrative list of factors that must be considered by the CCI while establishing whether or not an enterprise is in a dominant position. This includes factors such as market share, size & resources of enterprise & its competitors, vertical integration & network effects, dependence of consumers on such enterprise etc. However, since dominant position refers to a position of strength enjoyed by an enterprise in the “relevant market”, assessment of dominance is to be preceded by delineation of the correct relevant market in which dominance is to be assessed. As laid down is subsections 6 & 7 of Section 19, this relevant market has two components- ‘relevant geographic market’ and ‘relevant product market’. In context of WhatsApp, the CCI has previously established that it is in a dominant position in the market in two noteworthy cases. In the case of Harshita Chawla v. Whatsapp & Facebook Inc., wherein the informant accused WhatsApp of violating Section 4 by using its dominance in the online messaging apps market to capture a different market (online payments), the CCI delineated the relevant market as ‘the market for over-the-top (OTT) messaging apps through smartphones in India’. Similarly, in Vinod Kumar Gupta (for ‘Fight for Transparency Society’) v.Whatsapp Inc., the CCI adopted a similar viewpoint, stating that its market is instant, internet based communication services through third-party communication apps on smartphones, which is different from text messaging services. Additionally, in both of the aforementioned cases, the CCI also held that WhatsApp was in a dominant position in this relevant market, on several grounds. Firstly, with regard to Market Share, the CCI observed that WhatsApp is the most downloaded and widely-used instant messaging app in India. It reached this conclusion by using publicly available information to ascertain that it had over 500 million active users, was installed on 96% of smartphones and was used by 64% of all Indian mobile users. It further observed that these figures were far ahead of its closest competitors such as Snapchat or, more recently, Telegram & Signal. Further, in both cases, it was held by the CCI that factors such as the network effect created by its vertical integration with Facebook and increased costs of switching from one platform to another create a dependence of consumers and constitute significant barriers to entry. Abuse of Dominance By WhatsApp Despite holding that WhatsApp is in a dominant position in both of the aforementioned cases, the CCI refused to hold it accountable for abuse of dominance in either scenario. Since the case of Harshita Chawla (supra) was in context of WhatsApp Pay, it did not raise privacy policies as an issue and hence is not relevant in the present context. However, the case of Vinod Kumar Gupta, which was filed subsequent to the takeover of Whatsapp by Facebook, is of immense relevance to the present situation. This is because it was filed in the context of a privacy update, akin to the present update, introduced by WhatsApp subsequent to the takeover. Through this update, users were forced to share certain personal information and account details with Facebook in order to continue availing services of Whatsapp. The informant alleged that these details were used by Facebook for purposes such as creating targeted advertisements. Further, it was alleged that the

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A Critique of ‘Debtor in Possession Model’ Under Pre-Pack Insolvency in India

