Author name: CBCL

Reflecting on the Madras High Court Judgment: Transparency and the Clean Slate Theory in IBC

Leave a Comment / Insolvency Law /

[By Soniya Raghuwanshi] The author is a student of Institute of Law, Nirma University.   Introduction The Insolvency and Bankruptcy Code (IBC) of 2016 marked a significant shift from the previous rigid legal frameworks, focusing on a more holistic approach to insolvency. Unlike earlier statutes that concentrated on recovering loans, the IBC emphasizes loan restructuring, aiming to strike a balance between the interests of creditors and corporate debtors. This ensures the survival of the company while also satisfying the creditors’ claims.  The Clean Slate Theory (CST) posits that once Resolution Plan is approved by Committee of Creditors and subsequently by the approval of Adjudicating Authority then, all claims, whether resolved or unresolved, are extinguished. This doctrine ensures that successful resolution applicant can take over the business without any lingering liabilities. The Committee of Creditors (CoC) play crucial roles in enhancing the effectiveness and integrity of the insolvency process. A recent ruling by Justice N. Seshasayee of the Madras High Court in the case of “The National Sewing Thread Company Limited vs. TANGEDCO” highlighted the importance of transparency and full disclosure in the IBC proceedings. The judgment reaffirmed the CST’s application, the CoC’s commercial discretion, fair treatment of creditors, and the need for judicial supervision, ensuring that the principles of the IBC are upheld in practice.   This article therefore, delves into the implication of Clean Slate Theory and examines substantial questions regarding the validity of claims post-approval of a resolution plan, the equitable treatment of operational creditors, and the extent of judicial oversight in insolvency proceedings for ensuring transparency and fairness This case also underscores critical aspects of the Insolvency and Bankruptcy Code (IBC) in India thus brings to light the critical balance between the CoC’s commercial wisdom and the need for transparent and fair resolution processes under the IBC.  Analyzing the Implications of IBC Resolution Plans on Creditor Claims and Judicial Oversight The recent case involving TANGEDCO’s claim for unpaid electricity charges against The National Sewing Thread Co. Ltd. brings to the forefront several critical aspects of the Insolvency and Bankruptcy Code (IBC) and its application. Wherein to determine “TANGEDCO’s Post-Plan Claim Validity under IBC, “The heart of the dispute lies in whether TANGEDCO’s claim for unpaid dues can survive the approval of a resolution plan under the IBC. The petitioner’s stance is that the resolution plan nullifies the claim, while TANGEDCO insists that the resolution plan failed to address its statutory dues. The resolution plan’s binding effect, as per Section 31 of the IBC, suggests that once approved, it should extinguish all prior claims, including those of statutory creditors.  Furthermore, the question pertaining to the compliance with IBC’s Section 30(2) which mandates fair treatment of operational creditors, ensuring they receive no less than the liquidation value of their claims. The resolution plan’s compliance with this section is pivotal, as it guarantees the minimum entitlement due to operational creditors and prevents their disenfranchisement. The need for the judicial review of Coc’s Commercial Decisions is crucial in determining the fairness.   The scope of judicial review over the CoC’s decisions is limited. Courts generally defer to the commercial wisdom of the CoC unless there is a glaring non-compliance with the IBC’s statutory requirements. The judiciary’s role is not to reassess the CoC’s business decisions but to ensure that the resolution plan meets the IBC’s provisions. However, the applicability of The Clean Slate Theory(CST) under the IBC posits that an approved resolution plan should wipe the slate clean for the corporate debtor, negating all previous claims and liabilities This principle is crucial for the resolution applicant to commence operations without the burden of past debts, providing a fresh start.  Therefore, the IBC strives for equitable treatment of all creditors, though it recognizes the distinct roles of financial and operational creditors. The resolution plan must not discriminate unjustly among different classes of creditors, ensuring that each class is treated fairly and equitably within the framework of the IBC  The Judicial Microscope The judgment delves into the M.K. Rajagopalan case, drawing parallels to emphasize the supremacy of the Committee of Creditors’ (CoC) commercial wisdom, contingent on the complete disclosure of information. The omission of electricity dues raised eyebrows, suggesting a deliberate act rather than an oversight.  In M.K. Rajagopalan v. Dr. Periasamy Palani Gounder, the Supreme Court emphasized that the CoC’s commercial decisions must be based on complete and transparent information and must ensure equitable treatment of operational creditors. The ruling highlighted that commercial wisdom of the CoC means a considered decision taken with reference to the commercial interests and the interest of revival of the corporate debtor and maximization of the value of its assets. This decision has introduced a much-needed responsibility to the thought process of the CoC, ensuring that their decisions are made with all relevant information.  The core Principle of Clean Slate Theory is to provide the Corporate Debtor with a fresh start, free from all the past liabilities and claims which ensures the debtor to be released from obligations and transgressions before the approval of resolution plan. The court emphasized that without complete disclosure of information, the core principle of the Clean Slate Theory is compromised. In the realm of insolvency proceedings, the Supreme Court has reaffirmed the critical importance of the Committee of Creditors’ (CoC) commercial wisdom in the evaluation and approval of resolution plans. This acknowledgment is predicated on the condition that such decisions are in strict alignment with the provisions of Section 30(2) of the Insolvency and Bankruptcy Code (IBC). The CoC, primarily composed of financial creditors, is entrusted with the responsibility to judiciously assess the practicality and sustainability of the proposed resolution plans.   Simultaneously, the Court has delineated the limited yet pivotal oversight role of the Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT). Their function is to ensure that the resolution plan not only meets the statutory mandates but also dispenses equitable treatment to all classes of creditors, thereby upholding the integrity of the insolvency resolution process.   Moreover, the principle of equitable treatment of creditors, particularly operational creditors

