Author name: CBCL

Excessive Taxing Ambit of the Executive & Quasi-Judicial Authorities

Taxation Law /

[By Samridhi] The author is a student at Law Centre-1, Faculty of Law, University of Delhi. Status Quo On 24 November 2020, the Allahabad High Court delivered a judgment on an issue involving the revocation of the registration certificate by the Assistant Commissioner because the assessee had failed to file the returns for a period of six months. The Court while ruling in favour of the assessee noted that the administration of quasi-judicial functions by the people ‘who do not have a legally trained mind’ had led to discharging of the functions in an arbitrary manner. The Court found that the Commissioner’s failure to verify the assessee’s claims that the returns were filed and the Appellate Authority’s admission that the averments made by the assessee could not be verified at the appeal stage was ‘manifestly arbitrary’ and ‘militates against the whole purpose of a statutory appeal’. The Court granted the assessee a cost of Rs. 10, 000 to compensate for the unnecessary harassment and wastage of financial resources. These observations merit serious consideration in the backdrop of the Government’s increasing inclination to expand the powers of quasi-judicial authorities and the Executive. This has led to an increase in the litigation at the doors of High Courts due to arbitrary orders being passed by such authorities which remain incongruent with established legal principles. This is evident through several High Court judgments where the lack of application of legal mind leads to a frequent overturning of the orders issued. A recent example can be noted through the Kerala High Court’s judgment in the matter involving the validity of the proceedings initiated under Section 130 of the Central Goods and Services Act, 2017 (“CGST Act”). The Court discovered that the notice issued by the Income Tax Department (“Department”) against Veer Pratab Singh did not show anything which could have suggested an intention to evade taxes. Despite the lacunae in the notice, the authorities rejected Mr. Singh’s contentions and confiscated the goods. The High Court found that the proceedings initiated by the Department were legally unsustainable as there was no evidence through Mr. Singh’s act or omission that could provide grounds for establishing an intention to evade taxes. This highlights the dismal failure of the Department’s proceedings and rulings. Deloitte had calculated that the Department is successful in only 11.5% of appeals, while the global average is at 65%. The resultant chaos in implementation of taxation statutes has made the assessees vulnerable to such arbitrary actions initiated by the Department under the boundless power which operates outside the purview of the Legislature. The vulnerability is demonstrated from the increasing arrests of the assessees under the CGST Act where the ambit of Section 69, which grants the power to arrest, has been exploited by the Commissioners to establish ‘reasons to believe’. It was reflected in the judgment pronounced by the Bombay High Court that a mere paraphrasing of the requirements of Section 41 of the Code of Criminal Procedure, which provides for the situations when such power to arrest may be exercised, will not be sufficient to form ‘reasons to believe’ and effectuate an arrest. While the lackadaisical approach towards constituting the GST Tribunal has robbed the assesses of an opportunity to avail a judicial mind on the validity of the orders. It compels the aggrieved assessee to go to the High Court which continues to suffer from a logjam thereby leading to prolonged pendency, to challenge the orders. Need for Review of the Executive Powers It is contended that the economic offenses are distinct in nature and a separate mechanism needs to be developed for their regulation. Moreover, the delegated functions to the Executive are necessary for a nation where legislative proceedings are repeatedly disrupted. Moreover, there is an urgent need to boost economic growth and attract investments to facilitate post-lockdown recovery and implementation of government schemes and initiatives. It is a well-established fact that the collection of taxes in the government’s coffers reflect economic prosperity. This prosperity can be achieved by providing certainty with respect to taxation provisions in order to attract investment and instill confidence in the minds of the assessees to pursue economic growth and profits without fear of harassment. The same has been reiterated by the Supreme Court through Justice Chandrachud where he stated that, “There is a significant value which must attach to observing the requirement of consistency and certainty. Individual affairs are conducted and business decisions are made with the expectation of consistency, uniformity, and certainty. To detract from those principles is neither expedient nor desirable.” But the Executive has been known to detract to principles which have been found to be undesirable, and such principles have found the assent of the appellate authorities in several instances where a wrong interpretation leads to a decision either in favour of the Department or a dismissal. In either circumstance, the assessee has to go to the High Court. A recent example can be found in the Allahabad High Court’s judgment which pronounced that a bare reading of Sections 73 and 74 of the CGST Act provides that a show-cause notice is mandatory to be served before determining the leviable tax on ‘deemed supply’ and the orders and arbitrary penalty amount were set aside. Besides, the disruption of legislative proceedings or the distinction of economic offenses cannot provide a ground for the Legislature to abdicate its responsibility of being diligent in executing its legislative functions and employ ambiguous and equivocal terms to provide a wide ambit of powers to the Executive to implement unclear legislative intentions. The interpretation of such statutory provisions only leads to a surge in the judicial burden as it increases the number of cases filed to seek clarification and resolution of disputes with respect to incorrect assessment. Moreover, tax certainty cannot be provided by ousting the inclusion of law members at the frontline through the establishment of the Board for Advance Ruling (‘Board’) in place of the Authority of Advance Ruling (‘Authority’). This initiative by the

Excessive Taxing Ambit of the Executive & Quasi-Judicial Authorities Read More »

