Author name: CBCL

Fintech M&A – A New Challenge for Competition Authorities

Leave a Comment / 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.

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FTC v. Facebook: Lesson for the Indian Competition Regime

Leave a Comment / 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

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

Leave a Comment / 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

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

Leave a Comment / 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

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Future of Consolidated Resolution of Insolvent Group Companies in India

Leave a Comment / 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

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The Hoodwink of Discounts: Predatory Pricing and E-Commerce

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[By Milind Rajratnam and Anusha Maurya] The authors are students at the Dr. Ram Manohar Lohiya National Law University, Lucknow.  During online shopping festivals such as Flipkart’s “Big Billion Days” and Amazon’s “Great Indian Festival”, e-commerce giants offer some major discounts on their products. In 2020, during the initial days of their flagship festive season sales, Flipkart and Amazon were raking together at $3.5 billion (about Rs 26,000 crore). More often than not, these discount tactics lead to clashes between traders’ associations and e-commerce giants. It has also been an epicenter of controversy wherein stern allegations of anti-competitive practices and FDI policy violations are made against E-commerce giants by several traders’ associations. Prima facie deep discounting creates a mirage of consumer welfare, however, in reality, it threatens the very objective of consumer welfare by eliminating competition in the market. Owing to this, it is a widely debated issue in the realm of competition laws across the world. This blog critically analyses the current legal framework in India governing predatory pricing in the e-commerce sector along with its loopholes. It concludes by recommending some effective measures that can be adopted by the Indian legislators from their European counterparts to deal with this menace. What is Predatory Pricing? Predatory Pricing is a strategy embraced by major e-commerce companies to sustain short-term losses by reducing the prices of their goods below average cost and then recouping the losses by charging higher costs after the elimination of other competitors from the market. To prove that a particular pricing strategy is “predatory”, it is imperative to prove that such price is set below the marker of average cost with the purpose of eliminating other competitors. Therefore, the determination of the threshold as well as the allied circumstances, at which prices become predatory, is of paramount importance. On 20 August 2009, the Competition Commission of India (hereinafter “CCI”) rolled out the Competition Commission of India (Determination of Cost of Production) Regulations wherein it was clarified that the default cost benchmark for the determination of whether a dominant undertaking is pricing below cost is the Average Variable Cost (hereinafter “AVC”) test, but the CCI may also resort to the nature of the industry, cost prevailing at market value, etc. However, in MCX Stock Exchange Ltd. v. NSE (the first case concerning predatory pricing in India), it was highlighted that the CCI has complete discretion in adopting several other approaches for the determination of predatory pricing in India. In this case, it was held that the Average Total Cost (hereinafter “ATC”) test, which calculates a firm’s total average