Author name: CBCL

Conclusion of a Corporate Saga: The Tata-Mistry Dispute

Company Law /

[By Mansi Avashia] The author is a student at the Gujarat National Law University. Introduction The Tata-Mistry dispute has been one of the most controversial and hostile battles in the corporate sector of India. On March 26, 2021, the Supreme Court brought an end to this longstanding feud by setting aside the 2019 National Company Law Appellate Tribunal [“NCLAT”] order which had restored Cyrus Mistry as the Chairman of the Tata group. In this post, the author analyzes the Supreme Court judgment in detail and highlights why this decision is an important precedent in Indian jurisprudence. Facts Tata Sons was established as a private company in 1913. Over the years, the Shapoorji Pallonji group acquired 18.37% of the total share capital of Tata Sons. In December 2012, Cyrus Mistry was appointed as Executive Chairman of Tata Sons for five years.[i] Cyrus Mistry was ousted by a board resolution passed in October 2016and was removed as a director from Tata’s group companies, i.e., Tata Consultancy Services, Tata Teleservices, and Tata Industries Limited.[ii] Two companies of the Shapoorji Pallonji group, namely, Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, approached the National Company Law Tribunal [“NCLT”], Mumbai alleging oppression, mismanagement, and unfair prejudice by Tata Sons. NCLT dismissed the petitions of Shapoorji Pallonji group companies and hence the matter was appealed before NCLAT.[iii] The NCLAT reversed the decision of the NCLT and found the removal of Cyrus Mistry illegal. The NCLAT also restricted Ratan Tata and the nominees of Tata Trusts from making any decisions that needed majority approval in an AGM or of the board of directors. .[iv] Tata Sons approached the Supreme Court to decide the matter. Issue The questions considered by the Supreme Court were: Whether the company’s affairs were conducted in a prejudicial and oppressive manner and whether the facts justified the winding up of the company on just and equitable grounds? Whether the reliefs granted by the NCLAT particularly with respect to the reinstatement of Cyrus Mistry, were in consonance with the power available under Section 242(2) of the Companies Act, 2013 [“the Act”]? Whether the NCLAT had the power to mute Article 75 from the Articles of Association [“AoA”] of Tata Sons? Whether the affirmative voting rights granted by the AoA were oppressive and prejudicial in nature? Whether the re-conversion of Tata Sons from a public to a private company required approval under the provisions of the 1956 Act and the Act? Findings Oppression and Mismanagement The NCLT in its decision had provided reasoning for all the allegations of oppression and mismanagement including Air Asia dealings, Nano project failure, dealings with Siva Group Company, which were not addressed by the NCLAT in its order. These findings were not appealed by Cyrus Mistry. Hence, the Apex Court considered the NCLT’s decision as final and did not make any determination on these matters. Invocation of just and equitable clause Section 242 requires the Tribunal to decide whether it was just and equitable for the company to be wound up due to oppression and mismanagement. The Court held that the grounds would be fulfilled when there was a mutual breakdown of confidence in a company that operates as a quasi-partnership.[v] In the present case, there was no quasi partnership since Shapoorji Pallonji had acquired shares decades after Tata’s inception. Moreover, some disagreements among the management were not sufficient to invoke the clause. The Court also pointed out that the NCLAT should have considered the feasibility to wind up a company with charitable trusts as its shareholders. Reinstatement of Cyrus Mistry by the NCLAT At the outset, the Court pointed that Cyrus Mistry’s behaviour of leaking confidential emails to the press and sensitive information to the tax authorities was largely responsible for the loss of confidence among the Board of Directors and his subsequent removal. With respect to the reinstatement in the NCLAT order, the Supreme Court’s observation on this finding was three-fold. First, that Section 242 did not provide for the power to reinstate persons in a case of oppression and mismanagement. Second, Cyrus Mistry had not sought reinstatement as a relief in his prayer before the Court. Third, Cyrus Mistry’s tenure had expired as it was for a period of 5 years, from 2012-2017. Thus, the NCLAT had gone beyond its powers by appointing Cyrus Mistry as the Chairman ‘for the rest of his tenure’. Further, the Court also noted that if the removal of Cyrus Mistry was illegal as found by the NCLAT, it was still an effective dismissal and could raise a claim for damages. Further, a contract of personal services could not be enforced by Courts. Thus, the NCLAT finding was found to be incorrect. Abuse of AoA Article 75 Article 75 conferred power on the Company to require any holder of ordinary shares to transfer his shares. This was rendered ineffective by the NCLAT in its order and its use was restrained on the basis of ‘likelihood of misuse’. The Court observed that Section 241 and 242 only provides for past and present prejudicial conduct and not for a future possibility of misuse. [vi]The Article had been a part of the AoA for a long time and Cyrus Mistry was himself involved in amending it. There were no instances of invocation or misuse of Article 75 by Tata Sons. Thus, the NCLAT’s decision was found to be unsustainable. Affirmative Voting Rights Article 121 of the AoA provided that all the matters which required the consent of the majority of directors had to be approved by the nominee directors appointed by the Tata Trusts. Cyrus Mistry wanted these rights to be restricted to certain matters and also be extended to the nominee directors of the Shapoorji Pallonji group. He also contested that these the presence of these rights impeded the nominee directors to make unbiased decisions in the best interests of the Tata companies. The Court held that  affirmative voting rights were commonly found in AoAs of companies all over the world

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Strategies for Corporate Recovery through M&A during COVID-19