Insolvency Law /

[By Pranav Karwa and Gaurav Karwa] Pranav is a student at the National Law University, Jodhpur and Gaurav is a student at the West Bengal National University of Juridical Sciences.   Pre-pack insolvency process involves an arrangement between the debtor and the creditor to negotiate the sale of assets before initiating the insolvency proceedings via the court or any other appropriate forum so as to enable resolution and debt recovery at a faster pace than the regular insolvency resolution process. This practice was prevalent in countries like the USA and UK since 1978, however, recently, the Insolvency and Bankruptcy Board of India notified the Insolvency and Bankruptcy Board of India (Pre-Packaged Insolvency Resolution Process) Regulations, 2021 ( “Pre-Pack Regulations”) for MSMEs, which are squarely based on the Report of the Sub Committee of the Insolvency Law Committee, chaired by Dr. M.S. Sahoo. One of the most striking recommendations made by the sub-committee was the “debtor in possession model.” As per this model, during the pre-pack insolvency process, the promoters are permitted to remain in the Management of the affairs of the Corporate Debtors except for the matters covered under § 28 of the Insolvency and Bankruptcy Code, 2016 (“the Code”), which require mandatory approval of Committee of Creditors (‘CoC’). This recommendation of the sub-committee has been retained under Chapter X, Rule 50 of the Pre-pack Regulations, with minor changes. The authors believe that the “debtor in possession model” is in stark contrast to the existing insolvency regime in India and is marred with various inconsistencies and difficulties. Critical Analysis of Debtor in Possession Model proposed under the Pre-Pack Regulations The authors believe that ‘debtor in possession of the management model’ is fundamentally contrary to the well-established principles of insolvency jurisprudence in India. It seeks to place the same set of promoters back in the helm of affairs who are ultimately responsible for dragging the company to insolvency. 29A of the Code lays down the eligibility criteria of resolution applicants and bars certain classes of persons from submitting a resolution plan. Therein, promoters of the Corporate Debtor are barred from submitting a resolution plan. The rationale behind this rule is to keep the persons responsible for the default of the Corporate Debtor out of its Management. Moreover, as observed by Supreme Court in Chitra Sharma v Union of India, the primary intention of inserting § 29A in the Code is to prevent people responsible for the insolvency of the Corporate Debtor from getting a backdoor entry in the Management of Corporate Debtor. This practice further ensures effective corporate governance and the maintenance of public interest. It, thus, becomes clear that the legislature and judiciary have been highly concerned about the involvement of promoters in the Management of Corporate Debtor, and this apprehension justifies the rationale behind the insertion of § 29A. The ‘debtor in possession model’ under the Report of the Sub-Committee and Rule 50 of the Pre-Pack Regulations goes squarely against the very spirit of § 29A as even after the initiation of the Pre-Packaged Insolvency Process, the promoters remain at the helm of affairs. Moreover, recently, in Arun Kumar Jagatramka v. Jindal Steel and Power Limited, the Apex Court decided whether the promoters, who are ineligible u/s 29A of the Code, can propose any scheme of arrangement u/s 230 of the Companies Act, 2013. The Court observed that § 29A of the Code ensures a sustainable revival of the Corporate Debtor and is grounded on the fact that the person responsible for the problem cannot participate in resolving the problem. Finally, the Court disallowed such promoters, ineligible u/s 29A of the Code, from submitting a compromise or arrangement u/s 230 of the Companies Act, 2013 as it would be manifestly arbitrary. Therefore, a corollary to bar u/s 29A of the Code is a bar from proposing any scheme u/s 230 of the Companies Act, 2013. Furthermore, there is a power and responsibility mismatch for Resolution Professionals under the Pre-Pack Regulations. Minimal powers have been given to the Resolution Professional to visit Corporate Debtor’s premises, inspect assets and prepare a monthly report with the Corporate Debtor for CoC, among others under Rule 50 of the Pre-Pack Regulations. Ultimately, the Management of the Corporate Debtor does not transfer to the Resolution Professional on initiation of the Pre-Pack Insolvency Resolution Process. Therefore, it may become practically difficult for the Resolution Professionals to discharge their statutory obligations. For instance, a Resolution Professional has to undertake multiple responsibilities like overseeing an independent asset valuation and also conducting an eligibility test under § 29A as to proposing resolution plan. However, it may become difficult for Resolution Professional to complete all these duties in a ninety-day timeline when the Resolution Professional is not in Management or responsible for preserving the value of assets. The way forward: Suggestions The authors believe that Pre-Pack Insolvency Resolution Process has remained unexplored and can reduce the pendency of insolvency matters if implemented in the proper form. The Pre-Packs can wholly revolutionise how insolvency resolution takes place, which is necessary, considering the Indian economy is gripped with the challenge of mounting Non-Performing Assets at present. Further, it is feared that soon after the ban on insolvency application is lifted on 25th March, 2021, an upsurge in insolvency applications under the Code may temporarily derail the insolvency resolution process. Thus, the Sub-Committee of Insolvency Law Committee has rightly observed that the real test of Pre-Pack Insolvency will be how it pans out once implemented during the COVID-19 Pandemic and even post-pandemic. Also, the Scheme, as introduced by Pre-Pack Regulations, is only in its nascent stage and will require requisite revisions to suit the Indian Insolvency Regime. For instance, presently, the Promoter has been given a very significant role in the Management during the Pre-Pack Insolvency Resolution Process. Thus, Rule 50 of the Pre-pack Regulations must be revised to completely exclude the Corporate Debtor/Promoter role in the Management once the resolution process starts. Moreover, instead of opting for a single option Pre-Pack

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Bringing Artificial Intelligence to Boardroom

