Author name: CBCL

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

Leave a Comment / 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

Leave a Comment / 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

Leave a Comment / 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?

Leave a Comment / 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

Leave a Comment / 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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Supreme Court on Arbitrability of Insolvency Law Disputes: The Case of Indus Biotech

Leave a Comment / Arbitration Law, Insolvency Law /

[By Akshita Totla] Akshita is a 4th year law student at the Institute of Law, Nirma University. Recently, the Supreme Court in Indus Biotech Private Limited v Kotak India Venture (26 March, 2021) (Indus Biotech),[i] elaborately discussed the arbitrability of the insolvency law disputes in India. The SC in this case categorically held that post the admission of petition under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), the dispute would be non-arbitrable.  In this article, the author examines the position of law in India and other major jurisdictions on arbitrability of insolvency matters and concludes by providing possible alternatives to the approach adopted by the SC. Factual Background A dispute arose between Kotak and Indus Biotech in relation to the valuation of Optionally Convertible Redeemable Preference Shares (OCPRS) while they were being converted into equity shares. On account of failure of Indus Biotech in redeeming OCRPS within the stipulated time, Kotak triggered the IBC by filing an application for initiation of Corporate Insolvency Resolution Process (CIRP). Before the admission of CIRP application, Indus Biotech filed an application under section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), contending that section 7 IBC petition is not maintainable by virtue of the arbitration clause contained in the agreement. NCLT, Mumbai in 2020 allowed an insolvency dispute to be settled by arbitration by dismissing section 7, IBC application filed by Kotak observing that there is no default. In this backdrop, a Special Leave Petition was filed before the SC. The SC observed that where an application seeking reference to arbitration is filed during pendency of section 7, IBC petition, the adjudicating authority needs to first decide upon the maintainability of CIRP application. And upon admission of section 7 IBC petition, any application under section 8 of the Arbitration Act would thereafter be not maintainable. IBC Proceedings are in rem after CIRP application is admitted The insolvency proceedings are proceedings in rem i.e., having effect on the world at large.[ii] The SC in Booz Allen,[iii] categorically held that insolvency matters are non-arbitrable.  To provide more clarity on this issue, the SC in Indus Biotech divided the proceedings into two stages- pre-admission and post-admission stage. In the pre-admission stage, the insolvency proceedings remain in personam. While post the admission of CIRP application, the proceedings become in rem. The SC while referring to Vidya Drolia v Durga Trading Corporation,[iv]  noted that on admission of Section 7, IBC petition, third party rights are created in all the creditors, and the proceedings will have erga omnes effect. Thus, it is only upon admission that the matter would become non-arbitrable. In pre-admission stage wherein, the petition is filed by a financial creditor, the NCLT is only required to ascertain