Mergers & Acquisitions /

[By Nandini Shenai] The author is a student at the NMIMS School of Law, Mumbai. Countries around the world are imposing strict restrictions and social distancing norms as the Covid-19 outbreak worsens and the number of positive reports and casualties continues to rise. The catastrophe has transformed into a financial downturn plummeting the financial sector into an unprecedented recession, as the wheels of economic development come to a stop. The economic standstill in India comes as a consequence of the same. Changes in the market landscape, valuation problems, and a shortage of financial backing as a result of banks’ restricted lending and corresponding reallocation of excess funds are some of the primary factors of strategic planning. With regard to current negotiations, corporations must choose between bringing deals to a halt or accelerating the process. M&A transactions already in the planning phase or on the verge of being implemented would most probably be postponed until the economic downturn passes. Potential buyers are more likely to drop out of market bid systems. Multinational companies and Private Equity funds are expected to save capital in this volatile environment and move their focus to ventures that are domestic to their respective countries, which could have an impact on cross-border trade. Interpreting mergers and acquisitions in light of the existing conditions and circumstances would provide clarification when facing complexities.  Companies are resorting to a variety of unconventional corporate strategies, including emerging innovation technology acquisitions, risk mitigation, divestiture of secondary resources, collaborations with competitors, funding beyond venture capitals, diversified alliances with experts, and strategic associations with governments, in addition to rigid M&A. These incredibly turbulent times have given rise to a rare set of possibilities.   While some of the M&A transactions were due to companies restarting deals that had been placed on hold given the financial slump caused by the various national lockdowns, a large majority of it also demonstrated companies’ endeavors to undergo transformations and succeed in the post-pandemic setting. Transactions in the COVID Era: Various schemes and tax relaxations that were put forth by the Central Government in the 2020 budget including the inflow of cash that comes from sovereign wealth funds and the implementation of eased policies by the SEBI and the MCA have proved to act as a boost needed for M&A transactions in the times of the pandemic. Highlighted below are certain factors that may change the way M&A deals have traditionally been followed in India: Scope for investment: M&A deals completed during this span of time will need to account for the constraints imposed by the current situation and the strategy to decision-making will have to be rectified to meet the current challenges. Nevertheless, the downturn can provide some prospects for investors, who can take advantage of lower stock prices in the immediate future to gain a greater profit on investments once normalcy returns. Due Diligence:  A focused emphasis would be provided on clauses of contracts like indemnity clause, termination clause, risk of insolvency, ability to repay debts, medical insurance and benefits for employees, and regulatory compliance. Due to the evolution of the virtual corporate world in times of the pandemic, a stricter data protection and data privacy regime would be followed by companies. Pertaining to cross-country data transfers, stronger enforcement of international data protection rules like the GDPR needs to be done. Digitization of Regulatory Practices: Although the SEBI and the RBI have allowed stakeholders to file petitions digitally, the CCI allowed them to submit a tandem of applications digitally in March 2020, as well as pre-filing consulting via virtual conferencing in connection to, among other things, combinations that are in the ambit of the green channel path. Regulatory Interference: Opening up the possibility of delays in receiving clearance from statutory bodies, shareholders may opt for systems that do not have many regulatory configurations. As a result, a share purchase could be preferable to a downturn transaction under a corporate transfer arrangement. Indemnity: Potential buyers will need to determine the risks posed by the financial meltdown caused by Covid-19 to pursue detailed indemnity. Not only will the owners use information and subjectivity qualifiers to properly establish these indemnities, but they will also consider revealing any clear details pertinent to the Covid-19 situation in the form of a documented declaration.  Strategies for Corporate Recovery: The role of M&A will be reshaped in a post-Covid-19 setting as companies struggle to hold their standing in the market, accelerate the recovery process, and brace themselves to survive through a mix of offensive and defensive M&A strategies. Owing to the current pandemic, companies are resorting to either of the two processes of corporate revival. Defensive M&A: Defensive M&A strategies are the ones that are used to safeguard the functioning of the company. These strategies basically cater to hostile takeovers and are used to salvage the value of companies and safeguard markets to maintain competitive parity. To save capital from loss-making segments and maintain a stable primary sector, financially troubled businesses need to take drastic measures, such as the sale of assets that are distressed. The sale of distressed assets in crisis situations necessitates the quickest possible process to increase profits. Some defensive strategies that are could be followed by companies are mentioned below: Divestments: Due to the current economic strain, secondary assets that are and widely desirable after and do are not usually set for sale can be divested. In this type of situation, those who sell such assets must be fully cognizant that the number of prospective purchasers will be limited, and they must be mindful of how to handle asset fire-sales. Investor Activism: At the time of downturns, vigorously seeking value creation initiatives is critical to long-term success, as is knowing what investor activists or competitive bidders would seek. This may include rethinking shareholder returns, capital allocation, and trade finance, among other things. End-to-End M&A: Companies can aggressively reduce expenses and open up cash flow by taking pivotal steps to consolidate recent acquisitions. Private equity firms, institutional investors, distressed venture capitalists, and large corporations with solid investment portfolios are all in a hurry to act quickly and pursue potentially “predatory” M&A approaches.      