Company Law, Contemporary Issues /

[By Abhinav Gupta] The author is a student at the National Law University, Jodhpur.  Introduction While discussing his book, 21 lessons for the 21st Century, Yuval Noah Harari points out that humans face existential crisis due to technological disruption. In his other book, Homo Deus: A brief history of tomorrow, he highlights the good and bad of artificial intelligence (AI). He believes that AI holds the potential to exterminate mankind. The emergence of cases where algorithms and AI have replaced humans has made this prophecy more increasingly daunting. Algorithms and AI are revolutionizing the way businesses operate. The disruptive effects of such technology have been felt across various business functions. These emerging technologies have the potential to create corporations that are completely autonomous and run by algorithms. At the same time, they can be used to just assist in increasing the efficacy of business operations. Business decisions require comprehending a variety of data and AI has proved its capability to process complex data to reach conclusions. The use of AI in boardrooms can help directors and benefit stakeholders by complementing them, if not substituting, in performing their functions. In this article, the author discusses how AI has the capability to revolutionize the functions of directors and what the operational and legal hurdles are in employing AI at the highest level in corporations. Artificial Intelligence AI has the ability to process huge amounts of data. While human intelligence can process only the seemingly important and related data, AI can process unrelated data as well, which might have a bearing on the decision. There are three kinds of AI, differentiated on basis of decision-making rights allocated to such AI, namely, assisted, augmented and autonomous. Under the assisted AI, the tech merely assists in the process of decision making and does not take decisions itself. The decision-making power continues to rest with the human. Augmented AI shares decision rights with humans and both learn from each other. On the other hand, autonomous AI completely replaces the human and operates independently of human intervention to take over all the decision rights. This distinction between different kinds of AI can be implemented in corporations in order to develop a robust technical environment. Using AI in Corporate Functioning The ability of AI, big data, and machine learning can be exploited to assist corporations in taking strategic decisions, managing risks and ensuring compliance. Moreover, humans are often faced by their cognitive biases which prevent them from considering certain relevant information or flip side of issues. AI, unlike humans, is free of these biases which can greatly affect the functioning of a corporation. AI would help directors in exercising ‘independent judgment’ and become appreciative of various views as each suggestion by AI will be based upon concrete data. AI can be used to channel contrarian views based on such data and reduce the occurrence of ‘groupthink’. Groupthink refers to a situation where an individual tends to agree with the viewpoint of the majority in order to form a consensus, irrespective of the validity or correctness of such viewpoint. Hence, directors will be able to convey dissent in boardrooms which is essential in order to ensure that decisions taken by the board are in the best interests of all the stakeholders rather than just the directors or a select group. AI can also be used for the selection of board members. With more and more information available about directors regarding their qualifications, past experiences, AI should be able to process this data to ascertain the future performance of the candidates in light of the objectives and future plans of the company. It would be easier for AI to comply with the law regarding the qualifications of directors. For instance, Section 149(6)(a) of the Companies Act, 2013 (the Act) provides that independent directors should have the relevant experience and expertise. Moreover, they should not have any pecuniary relationship with the company. Naturally, this would entail going through past transactions of the candidate as well as the company. An AI, which has all such data of transactions, would be much better equipped to determine if the candidate possesses such experience and expertise and whether they have any pecuniary relationship with the company, ultimately helping in compliance. The availability of data allows AI to foresee trends and at the same time handle the data of past and present, efficiently. Thus, AI can assist in the early detection of non-compliance, allowing the company to mitigate penalties and punishment associated with such non-compliance. It has been the approach of corporate law scholars that boards must be monitored in order to uphold the interests of shareholders and prevent self-serving directors from putting themselves before the corporation. The Indian regulator has conformed to such an approach by keeping checks on directors and providing for their duties (see Section 152; Section 166; Section 169; Section 171 of the Act). By keeping a record of all the transactions undertaken by the directors, AI allows keeping a tab on the functioning of the board to ensure compliance with the law. Be it reporting related party transactions (see Section 188 of the Act) or whether directors are complying with their duties under Section 166 of the Act or Schedule IV of the Act. Moreover, AI helps in handling the agency problem. The agency problem refers to the conflict of intentions of a principal and agent. Where the principal expects the agent to work in furtherance of his best interests, the agent would have certain interests of his own and might prioritise them over the principal’s interests. However, AI does not have any agenda of its own. It would operate on the basis of the available information and how it is employed by the directors. AI would act to the best of its capability in the best interests of the stakeholders rather than pursuing its own agenda. Directors authority and Duty to delegate to AI After affirming that AI has the capacity to make informed decisions, one must understand whether

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Exploring The Dimension of Unvested Stock Options During Involuntary Termination