Confluence of the Impact Approach and Stakeholder Theory of CSR

Company Law /

[By Digvijay Ravindar Singh] The author is a student at the National Law School of India University, Bangalore. The concept of CSR differs between developing countries and developed countries with respect to its definition as well as implementation. Additionally, there is no comprehensive, “one size fits all” global corporate governance or CSR system based on western codes and regulations that can be implemented in emerging markets. As per several writers, the rationale behind the concept of CSR also varies in developed and developing countries. In this paper, the researcher shall dissect the rationale/theory behind CSR in India, compare it with another theory called the “Stakeholder Theory”, and subsequently, suggest a confluence between both these theories using which certain reforms can be brought about in the Companies Act [“the Act”]to ensure maximum social benefit. The thesis of the paper is that amending the Companies Act through the introduction of a confluence of two different theories of CSR will result in maximum social impact. Trend of “impact approach” in India In the present time, the COVID-19 pandemic has depleted the finances of the Government. The Government anticipated such costs, and consequently:- Declared, through the Ministry of Corporate Affairs (MCA), that the funds spent on COVID-19 management would be treated as eligible CSR activity. The order stated that the CSR funds can now be used for promoting preventive care healthcare infrastructure and disaster management. The MCA notified that the items under Schedule VII will be broadly and liberally interpreted in the wake of the crisis. Amended the CSR norms to include research and development (R&D) spending on new vaccines and drugs related to COVID-19. The caveat being that such research and developmental activities should be carried out in collaboration with any of the institutions mentioned in item (ix) of Schedule VII of the Act. The reason behind such directions and amendments was solely to redirect the CSR funds for COVID-19 relief. It can, therefore, be seen that the Government is trying to direct CSR funds to sectors that can translate it to a greater impact on society in the present time. Mitra has observed that in a developing country like India, it is in the best interest of both the stakeholders (the Government and the governed) that the Government and the Corporations work together to develop the human capital of the country to bring about a glorious future. This is the rationale behind the development of CSR in developing countries. It is to aid the Government in funding sectors where it cannot invest due to budgetary constraints. Various authors state that CSR should be used for benefiting society in a form of a shared social responsibility as this maximizes social welfare and reduces the negative externality in the largest amount. This approach can therefore be termed as the Impact Approach. With the COVID-19 pandemic ravaging the country, resulting in loss of life and livelihood, it will not be a wrong assumption to make that the Government is following the Impact Approach of CSR usage, by opening up avenues for companies to invest their CSR allocations for COVID-19 eradication efforts to maximize social welfare. Offsetting of negative externality Another approach to CSR is ‘offsetting of negative externality’ or the Stakeholder Theory which differs from the ‘Impact Approach’.The term ‘Negative Externality’ has been defined as the harm that the business transaction of a corporation does to a third party. ‘Offsetting of Negative Externality’ is, therefore, the lessening or the removal of the harms caused to stakeholders of a corporation due to its actions. This approach is governed by the idea that while corporations should invest their CSR for social welfare, at the basic level they are still accountable to their stakeholders first. Hence, the CSR amount should be invested such that the stakeholders, which consist of parties directly and indirectly affected from the working of the company, are benefited. Proposal for the maximum benefit to stakeholders It is proposed that, for the maximum benefit to the stakeholders of a corporation, there must be a confluence between the two principles of impact approach and offsetting of negative externality such that the offsetting of the negative externalities of a corporation can take place with the maximum impact. This resultantly means that a corporation must identify its most negative externality and then, using the impact approach, the company should use the CSR amount where the society can have the greatest welfare. For instance, the most negative externality of a tobacco company would probably be the number of deaths that its product causes by oral cancer. By using the confluence between the Impact Approach and the Stakeholder Theory at this stage, the possible sectors for investment will be considered and the sector where social welfare will be maximized will be invested in. In this case, it will probably be the investment of the CSR amount in an oral cancer institute. The confluence between the two principles will, therefore, help achieve the maximum social welfare while offsetting the corporation’s greatest negative externality.  My proposal for the confluence of the two principles mentioned above is:- There must be an independent impact assessment firm that evaluates the business transactions of a corporation and traces its most negative externality. The corporation must be incentivized to invest in offsetting its most negative externality such that the rationale behind the CSR concept can be realized and the corporation can cause maximal positive impact to the interests of its stakeholders. Proposal for incentivizing corporations and its effect on criminality As mentioned in the previous section, corporations need to be incentivized for investing to offset their greatest negative externality. This can be achieved through the following ways- Double CSR credit (the amount invested will be counted as double for the CSR requirement) should be provided for incentivizing the investment of the corporation to offset its most negative externality. A detailed report regarding the same must be attached to the company’s annual report as prepared by an independent impact assessment firm each year. The cost for hiring

Confluence of the Impact Approach and Stakeholder Theory of CSR Read More »