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Insolvency or Arbitration: A Fight Between Special Statutes

Arbitration Law, Insolvency Law /

[By Injila Khan and Utkarsh Mishra] Injila is a student at the Institute of Law, Nirma University, Ahmedabad and Utkarsh is a student at Symbiosis Law School, Noida. The Insolvency and Bankruptcy Code 2016 was enacted to structure and amend laws relating to the reorganization of financial assets and insolvency resolutions relating to corporate persons. Part II of the code deals with Insolvency Resolution and Liquidation for Corporate Persons and accordingly financial creditors, operational creditors, and corporate debtors can initiate Corporate Insolvency Resolution Process.[i]On the other hand, the Arbitration and Conciliation Act, 1996 governs the procedure related to both domestic as well as international arbitration along with their relevant enforcement. However, recently, there has been an ample number of cases where a financial dispute between parties often overlooked arbitration and lead to the process of insolvency of the company that owned the money in the first place. This leads to the failure of the concept of an alternative dispute resolution mechanism as a whole. Moreover, insolvency proceedings create numerous problems for the company who might not be out of funds but simply disputes the existence or quantification of a financial obligation created on the basis of a contractual arrangement. This further leads to insolvency being used as a pressure tactic to strong-arm the debtor organization into unfair payments. Ascertainment of the Term “Debt” under IBC Section 7(5) of IBC states that to initiate Insolvency Proceedings by the Financial Creditor there has to be a judicial determination by the Adjudicating Authority (AA) as to whether there was a ‘default’ by the Financial Debtor. As soon as the AA is satisfied that default has occurred it should accept the application for initiation of CIRP. This was effectively reiterated by the NCLT in the case of Innoventive Industries Limited v. ICICI Bank[ii]which states that claim of default by the financial creditor must be followed by ascertainment of existence of default by the AA. Thus, to start insolvency, the only criteria is debt. Wider Interpretation of the term “financial debt” Sec. 3(12) of IBC defines ‘default’ as non-payment of debt either totally or in part. In the case of SGM Webtech Pvt Ltd. v. Boulevard Projects Pvt Ltd[iii]it was held by the AA that even Fully Converted Debentures (FCCD) are unequivocally treated as a Financial Debt under Sec. 5(8) of IBC and for this reason, FCCDs were considered as financial debt. Also, Sec. 5(8) of IBC mandates debt to be disbursed against the consideration for the time value of money and since interest on debentures increases, therefore, it subscribes to the concept of the time value of money. Therefore, non-payment of any outstanding FCDs will qualify as non-payment of a debt and will be counted as a Default. Thus, debt obligations created by Financial securities are also being considered as financial debt and hence, a chance to invoke insolvency. Arbitration and Section 7 of IBC Disputes falling under Section 7 of the IBC belong to the class of litigations which are deemed non-arbitral.[iv]Therefore even if the agreements entered into by the parties contained an arbitration clause, they hold no relevance as soon as the dispute falls under Section 7 of the Code and there is any debt owed, in part or whole. The Supreme Courtin the case of Booz Allen & Hamilton v. SBI Home Finance Ltd[v]held that “generally and traditionally all disputes relating to ‘rights in personam’ are considered to be amenable to arbitration and all disputes relating to ‘rights in rem’ are required to be adjudicated by courts and tribunals”.Since the applications filed under Sec. 7 of IBC are matters relating to ‘right in rem’,[vi]therefore they are inherently incapable of being arbitrated. The Courts took a similar view in the case of Haryana Telecom v. Sterile Industries[vii]where an application under Sec. 8 of  Arbitration and Conciliation Act was not allowed in oppression and management cases under the Companies Act because it was a matter relating to ‘right in rem’. Therefore, it is sufficiently clear that the non-arbitrability of the class of disputes falling under section 7 of IBC makes the application liable to be rejected. Furthermore, in the Booz Allen case[viii], it was specifically listed by the SC that “if the subject matter of a suit involved Insolvency and Winding up matters, then such cases were non-arbitral in totality.” Therefore, any dispute that falls out of the private fora of the two parties and causes a breach even unintentionally shall make arbitration impossible as it classifies as a matter related to right in rem. The current stand of the case-law-based jurisprudence is sufficient to point towards an unstructured and unclear way of classifying a matter into the class of “right in rem” as there is no interpretation of the terms conclusively. The floodgates for divertive tactics in order to prevent arbitration comes from the fact that litigation is generally favourable to the party whose strategy is to prolong the dispute and the courts and tribunals having a huge backlog facilitates the same (A. Ayyasamy v. A. Paramasivam)[ix]. In the Booz Allen case[x], the court opened the floodgates to interpretational litigation when they stated that the subordinate rights related to personam that have arisen from a right in rem can be arbitrated. This comment over the flexibility of the right in rem vis a vis right in personam bifurcation has caused a lot of litigation since the court has to conduct a case-to-case evaluation of the dispute in question. Different interpretations by different High Courts and Supreme Court judges having to distinguish cases has made the questioning of the arbitrability of a dispute a favourable strategy to prevent payment of dues or as a pressure tactic against companies. Furthermore, the application of cases that interpreted the Arbitration Act 1940 such as Natraj Studios (P) Ltd. v. Navrang Studios[xi] has created further ambiguity since the 1996 A & C Act has a remarkable difference from the preceding statute and thus, precedents being used that have adjudicated the 1940 Act has also created huge jurisprudential inconsistencies. Furthermore, IBC and the Arbitration Act are

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Corporate Social Responsibility: Choice or Coercion