cost by dividing its fixed costs and variable costs by its total output, is a more economical and long-term test to determine predatory pricing. Indian Jurisprudence on Predatory Pricing: Under the Indian Jurisprudence, predatory pricing is defined as ‘discriminatory or unfair pricing’, and is prohibited under the Competition Act, 2002 (hereinafter “Act”). Section 4 of the Act expressly prohibits any group or enterprise from abusing its dominant position in the market by imposing ‘unfair price’ (including predatory price) or any ‘unfair condition’ that may eliminate competition or restrict market access to the new entrants. Since predatory pricing is the practice of abusing the dominant position, it must be proved that such an e-commerce platform is a dominant player in the market. While determining the dominant position of an enterprise, the consideration of its market share in the relevant market plays a vital role. However, in All India Online Vendors Association v. Flipkart, the CCI held that online marketplaces cannot be prosecuted for abusing “dominant position” as their current market share represents only a minuscule fraction of the total market. Moreover, a narrow interpretation of ‘dominant position’, as stipulated in the Act, will preclude a new entrant in the market from being scrutinized for the practice of predatory pricing, though it may have sufficient financial resources to withstand losses. Such an interpretation is responsible for the exoneration of a number of entities that were alleged to engage in such anti-competitive and unfair practices. For instance, in Airtel v. Reliance, the CCI held that Reliance Jio Infocomm Ltd. cannot be made liable for predatory pricing as it was a new entrant in the relevant market and its competitive pricing is a short-term business strategy to establish its identity in the market. In this regard, the authors recommend that during the assessment of dominant position and predatory pricing by online marketplaces, one should consider not only their market share but also their position of strength in the market. This view has also been upheld in a recent order of the Supreme Court wherein the capacity to sustain losses while offering unfair prices was held to be an indicator of the position of strength in the market. Legislative Interventions so far: The past few decades have seen substantial growth in e-commerce in India. Despite this booming development, the laws regulating the same have experienced considerable setbacks. The major laws governing e-commerce are the Information Technology Act, 2000 and Information Technology (Intermediary Guidelines) Rules 2011 which prima facie aim to regulate e-commerce and e-transactions rather than focussing on anti-competitive practices in the realm of e-commerce. Furthermore, their regulatory impact stands nullified due to Section 79 of the IT Act which provides immunity to e-commerce marketplaces on the ground of them being “intermediary” in the transaction. Owing to this, most of the e-commerce giants evade any anti-competitive liability under the masquerade of being “intermediary” facilitating online sales. Thus, the Indian Government through its Ministry of Consumer Affairs Food and Public Distribution has rolled out the Consumer Protection (E-Commerce) Rules, 2020 (hereinafter “Rules”) that specifically outline the obligations of sellers and e-market platforms in an effort to adopt a more consumer-centric approach. These Rules vide Rule 4(3) and Rule 6 explicitly bar e-commerce entities and sellers of e-marketplace respectively from engaging in unfair trade practice’ in the course of business on its platform or otherwise. Also, Rule 4(11) prohibits e-commerce entities from unreasonably manipulating prices in