The Billion Dollar Mistake: An Insight into the Citibank Wire Transfer Case

Contemporary Issues /

[By Raj Shekhar and Krati GuptaI] Raj is a student at the National University of Study and Research in Law, Ranchi and Krati is a student at the Rajiv Gandhi National University of Law, Punjab. The US District Court in the Southern District of New York on 16th February 2021 declared that In the Re Citibank Wire Transfers case, the “discharge-for-value” principle stands applicable and the defendants (the lenders for Revlon Inc.) in the case were entitled to retain funds sent by the plaintiff (Citibank) under a credit facility to which the defendants were a party. The present judgment finds its roots in the precedent established in the 1991 case of Banque Worms v. Bank America International[i] which also involved a similar question of a wire transfer worth $2 million. However, a lot of hue and cry surrounds the matter as the overall reasoning behind the judgment and the potential impact are unclear to the public at large. In light of the above judgment, this article tries to analyze the questions of law involved, the reasoning behind the judgment, and its potential impact on the banking industry wherein the principles deliberated upon in the case are expected to set precedents. The Citibank Case: Background and Factual Matrix In August 2020, Citibank (“the bank”) acted as an administrative agent for a syndicated term loan taken by Revlon, Inc. had intended to wire $7.8 million in interest payments to Revlon’s lenders. However, owing to a human error, the bank not only wired the $7.8 million which constituted Revlon’s interest but along with it the bank also wired an additional amount of nine hundred million dollars ($900 million) of its own money as well. Co-incidentally, the total amount received as a result of such wire transfer was equivalent to the total amount (principal and the incurred interest) which Revlon owed to its lenders. The bank put on the defence that the money was transferred as a result of human error and believing it, some lenders co-operated by returning the money. However, one of the lenders believed that the transfer was intentional and hence, declined to return the money wired to them by the bank. Aggrieved by the denial to return the wired funds, the bank approached the New York Court which to the bank’s dismay ruled in the favour of the lenders. Justifying its stance, the court held that the amount wired “by mistake” was to be held as “final and complete transactions, not subject to revocation” and under no condition can be returned as it was barred under the principle of “discharge-for-value-defence“, which provides that in case of accidental transfers, the lenders can keep the money if it discharges an existing liability and they didn’t know it was an accidental transfer. The New York Court’s Ruling: Understanding ‘discharge-for-value’ Principle The discharge-for-value principle that was used in the case is generally operational in cases where a claim for unjustified enrichment has been made. It discharges the liability of returning the mistaken credit when the beneficiary receives money to which it is entitled, in this case, the principal plus the incurred interest on money lent to Revlon amounted to the wired sum, and hence, has a bonafide belief that it is entitled to such amount and should retain the funds. The beneficiary should not be expected to consider what has to be done with the funds but is expected to consider the transfer of funds as a final transaction. This principle finds its roots in the case of Banque Worms v Bank America. Along with this, Citibank, a leading financial institution in the world, could make a mistake of billions was quoted by the court to be borderline irrational to assume and so the lender cannot be held liable for handling the money with a mala fide intent. The “Unjust Enrichment” Conundrum: What do the Indian Laws Say? As per Section 72 of the India Contract Act, a person to whom a commodity has been delivered or money has been paid by mistake is bound to repay or return it to the person who transferred it mistakenly. In the famous case of Kelly v. Solari[ii], it was held that in cases where the money is paid to another under a mistake of fact that made the transferor believe that the transferee was entitled to the money and the same would not have been paid if the transferor would have known that the fact was a mistaken belief, then there would be a legally valid ground for instituting a suit towards the recovery of such amount as it would be against conscience as well as the law to retain it. In such cases, however careless the party paying may have been, omitting due diligence to inquire into the fact a valid ground for recovery of such money would still stand true. The same precedent was followed in the case of the Imperial Bank of Canada v. Bank of Hamilton[iii]. Further, in the case of Kleinwort v. Dunlop Rubber Co[iv], it was held that if money is paid under a mistake of fact and is re-demanded from the person who received it the same shall be payable to the person demanding such a refund. The Calcutta High Court in Jagdish Prosad Pannalal v. Produce Exchange Corporation[v] had clarified the stance and stated that even though the sum paid under the mistake of fact is recoverable, the same is not true for all cases. In some cases owing to circumstances, a plaintiff may be disentitled by estoppel or other related factors. In other cases of mistaken credit like Union Bank of India v. Surana Bangles, S. Kotrabasappa v. Indian Bank[vi], Ganesh Cotton Traders v. General Manager[vii], UCO Bank, etc. the courts have always ruled in the favour of returning the mistaken credit. However, there has been an exception, and in the case of Metro Exporters (P.) Ltd. v. State Bank of India[viii], where the Apex Court even though it appreciated the right to recover the money

The Billion Dollar Mistake: An Insight into the Citibank Wire Transfer Case Read More »

Corporate Governance in Banks: Need for RBI to Engage Proactively

Corporate Governance /

[By Sourav Kumar and Jyotshna YashaswiI] Sourav is a student at the National Law School of India University, Bangalore and Jyotshna is a student at the Chanakya National Law University, Patna. Introduction In the previous few years, the country has witnessed several banks facing an extreme crisis due to the ballooning Non-Performing Assets (NPAs). In 2018, a fraud of almost $2 billion was discovered at the Punjab National Bank. PMC Bank, Yes Bank, and Lakshmi Vilas Bank have almost collapsed, necessitating an intervention from the RBI to control the situation. Although the reasons for these crises are different, there is one common point among all of them, i.e., lack of internal control. In this article, I argue that the overlap between the board of directors (Board) and the management of the bank deteriorates the corporate governance standards in a bank. This overlap may be in a formal sense (through numbers), or in a factual sense (through influence). I will support my claim by proving that recent bank crises in India were a result of the failure of corporate governance caused by an overlap between the Board and the management. I further argue that prevention of such failure of corporate governance requires the RBI to establish an internal pressure mechanism for all banks by appointing nominee directors to the board of banks, in addition to the external regulatory mechanism that RBI exercises currently through various regulations. Failure of Corporate Governance in the Recent Past In March 2020, an excessively large amount of NPAs and constant failure to secure fresh funding prompted the RBI to take over the charge of Yes Bank and supersede its Board. The bank was put under moratorium and the RBI formulated a bailout plan led by the SBI. This crisis at the Yes Bank had been plaguing the bank since 2015 and was concealed from the RBI.  The former CEO of the bank Rana Kapoor engaged in aggressive lending to entities like Reliance Industries, Essel Group, DHFL, etc. which were already stressed and could not secure credit from other banks.[i] This aggressive lending resulted in a large amount of NPA, which was flagged for the first time in 2017-18. In the case of Lakshmi Vilas Bank, directors having substantial shares interfered with the management leading to the granting of loans to the likes of Jet Airways, Religare, CCD, Nirav Modi, etc.[ii] who were already financially stressed. This resulted in the burgeoning of NPAs at the bank, leading to the crisis. In the case of PMC Bank, more than 70% of the loan amount was given to a single entity, HDIL, whose financial credibility was already in question.[iii] All these crises were a result of a very large amount of NPA. The NPA was accumulated as a result of the unethical lending by the banks without properly accounting for the risk factor involved in such lending. The risk appetite of a bank is decided by the Board, and the management runs the bank in line with the risk approach decided by the Board. Therefore, it is clear that such unethical risk-prone lending can only be possible if the corporate governance structure has collapsed. This collapse of corporate governance structure in Yes Bank could be understood from the fact that one of the independent directors of the bank Uttam Prakash Aggarwal had resigned from the board citing corporate governance failure. He stated that there was a complete failure of corporate governance at the Bank as the bank was being run by the managers and not the Board.[iv] The Problem of Overlap between the Board and the Management: Various directors appointed to the Board of a company are also senior management officials of the company. This overlap between the Board and the management allows the executive directors to control or influence the functioning of the board, which was also the case with Yes Bank. Rana Kapoor used his influence to control the independent directors of the Board. On the contrary, in the case of Lakshmi Vilas Bank, the flow of this influence had reversed, where the directors interfered with the management. With respect to PMC Bank, there is no concrete proof to show such influence. However, it is highly improbable for the management to extend 70% of its loans to a single entity without effectively controlling the Board. An overlap, either in a formal or a factual sense, between these two separate organs of a company contradicts the basic principles on which corporate governance of banks is based. The RBI attempts to ensure corporate governance standards in the banks through various regulations. The most important principles on which the RBI regulations are based are ‘Transparency and Disclosure’.[v] Accordingly, the management of a bank should disclose all material information to the Board and maintain transparency. However, if the Board and the management overlap significantly in any manner, then this principle is rendered futile leading to a collapse of the corporate governance structure. The Need for Proactive Engagement by the RBI According to Section 149(4) of the Companies Act, one-third of the directors on the Board of a listed public company should be independent directors (IDs). This requirement for the composition of the Board may be changed by the central government for special classes of companies. The RBI in a recent discussion paper has proposed to tackle this problem of overlapping in a formal sense by proposing that the majority of Board members should be independent directors. It also proposes that the Audit Committee and the Risk Management Committee, the two most important committees of a bank, should comprise of at least two-thirds of independent directors. This proposal will certainly reduce the influence of the management over the Board and its important committees. However, the independence of the Board cannot still be ensured as there would still be some scope to influence the independent directors. This is because the director’s duties are often followed only in letter and not in spirit. The Yes Bank episode is a perfect example to show