the existence of default. The Corporate Debtor (CD) cannot either contend that the petition is used as a tool to bypass arbitration proceedings or there is a dispute regarding the debt amount. This highlights a lacuna in the current framework which disallows CDs to raise bona fide disputes. In circumstances like that of present case, where the dispute was regarding the interpretation of a contractual clause, arbitration can be used as mechanism for quantifying debt. This would rather provide more clarity on the amount of financial debt. Foreign Jurisprudence In the UK, insolvency proceeding does not bar a party to proceed with arbitration. This position was established in Fulham Football Club Ltd v Richards (2011),[v] where the court of appeal ruled in the favor of arbitrability of shareholder unfair prejudice claim. The court of appeal also observed that arbitrability of insolvency law disputes would depend on the whether the dispute involves third party rights or not. For instance, disputes relating to a) order for the payment of debts owed by the insolvent company; b) determination of assets of the estate; or c) determination of schedule of claims, would affect the third-party creditors and would not be arbitrable. Recently, in Riverrock Securities Limited v International Bank of St. Petersburg (2020),[vi] the English High Court held that avoidance claims brought under the Russian insolvency law were contractual in nature and are hence, arbitrable. The court also noted that “the presumption that an arbitration agreement should not extend to claims which only arise on a company’s insolvency” would not arise in English Insolvency cases. This judgment demonstrates the pro-arbitration approach of the English courts, even in cases involving foreign insolvency law. The courts of the United States, emphasize on the policy favoring commercial arbitration than the domestic notions of arbitrability as stated by Justice Blackman in Mitsubishi Motors Corp. v Soler Chrysler-Plymouth Inc. (1985),[vii] In the U.S., the arbitrability depends on whether the matter involves “core” or non-core” issues of insolvency. “Core” bankruptcy proceeding matters are considered non-arbitrable. These proceedings involve determination of rights created by federal bankruptcy law which could only arise in bankruptcy proceedings or a proceeding that could not have existed outside of bankruptcy. On the other hand, in “non-core” matters the court has to compel arbitration. In In re Electric Machinery Enterprises, Inc. (2007),[viii] the eleventh circuit while ordering arbitration held that dispute regarding contractual claim for the money owed was not a “core” proceeding. Furthermore, even if it was a “core” proceeding, there was no evidence indicating that the arbitration proceedings would have conflicted with the object of the Bankruptcy Code. The above-mentioned judgments suggest that the courts of both UK and US have tried to bring coherence in laws and maintain an approach that is consistent with the legislative policy of their respective arbitration laws. The way forward: Is Reconciliation between the IBC and the Arbitration Act Possible? The legislative intent behind the Arbitration Act is to develop arbitration friendly environment in the country. While the IBC aims to rescue corporate debtor within a specified limit by balancing the interest of all the stakeholders involved. Now, the issue here is whether overriding effect of IBC over an arbitration clause based on the consent of the parties, violates the principle of party