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The Paradox of Revival of Unviable Businesses: When Over-Emphasis on Revival Leads to Value Erosion

Leave a Comment / Company Law /

[By Ishita Chandra] The author is a student of Dr. B.R. Ambedkar National Law University, Sonepat.   INTRODUCTION The liquidation of a corporation denotes the cessation of its activities, business endeavours, or existence upon its incapacity to settle its debts or obligations, owed to its creditors. Section 230 of the Companies Act empowers the liquidator, in the event of a company undergoing liquidation under the Insolvency and Bankruptcy Code 2016 (IBC), to propose a Scheme of Compromise and Arrangement. Such a scheme enables companies to reorganize their operations through mergers, demergers, acquisitions, or other forms of restructuring. This may include reorganizing the company’s share capital by consolidating shares of different classes or dividing shares into distinct classes. Nevertheless, this article endeavours to explain why, in a liquidation proceeding under IBC, a Scheme for Compromise and Arrangement should not be permitted particularly while dealing with a company that is entirely unviable and the operations of which are economically unfeasible.  INSOLVENCY PROCEEDING  – A CONSCIOUS STEP THAT IS UNDERGONE AFTER CONSIDERING THE SCOPE OF COMPROMISE AND ARRANGEMENT When a corporate debtor defaults on its debts, a legal process called the Corporate Insolvency Resolution Process (CIRP) gets initiated under IBC, with the objective of addressing the insolvency of corporate entities. It becomes imperative to note that the CIRP gives adequate time for resolution of insolvency. Statutorily, the CIRP should be completed within a period of 180 days from the date of admission of the application seeking to initiate CIRP proceedings. An additional one-time extension of 90 days may be provided by the Adjudicating Authority. The resolution process, including the time taken in legal proceedings, must be completed within a total of 330 days, failing which, liquidation proceedings will be initiated against the corporate debtor as per Section 33 of the Code. The aforementioned provisions uphold the spirit of the IBC expressed through its Preamble which aims to maximize the value of assets, in a time-bound manner. The time allowed by the IBC to conclude the resolution process is more than sufficient to arrive at a viable resolution plan to save a viable company from corporate death. Thus, a Scheme of Compromise and Arrangement essentially leads us to understand that a mere extension provided for the proposal of a scheme of compromise and arrangement adds no value to the resolution process of an unviable business and merely prolongs it incessantly.   Generally, parties resort to insolvency proceedings under the IBC only after exhausting all other potential avenues for resolving disputes between debtors and creditors, leaving no further options for resolution. Hence, it is evident that both the debtor and creditors must have previously considered the possibility of a Scheme of Compromise and Arrangement before resorting to the IBC. Consequently, the initiation of CIRP should be regarded as a deliberate and well-considered action. However, permitting a compromise scheme during the liquidation process of an unviable company undermines the gravity of such a decision.  PROLONGED LITIGATION – A CHALLENGE FOR UNVIABLE BUSINESSES Allowing schemes of arrangement during liquidation proceedings, allows for a never-ending cycle towards resolving an entity as such schemes are time consuming processes, whereas the focus of the Code is to create time-bound processes. For proposing a Scheme of Compromise and Arrangement, Section 230 mandates convening gatherings of both creditors and members, further outlining a comprehensive voting procedure for endorsing a scheme that necessitates agreement from a majority representing three-fourths in value of said creditors, members, or a specific class among them. The convening of a creditors’ meeting as required by Section 230 of the Companies Act can be waived if creditors representing 90% in value provide their approval for the arrangement through affidavits. This underscores that a creditor who refuses to cooperate can disrupt the fair allocation of assets or hinder the adoption of a viable resolution that serves the company’s best interests. Creditors might choose to contest a settlement plan, leading to prolonged legal disputes that impede the ultimate timeline of a liquidation process, causing further setbacks in the form of erosion of the value of the assets. Thus, if the promoters and ex-management of an unviable business are allowed to present schemes in liquidation on the basis of Section 230 of the Companies Act, 2013, this would result in prolonged litigation under the Code.   Furthermore, an entity under the auspices of IBC gets multiple chances of proving its viability. A viable business should ultimately find success through CIRP proceedings. Therefore, pressing for an additional chance through a “scheme” might indeed prove to be ineffective in case a company is completely unviable.   A major obstacle to business restructuring can arise from a system that practically prevents the efficient dissolution of a viable entity. Placing excessive focus on revival while disregarding the reality that, in certain instances, liquidation is the optimal approach for value maximization, could potentially result in the erosion of the value of the assets. Schemes of compromise or arrangement may not always be feasible, or economically viable once a decision to liquidate the corporate debtor has already been made, following the failure of the CIRP. Further, repeatedly attempting revival, through schemes of arrangement or otherwise, even where the business is not economically viable is likely to result in value-destructive delays, and was identified as a key reason for the failure of the regime under the SICA (Sick Industrial Companies Act, 1985), by the BLRC in its Interim Report.  HOW OVER-EMPHASIS ON REVIVAL MAY LEAD TO VALUE EROSION It is crucial to recognize that the value of assets and the duration of insolvency resolution are inversely related. As the delay in insolvency resolution persists, it becomes increasingly probable that the liquidation value will decline over time, given that several assets (especially tangible assets like machinery) suffer from substantial economic depreciation overt ime. Therefore, in cases where companies are entirely unviable and economically unsustainable, excessive emphasis on revival through a Compromise and Arrangement Scheme (which would lead to further delay of approximately 3 months) could lead to unnecessary erosion of value due