Corporate Governance in Banks: Need for RBI to Engage Proactively Read More »

Fintech M&A – A New Challenge for Competition Authorities

Competition Law, Mergers & Acquisitions /

[By Lavanya Gupta] The author is a student at the Symbiosis Law School, Pune. Background The financial services industry, with its innate technology, has been a significant sector of economies across the globe, and this fact is supported by the existence of payment processing mechanisms, ATMs, etc. However, of late, a separate industry that exclusively focuses on the development of newer technologies for the financial services sector has been rising, i.e., the fintech industry. In other words, while the financial services industry develops products for consumers, the fintech industry develops the technology that ensures extensive and widespread use of such products by leveraging the worldwide adoption of mobiles and smartphones, and the ubiquitous internet. The speed of M&A between the players of the financial services industry and the fintech industry has recently seen an upswing since mergers and acquisitions (“M&A”) present an opportunity for fintech companies, which are mostly start-ups, to advance their capabilities and expand their reach. Additionally, the fintech industry is characterized by high growth and recurring revenue and is thus an attractive industry for private equity and venture capitalists alike. Concomitantly, as per a 2019 report, fintech M&A has seen a five-fold growth over the past decade. With such a growth profile, it is perhaps apparent that fintech M&A is moving from “too small to care” to “too big to ignore” and in the same line, it is attracting the interest of multiple stakeholders. Amidst the heightened attention, scrutiny by antitrust regulators was obviously to follow, and cases like Visa/Plaid and Mastercard/Nets are paving the way. This article looks at the approaches of various competition authorities across jurisdictions during their assessment of notable fintech M&A deals, and the probable course that fintech M&A is going to take in the near future. Fintech M&A’s Antitrust Scrutiny in the United Kingdom and the United States United Kingdom’s (“UK”) competition regulator, the Competition and Markets Authority (“CMA”), and the United States’ (“US”) Department of Justice (“DOJ”) have reviewed many fintech deals in the recent past. While the CMA has time and again asserted itself as the chief antitrust review agency for fintech deals, the DOJ has been vigilant of fintech M&A that may hurt the American market and consumers. A case in point is the Visa/Plaid merger: In January 2020, Visa decided to merge one of its subsidiaries with Plaid that would lead Visa to gain indirect control over Plaid. It is pertinent to mention that Visa is a well-established global player for electronic consumer-to-business (“C2B”) payments. On the other hand, Plaid (established in 2013) provides services like aggregation of consumers’ account information and signaling businesses about payments made by customers.  Hence, there is a notable overlap in the entities’ C2B payment services. In other words, Plaid is a new entrant in a market where Visa already enjoys significant market power. Since the pre-merger and post-merger shares of the two parties breached CMA’s “share of supply” threshold, the transaction attracted antitrust scrutiny by the CMA which concluded in August 2020 after a 2-month long inquiry by the regulator. Though the CMA observed that the merger would dilute competition in the market, the transaction was given a green signal by the CMA since it was also observed that multiple other PIS providers were existing in strong competition in the UK. On the other side of the globe, the reaction to the proposed transaction was quite the opposite. Unlike its English counterpart that cleared the deal, the DOJ filed a civil antitrust suit to stop the acquisition. The DOJ’s suit was based on the fact that the “strategic” acquisition of a nascent competitor by Visa is a sham to eliminate upcoming competition in the market that Visa operates in. Principally, DOJ objected to the “killer acquisition” being proposed by Visa. Following the DOJ’s suit that was pending trial, Visa terminated its acquisition plan in January 2021, which was welcomed by the DOJ. In the same month when DOJ sued Visa, the American competition regulator cleared Mastercard’s acquisition of Finicity (a start-up that provided an open-banking platform). Some have argued that with such contrasting decisions surrounding fintech M&A, the DOJ’s stance on the whole issue seems unclear. However, it must be noted that the DOJ blocked the Visa/Plaid transaction since the two parties were in competing business, but in Mastercard/Finicity the two parties had complementary technology, and hence, the deal was given clearance. Additionally, according to the DOJ, Visa’s acquisition of Plaid for $5.3 billion was 50x the market price, and thus Visa was essentially paying to preserve its dominance. On the other hand, since the price was deemed correctly calculated in the Mastercard/Finicity transaction by the DOJ, the deal was not stopped. Hence, within fintech M&A, while there has been an increased deal activity in the sub-sectors of point-of-sale services and merchant payments, competition watchdogs have been active and have modified their review processes to understand the typical workings of the dynamic fintech industry as a whole. From the numerous orders on various fintech M&A transactions, it can be understood that antitrust agencies are keen on exercising a fastidious assessment to capture and understand business strategies and identify “killer acquisitions” or “reverse killer acquisitions”. For instance, a primary consideration in antitrust scrutiny of fintech M&A is the valuation analysis. The identification of a deal premium, which is usually discussed and explained in the internal documents relating to the transaction, can be a potential red flag and could indicate a “killer acquisition” intention, as was the case in the Visa/Plaid transaction. The Indian Antitrust Approach to Fintech M&A India’s Competition Commission of India (“CCI”) had a chance to review a fintech M&A transaction when it was notified of Visa’s acquisition of 13% stake in IndiaIdeas. While assessing the merger, CCI noted Visa’s affiliation with various Indian banks for the issue of credit cards and debit cards. On the other hand, it was observed that IndiaIdeas provided a host of services like payment services, voucher distribution, biller network, authentication services, etc. to businesses.