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Role of the Resolution Professional: Unveiling the Covert Practices

Leave a Comment / Insolvency Law /

[By Umang Pathak] The author is a student at the Jindal Global Law School. On 18th December 2020, the National Company Law Appellate Tribunal (“NCLAT”) in Rajnish Jain v. Anupam Tiwari & Anr., held that, neither the Resolution Professional (“RP”) nor the Committee of Creditors (“COC”) have the sufficient vires to determine disputed claims of creditors. Only the National Company Law Tribunal (“NCLT”) has the judicial authority to adjudicate upon the claim of a creditor – whether the debt falls under s. 5(8) as financial or s. 5(21) as operational debt under the Insolvency and Bankruptcy Code, 2016 (“I&B Code”). Ex Facie, the decision seems to simply clarify the roles of an RP and COC, but on a deeper scrutiny, it also reveals how a legal lacuna can be misused to strip off legitimate rights of a creditor and ultimately, “game” the system. Thus, the article attempts to first, present the law with respect to the role of RP and COC. Second, the article shall expound upon the facts of Rajnish Jain case which shows how the legal lacuna was being exploited by the RP and the promotor of the corporate debtor. Finally, the article shall conclude with few remarks by the author and a possible suggestion that can be implemented to tackle the issue. Introduction – Role of RP S.25(2)(e) of the I&B Code read with Regulations 13 and 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (“CIRP Regulations”) entrusts the duty of maintaining an updated list of claims that includes verification and determination upon the RP. Furthermore, the above-mentioned regulations also limit the role of RP to that of an administrative authority, to verify and collate claims. Under s. 18(1)(b) of the I&B Code, the interim RP is to receive and collate all the claims submitted by the creditors pursuant to the public announcement regarding insolvency of the corporate debtor. The interim RP is also entrusted to constitute the COC after receiving these claims under s 21(1) of the I&B Code. S. 28 enumerates the occasion when the RP requires approval of the COC for certain matters, mentioned under sub-sections (1) clauses (a) to (m). Also, 66% of voting share is required in the COC meetings to pass a proposed resolution plan. Thus, on perusal of the aforementioned statutory provisions under the Code, the role and responsibilities of RP is non-judicial and limited to administrative functions essential to the insolvency resolution procedure. This has been reiterated in the landmark decision of Swiss Ribbons Pvt. Ltd. v. Union of India, where the court whilst upholding the constitutionality of the provisions, held that the RP is really a facilitator of the resolution process, whose administrative functions are overseen by the COC and by the adjudicatory authority. However, the complications arose on the interpretation of “collating” and maintaining an “updated” list of claims, and in Dipco Pvt. Ltd. v. Jayesh Sanghrajaka, where the appellate tribunal held that the decision of RP for collating claims of creditors is of quasi-judicial nature, and therefore, the adjudicatory authority lacks jurisdiction to re-determine the claims. Thus, the legal issue is with respect to the vires of the RP – whether an agitated creditor is supposed to file his claim before the adjudicatory authority, the COC or the RP. Case Review – Facts This lacuna has left the essential catalysts of the resolution process i.e., the creditors in utter dismay. However, it has also provided an opportunity for the RP to manipulate the system in their favor that has been demonstrated in the Rajnish Jain case. The facts are fairly simple – before constituting the COC inter alia the interim RP within 7 days of the public announcement has to verify and collate the claims of the creditors. One of the creditors named M/s BVN Traders filed its claim as ‘financial creditor’ (“FC”) which was duly admitted by the interim RP. After appointment of the RP by the NCLT, Rajnish Jain who is the suspended promotor of the corporate debtor, filed an application under s. 60(5) of the I&B Code stating that M/s BVN Traders is not a FC. The RP was then directed to re-verify the claim to which he submitted that BVN Traders debt falls under operational debt. Before the order of the adjudicatory authority, the matter was placed before the COC which then voted for BVN Traders as a FC. Pursuant to this meeting, the adjudicatory authority also rejected the application filed by the promotor and held BVN Traders to be FC. Again, a resolution was passed to reverse the decision of the adjudicatory authority, which was successfully passed thereby declaring BVN Traders as an operational creditor (“OC”). Another agenda in that meeting was to withdraw the insolvency application under s. 12A that required approval of ninety percent voting, which was vehemently opposed by BVN Traders having 30% voting share. In the final COC meeting, two agendas were proposed – first was to eliminate BVN traders as a creditor and second, to again pursue withdrawal of application under s. 12A. Both of them were approved which led to the present suit by the creditor, as he was stripped off his rights even after the order by the adjudicatory authorities. Case Review – Analysis The facts of the case clearly indicate conspiracy against BVN Traders by the RP and the suspended promotor of the corporate debtor, as also emphasised by the NCLAT. The whole scheme’s objective was to withdraw the insolvency application by the operational creditor, to which BVN Traders was opposing. Therefore, even before the order by the adjudicatory authority regarding the claim, the RP took the route of COC’s approval, which ultimately led to first, stripping off BVN Trader’s position as financial creditor, and second, to completely take away his rightful claim as any creditor during the insolvency procedure. This was caused by the lacuna regarding the vires of the RP – whether maintaining an “updated” list of the claims includes re-determining

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SEBI Stewardship Code: The Way Ahead