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Cautiously Compliant: Adapting to Data Privacy Laws in M&A Transactions

Leave a Comment / Mergers & Acquisitions /

[By Aditi Kundu & Prithviraj Chatterjee] The authors are students of Hidayatullah National Law University, Raipur.   Introduction Passed on 11th August 2023, the Digital Personal Data Protection Act of 2023 (‘the Act’) envisages to regulate the intricacies of digital personal data processing. Once enforced, through this act the government aims to recognise the rights of individuals regarding their personal data and at the same time ensures personal data processing entities lawfully carry out their operations. Such entities apart from adhering to their obligations under the Act will also have to oversee its compliance during Mergers and Acquisitions (‘M&A’) transactions. While navigating the contours of the Act, the Authors will also analyse multi-fold implications on M&A transactions concerning Buyer Company, Seller Company and Legal Advisors. Finally, a clear picture would be visible by a sectoral study of M&A transactions occurring in the Financial Sector.    Overview of the DPDP Act, 2023 The main focus revolves around the protection of Digital Personal Data which is any piece of information in a digital medium that identifies/relates to an individual. The data stored by an entity is susceptible to mishandling and breach of privacy during various formalities and processes involved in M&A transactions which calls for greater liability on such entities in order to hold them accountable. The enforcement of the DPDP Act would subsume the governance regarding digital personal data while non-digital personal data would still fall under the Information Technology Act, 2000 (‘IT Act’) and Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (‘SPDI Rules’).    Breakdown of the Act The Act has recognised three central stakeholders, i.e. Data Fiduciary, Data Principal and Data Processor. Firstly, the Data Fiduciary determines the purpose for which the personal data will be processed. Secondly, the Data Principal is the individual whose data is in question. Lastly, Data Processors are those who process the data on behalf of the Data Fiduciary.   Obligations of Data Fiduciary The obligations of Data Fiduciary can be categorised into (i) Consent specific obligations; (ii) General obligations.  The data fiduciaries can process personal data only for lawful purposes. And this processing can be justified on two grounds, firstly, informed consent of the data principals and secondly, certain legitimate uses recognised under Section 7 of the Act. Such consent has to be explicit and can be attained via notice which has certain parameters such as it should convey what personal data will be collected and the purpose for the same.   A major respite for the Data fiduciary comes in the form of exemptions of its obligations for certain cases such as scheme of arrangement, merger, amalgamation, demerger and any reconstruction or transfer of undertaking. However such exemption is granted once a court, tribunal or other competent authority gives its approval to the transaction. By providing this the Act naturally creates a distinction in Section 17(1)(e) between those transactions that get approval such as scheme of arrangement or mergers and those that do not need any approval like acquisitions or share purchase transactions. The former transactions therefore are exempted while the latter will still need to comply with the provisions of the Act.   Implications for Various Parties in an M&A Transaction In a M&A transaction, both the seller and buyer companies are obligated as data fiduciary to comply with the Act, since they determine how data will be processed throughout the transaction. While entities like legal advisors are data processors acting on behalf of aforementioned data fiduciaries.  Seller Company The present scenario with most privacy policies follow the trend of using crafty, broad and vague consent requirements such as allowing the sharing of data with an intermediary, vendors or service providers but the Act will require all sellers to overhaul their current privacy policy with specified consent to accommodate any future potential merger or restructuring process. This is a viable precautionary measure for sellers to avoid any messy litigation while they are engaged in a major transaction. Additionally, compliances are enhanced against the selling company regarding serving consent notice which must instil an affirmative and clear action from the data principals which will require the seller company to incorporate an effective consent mechanism. Further Section 8 (6) of the Act compels the data fiduciary to inform the Board and each Data Principal in the event of a personal data breach which would lead to a negative market perception thereby affecting the seller’s valuation during an ongoing transaction. Now in the absence of a minimum threshold, even a minor breach can have huge implications due to the spread of misinformation in the market.   Buyer Company The major obligation for the Buyer Company would be the diversification of its Due Diligence drill. The expanded horizon of due diligence would entail checking the status of the seller company’s compliance with the data privacy laws which would include any sector-specific guidelines as well; ensuring that the seller company’s privacy policies are as per the law; the buyer will also have to run through the contractual obligations of the seller company. For example, where the seller company is a service provider its privacy obligations under the third-party contracts will have to be checked. In an M&A transaction, buyer companies have a level of protection against the seller companies by way of Representation & Warranties (‘R&W’) given by the latter for its legal compliances. Considering the wide ambit of privacy laws, it would be beneficial for the buyer companies to negotiate for a privacy-specific R&W, this would maximise the protection against hefty fines and penalties under the Act in case of any unanticipated breaches.   Legal Advisors Having seen that the sole responsibility for any breach would lie on the data fiduciary, it is very likely that the data fiduciaries would intend to be indemnified by the law firms, who process each transaction, for a breach caused by the latter. Therefore it is pertinent for law firms to negotiate such indemnity clauses while dealing with buyer or seller companies. Moreover, the law firms will