Fintech M&A – A New Challenge for Competition Authorities Read More »

FTC v. Facebook: Lesson for the Indian Competition Regime

Competition Law /

[By Rushil Anand] The author is an associate at ALA Legal. Introduction – In what can be the watershed moment for Anti-Trust Cases in 21st Century, the Federal Trade Commission of United States, on 9th December 2020, sued Facebook for maintaining its monopoly illegally. According to the complaint, Facebook over the years has abused its dominance by imposing anti-competitive conditions such as, regressive policies that allow third-party Application Programming Interface (APIs) access to Facebook Blue (platform is generally known as Facebook), only if they are not competing with Facebook. The investigation highlights how certain inherent structural features of the digital market itself make it prone to monopolization. These structural features can broadly be divided into concentration of users, revenue, and data. India in recent years has seen certain mergers and acquisitions, most notably the Jio-Facebook deal, capable of tipping the Indian digital markets towards monopolization. Scrutinizing the Jio-Facebook deal through this derived framework of structural features, the monopolization risk posed by it becomes evidently clear. Similar to how the concentration of users, data, and revenue with Facebook made the American digital markets prone to its abuse of dominance, the Jio-Facebook, including their stated purpose of combining JioMart and WhatsApp can have serious consequences for the comparatively nascent Indian digital markets. This calls for closer scrutiny of Jio and Facebook’s conduct and incorporating effects of these structural features in future CCI investigations. Inherent Structural Features – Concentration of Users Monopolization risk posed by concentration of users primarily surrounds two digital market phenomenon called Network Effects and High Switching Costs. Networks Effects is a phenomenon whereby monetary as well as the utility value, of a digital platform, increases, at an increasing rate, as more people join the platform. As the number of users increases, it leads to a gain for the existing users of the service, as interactions with more users are possible on the same platform. Furthermore, users will start becoming familiar with the digital platform’s interface, helping them navigate the platform with ease and invest personal time in it by building connections and sharing content (such as pictures and posts) that cannot be moved to other rival platforms. Shifting to another platform will be a loss of this valued personal investment. This cost associated with shifting to a new platform is called Switching Cost. Just like Network Effects, Switching Cost increases over time, to the benefit of the dominant player. Strong Network Effects and High Switching Cost locks-in the dominant position of a platform, especially for the first movers and creates a dependency once such position is locked-in. Gradually, the effect of these phenomena increases, making it difficult for new competitors to attract users. FTC in its complaint stated that strong Network Effects and High Switching Costs act as entry barriers that help Facebook maintain its monopoly – “65. Facebook’s dominant position in the U.S. market is durable, due to significant entry barriers, including direct network effects and high switching costs”. Concentration of Data Having a large number of users allows a platform to have access to large sets of data. It allows platforms to track broader user trends and any potential competitive threat that can either be copied, acquired or suppressed. Just like the concentration of users, the concentration of data is self-reinforcing as more data allows them to perfect their platforms, which attract users and hence attract more data. Aware of the competitive advantage of data, Facebook pervasively collects data and tracks competitive threats, according to the FTC complaint, to maintain its monopoly. Facebook in 2010 introduced Open Graph API, which allows third parties to add a Facebook interface to their website. Due to the popularity of the platform and familiarity with its interface, developers were quick to adopt the API. The API allows Facebook to track potential competitive threats by sharing with Facebook data of any user interacting with third-party platforms utilising the Facebook interface. By 2012, the API was estimated to be sharing one billion pieces of social data with Facebook per day. Mike Hoefflinger, former Head of Global Business Marketing of Facebook, in his book “Becoming Facebook” stated Open Graph API was used to track Instagram, as Instagram had enabled the Open Graph API on its platform before it was acquired by Facebook. Facebook also acquired a digital platform named Onavo, a Spyware VPN provider which unknown to its users, tracked their activity. Through Onavo, Facebook had access to data that helped them track and identify apps that posed a competitive threat before it was forced to shut down the app in 2019. The complaint quotes an internal Facebook document, showing how the acquisition helped them track competitive threats to buy or suppress them – “With our acquisition of Onavo, we now have insight into the most popular apps. We should use that to also help us make strategic acquisitions.” Concentration of Revenue Unlike traditional businesses, most digital platforms do not charge any monetary fee. Instead, they rely on user data which is monetized by being sold to advertisers. This is a very crucial part of their business as advertisement is the largest source of income for most digital platforms. Facebook, according to FTC, earned around $70 Billion from advertisement, 98% of their total revenue. Data sold to advertisers is utilized to personalize advertisements. This form of advertising is called social advertising. It allows advertisers to not only reach large numbers of audiences but also restrict it to likely interested parties. It is a data-reliant mode of advertisement which favours company that can persistently track users’ data. Advertising with Facebook, with over 2.7 billion users per month on Facebook Blue alone, has become necessity for any advertisers to effectively compete in their domain. David Heinemeier Hansson, Chief Technology Officer of Basecamp, in the hearing before the Subcommittee On Antitrust, U.S. House of Representatives Judiciary Committee laid out how refusing to advertise on Facebook is like “competing with one arm behind your back”, asserting that they were losing growth by not advertising on Facebook. This