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The Proliferation of Stewardship Codes In India – The Need For Revamp

Leave a Comment / Capital Markets and Securities Law /

[By Mathangi K ] The author is a student at the Gujarat National Law University. Introduction The idea of a Stewardship Code has gained prominence across the world, with the UK adopting the world’s first Code for its domestic financial market in 2010.[i] The principal objective behind the UK’s adoption of the Stewardship Code was to incentivize its ‘rationally passive’ shareholders to monitor the company’s management, thus helping them become responsible and actively engaged shareholders. Soon after the UK adopted the Code, such Codes proliferated throughout Asia; India followed suit with the Insurance Regulatory and Development Authority of India (IRDAI), the nodal agency for regulating the insurance sector, enacting a set of stewardship guidelines for the insurers in 2017.[ii] This was followed by the Pension Fund Regulatory and Development Authority’s (PFRDA)guidelines for pension funds in India in 2018,[iii] followed by the Securities and Exchange Board of India’s (SEBI)guidelines for mutual funds and alternative investment funds in 2019.[iv]The most recent development is the enactment of procedural guidelines for proxy advisories in India by the SEBI in August 2020.[v] This article aims to explain why the Code will have a minimal impact and may not bring a considerable difference in the Indian corporate governance regime. It traces through the poor implementation and redressal mechanism of the various codes and suggests suitable measures with a view to improving the same. The Problem of Enforcement However, even after the enactment of these Codes, they have been at the center of the debate over their effectiveness and implementation. Globally, the most critical verdict on the Code’s implementation was featured in the FRC’s Kingman Review 2018, which commented that ‘the Code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition’.[vi] In terms of its enforcement mechanism, the Stewardship Code in India differs largely from the UK’s idea of ‘soft law instrument’. Firstly, there is a lack of a single code in the form of soft law, but instead, several mandatory guidelines have been issued by the regulatory agencies for their respective stakeholders. This extreme fragmentation of codes in India leads to contradictions, both in theory and the enforcement of these codes. For instance, the code issued by the IRDAI is based on the ‘comply-or-explain’ basis. On the other hand,  the code by the PFRDA lays down that the pension funds ‘shall follow’ and the code by SEBI for mutual funds and alternative investment funds lays down that the funds ‘shall mandatorily follow’ the code.  Lastly, the procedural guidelines for proxy advisories lay down that these advisories ‘shall comply’ with these guidelines. Secondly, while these codes lay down the principles, none of these adequately provide for a redressal mechanism or lay down the consequences of violation or non-compliance to the principles indicated in the guidelines. The Feasibility of the Comply-or-Explain Approach The IRDAI’s guidelines for the insurers work on the basis of the ‘comply-or-explain’ approach; wherein, the insurers are required to indicate reasons and justifications for the deviation or non-compliance to the principles enshrined in the guidelines. On the face of it, the comply-or-explain approach has the inherent advantage of tailoring the principles to the unique characteristics of individual companies, thus appearing to be better than the “one size fits all” approach. At the same time, the effectiveness of this approach presupposes the presence of various institutional conditions such as the ownership and control structure, transparency of financial operations of the company, the ability of the shareholders to assess the behavior of companies. All of these factors are an extremely costly as well as challenging task in an emerging economy like India. This approach has proven to be ineffective even in a developed economy such as the United Kingdom; for instance, a study of compliance behavior of firms belonging to the FTSE350 companies in the UK between 1998 to 2004 reports that more than 50% of the companies that did not comply with the corporate governance codes and failed to deliver specific explanations, while more than 15% failed to provide any kind of explanations at all.[vii]This lack of compliance of the entities with the codes and subsequent failure to provide explanations, exposes the little initiative taken by companies for fine-tuning their governance policies since there was hardly any movement towards providing adequate explanations. Further, in this approach, there are two judges to the alternative proposal structures or explanations provided by the insurers- the market and the regulator. Firstly, the market, which encompasses the shareholders, is a costly way of enforcement. The ultimate sufferer due to the fall in the shares’ price is the shareholders themselves, thus becoming counter-intuitive to the purpose for which it was created. Secondly, for the regulator to be the judge can be a challenging task, in an emerging economy like India. The market regulators in India are still in the process of framing governance standards and therefore do not have well established and tested benchmarks against which the sufficiency of the explanations provided by the insurers can be judged. The Lack of an Enforcement Mechanism While the PFRDA’s and SEBI’s guidelines for mutual and alternative investment funds introduce a far more stringent approach to ensure compliance, these fail to lay down a concrete enforcement mechanism. Until today, the consequences faced by an institutional investor upon failure to comply with the code remains a grey area. Consequently, these guidelines will fail to translate into action unless accompanied by a well-established enforcement mechanism. Contrary to these guidelines, the SEBI’s latest guideline for the proxy advisories lays down a concrete enforcement mechanism by adopting specific provisions for establishing a grievance redressal forum. Failure to Regulate International Proxy Advisories The problem with the guidelines for proxy advisories is not its enforceability but rather its exclusion. By way of the code, the regulatory agency seeks to bring only the homegrown proxy advisories under its purview, thus excluding the foreign proxy advisories that continue to play a significant role in the Indian market. For instance, two international proxy advisories – Institutional Shareholder

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Equalization Levy: Concerns Over Taxation on Digital Economy