Company Law, Contemporary Issues /

[By Anchal Bhatheja and Chaaru Gupta] Anchal is a student at the National Law School of India University, Bangalore and Chaaru is a student at the National Law University Jodhpur. Section 135 of the Companies Act 2013 (the “Act”) in India provides for mandatory Corporate Social Responsibility (CSR) by corporations. Prior to 31.07.2019, the provision required corporations to merely ‘comply or explain’, that is, if a company did not spend the earmarked CSR expenditure, it had to disclose the reasons in its board report. However, the 2019 Amendment to the Act turned Section 135 into a ‘comply or suffer’ provision. It went a step ahead and provided for a fine, ranging from 5,000 to 25 lakh or imprisonment for 3 years or both. The provisions pertaining to imprisonment had to be removed due to the backlash from companies. Nevertheless, mandatory CSR continues to remain intact. Interestingly, on 22nd March 2021, the Union Minister of State for Finance and Corporate Affairs in India, while responding during the question hour in the Lok Sabha, said that the policies of the central government were not being implemented using the (CSR) funds that come from the companies.. Article 12 of the Constitution of India provides that governance is the State’s responsibility which makes the validity of the question doubtful. In this article the authors aim to discuss the viability of making CSR mandatory in the Indian context, from the perspective of promoting innovation and growth of businesses as well as social justice. There are overwhelming rationales, rooted in law and economics, to shift from CSR to other ideas namely Corporate legal Responsibility (1), Corporate Social Incentives (2), Individual Social Responsibility (3), and Governmental Social Responsibility (4). This is because the burden of social justice cannot be put on the corporates and should be on the government. And if at all it is to be done by a non-governmental entity, it should be individuals who undertake it voluntarily and not out of compulsion. CLR- Corporate Legal Responsibility Milton Friedman argues that the only social responsibility of corporates is to maximize their profits while playing by the rules of the game. They should be made to comply with regulatory laws like the Environmental Protection Act, 1986, The Air (Prevention and Control of Pollution) Act, 1981, Tax laws, etc. while carrying out their businesses, rather than having to mandatorily comply with CSR requirements. Presently, the law is reflective of a paradox. For instance, on one hand, India loses10.3 Billion Dollars or 75,000 Crore Rupees due to tax evasion by corporates on an annual basis. On the other hand, the CSR regulations mandate these corporates to contribute towards Prime Minister’s Relief Fund, Rural Development Projects, skill development projects, and other such government initiatives under Schedule VII of the Act. The paradox in the data suggests the State invests its limited administrative resources in making the businesses run legally before it makes them run ethically. Furthermore, better legal enforcement will lead to more voluntary compliance and would, consequently, increase investor confidence. This would also reduce disputes and litigation in the realm of company law, which presently puts a burden on state resources as well as hampers the growth of businesses. CSI- Corporate Social Incentive Mandatory philanthropy is an oxymoron. Mandating donations defeats the very purpose of philanthropy or CSR. Furthermore, coercing the corporates to engage in CSR will hamper innovation and corporates will allocate funds just out of fear of penalty. This was in fact witnessed when a lot of corporates invested in the construction of the statue of the popular Indian Leader Sardar Vallabhbhai Patel, dubbed the Statue of Unity, to stay in the good books of the government. It is better to positively incentivize corporates to take initiative on their own accord in the sector they are working, instead of coercing them to work in areas that they do not deal in. This will lead to more efficient outcomes as they would have expertise in those specific areas. Further, from a business perspective – it will also help them in improving their image and market base. For example, incentivizing a software company to build accessible software for the differently-abled is more logical and economical than forcing them to build toilets in a nearby village. Therefore, towards this end, the state can offer benefits like preferential clearances and tax abates to the corporates that act upon corporate social incentives in charity, instead of penalizing them for not being “charitable”. ISL -Individual Social Responsibility If CSR is not mandatory, the individual shareholders’ earnings will increase as the expenditure of the company decreases. This encourages the shareholders to engage in charity on an individual level, for a cause that aligns with their idea of social responsibility. Even if elimination of the expenditure of the company which goes into CSR investments does not lead to an increase in the income of an individual, they will be naturally more inclined to engage in charitable activities as compared to a situation where they know that their company is already investing enough of its resources in CSR and there is no need for them to engage in charity on a personal basis. Further, the decisions regarding the areas in which a company will invest, to fulfill its CSR requirements are taken by the Board of Directors (BoD) on the recommendations of the CSR committee which comprises two directors and one independent director. However, it does not mean that the opinion of the BoD necessarily aligns with the opinion of the shareholders. If the law omits the requirement of this coerced social responsibility on the corporates, the shareholders on their personal level will be able to have a free dialogue with their ideas of what social justice means to them and will be able to decide the areas they would want to engage with as philanthropists. Thus, the resultant satisfaction of the transaction will be much higher for the individuals. In fact, EdelGive Hurun India Philanthropy List 2020 suggests that individual philanthropy has just been

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Prospective Application of the Notification Increasing IBC Threshold: NCLT’s New Approach