FTC v. Facebook: Lesson for the Indian Competition Regime Read More »

Scope of NCLT/NCLAT’s Inherent Powers: Meeting the Ends of Justice

Insolvency Law /

[By Rozat Akolawala ] The author is a student at the Maharashtra National Law University, Aurangabad. Like any other tribunal, the National Company Law Tribunals (hereinafter ‘NCLT’) across the country, and the National Company Law Appellate Tribunal (hereinafter ‘NCLAT’) have inherent powers that are exercised to meet the ends of justice and prevent the abuse of process of the Tribunal. It is well settled that the Tribunals cannot go beyond the purpose and objectives of the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘IBC’), this implies that the Tribunals cannot interfere with the commercial decision of the Committee of Creditors (hereinafter ‘CoC’), unless it is unjust or violates the provisions of the IBC. This principle implies that the NCLTs’ and the NCLAT’s inherent powers cannot go beyond the commercial decision of the Committee of Creditors (hereinafter ‘CoC’) unless it is patently unjust or against the provisions of the IBC. The article focuses on the journey of these “inherent powers” from the year 2016, and the judicial pronouncements that set up the circumstances under which the Tribunal exercises these powers. Background The Central Government has a rulemaking power under Section 469 of the Companies Act, 2013 and it formulated the NCLT Rules, 2016, and the NCLAT Rules, 2016 under the provision. Both the Rules have similar provisions on the inherent powers of the Tribunal. However, according to Rule 10(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, only selective Rules apply to the IBC, and Rule 11 falls in the left-out category. One can understand that the legislature intended to restrict the implementation of the rules in the IBC, and it is pertinent to note that Rule 11 which invokes the exercise of inherent powers was kept at bay. The reason behind this was the suggestion in the BLRC Report[i]. While dealing with the resolution process of the Corporate Debtor, the commercial decision of the creditors is placed at a high pedestal. The BLRC Report suggested that inherent powers of the Tribunals should be out of the statutory process to limit their interference in commercially viable decisions, to give effect to the commercial wisdom of the CoC. It was clarified in the case of Lokhandwala Kataria[ii] that as per Rule 10(1) only Rules 20 to 26 has been adopted for the functioning of the IBC and Rule 11 was excluded from the same. This was later affirmed by the Supreme Court and further in the case of Uttara Foods and Feeds[iii] it directed the authorities to carry out amendments which shall allow the Tribunals to exercise their inherent powers while dealing with insolvency proceedings filed under the IBC. The NCLAT in the case of Lokhandwala Kataria[iv] held that Rule 11 has not been adopted for the IBC’s purpose and Rule 10(1) adopts only Rules 20 to 26 so far. The Supreme Court later affirmed the same. In the case of Uttara Foods and Feeds[v], the Supreme Court reiterated the decision in Lokhandwala Kataria[vi] and directed authorities to amend the laws and to include inherent powers in the statutory working of the insolvency proceedings. Section 12A was incorporated in the IBC after considering the recommendations in the Insolvency Law Commission Report of March 2018. As per Section 12A if a withdrawal application for initiating insolvency proceedings has been approved by the CoC with a 90% voting share, same can be allowed by the Adjudicating Authority. In further discussion, in March 2018 in the Insolvency Law Commission Report, and after that Section 12A found its place in the IBC. Under Section 12A, the Adjudicating Authority can allow withdrawal of application for initiating CRIRP if approved by the CoC with a 90% voting share. In the case of Swiss Ribbons[vii], the Supreme Court held that the Adjudicating Authority can deal with a withdrawal application till the CoC’s constitution, this fell under the ambit of its inherent powers. Judicial Pronouncements   Judgments revolving around the inherent powers of the NCLTs/NCLAT touch on the following areas- Review Application In the case of Shri Lalit Aggarwal[viii], the NCLAT while adjudicating a Review Application referred to the case of Dr. M.A.S. Subramanian[ix] and observed that power to review is not an inherent power of the court. The NCLAT exercised its inherent powers only to correct typographical errors of the Review Application. Discussing evidence and arguments of the Review Application was beyond the NCLAT’s power. Correspondingly, in the matter of Deepakk Kumar[x], the NCLAT believed that “review” is not an inherent power until and unless it is expressly mentioned in a statute or arises by any necessary implication. A Tribunal’s power to “review” must be a statute’s creation. Commercial Wisdom of the CoC In Sushil Ansal’s[xi] case, two Financial Creditors prayed for invoking Rule 11 of the NCLT Rules, 2016 to terminate the CIRP against the Corporate Debtor as they had agreed to settle the dispute. Relying on the award of Swiss Ribbons[xii], the NCLAT observed that to allow the settlement via their inherent powers, it is necessary to first hear both the parties and check if the CoC’s is formed. The Tribunals often construe the creditors’ decision strictly; however NCLT, Mumbai recently passed a judgment as to the obligations of the creditors. In the Dy. Commissioner of Customs DEEC[xiii] case, the question that arose was whether the Resolution Professional must send notice to the creditors requiring them to file their claim or is it the creditors’ duty to file their claim on the issue of the public notice. It was held that it is the creditors’ responsibility to file the claim, the NCLT, Mumbai refused to invoke its inherent powers to prevent violation of the provisions of the Code. Necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal The arguments in the matter of Univalue Projects[xiv] before the Calcutta High Court was that invoking the inherent powers of the Tribunals is a judicial function and not administrative. The opinion of the Court was that the Tribunals derive their inherent powers from a delegated legislation and ergo, cannot supersede the statutory provisions of the