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Protecting Innovation: An Analysis of India’s Trade Secret Landscape

Leave a Comment / Contemporary Issues /

[By Siddh Sanghavi] The author is a student of National Law University Odisha.   Introduction  The 22nd Law Commission on 5th March 2024 came out with its 289th report on “Trade Secrets and Economic Espionage”, wherein it suggested the need for special legislation to protect trade secrets and prevent economic espionage. The Law Commissiosn based on the report also came out with a draft bill titled the Protection of Trade Secrets Bill.  A trade secret is a type of intellectual property that is a confidential business secret and is not generally known or easily accessible. Trade Secrets are considered to be economically valuable because of their secrecy.    India is under an international obligation to protect Trade Secrets. Article 39 of the TRIPS agreement (Agreement on trade related aspects of intellectual property rights) mandates the state to protect “undisclosed information”. The risk of protection of trade secrets and economic espionage has affected businesses for a long time. From the 1983 Star Wars Case, wherein an employee tried to steal the script of the upcoming star wars movie, to the attempted breach of the secret Coca- Cola formula.   This blog analyses the current regulations in India to protect trade secrets vis- a- vis the need for specialised legislation, it analyses the provisions of the draft bill, and gives suggestions for the same.   Inadequacy of current Laws to protect trade secrets India does not have a specific statute or act protecting trade secrets. Currently, Trade Secrets in India are protected mainly through Non-Disclosure Agreements between parties and provisions of the IPC and Information Technology Act 2000 (IT Act), which provide for criminal sanctions. These acts do not provide any special procedure to protect the rights of the trade secret holder nor do they provide any comprehensive set of relief that will be available in case of any leak of trade secret. The question also arises as regards to civil remedies to protect trade secrets in the absence of a contract or in cases of breach by a third party.    Civil Remedies Indian courts, in the absence of a contract provide for protection of trade secrets based on equity principles and common law action for breach of confidence. For example in the case of Richard Brady V. Chemical Process Equipment Pvt Ltd the Delhi High Court granted an injunction even in the absence of a contract citing its broader equitable jurisdiction. Granting of injunction has been one of the main remedies used by courts in India to give protection for leak of trade secrets.   Further, in cases of violation of NDA or leak of trade secret, there is currently no special procedure outlined through which remedy can be sought through the court system. Usually if a company wants to claim damages or seek compensation it will have to go through the long and tedious court process, which itself might lead to disclosure of the trade secret and cause more harm than good.   Criminal Remedies With regards to criminal remedies, currently, when cases of Economic Espionage and trade secrets are registered the accused are usually charged with sections of Theft, trespass, dishonestly receiving stolen property and Cheating.   However courts are hesitant to apply IPC to cases of economic espionage. For example in the case of Pramod, Son of Lakshmikant Sisamkar V. Garware Plastics and Polyester {Pramod case}, the Bombay High Court refused to use criminal sanctions against certain engineers who had taken certain documents from their employers and opened a new company. The court held that since the allegedly stolen documents haven’t been used and the new company wasn’t operational criminal sanctions couldn’t be imposed. This leaves the aggrieved with almost no recourse to criminal charges against the accused.   Trade secret protection clauses have also been indirectly incorporated in the IT Act. When economic espionage is carried out through electronic means criminal remedies have been provided under the IT Act. For instance in Mphasis BPO Fraud case in 2005, the IT act was used to give punishment when there trade secrets were stolen due to unauthorised use of computer resources.   Section 43 of the IT Act read with Section 66 prohibit unauthorised use of computer systems and breach of electronic devices without authorisation. The punishment provided under these sections is imprisonment upto 3 years and a maximum fine of Rupees 5 Lakhs.   However, the penalty prescribed is not at all adequate since trade secrets when stolen may cause losses of millions and billions rupees to the aggrieved company who has invested a substantial amount of capital in the research of proprietary technology. This disproportionality between the loss caused to the company and penalty imposed needs to be rectified when cases specific to corporate espionage are involved. Calling for a specialised legislation for protection of trade secrets.   Furthermore, in the absence of a specialised legislation, when cases arise, judges rely on precedents and interpretation of the provisions of the IPC and IT Act in their applicability to protect trade secrets to address the problem. This leads to greater confusion and lack of reliability in the legal framework.   Further clarity regarding the law can only be ensured through a special law dedicated towards outlining the rights, restrictions and remedies for trade secret holders.   Analysis of the Draft bill The draft bill is definitely a step forward in providing a comprehensive framework for the rights and responsibilities of the trade secret holder. The draft bill now provides for an all-inclusive legislation, stating the various rights and duties of the holder, including the right to license and commercialise the trade secret to use it as a stream of revenue. It also provides that any misappropriation of the trade secret will allow the holder to initiate legal action.   While the right to license a trade secret was first governed by general contract law. An express statutory recognition of this right of the holder, along with an attached remedy in case of misuse is definitely more favourable for businesses in India.   Many countries like the UK, USA, and France among