Insolvency Law /

[By Christina D’Souza] The author is a third year student at RMLNLU, Lucknow. It has been almost a year since the Notification dated 24.03.2020([i]) (“Notification”) was notified by the Ministry of Corporate Affairs to increase the amount of default from 1 lakh rupees to 1 crore rupees for filing applications under Part II of the IBC. Even today, an issue is raised before NCLTs regarding the admissibility of claims less than 1 crore rupees where date of default is prior to the date of Notification. In May 2020, in the case of Madhusudan Tantia vs Amit Choraria ([ii]), the NCLAT clarified that the Notification is  prospective in nature. It also went on to note that the Notification will not apply to the applications where default occurred prior to the date of Notification. However, in July 2020, the Delhi High Court in the case of Pankaj Agarwal vs Union of India ([iii]), passed an interim stay on the order of NCLT accepting an application for a default of less than 1 crore where default occurred prior to the date of Notification. The Delhi High Court noted that there was an error by the NCLT in accepting the application, as the Notification was clearly applicable. Kerala High Court([iv]) and Madras High Court([v]) have taken similar positions. Recently, in February 2021, the Delhi High Court, in the case of Hari Singh vs Dynamic Aura LLP([vi]), directed the parties to the NCLT to have this issue of admissibility of claims prior to the date of Notification resolved. The NCLT took a divergent approach on this issue. Even after agreeing that the Notification has a prospective application, the NCLT went on to dismiss the application for which the date of default was prior to the date of Notification. NCLT’s Observations in Hari Singh Case Prospective or Retrospective application of the Notification not an issue NCLT accepted that the Notification has a prospective effect, but it went on to note that the issue is not whether the Notification is retrospective or prospective in nature. The issue is whether the right to file an application is a statutory right or a vested right. Right to file an application under IBC Code is a statutory right In this regard, the NCLT went on further to note that monetary jurisdiction is a statutory right, not a vested right. It reasoned on the lines that elements of vested right are altogether different from the statutory right. The Right of filing a case is a statutory right, not a vested right, when statute goes, that right also goes. The jurisdiction under the IBC is one of the remedies the creditor has. If the creditor cannot meet the requirements to initiate insolvency proceedings, then it is always open to the creditor to proceed before the DRT under SARFAESI Act or the Civil Courts under the Civil Procedure Code. Therefore, the parties shall not remain under the notion that it is a vested right to file cases below the threshold limit of one crore, even after that statutory right is not in existence in the statute. Thereby, unless a statutory right is exercised within time, i.e., before 24.3.2020, it cannot be construed as a vested right to file a case. Class Concept for monetary jurisdiction The NCLT recognized a class of creditors for the purpose of the jurisdiction of the Tribunal in light of the Notification. As per the same, the class of creditors who cross the threshold of one crore rupees to file cases, shall be able to invoke the jurisdiction of the Tribunal. The NCLT grouped all kinds of creditors in only one class because the Notification pertained to section 4 of the IBC and section 4 is applicable to all classes of creditors. Thus, the creditor filing an insolvency application shall belong to this class, i.e., must have crossed the threshold of one crore under section 4 of the IBC. The increased threshold applies to non MSME cases as well While interpreting the text of the Notification in a literal sense, the NCLT noted that “if at all the Government intention was only to apply this threshold to MSME cases, Government would mention that specifically”. NCLT further noted that they are required to go by the plain language of the Notification and not otherwise because there is no ambiguity in understanding its language. Nevertheless, even if the Notification was only for providing a relief to MSMEs, the Government at its level cannot create such a classification because that would be a legislative policy work, which cannot be done by the Government alone, without the approval of the Parliament through Legislation. Analysis of the Decision Interestingly, in the Hari Singh case, the Delhi High Court itself directed the NCLT to determine the legal point raised by the petitioners. The position that the Notification is applicable prospectively is more or less settled and the NCLT was right in not delving into the same. What sets this decision apart from all the previous decisions on this issue is the fact that even after accepting that the Notification is applicable prospectively, the NCLT still went on to dismiss the application because the threshold was not met, and the date of default was prior to the date of Notification. To support its decision in this regard, the NCLT did give some strong reasons and at the same time it made the applicants aware of an alternate remedy which they could pursue instead. An interesting question comes up regarding the precedence of Hari Singh case as the NCLAT in Madhusudan Tantia case has given a different observation in this regard. Even though both the Delhi High Court in Pankaj Agarwal case and the NCLT in Hari Singh case have reached a similar conclusion, the NCLT has taken a divergent view while coming to its conclusion, which is evident from the reasoning which is first of its kind. While the Delhi High Court in Pankaj Agarwal case was of the opinion that the objective of bringing

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‘SPACs and their Position in India’: An Analysis

Capital Markets and Securities Law /

[By Anumeha Agrawal] The author is a student at the Symbiosis Law School, Pune Introduction A Special Purpose Acquisition Company (hereinafter referred to as “SPAC”) as the nomenclature suggests is a company incorporated with the sole aim to acquire another private company thus converting it into a public company. The first step involved in the functioning of SPAC is the incorporation of the company with the promoters having expertise in the field of investment or the identified sector (if any). The second step is conducting an IPO where the public will invest in the company (without any business except for acquiring a private company), here the importance of reputed promoters arises as the investors are essentially banking on the technical know-how of the market and the identified sector for the acquisition. Following the IPO is the identification of the private company for the proposed acquisition and once identified the shareholders’ approval is required. The SPAC can only proceed with the proposed transaction if the proposed transaction secures a certain percentage of votes (differing in different jurisdictions, mostly lies between 50-90%). In case the requisite majority is achieved the dissenting shareholders have a right to get their investment returned (subsequent to a nominal deduction). The target company is acquired and the company becomes public by virtue of reverse merger and has the capital raised by the SPAC. In the event the requisite majority is not achieved then the SPAC can either identify another target company or liquidate depending on how much time has passed from its incorporation (differing in different jurisdictions, mostly lies between 18-36 months). Upon liquidation, the investors are paid back their investment with the interest accumulated in the escrow account (if any ) however the management is at the bottom of the sequence of payment, hence liquidation of SPAC is most detrimental to the interests of the promoters and the managerial personnel of SPACs. Commercial Viability: The SPAC is a commercially viable investment vehicle as its structure is sustainable and there is a tangible need for the same in the market. There is a clear imbalance between the credit availability to small and medium corporations and the stringent eligibility criteria corporations are required to adhere to owing to the interest of the prospective equity investors. According to NASDAQ the year 2020 was the year of SPACs as their IPOs raised gross proceeds of 79.89 billion US dollars which was an increase of 462%. The Mckinsey Report of the year 2020 Asia can annually dispense 800 billion US dollars for funding midsized to large corporations, thus reinstating the commercial potential of SPACs[i]. Experts like Goldman Sachs have expected 2021 to be the year of SPACs in Asia.[ii] International Legal Scenario SPACs are descendants of the blank check companies, which were companies in a development stage company that has no specific plan or purpose or has indicated their business plan is to engage in a merger/ acquisition with an unidentified company other person.[iii] These companies were common instruments of fraud in the 1980s and particularly issued penny stocks. Congress in 1990 enacted legislation requiring strict disclosures and management requirements on blank check companies, i.e., Securities Enforcement Remedies and Penny Stock Reform Act of 1990[iv]. In particular, Rule 419 accorded several protective measures to the investors when dealing with the blank check companies like a deposit of IPO funds raised and securities issued in an escrow account; an 18 month limit on the company’s right to retain investor funds without completing an acquisition; a prohibition on the trading of securities held in escrow; filing of a post-effective amendment upon the consummation of an acquisition; refund for investors disapproving a proposed acquisition; and a requirement that the acquisition must account for at least eighty percent of the funds held in escrow. These rules significantly decreased the fraudulent activities associated with respect to blank check companies. By the mid-1990s US economy emerged from a deep recession and the small companies started to grow and then further companies initiated incorporation for the sole purpose of merging with a private entity however the shares were not penny stocks, therefore, the same was not governed by Rule 419, thus SPAC were formed. Few differences between blank check companies and SPACs were the former had 18months to complete an acquisition as compared to the latter which had 24 months. The success of private equity in European countries led to the introduction of SPACs in several European countries around 2005, it is a more viable option due to less stringent requirements as compared to the NASDAQ and NYSE norms. For example, incorporating SPAC with specifically targeted company in mind is allowed and there is no requirement of the minimum fair accounting value of the target company to be 80% of the trust. The SPACs are also provided greater flexibility in the selection of target companies and multiple investment cycles for a SPAC. In Europe, multiple smaller acquisitions are executed in contrast to the single large transactions that are typical to US SPAC. Despite the developed scenario of private equity in the Asian markets, there are only three jurisdictions that have noteworthy SPAC transactions, China, Malaysia and South Korea. Malaysia and South Korea officially recognize SPAC as an investment vehicle and are largely based on the US and UK laws, whereas China has several SPAC transactions owing to the need of Chinese companies to raise foreign investment and get listed on international stock exchanges like NYSE and NASDAQ however the jurisdiction lacks governing legislation. Governing Indian Laws There are no special legislations governing SPACs in India and the general corporate laws govern them including Companies Act, 2013[v], Securities Exchange Board of India  Act, 1992[vi], Rules and Regulations and listing of corporate entities are SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018[vii] and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[viii]. One of the requirements of commencement of business by a company within 180 days of incorporation[ix] will have to be amended for SPAC as the SPAC do