Scope of NCLT/NCLAT’s Inherent Powers: Meeting the Ends of Justice Read More »

CCI’s Market Study In Telecom Sector: Lessons From The Past And The Foreign

Competition Law /

[By Raghav Harini N] The author is a student at ILS Law College, Pune. The Competition Commission of India (CCI) recently published a report on a market study on the telecom sector in India. The Report examined the mechanics and the economics of the sector to identify potential competition law concerns.  This post explores these concerns and analyses them from the lens of CCI and international jurisprudence to address them in an effective way. In light of the same, the article also proposes the introduction of market -structure-based assessment in lieu of dominance-based assessment under S.4 of the Competition Act, 2002 (the Act) and unified regulatory consultation between sectoral regulators and CCI.      I.   Key Takeaways from the Report The Indian Telecommunication sector is highly concentrated with 3 private sector Telecom Service Providers (TSPs) namely RJIo, Airtel and Vodafone-Idea controlling 88.4% of the market share. RJio with its initial launch offer caused a disruptive reduction of data prices; this was received by parallel pricing strategies by the competitors. While this seems to have placed India as the world’s cheapest telecom market, the TSPs have been earning negative profits consistently, indicating a sector-wide distress. According to the Report, consumers value network coverage, customer service, tariff packaging and lower tariffs in choosing their TSP. With greater parity among the products of the competitors, non-price attributes contribute significantly towards retaining customers and widening the clientele. The industry is also showing an accelerated interest in vertical integration with over-the-top (OTT) platforms. The recent examples include Reliance Jio’s acquisition of stake in both Eros and Balaji Telefilms, Airtel’s offer with Hotstar , Vodafone’s deal with Amazon, and Facebook’s investment in Reliance Jio. Two of the TSPs have also introduced their own content platforms namely Airtel’s Hike, Reliance’s Jio Cinema.    II.Analysis of Competition Concerns in the Telecom Sector The Report has highlighted that the vertical convergence in the sector has the potential to cause adverse effects on the competition. The current TRAI framework on net neutrality proscribes TSPs from engaging in differential treatment with any of its vertically integrated entities; the Report clarifies that if the dispute merits detailed competition law investigation, then CCI may take it up. It has also cautioned the potential data aggregation in the telecom sector and CCI may examine excessive data extraction by these digitally-enabled entities. Whether excessive data extraction constitutes a valid cause of action under competition law is controversial. Several antitrust agencies including CCI shy away from taking up excessive pricing cases, for reasons such as inability to define what constitutes excessive, presence of countervailing powers, self-correcting attributes of the free-market system, and perils of regulatory intervention; arguments of same fashion may be applicable to excessive data extraction as well. However, excessive data harvest by entities with significant market power may be construed as exploitative behaviour from consumer protection and privacy angles. The German antitrust authority in the case against Facebook explored the anti-competitive and welfare-reducing effects of excessive data extraction by digital platforms. The authority observed that violation of privacy laws can be read into abusive conduct by a dominant entity since the aim of the law was to prevent the dilution of the constitutional right to self-determination in business dealings, where one party is able to unilaterally command the terms. It remains to be seen how the CCI would read the intersection of competition law, data protection law, and our constitutional right to privacy into exploitative data harvest practices. Privacy has been recognised as a non-price parameter by both European Commission (EC) and the Federal Trade Commission (FTC). The Report, drawing inspiration from global jurisprudence, has clarified that such privacy concerns may be examined under the Indian competition law domain. It observed that privacy is central to consumer welfare, any dilution or violation of the data protection standard by a firm with significant market power can be examined by CCI. Earlier CCI had expressed a divergent view in the case Vinod Kumar Gupta v. WhatsApp Inc o by stating that “allegations of breach of the IT Act, 2000 do not fall within the purview of examination under the provisions of the (Competition) Act.” The Report’s observation in converging the two domains of law is welcome at a time when the industry is witnessing rapid vertical integration. CCI may also consider examining the privacy and data protection standards of the merging entities as a metric of consumer welfare at the merger approval stage. Digitally enabled markets are characterized by structural risks such as network effects and lock-in effects. The creation of walled gardens, as the Report describes, is a result of technological unification and vertical integration in the telecom sector; this tends to lock the consumers within the ecosystem, leaving no incentive for them to switch or cross-visit other TSPs. TSPs also perform platform roles between content providers and subscribers. A vertically integrated firm therefore can hinder competition and indulge in abusive conduct. However, none of the TSPs enjoys a dominant position in the market and therefore they cannot be brought under the purview of S.4 of the Act since it employs a dominance-based assessment. In consideration of the structural risks that sectors such as telecom may be exposed to, an alternative assessment may be considered on lines of Competition and Market Authority’s Market Investigation Regime. This regime employs a market-structure-based assessment in lieu of dominance-based assessment. This is effective for two reasons; firstly, it does not require the presence of a dominant firm in the relevant market. Secondly, this assessment is useful in markets where none of the players engage in anti-competitive behaviour but the market is not competitive; CMA cannot impose a penalty on the players but can merely propose structural remedies (such as divestments) and/or other behavioural remedies to correct market risks as long as it can justify the consumer welfare associated with the proposed remedies. Stakeholder engagement in the investigation process as opposed to adversarial inquiries aids the authority in addressing the concerns in the sector most effectively. Such sector overhauling remedies