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Indo-Mauritius Tax Treaty Amendment: Addressing Missing Pieces in the Jigsaw

Leave a Comment / Taxation Law /

[By Aayush Ambasht & Param Kailash] The authors are students of Symbiosis Law School, Pune.   Introduction On March 7, 2024, corporate entities stood to witness an extensive development in the Indo-Mauritius Tax Treaty, with an amendment to its preamble and the introduction of the Principal Purpose Test (PPT), implying the requirement for tax authorities to look beyond ‘Tax Residency Certificates’ produced before them by investors from Mauritius. In essence, the treaty aims to touch two primary objectives: the introduction of the Principal Purpose Test and alignment of the Indo-Mauritius Tax Treaty with the Base Erosion and Profit Shifting (BEPS) rights package put forth by the Organisation for Economic Co-operation and Development.   This piece seeks to provide deductions and key takeaways from the introduction of the PPT, potential implications to the money markets associated, as well as unaddressed concerns regarding the nature of investment discipline of the Foreign Portfolio Investor (FPI) landscape in corporate India.   Brief Background On May 10, 2016, the amendment to the Indo-Mauritius DTAA brought about a degree of fine-tuning of the source country taxation, which paves a way for the inclusion of the Limitations of Benefits clause. This was followed by a 2017 press release allowing for the grandfathering of the agreement as well as ensuring standards applicable for future investors. Unlike the 2024 amendment, a 2017 press release by Mauritius clarified concerns regarding the inculcation and implementation of the BEPS minimum standards, by holding the matter to be an item of bilateral discussion between countries. However, deviating from the given stance, the Indo-Mauritius DTAA by way of amendment on March 7, 2024 (which got available to the public on April 11, 2024) chose to align the treaty in lines with OECD proposals concerning the BEPS, with specific emphasis on the introduction of the Principal Purpose Test (PPT).   Key Takeaways from the Amendment Article 1 – Revision of the Indo-Mauritius DTAA  The binding nature of the Preamble of the Indo-Mauritius treaty stands revised following the amendment by omitting the phrase “for the purpose of mutual trade and investment” and replacing it by “without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.”  Through this development, an earnest attempt to delineate tax evasion vis-à-vis avoidance by way of treaty-shopping arrangements and indirect benefits of residents based out of foreign jurisdictions has been made.   Article 27B – Alignment with the Principle Purpose Test  Recognizing the pulse of “entitlement to benefits” in line with the “Principle Purpose Test” provided under Article 7 of the MLI for Prevention of Treaty Abuse, benefits accruing out of an item of income with the principle purpose of the transaction or arrangement which may have resulted in such a benefit; shall not be granted unless it is in accordance with the objects or purpose of the Indo-Mauritius Convention.   As an objective driven move, bridging the opacity between both monetary and non-monetary benefits basis the PPT has been sought. This shall minimize possible defaults and unregulated returns beyond the scope of the prescribed business purpose/commercial structure.  Taxation of Capital Gains   As far as capital gains for Indian investments parked through the Mauritius route subject to the 2016 amendment are concerned, capital gains earned by a tax resident of Mauritius on sale of shares of an Indian company were not taxable in India. This exemption had been withdrawn for benefits arising from sale of shares of an Indian company acquired by a Mauritian resident after March 31, 2017. Therefore, investments made prior to April 1, 2017 were grandfathered and sale of such grandfathered shares continued to benefit from the capital gains tax exemption under the tax treaty regardless of when such shares would be sold.   Keeping in mind the amendment at hand, moving the needle on fiscal evasion of taxes on capital gains and income before or after the effective date of this amendment would be privy to the PPT. This would ensure an imposition of a requisite litmus test given the complexities of grandfathering of shares and computation of capital gains on such equity variables.  Analysis and Industry Implications for Indo-Mauritius Money Markets A shift from the golden age of the Indo-Mauritius tax treaty where capital gains tax was effectively never paid merely by channelling money through Mauritius, demanded intervention from the government. The significance of the tax treaty and the pertinent role Mauritius has played in the Foreign Portfolio Investor (FPI) landscape in India stands under question through the introduction of the Principal Purpose Test. With a cursory construction of the PPT, the tax treaty is pivoted towards falling in line with Action 6 of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS), with the framework calling for the establishment of a minimum standard to prevent treaty shopping, thereby furnishing a commitment on behalf of both India and Mauritius Governments to eliminate opportunities for double taxation or tax evasion. While the test mentions about “non-taxation” and “reduced taxation,” more clarity on this conjoint adage must align with mutual benefits without deviating from the prescribed investment route between the two countries.  Further, the question of the grandfathering effect of the treaty also comes into the equation, considering the treaty shall be effective from the date of its entry into force, with no regard concerning the dates during which the taxes were levied or the taxable years the said taxes are concerned with. The ambiguous nature of the protocol calls for challenges arising from investments made prior to the 2017 amendment, keeping in mind the retroactive applicability of the PPT. Pursuant to this challenge, the grunt of regulatory blanks for transactional structures involving the direct or indirect sale of shares, movable assets, immovable assets and family trust funds; challenges shall be faced by investors and the tax authorities of the respective countries arising from its application. To summarize, the retroactive nature of the PPT calls for challenges arising, not only concerning potential fresh investments from Mauritius, but also existing historical structures, sheltered by tax benefits under the grandfathering treaty, thereby leading