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CCI’s Aftermarket Dilemma: Legacy of Shamsher Kataria and Future of Electronics Market

Competition Law /

[By Vanshaj Dhiman and Palak Jagetia] The authors are students at the Dr. Ram Manohar Lohiya National Law University, Lucknow. Relevant market delineation has become the most prominent determinant to ascertain the market power of enterprises and to analyze their ability to abuse their market power or to cause an appreciable adverse effect on competition (AAEC) in the market. Market practices like making warranty obligations contingent to use of its own aftermarket, lack of open market access to genuine spare parts, accessories, and associated technical know-how for the after-sales services of the product, higher aftermarket prices, etc, lead to consumer harm and foreclosure in the aftermarket and thus causing AAEC. Aftermarket is a type of derivative market consisting of spare parts, repair services, and consumable goods.[i]An in-depth analysis of Indian, European, and American case laws suggests that the following parameters need to be considered while determining whether an intertwined market of the primary product and its aftermarket shall be delineated into two separate relevant markets – a) Whether the consumer undertakes whole-life cost analysis at the time of purchasing the primary product; b) Is it possible for a consumer to switch to aftermarket of another manufacturer; and c)What is the cost of switching to another primary product relative to the cost of the spare parts? As far as the automobile sector is concerned, all the mature jurisdictions including India depict the need for delineation of a separate aftermarket rather than a single system’s market consisting of primary market and aftermarket. However, when it comes to the market for electronic appliances, the Competition Commission of India (CCI) seems to deviate from the separate aftermarket rule. The CCI did so as it believed that the availability and accessibility of information about the aftermarket products were sufficient enough to delineate a unified system’s market. This is evident from the cases of Trend Electronics v. Hewlett Packard and S.K. Mittal v. HP Inc., where the CCI denied recognizing the existence of a separate relevant aftermarket and held that Hewlett Packard (HP) was not dominant in the ‘market for laptops including its spares and after-sale services in India’. In this blog, the authors shall discuss the possibility and feasibility of the existence of a separate aftermarket in cases of laptops as well as mobile phones. Whole Life-Cycle Cost Analysis The concept refers to the consumer’s ability to compute the life-cycle cost of a product at the time of purchasing it and the customer’s anticipation of the future costs of ownership of the primary product by taking into account the probable expenditure on after-market products.  Engaging in this analysis is based on various factors, inter alia, availability, and accessibility of information in the public domain, and presence of required sophisticated analysis skills in the consumers. As far as printers and photocopiers are concerned, a unified system’s market encompassing of primary and aftermarket should be delineated. The consumables (toner cartridges) are indispensable for the proper functioning of printers or photocopiers and will be needed again and again depending upon the life-cycle of the primary product. Therefore, it can reasonably be presumed that a consumer will undertake the whole-life cost analysis at the time of purchasing the primary product. Now, this position needs to be distinguished while dealing with other aftermarket cases where instead of consumable products, spare parts and repair services are involved. Lack of sophisticated analysis skills, prevalent consumer myopia, and illiteracy make the Indian consumers more sensitive to upfront cost than running cost. Moreover, even if consumer undertakes life Cost Analysis at the time of purchase, then too does it really prevent them from getting locked-in?  The answer is “No”, as all the prominent manufacturers engage in similar anti-competitive practices leaving consumers with no alternative but to buy from one of them. Thus, even the prior knowledge about the lifetime cost of a product cannot be construed as the sole reason to delineate a unified system’s market. Non-Substitutability and Locked-in Effect An aftermarket may be broader than merely the secondary products of one brand of primary product where the secondary products of different brands of primary product or independent secondary product bands are readily substitutable. However, if the secondary products for different brands are not compatible or substitutable, and a consumer requires certain parts and accessories for his/her smartphone or laptop, in a sense, the consumer is ‘locked-in’ to use brand-specific parts. The CCI, in Shamsher Kataria v. Honda Siel, noted that since the spare parts of one automobile brand are not substitutable with spare parts of other brands, the consumers are ‘locked in’ and forced to purchase the brand-specific spare parts. If the manufacturers do not allow consumers to use the spare parts and repair services of other manufactures including independent service providers and even then, consumers choose to use the parts of other manufactures, those consumers will have to face a penalty in terms of revocation of the warranty obligations. Thus, such practices are not only anti-competitive in nature but also force the consumer to use the unlawfully tied aftermarket products even if they are provided at a higher cost. The Magnitude of Switching Cost Generally, the magnitude of switching cost is considered as the determinant factor while deciding the existence of a separate relevant market. That means, if it is possible to switch to another primary product to avoid higher costs in the aftermarket, there may be a unified system’s market encompassing the primary and secondary products. That said, just to avoid the increase in the cost of aftermarket, a consumer who already owns a primary product will not undertake the switching costs, which are as high as the cost of a new phone or laptop. Furthermore, even the second-hand product market could not decrease the switching costs to reasonable levels as the residual value of these products is very low owing to fast-changing technology and a high rate of obsoletion in the electronics market. Analysis – Antitrust Concerns at Play It is a settled position that in case the consumer finds