Capital Markets and Securities Law, Company Law, Contemporary Issues /

[By Pallavi Mishra] The author is a student at the Hidayatullah National Law University.   In recent years, the concept of Employees’ Benefit Schemes in the form of Stock Options has gained popularity for paying compensation to the employees, while also giving them incentives to contribute towards the betterment of the company. The history of discussion on employment schemes in India dates back to 1997, wherein the JR Verma Committee suggested that the guiding principles for the administration of employment schemes in India would be “complete disclosure and shareholder approval.” Presently, the Employee Stock Options for listed companies in India are governed under the Companies Act, 2013 and SEBI (Share Based Employee Benefits) Regulations, 2014 (“SEBI SBEB Regulations”). While briefly discussing the procedure of grant of options, the author in this article delves into examining the bargaining position of an employee who has been involuntarily terminated from service leading to forfeiture of unvested stock options. The article also contemplates amendments that may be brought about in the functioning of the Compensation Committee, required to be constituted for the administration of employees’ stock options in India. Exercise, Grant and Vesting of Stock Options Stock options are usually offered to the employees at a price lower than that prevalent in the market. In order to convert the options into shares and exercise the rights granted, the employees are under an obligation to render their services to the company during the “vesting period”. As per Regulation 18, there is a statutory requirement of a minimum of one year within which none of the stock options can be exercised by an employee in India. It is important to note that in addition to this, a company usually imposes other time-and-performance based stipulations before the employees gain the right to convert options into shares of the company. A combined reading of Regulations 2(j), 2(zi) and 2(zj) lead to the inference that only once the vesting period and conditions are fulfilled can the employee exercise the stock options and receive benefits associated with the grant of shares under the scheme. [i] Unvested Stock Options and Involuntary Termination In the above-mentioned scenario, there may arise an unfair situation wherein an employee has been rendering services to the company for a fairly long period of time but is terminated from the service under unforeseen circumstances. Alternatively, an employee may also be terminated from service in bad faith shortly before the vesting period to deter him from receiving the benefits of his stock options. This scenario assumes immense importance in the current times as many companies across India have been laying off employees and reducing workforce to overcome the losses incurred due to the COVID-19 pandemic. As per Regulation 9, in case of voluntary or involuntary termination of an employee from the service, all unvested shares get forfeited while the employee retains the right to vested shares, which he may be forced to exercise prematurely under unfavorable market conditions. In light of this issue, it is necessary that fair and equitable caveat be introduced within the SEBI SBEB Regulations to improve the position of an employee who has worked hard under the expectation of gaining the right to ownership in the company. Way Forward It is suggested that mandatory provisions for pro-rata vesting be introduced as a proviso to Regulation 9(6) for situations wherein the employee is terminated unexpectedly and/or involuntarily. The theory of pro-rata vesting rests on the assumption that a stock option is a deferred form of compensation for the employee and every day the employee becomes entitled to some percentage of it. In cases of termination of an employee, the SEBI SBEB Regulations must also provide for review by the Compensation Committee (required to be appointed under Regulation 6 for the administration of employment benefit schemes) to assess whether the employee has completed “substantial performance” of the vesting conditions and the time period. The committee could take into consideration factors like whether the employee has performed his duties regularly, his contributions towards the growth of the company, and the time left for the unvested options to become vested. While there is a dearth of jurisprudence in relation to this issue in India, a parallel could be drawn from section 12 of the Specific Relief Act which states that “Where a party to a contract is unable to perform the whole of his part of it, but the part which must be left unperformed by only a small proportion to the whole in value and admits of compensation in money, the court may, at the suit of either party, direct the specific performance of so much of the contract as can be performed, and award compensation in money for the deficiency.” In the case of AL Parthasarthi Mudaliar v. Venkatah Kondiar Chettiah, observations in relation to the performance of a contract were made, wherein it was stated that equity demands specific performance of a contract, where the portion left unperformed in small. Thus, it is a settled principle in law that justice requires the remaining part of the contract to be performed rather than a negation of the entire contract. Assuming that the grant of stock options is a contract between the company and the employee, wherein the employee has performed the contract substantially, there is sufficient ground for him to claim pro-rata vesting of the shares in case of unforeseen and involuntary termination from employment. Reliance is also placed on the Californian jurisdiction case of Division of Labour Law Enforcement v. Ryan Aeronautical Company in which similar observations were made with regard to breach of stock option contract between the employer and the employee, wherein the Court while granting damages to the employee held that substantial compliance could be said to meet the requirements of the vesting obligations under the contract. It is also interesting to note that Rule 12 of the SEBI (Share Capital and Debentures) Rules, 2014 entails any company other than a listed company to comply with several conditions before it can

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