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​​​Incentivizing Cartel Disclosure: India’s Leniency Plus Regulation Analysis

Leave a Comment / Competition Law /

[By Yatendra Singh] The author is a student of Dr Ram Manohar Lohia National Law University, Lucknow.   ​​​Introduction  ​​In the complex landscape of competition law, uncovering and prosecuting cartels remains a formidable challenge worldwide. India’s recent introduction of the Competition Commission of India (Lesser Penalty) Regulations, 2024 marks a significant stride towards enhancing antitrust enforcement. This article explores how these regulations incentivise cartel disclosure through leniency provisions akin to global standards, aiming to strengthen fair market practices. By examining the impact and nuances of these measures, this discussion underscores their pivotal role in shaping India’s competitive economic environment.​  For instance, cartelisation is not a new phenomenon. In the 1800s, powerful trusts like the Standard Oil Company had ​​monopolized crucial sectors in the United States, controlling prices and stifling competition. The unchecked power of these trusts led to market disruption, escalating prices, and compromising consumer welfare. In response, the US enacted its first Competition Act, the Sherman Antitrust Act, in 1890 to address these abuses, signalling the need for anti-trust legislation to curb monopolistic practices and safeguard economic and consumer interests.  ​​​While these laws are good for regulating the market and punishing those who break it, ​however​, they are not sufficient to unearth hidden Cartels. In fact, India’s first Anti-trust Act (Monopolies and Restrictive Trade Practices Act 1969) was replaced because it became redundant after India’s new economic policy in 1991 and the globalisation of the market. Cartels, by their nature, are hidden and secret. Cartel cases are difficult to investigate and detect because of the scope and complexity of many cartels. The conspiracy can be established through both direct and indirect means. ​​Often, only the participants know exactly how the cartel works. According to MIT economist Alexander Wolitzky, participants typically become aware of cartel activities through various channels, including industry conferences, informal networks among competitors and conventional wisdom.  Therefore, the Competition (Amendment) Act 2002 and new regulations in the leniency scheme, namely The Competition Commission of India (Lesser Penalty) Regulations, 2024, become important. This new amendment aims to unearth hidden cartels by offering an additional reduction in monetary penalty. It will be interesting to see how these new regulations play out in a market that operates through digital platforms, where detecting cartels becomes even more challenging.  ​​Cartels​  Cartels are defined under section 2 of the Competition Act as an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or trade in goods or provision of services. A cartel is usually understood to be formed by a group of sellers or buyers who bond together and try to eliminate competition. Supreme Court defined cartels in ​​Union of India vs Hindustan Corporation Limited as an association of producers who, by agreement among themselves, attempt to control the production, sale, and price of the product to obtain a monopoly in any particular industry or commodity.   Cartelisation is a type of horizontal agreement that shall be presumed to have an appreciable adverse effect on competition under Section 3 of the Act. Horizontal agreement refers to an agreement between two or more parties that are at the same stage of production and on a similar line of production. ​​It is presumed to affect the consumer market adversely, such as inflated prices and reduced choices for cheaper alternatives. This was highlighted in Neeraj Malhotra v. North Delhi Power Ltd, where electricity distribution companies restricted consumer choices by distributing faulty meters, adversely affecting the market by inflating bills, limiting competition, and enabling price manipulation through cartel-like behaviour.  Horizontal agreements are, by their very nature, prohibited by law. In case there is an application of cartelisation against the enterprise, the enterprise has to prove its innocence. Additionally, the Competition Act empowers the CCI to impose penalties and/or fines on the detection of cartels under Section 27 of the Act.   In ​​Express Industry Council of India v Jet Airways (India) Ltd, the Competition Commission of India (CCI) found a cartel involving airlines, including Jet Airways, IndiGo, and SpiceJet, collaborating to fix Fuel Surcharge rates in the air transportation sector. CCI imposed penalties on Jet Airways (Rs. 39.81 crore), IndiGo (Rs. 9.45 crore), and SpiceJet (Rs. 5.10 crore) for overcharging cargo freight under the guise of a fuel surcharge. This action was deemed to violate Section 3(1) read with Section 3(3)(a) of the Competition Act, addressing anticompetitive practices and safeguarding consumer interests. In light of the above case, it is clear that once found guilty of cartelization, Enterprises have to pay a heavy penalty. However, the Competition Act also has a whistle-blower provision that could reduce these penalties up to 100%.   ​​Leniency Provision​  Section 46 of the act deals with the leniency provision. This provision can grant leniency by levying a lesser penalty on a cartel member who provides full, true, and vital information regarding the cartel. The scheme is designed to induce members to help detect and investigate cartels. This scheme is grounded on the premise that successful prosecution of cartels requires evidence supplied by a member of the cartel. ​​Leniency schemes have proved very helpful to competition authorities of foreign jurisdictions in successfully proceeding against cartels. For Instance, The US corporate leniency program has been very successful. Previously, the Department of Justice received about one amnesty application per year. With the introduction of the new policy, however, this rate has surged to approximately two applications per month. Notably, amnesty awards have been pivotal in several prominent cases, such as the Vitamins investigation, where the applicant received a substantial fine reduction totalling nearly $200 million.  Similarly, In India, In Anticompetitive Conduct in the ​​Dry-Cell Batteries Market in India Vs Panasonic Corporation and Others The commission finds that Panasonic Corporation and its representatives provided genuine, full, continuous, and expeditious cooperation during the course of the investigation. Thus, the full and true disclosure of information and evidence and continuous cooperation provided not only enabled the Commission to order an investigation into