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Is Corporate India Ready To Board The SPAC-Ship?

Capital Markets and Securities Law, Company Law, Mergers & Acquisitions /

[By Mohammad Aqib Gulzari] The author is a student at the University School of Law and Legal Studies, GGSIPU, Delhi. Introduction The American phenomenon of ‘Special Purpose Acquisition Companies’ (SPAC), popularly known as ‘blank cheques companies’, has caught the eyes of investors around the world and taken the international capital market by storm. SPACs are primarily shell companies designed to take companies public without going through the traditional method of Initial Public Offering (IPO). According to a recent market statistics report by the ‘SPAC Tracker’ for April 2021, SPACs have managed to raise an all-time record-breaking USD 98 billion with a total of 308 listings on US stock exchanges in just the first four months of 2021. The modus operandi of a standard SPAC is simple. The SPAC, an already-listed company, targets an unlisted operational company and merges with it to form a single listed entity. This is referred to as a De-SPAC transaction — i.e., a reverse merger wherein the acquisition of a private company is executed by an existing public company so that the private company can bypass the extensive and complex process of going public. These De-SPAC transactions are often led by industry experts who leverage their expertise of the market to raise capital and create synergy for every stakeholder. Under American law, the transaction is required to be completed within a period of 2 years; if it is not completed, or if a target company is not identified by the management team of SPAC, the money is returned to the investors without any hassle. Under the laws of India and the UK, however, such redemption is not allowed. Nevertheless, SPACs are increasingly becoming popular in India (e.g. Flipkart and Grofers). This is so even though not a single SPAC has been listed on the Indian stock market to date, owing to legal impediments and an unfavourable regulatory regime. In this context, this article attempts to present a clear picture of SPACs in India from a legal standpoint considering the investors’ as well as the regulatory concerns and examines the feasibility of the SPACs structure and operation within the Indian domain. Unfavourable Regulatory Framework for SPACS in India  The Companies Act, 2013 (Act) is perhaps the biggest roadblock for SPACs in India. De-SPAC transactions stand in direct contravention of the Act as well as other Indian laws discussed below, such as SEBI Regulations, FEMA, RBI Master Directions, and the Income Tax Act, 1961 (ITA). As per Section 248 of the Act, the Registrar of Companies (ROC) is empowered to invalidate and strike off the names of the companies which do not commence operation within one year from the date of incorporation, unless they seek a dormant status under Section 455. In exercise of this power, the ROC, under the mandate of MCA, invalidated 2,26,166 shell companies in 2017-18, 2,25,910 in 2018-19, and 14,848 in 2019-20. [No company was invalidated in 2020-21 as more than 11,000 companies had applied for a “voluntary invalidation”—another avenue provided under Section 248(2).] Since a De-SPAC transaction requires two years to complete, it will inevitably be hit by Section 248 of the Act. Thus, the Act would require significant amendments for SPACs to establish a structure in India and meet their objectives such that SPACs can be allowed to remain in existence for a period of two years from the date of incorporation. Outbound Merger: Overseas Direct Investment Regulations In case of an outbound SPAC merger, i.e., where a foreign listed SPAC acquires an Indian target company, Indian shareholders are subject to Overseas Direct Investment regulations in the matter of holding shares in the listed merged entity post-De-SPAC, either as consideration for a merger or as a share swap. Such holdings by shareholders must comply with the RBI Master Direction on liberalized remittance which caps the Fair Market Value (FMV) of the security or holdings in an overseas entity at USD 250,000 annually. The value of the security is bound to exceed the FMV, resulting in contravention of laws at the hands of the Indian shareholders if they own a greater stake in the merged foreign entity. Thus, the issue calls for modifications in the said regulations to enable the Indian shareholders to own larger stakes in foreign entities through De-SPACing. Predicaments in Listing the SPAC on Indian Capital Market Due to non-compliance with SEBI norms, SPACs cannot be listed on the Indian capital market. SEBI has laid down eligibility criteria for an IPO under Regulation 6(1) of SEBI (Issue of Capital And Disclosure Requirements) Regulations, 2018 which require companies to have net tangible assets of at least 3 crores INR in the preceding three years, minimum average consolidated pre-tax operating profits of 15 crores INR during any three of last five years, and net worth of at least 1 crore INR in each of the last three years. While SPACs may list themselves using an alternate route under Regulations 6(2) and 32(2) which allow companies to go public through a book-building process pursuant to which 75% of the IPO must be allotted to qualified institutional buyers. Thereby, curtailing investment opportunities for retail investors as they can only be allotted 10% of the IPO. Taxation Conundrum The De-SPAC transaction will be taxable under Section 45 of the ITA which states that any capital gain derived by a person, from the transfer of the capital asset, is taxable in India. The SPACs acquire the entire share capital of the target company via two methods either for cash consideration or in exchange for its shares. In both cases, capital gains will ensue in the hands of the shareholders. De-SPAC transaction is not tax neutral in India as it is not explicitly exempted from capital gains tax under Section 47 of ITA which provides for the exemption from capital gains tax for Indian amalgamating companies pursuant to a scheme of amalgamation. In order to complete such transactions without undue tax imposition, an enabling provision must be added in the ITA to accord more clarity and