Leave a Comment / Contemporary Issues, Corporate Governance /

[By Hansaja Pandya] The author is a student at the Gujarat National Law University. Stewardship is defined as the art of conducting, supervising, or managing of something entrusted to one’s care. The Stewards of commercial markets are institutional investors like the pension funds, mutual funds, insurance companies, asset management companies, investment advisors etc. They shoulder a responsibility to exercise their rights as shareholders of investee companies in order to ensure that their client’s money invested in various companies yields beneficial returns and the investee company does not mis-handle the money. Hence, Securities and Exchange Board of India (SEBI) recently promulgated the Stewardship Code, 20191 (SEBI Code) for institutional investors in India. It sets out the principles that enhance investor engagement and transparency and define their ownership and governance responsibilities. It is expected that the SEBI Code will automatically check and balance the system of corporate governance and allow institutional investors to engage with the investee company in circumstances of poor financial performance of the company, corporate governance related practices, remuneration, strategy, risks, leadership issues and litigation. But these ambitious goal might not see the light of the day, because the SEBI Code is completely based on the United Kingdom Stewardship Regime. India has straightaway transposed the UK style Stewardship Code2 without giving much thought about the difference in the  corporate structures and motivations behind ensuring good governance practices. India has a concentrated shareholding structure wherein majority stakes are held by the promoters and their family members. UK on the other hand has a dispersed shareholding structure which allows institutional investors to hold significant share ina company and participate in corporate governance measures. In india, however, due to insignificant holding of institutional investors, their voices will be seldom heard. Furthermore, the stewardship goals of India and UK are very different. UK law focuses on Enhancing Shareholder Value (ESV Principle)3 stating that the ultimate objective of shouldering stewardship responsibilities is to ensure protection of the interests of the ultimate beneficiaries of institutional investors and thereby ensure ultimate prosperity and welfare. Transposition of such a UK-style stewardship model is not suitable in India because India has a pluralistic corporate structure that focuses on interest of all stakeholders and not only the beneficiaries of institutional investors. For instance, the Indian regulatory and legislative practices resonate a broader and more inclusive corporate environment as provided under section 166 of the Companies Act, 2013 which emphasizes on the fiduciary duties of the director4 to, “act in good faith promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.”  Further the provisions of Corporate Social Responsibility (CSR) in the Companies Act, 2013 suggests heavy inclination towards the inclusive stakeholder approach that aims to benefit the society at large and not only the beneficiaries of institutional investors. It can be said that the Indian stewardship regime, “…mistakenly concentrates monitoring in the hands of shareholders, where other stakeholders may have greater incentive to monitor, thereby unnecessarily relegating the importance of other stakeholders…”5 In an attempt to imitate UK Stewardship regime, the SEBI Stewardship Code has wrongly laid emphasis on benefiting the beneficiaries of institutional investors, without giving a second thought about the inconsistencies it would produce in the Indian corporate governance scenario. Given these hesitations in the successful implementation of the SEBI Stewardship Code, 2019, the author has attempted to collate together some of the best stewardship practices from across the world that could be an inspiration for the Indian Stewardship Regime: A. Netherland Stewardship Code: India is a jurisdiction that follows a stakeholder approach where the final aim of good governance is to benefit corporate economy as a whole. But our Stewardship Code does not reflect this broader stakeholder concern. An answer to this problem lies within the Netherland stewardship Code which provides for responsible use of share rights because, “it is key to creating long term value for the company and each one of its stakeholders, including shareholders”6. Netherland, just like India is a jurisdiction that invests heavily into the broader stakeholder approach and the same is reflected in its stewardship regime. India could broaden the Stewardship principles to reflect this broader approach aimed at benefitting the society at large and not just the clients of institutional investors.  B.  The South-African & Hongkong Stewardship Codes: It is now an established fact that it is quintessential to integrate Environmental, Social and Governance (ESG) factors while making any investment decision in order to predict financial performance more reliably.7 The SEBI Stewardship Code fails to put enough emphasis on the ESG factors. Presently, the SEBI Consultation paper8 and the National Guidelines on Responsible Business Conduct makes it mandatory to disclose compliance with ESG norms. But these measures lacks the force required for proper adherence and implementation of ESG factors, because no penalty for disobedience is prescribed. South African Stewardship regime provides a solution to this lacuna. They have put the requirement to comply with ESG norm as a part of their hard law under their Pension Funds Act, 1956. Regulation 28 issued by the South-African Minister of Finance under their Pension Funds Act now states in the preamble itself that, “prudent investing should give appropriate consideration to any factor which can materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character.”9 Hongkong Code also puts heavy emphasis on the adoption of ESG norms in its Stewardship Code by devoting an entire principle highlighting the importance that ESG norms have on companies goodwill, reputation and performance.10 Both these countries make non-compliance with ESG norms punishable. India could adopt a similar method and instead of just making a passing reference at the ESG norm in a “Code”, they could be incorporated as a hard law in the SEBI Rules and Regulations, violation of which would attract penalty. ESG norms is of utmost importance to the Indian scenario

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Anatomisation Of Substantive Consolidation Vis-A-Vis The Re Owens Case