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Transforming Competition: FTC’s Non-Compete Ban vs. India’s Legal Landscape

Leave a Comment / Competition Law /

[By Dhananjay Dubey] The author is a student of Institute of Law Nirma University, Ahmedabad.   Introduction  A Non-Compete Agreement is a legally enforceable agreement in which the “Restricted Party” agrees not to participate in any competitive activities during and for a set period after the termination of their commercial relationship with the “Protected Party.” It is a common tool used by businesses to retain valued employees, protect secret information and customers, and prevent unfair competing activities. Employment terminations, contractor or consultant engagements, corporate partnerships, and mergers or acquisitions are all scenarios that use non-compete agreements. In exchange for accepting the constraints, the Restricted Party must be given consideration, such as job offers or monetary recompense. The Agreement prohibits the publication of confidential information, even after the termination of employment.  FTC’s Ban on Non-Compete Agreements: A Shift in Competition Law  Recently in the month of January 2024, the (Federal Trade Commission) FTC issued a rule to ban non-compete agreements to protect competition across the country. On 23rd April 2024, the proposed rule came into effect after much deliberation. The said rule bans all types of non-compete agreements as violative of Section 5 of the FTC Act which prohibits unfair or deceptive practices affecting commerce. The framework of the rule is broad, prohibiting not only non-compete agreements but also other parallel arrangements that serve similar goals. This rule applies to any agreement that prevents or penalizes employees from exploring opportunities with competing companies.  Under the final regulation, new non-compete agreements for top executives earning more than $151,164 per year and holding major policymaking roles, such as presidents or CEOs, are forbidden, although existing agreements are still lawful. This differs significantly from the proposed regulation, particularly in terms of the treatment of existing agreements and notice obligations. Existing non-compete agreements do not require a formal termination. Firms must notify non-senior executive staff with existing agreements that they will no longer be enforceable once the law is implemented, allowing them to pursue other alternatives. The FTC provides a sample notice for clarity and uniformity, emphasizing employees’ ability to pursue their professional goals unrestricted.  Exception to the Final Rule  Exceptions to the rule exist for certain settings and entities. Firstly, non-solicitation and non-disclosure agreements are exempted, although employers should exercise caution as overly restrictive clauses may still breach the law if they unduly limit individuals from working in the same field. Secondly, the rule does not cover in-term non-compete agreements, which restrict competition during employment. Additionally, entities excluded from the FTC Act, like banks and insurance companies, are not bound by the regulation. Franchisee/franchisor contracts are also exempt, though workers of both parties remain protected. Crucially, the final regulation includes an exception for the sale of a business, allowing non-competes in bona fide sales without mandating a minimum ownership stake, as initially proposed. This exception ensures that genuine commercial transactions are not impeded by the rule.  Referenced assessment with Competition Law in India.  This development marks a significant comprehension of competition law in India. The rationale behind proposing such a rule is that it impedes labor mobility and stifles competition, thereby hindering innovation and the establishment of new businesses. The pertinent question here is whether such a development can be anticipated within the Indian Competition law framework. To address this, a brief examination of existing jurisprudence is necessary. Under Indian Law restrictive covenants such as the non-compete clauses fall under the domain of Section 27 of the Indian Contract Act, which asserts that any agreement pursuance of which prevents or restrains a person from practicing a lawful profession, trade, or business is void to that extent, with an exception for the sale and purchase of goodwill. While non-compete agreements seemingly fall within this provision, the Supreme Court, in the landmark case of Niranjan Shankar Golikari v. Century Spinning, scrutinized the validity of such clauses under section 27 of the Indian Contract Act, 1872, which invalidates agreements restraining trade. Justice J.M. Shelat stressed that while restraints on trade are not inherently against public policy, they must be reasonably necessary to safeguard the employer’s interests, placing the burden of proof on the party advocating the contract. The key factor in this case was the reasonability of the non-compete clauses.  It was further held in the case of Larry Lee Maccllister vs. Pangea Legal Database Solutions by CCI that negotiating conditions at the start of employment, including any constraints on future employment, is a standard procedure that does not pose competition problems. Employees consider these conditions when negotiating salary, demonstrating that such agreements are typical employment practices that have little impact on competition. The CCI determined that limits in employment contracts prohibiting employees from joining rivals after termination do not raise competition concerns. Such limitations are regarded as appropriate in preventing trade secret exposure or harm to businesses. Employment contracts are thorough agreements that lay down the rights and duties of both the parties i.e. the employer and the employee. Restrictive covenants such as non-solicitation, non-disclosure, and non-competition agreements are critical for safeguarding employers’ interests and ensuring contractual balance. It was also reasoned that section 3 of the Competition Act addresses service agreements such as exclusive dealing agreements rather than employment issues. The Act’s purpose is to safeguard rights in rem rather than prohibit them in personam. Personam remedies are provided by CCI to individuals but the dependence of the same is through a problem in rem.   Analysis  The inclusion of restrictive covenants in an employment agreement is critical for preserving integrity and efficacy, benefiting both the employer and the employee by establishing defined boundaries. These provisions ensure that rights and duties are understood by both parties. Non-compete agreements, while necessary, do not meet the standards of section 3 of the Competition Act, 2002, which requires a clear delineation of the market that would bear the impact of the adverse appreciable effect created due to the competition concerns arising out of the said employment agreement. In case a defined market is not outlined, on a bare