Leave a Comment / Taxation Law /

[By Devansh Jain and Vishal Marakana] The authors are students at the Institute of Law, Nirma University. In 2017, the Organization of Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) came up with an action plan to tax the companies which operate digitally in any country without having any actual physical presence in that country. The main aim was to tax the companies which transact digitally and avoid tax in the host country. Since, there was no appropriate mechanism, the concept of Equalization levy was introduced in India through the Finance Act of 2016, which targets companies operating digitally.  Although the Finance Act, 2016 (‘the Act’) introduced Equalization Levy only to target and tax the specified payments pertaining to online digital advertisements, in 2020, an amendment was made to the Act which expanded its scope immensely The broadened concept of Equalization Levy under this amendment stated that the consideration received/receivable by the E-commerce provider from services or products rendered by digital means will be taxed at 2%. The 2020 amendment was obscure and wide in scope, for which the parliament brought in various clarifications in the 2021 budget. However, those clarifications ramified the concerns over the amendment furthermore. In this article, we have discussed the issues with these clarifications to the amendment. Extensive and Inexplicit Clarifications The clarification regarding the ambit of equalization levy stated that the consideration received/receivable from E-commerce supplies or services shall include the consideration for the sale of goods or services irrespective of whether the non-resident E-Commerce Operator owns or provides them. This clarification crucially affects the non-resident E-commerce operators since now they are required to pay tax on the entire value of the goods or services, instead of the commission which they actually receive. Let us understand this with an illustration, an E-Commerce Operator based outside India is a platform to book movie tickets, which deducts 10% commission on each transaction. Now, a person books a ticket for a movie shown at PVR cinemas and pays INR 200 for the same. In this scenario, E-Commerce Operator’s commission is INR 20 and the Equalization Levy which is to be charged on the entire transaction value is INR 4. Hence, the E-Commerce Operator is charged with 20% of the commission earned by it. From the illustration made above it can be observed that the E-Commerce Operator is not exactly earning 10% commission from the transaction. This makes it burdensome for the E-Commerce Operator which merely acts as an intermediary between the customer and the service provider. Rationally, the charge on the entire value of goods or services provided through the E-Commerce Operator seems preposterous. Ideally, the Equalization Levy shall be levied only on the commission received by the E-commerce operator, rather than on the entire transaction value. The clarification is so ambiguous that the wording of provision “consideration received/receivable” creates a deeming fiction on the E-Commerce Operator to pay 2% of the Equalization Levy which might turn out to be unwarranted. In a situation where a transaction is made between two parties via a third-party application (messaging app/email), even if the third-party application is only acting as a communication channel and does not charge any commission, it would be liable to pay Equalization Levy on the transaction value. Ambiguity Regarding Approach to the Authority for Advance Ruling The Authority for Advance Ruling aids a non-resident in arranging his operations which are subject to payment of tax and facilitates in assessing the tax liability on future transactions. However, the Finance Act 2016, does not provide any provision regarding the Authority for Advance Ruling in the context of Equalization Levy. The clarification which amended Section 10(50) of the Income-tax Act, provides that, when tax is paid in the form of Equalization Levy, the assessee is exempted from paying any other tax under the Income Tax Act. Now under Section 10(50), a party might approach the Authority for Advance Ruling to determine whether it can claim an exemption under Section 10(50) or is subject to the provisions of Equalization Levy. On the contrary, Authority for Advance Ruling does not have any authority to adjudicate on the matters relating to Equalization Levy. Possibility of Double Taxation The provisions of the Equalization Levy were brought under the Finance Act, instead of the Income Tax Act, so that the party cannot claim benefits of the accommodating provisions of either the Income Tax Act or the Double Taxation Avoidance Agreements.  However, this action of the parliament has its own consequence; the claim for deduction against the tax obligation of Equalization Levy might be denied in a resident country of non-resident E-Commerce Operator, which would result in payment of double taxation by the E-Commerce Operator. Potential to Hinder Extra-territorial Operations The ambit of Equalization Levy is vast enough that it covers all the transactions which take place through an Indian IP address.  Cases wherein a non-resident transact through a non-resident E-commerce Operator using an Indian IP address can also fall within the ambit of Equalization Levy. Conclusion The Covid-19 pandemic has caused a huge disruption on the business entities, adding onto that, the extra burden of the Equalization Levy tax compliance will lead to the shifting of onus by the operators to customers. The Equalization Levy was introduced by OECD as a measure to collect the tax which was otherwise not collected, to formulate a system in which there are fewer deviations and fewer compliance costs, but due to lack of proper guidelines and clarifications, this has become nothing but an additional compliance cost for the E-Commerce operators. On one side, the Government wants to reel in foreign investment for which it has proposed various incentives, such as Special Economic Zones, exemption on the duty of import, income tax, and VAT exemptions, etc, on the other side, the Government has introduced Equalization Levy to charge tax on non-resident E-commerce Operators which is arduous, flawed and terribly irregular.

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Swiss-Challenge Model under Pre-Packs: The Position of Operational Creditors