Leave a Comment / Contemporary Issues, Insolvency Law /

[By Nikshetaa Jain] The author is a 2nd Year student at The National Law University, Odisha. 1. Introduction Corporate groups have grown immensely due to the various legal, tax and business benefits they provide to the owners. However, the structure of corporate groups is very complex, and it is often difficult to make clear distinctions between the ownership and management patterns. This difficulty becomes more pertinent when two or more companies belonging to the same corporate group go into liquidation since there are no provisions in the Indian Bankruptcy Code (hereinafter “IBC”), providing for combined liquidation of such companies. This lacuna in the IBC became more visible during the resolution proceedings of Videocon, Amtek, Adel, Aircel and Jaypee. Thus, there was a need to develop a framework for group insolvency in India. For this purpose, the Working Group on Group Insolvency was constituted, and it submitted its recommendations in the form of a report in 2019. The report suggested several mechanisms which could be used for group insolvency. One of the suggestions of the report was that provisions for substantive consolidation might be developed but at a later stage. However, the Court had applied the doctrine of substantive consolidation in the Videocon case. Since there is no legislative framework in the IBC for applying the doctrine, the courts have a broad discretion to apply the doctrine. Thus, there is a need to develop a framework for the application of this doctrine. While formulating a framework for substantive consolidation, guidance can be taken from foreign jurisdictions as group insolvency is a relatively new concept in India. In this article, the author tries to analyse the doctrine of substantive consolidation in light of the themes discussed in the landmark judgment of Owens Corning. 2. Meaning of Substantive Consolidation Substantive consolidation is a process wherein the assets and liabilities of two companies belonging to the same corporate group are combined so that the companies are treated as a single entity. The results of this process is similar to a merger as creditors of the distinct entities now become the creditors of the consolidated estate of the entire corporate group. 3.  Substantive Consolidation in light of the themes of Owens Corning Case Since there are no provisions for group insolvency in India, reliance is placed on foreign jurisdictions where substantive consolidation has been used commonly in group insolvency cases. In USA, substantive consolidation has been developed due to judicial interpretation. Owens Corning case has majorly contributed to the jurisprudence on substantive consolidation. The themes laid down in the case of Owens Corning are one of the most important principles which govern the application of this doctrine in the USA. In October, 2005 Owens Corning, a corporation and its subsidiaries filed for reorganization under the US Bankruptcy Code and subsequently developed a reorganization plan based on substantive consolidation of all the subsidiaries. The District Court granted a motion for substantive consolidation considering the administrative efficiencies of the doctrine. However, on appeal, the Third Circuit reversed the District Court’s decision and laid down the five themes which must be given due consideration while applying the doctrine of substantive consolidation. The first theme is to respect the rule of entity separateness and to use the doctrine of substantive consolidation only in exceptional cases. Limited liability and entity separateness are the most fundamental principles of corporate law. The structure of corporate groups has become the most preferred due to the fundamental principles of limited liability and separateness of entity, forming the core of the business operations. The principles of limited liability and entity separateness cannot be violated merely because it is difficult to untangle the financial affairs of various companies in the corporate group. The Courts are more reluctant to use this doctrine when a country follows the entity theory. The entity theory presumes that one entity of the corporate group cannot be liable for the debts of the other members of the same group. English laws follow the principle of entity theory,[i] and since most of the Indian laws are based primarily on the English laws, it is safe to assume that India also follows the entity approach. The Working Group also suggests that the doctrine of substantive consolidation, if adopted in the Indian insolvency law, should be applicable in a limited manner. Thus, the first theme can be applied in India as well. The second theme is that substantive consolidation is a remedy for those harms caused by the shareholders who have abused the principles of separateness. The doctrine of substantive consolidation was developed as a remedy for the creditors who had suffered harm due to abuses of the corporate form. Majority of the harms are caused to the creditors due to the fraudulent activities undertaken by an entity under the garb of corporate law principles. If the principles of corporate law would lead to fraud or injustice, then the equitable principle will apply in the form of substantive consolidation. This theme is in consonance with ‘creditor in possession’, an objective of the Indian insolvency law,  as substantive consolidation places the creditors in control of the assets of all the companies of the corporate group in case of abuse of corporate law principles. Substantive consolidation is suitable where an entity completely controls or dominates the corporate group of entities and transfers money between different entities as if the entities are mere departments of the group. The third theme is that mere benefit in the administration of a case cannot be the sole ground for applying the doctrine of substantive consolidation. Substantive consolidation cannot be granted merely on the ground that it is necessary for formation of a reorganization plan. Since any decision to consolidate the assets and liabilities of two or more entities of a corporate group affects the rights of both the debtors and the creditors, substantive consolidation should be applied only after a detailed examination of the rights and interests of the parties involved.[ii] In India, substantive consolidation was used for the first

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