CCI’s Market Study In Telecom Sector: Lessons From The Past And The Foreign Read More »

Future of Consolidated Resolution of Insolvent Group Companies in India

Insolvency Law /

[By Divya Mann and Anubhav Chaudhary ] The authors are students at the National Law University, Lucknow. Introduction Today, it is a common business practice in India for companies to establish their subsidiaries and associate companies. While some of these big conglomerates’ companies may establish them for commercial interest,[i] Others are established to supplement the sister concerns. The assets and liabilities of these group companies are so intricately intertwined[ii] that once they are declared insolvent and the Corporate Insolvency Resolution Process (“CIRP”) under Insolvency and Bankruptcy Code (“Code”) is initiated, the stand-alone resolution is neither cost and time effective nor an idol solution for the creditors. Therefore, in order to have a feasible insolvent group insolvency, the CIRP should be initiated against all the companies operating under a group as subsidiaries and associate companies in front of a common adjudicating authority and by clubbing the assets and liabilities of the group companies. This is where the need for the consolidation of CIRP of the group companies’ rules in. Indian Jurisprudence with Regard to Consolidation  CIRP Consolidation of the Videocon group is a landmark ruling by National Company Law Tribunal (“NCLT”), Mumbai on group consolidation in India. Even though consolidation is not provided in the Code either expressly or impliedly, the NCLT stemmed its power to order for consolidation by relying on the United States case of Re Vecco construction industries[iii] wherein it was held that bankruptcy courts may order for consolidation while exercising its equitable powers. In addition, US Bankruptcy Code provides the court with the power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provision.” [iv] However, the Hon’ble Supreme Court in the case K. Sashidhar v Indian Overseas bank[v] categorically held that NCLT and National Company Law Appellate Tribunal (“NCLAT”) are not Courts of Equity, thereby the basis on which Videocon judgment was passed by NCLT Mumbai lacked merit as it does not have the power to order for Consolidation claiming it is a court of equity. In addition, on the conjoint reading of section 196 (Power and Functions of the Board) and section 240 (Power to make regulations) of the Code, it is quite evident that the Insolvency and Bankruptcy Board of India (“IBBI”) is permitted to merely “carry out the provisions of this Code” and “not to carry out the purpose of this Code”. Therefore, such an explicit distinction in the provisions is to be noted and conclusively, it can be said that the IBBI cannot supplant its authority by bringing any amendment in the regulations.[vi] Other Relevant Provisions Section 60(5)(c) of the Code (Adjudicating Authority for Corporate Persons) allows the NCLT to deliberate on questions of law arising out of insolvency proceedings while Rule 11 of NCLT Rules[vii] entrust them with the inherent powers to pass any order as may be deemed necessary to meet the ends of justice. The above-mentioned provisions empower the NCLT with a certain degree of flexibility while adjudging insolvency cases, however, the NCLT and NCLAT being a statutory authority[viii] it cannot read something which is not already present in the statute.[ix] Further, an application filed under section 60(5)(c) of the Code is only maintainable in the situation when the CIRP has been initiated against the Company or when the Company is under liquidation. Working Group on Insolvency The Working group on Group Insolvency[x] constituted on the recommendations of the IBBI reported that at this stage India lacks the required technical know-how and infrastructure to carry out the consolidated resolution of group companies and the working group stems its view from the parliamentary debates on group insolvency. Thus, the NCLT cannot supersede the legislature and make something a law while exercising delegated legislation when that is expressly against the legislature’s opinion. Benefits of Consolidation The consolidation automatically results in extinguishing the inter-corporate claims[xi], subsidiary equity ownership interests[xii] and duplicative creditor claims[xiii] thereby maximising the assets of the company. Additionally, as was highlighted during the Lavasa corporations’[xiv] insolvency resolution, a consolidated resolution plan is an attractive proposition for the resolution applicant as opposed to a stand-alone resolution plan. Further, the consolidation among the group entities brings together information relating to the assets, creditors, obligations and business of the companies on one table[xv] and allows the courts the bigger picture in one glace therefore, putting aside multiple negotiations and making a feasible purchase option for the potential purchasers. Conclusion Consolidated insolvency resolution law in India will not only make the resolution process expeditious and profitable for the group companies but it will also allow the adjudicating authorities to pierce the corporate veil[xvi] and hold these group companies working as a single- economic unit[xvii] accountable for the manoeuvre of its subsidiaries and associate companies. However, at present, the NCLT is incapacitated in passing an order for consolidation until the same is incorporated in the Code along with a detailed procedure as to the formation of the consolidated committee of creditors, the appointment of a common resolution professional. Till the time amendment is brought to the legislation, procedural coordination can be practiced under rule 11[xviii], which bestows the NCLT with the power to issue an order for procedural coordination, while keeping the assets and liabilities of each individual entity distinct, thus preserving the substantive rights of all the creditors.[xix] This can be done by creating a two layer of COC[xx]. Analogous provisions can also be found in the Chapter 11[xxi]of the US Code that permits the Trustee to appoint such additional COC as it deems appropriate, and the German legislation statutorily highlights the role of group COC in assisting the individual COC while facilitating coordinated handling of proceedings.[xxii] Endnotes: [i] Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613. [ii] State Bank of India v. Videocon Industries Ltd., (2018) SCC Online NCLT 13182. [iii] In Re Vecco Const. Industries, Inc., 4 B.R. 407 (Bankr. E.D. Va. 1980). [iv] United States Bankruptcy Code, 11 U.S.C. § 105 (1978).. [v] K. Sashidhar v. Indian Overseas

Future of Consolidated Resolution of Insolvent Group Companies in India Read More »

Scroll to Top