Leave a Comment / Insolvency Law /

[By Damini Chouhan and Vinisha Jain] The authors are fourth-year students at the Institute of Law, Nirma University, Ahmedabad. Introduction The Indian Insolvency Law Committee (hereinafter “ILC”) believes that pre-pack models must be introduced as an alternative to Corporate Insolvency Resolution Process (hereinafter “CIRP”) to ease the insolvency process. ILC formed the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process (hereinafter “sub-committee”). This sub-committee proposed a pre-pack model to the government in October 2020. A pre-packaged insolvency resolution process can be encapsulated as follows. First, it will be available for insolvency resolution as a supplementary method along with CIRP but it shall not run parallel to it. Second, the process commences when the promoters submit a base plan after completion of other formalities. In order to upgrade the value of the Corporate Debtor (hereinafter “CD”), a model of Swiss Challenge has been introduced wherein the base plan submitted by the promoters may or may not be opened to a bid. To begin with, the base plan will have to be necessarily opened to Swiss Challenge if it does not propose to pay the Operational Creditors (hereinafter “OCs”) of the CD in full. On the contrary, if the base plan proposes to pay the OCs in full, the Committee of Creditors (hereinafter “CoC”) is free to decide according to its commercial wisdom whether or not this base plan shall be opened to a Swiss Challenge. Evidently, the optional approaches of the Swiss Challenge are the deciding factors for the outcome of the entire process. These approaches in turn are dependent on the payment proposed to be made to the OCs. Though protection has been imparted to OCs, the protection is hinged upon certain assumptions. This article, therefore, analyzes this provision in light of its probable fallouts and the importance of OCs. The Proposed Swiss-Challenge Model Swiss Challenge is a bidding process where each applicant makes a better offer than the existing one,  to secure the contract. It would now be introduced to the insolvency resolution process as well. As mentioned above, the proposed provision which is based on the payment to the OCs presents a binary approach with respect to the Swiss Challenge. The CoC has been made responsible to act in this respect according to the following two situations: first where the base plan proposes to pay the OCs in full and second where the base plan does not propose to make good the entire claim of the OCs. In the first scenario, the CoC has the choice to decide whether or not the base plan will be opened to Swiss Challenge and if CoC feels that it suffices in terms of value, CoC may accept the base plan and not open it to Swiss Challenge. On the other hand, if it feels that the base plan does not give the best value, the CoC applying its commercial wisdom may open it to the Swiss Challenge. Hence, in either case, the entire claim of OCs is protected irrespective of whether the base plan is opened to Swiss Challenge or not. In the second scenario, where the base plan does not propose to make good the entire debt owed to the OCs, the CoC has to mandatorily open the base plan to Swiss Challenge. A single round of bidding would take place and the plan that offers the best value shall proceed further in the process. The promoters shall be given a chance to match their base plan to such a competing plan. It is not necessary that the value escalation in the plan that is finally accepted reaches a stage where the entire claim of OCs is covered. Nevertheless, the OCs have to be paid the minimum liquidation value or no plan will be accepted and the pre-pack would close without consequence. Scope of Improvement In both scenarios, payment of at least the liquidation value to OCs is guaranteed incongruity with the existing CIRP Regulations.[i] Sadly, the liquidation value is generally way too less than what is owed to the OCs. The case of Maharashtra Seamless Limited v. Padmanabhan Venkatesh & Ors is an illustration of such situations where the liquidation value is not even close to the claimed amount. ILC acknowledged this issue in its 2018 Report, but it did not suggest any amendments due to the following reasons. First, even though the liquidation value is the mandate, it was observed that what the OCs actually receive is way above the liquidation value in most cases. Second, when the OCs receive a very less amount, it is in cases where the stress on the CD is extremely high. Third, no representations or evidence that suggest otherwise could be found. Hence, it decided to continue with the status quo, despite the fact that current law provides an inherent scope to the CoC and Resolution Applicants to lawfully leave the OCs with only a meager payout. It seems like ILC is turning a blind eye to a bomb just because it has not exploded. Similarly, just because there is no prima facie evidence of inequitable treatment, does not mean that such treatment is not there. Therefore, even if the faith of ILC in the maturity of CIRP is to be relied upon, the same cannot be said for pre-packs. It would be unwise to continue with the same position of law for the pre-packs regime as well, presuming that pre-packs would work out the same way as CIRP. Moreover, given the role of OCs as suppliers of working capital, in order for a CD to continue as a ‘going concern’, the aim should not just be to protect the OCs but also to incentivize them. Conclusion & Suggestions In both the scenarios of the Swiss Challenge model, the position of the OCs can be further strengthened or they will remain aloof from the value escalation or additional benefits that pre-packs offer. An express provision mandating equitable payouts to all the creditors in cases of abnormal profits or

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