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Locating Data Protection and Privacy Concerns Within Antitrust Analysis

Competition Law, Contemporary Issues /

[By Anam Chowdhary] The author is a student at the National Law School of India University, Bangalore.  In today’s world of the digital economy, it would not be wrong to suggest that consumer data indeed holds a high position. We cannot ignore the fact that data indeed has gained much more important than ever before when it comes to online transactions with or on big firms like Facebook, Amazon, etc. Data accumulated by these companies helps them not only analyze consumer patterns but also create demands and enhances their business.. In such a scenario where data is becoming the ‘new currency’, it is inevitable that concerns regarding data protection will rise. While such concerns seem to be within the jurisdiction of data privacy regulations like only,  time and again links have been identified between privacy concerns and antitrust laws.  In simpler terms, unregulated flow and processing of consumer data by dominant data-driven firms are said to have huge implications on the competition in the digital economy, thus explaining the need for antitrust analysis of the same. The connection between these areas has been identified by various jurisdictions including India where the Competition Commission initiated a suo-moto proceeding against the change in the WhatsApp privacy policy of 2021 (WhatsApp case), based on the fact that in a data-driven economy, implications of data accumulation on thcompetition cannot be ignored. Exemplary fine levied by the Federal Trade Commission on tech-giant Facebook for violating consumers’ privacy, is another example of this connection. Thus, in today’s digital economy, data protection and privacy concerns cannot be left outside of the purview of competition analysis as that amounts to taking a very narrow approach towards the understanding of the implications that lack of data protection brings forth in the market.” Connecting Data Protection to Competition Law In most jurisdictions, competition law has some basic goals- enhancing consumer welfare, maintaining healthy competition in the market, and economic efficiency. Data protection can enter this realm if it impacts one or all of these aspects of antitrust law. It is argued that data protection impacts consumer welfare and has an adverse impact on non-dominant firms in the market. Impact on Consumer Welfare  It would not be wrong to state that consumers are now concerned about how much of their data is accessible to companies and how this data is being processed The uproar after WhatsApp updated its privacy policy in 2021, the reaction to the Cambridge Analytica scandal can be examples of it. Thus, it can be stated that privacy is the new determinant of consumer welfare. In the Google-Doubleclick merger case before the FTC, a link was established between data protection and quality of service. Lowering of data protection was seen as lowering of the quality of service. Thus, when a dominant firm like Google keeps acquiring data, in a scenario of no competition (which shall be explained below), it can lower privacy standards for this data which in turn can impact consumer welfare as this reduction in privacy can be construed as a reduction in quality of service even in the WhatsApp case, this degradation of quality was taken into account to initiate investigations in the aspect of data sharing between WhatsApp and Facebook. Now, of course the question arises that if consumers are so concerned about their privacy, then why do they not shift to other competitors? This query can be answered by analysing the impact that excess data collection has on competition in the market, especially on non-dominant firms or new entrants. Impact on Competition in the Market – Wiping out the Competition Section 4 of the Competition Act, 2002 states that no firm shall abuse its dominant position. It has to be understood that the majority of the cases assessed by antitrust authorities with respect to privacy and competition have involved firms which are dominant in their relevant markets. Such domination in the market means that the particular firm has a large consumer base and thus a large data set at its disposal. These firms can process this data and create better services attracting more consumers and thus more data. Therefore, there is a cycle at play in the process where consumers give you data, and this data gives you more consumers. This basically helps in generating a network effect which keeps the consumers stuck with a particular service provider as there would be higher switching costs or even worse, no worthwhile competitors. The dominant position of firms like Facebook gives them access to such data bases which help in targeted advertising and come across as good service providers. But, this also means that having set their foot in the market with huge data sets and the consequent network effects, they pose an obstruction to the entry of new comers in the market. Thus, competition is eventually wiped out. Network effect based on services provided by data accumulation, can lead to such a creation of domination in the market that dominant firms can put forth ‘take-it-or leave-it’ conditions on consumers where the consumers are compelled to compromise their data in return of the services provided. As an example, the terms and conditions in the Whatsapp privacy policy update of 2021 provided for a ‘take-it-or-leave-it’ mechanism which the Competition Commission of India  construed as one of the grounds for initiation of ‘abuse of dominant position’ proceedings against the company.   It is worth mentioning here that privacy is now being put forth as a non-price competition. This was affirmed in the Facebook/WhatsApp merger decision and the Microsoft/LinkedIn merger decision by the EC. This position is also being accepted in India as is evident from the recent report of CCI on Telecom sector where reference has been made to privacy being a ‘non-price competition’. Thus, it can also be stated that dominance generated in the market on the basis of data accumulation can lead to a complete disregard of privacy as a non-price competition when there is no competition in the market (much like raising prices

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