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SEBI’s Amendments to AIF Regulations: Juggling Flexibility and Oversight

Leave a Comment / Capital Markets and Securities Law /

[By Biraj Kuanar] The author is a student of National Law University Odisha.   Introduction  The recent amendments to the SEBI (Alternative Investment Funds) Regulations 2012, introduced by SEBI on 25 April 2024, when read along with the circular issued by the Securities and Exchange Board of India (SEBI) on 26 April 2024, aim to create a tectonic shift in the alternative investment landscape in India. The goal of these amendments is to provide flexibility to Alternate Investment Funds (AIFs) and their investors while concurrently addressing regulatory arbitrage and circumvention of law concerns.  Before discussing the changes incorporated by the recent amendments, it is important to understand how AIF exits operate. These funds usually have a fixed tenure, after which they enter a liquidation phase. During this phase, fund managers are tasked with selling off the remaining investments and returning capital to the investors. However, fund managers face numerous hurdles when dealing with illiquid assets that can’t be easily divested within the stipulated timeline. This challenge thereby sets the stage for the recent amendments.  At the core of the changes lies the introduction of a “dissolution period” for AIFs, which promises to revolutionise the handling of unliquidated investments. Prior to the amendment, AIFs were presented with limited options while dealing with unsold assets due to a lack of liquidity at the end of their tenures. The first option is the distribution of assets taking place in-specie, which is the practice of distributing an AIF’s assets to investors in their current form instead of conducting the sale of assets and distributing cash so acquired. While such distribution allows for the fund’s closure on time, it creates difficulties for investors who may not be equipped to manage these assets on their own.  The second option for dealing with unsold assets is to set up liquidation schemes for holding or acquiring such assets. The amendments, by providing greater flexibility in handling such situations, ensure investor protection to a great extent.  The new dissolution period offers a more nuanced alternative aimed at streamlining the process under which, post-expiry of the traditional one-year liquidation period, AIFs can enter into the dissolution period after garnering approval from at least 75% of their investors. Meanwhile, the AIFs can sell the unliquidated investments or continue distributing them in-specie to the investors.  This flexibility, however, comes with strings attached. AIFs going down this route must first arrange bids for the remaining 25% of unliquidated investments to provide dissenting investors an option to exit. If, upon the exit of the dissenting investors, any portions of the bids remain, they are to be provided to non-dissenting investors for pro-rata exit, in case they choose to do so. What is important to note is that the dissolution period can’t exceed the AIF’s original tenure, nor are extensions permitted. In addition to this, neither fresh commitments from investors nor new investments by the AIFs are permitted to ensure that the liquidation of remaining assets is not hindered.  The launch of new liquidation schemes from 25 April 2024, has also been prohibited by SEBI. As in previous times, AIFs would set up separate liquidation schemes in order to acquire and hold the unliquidated investments of AIF schemes that were on the verge of expiring. This has been done to counter the notoriety of the mechanism, which plagued the commercial viability of the schemes.  Encumbrances on AIFs Equity: A Boost for Infrastructure Investments  The amendments have also ushered in changes to ‘encumbrances’ on equity holdings of AIFs. Category I and II AIFs have been permitted to create encumbrances on the equity of their investee companies. However, permission has only been provided for companies delving into projects in the infrastructure subsectors as listed in the “Harmonised Master List of Infrastructure” and for the sole purpose of borrowing by the investee company. And such encumbrances are to be explicitly disclosed in the AIF scheme’s private placement memorandum.  SEBI’s firm stance in addressing regulatory arbitrage and circumvention of law concerns  SEBI has taken a firm stance by imposing obligations on the AIFs, their managers, and Key Management Personnel (KMPs), to exercise caution while conducting due diligence concerning their investors and investments in particular on foreign investments. KMPs include senior executives such as the fund manager, chief investment officer, and other key decision-makers responsible for the fund’s operation and investment strategies, while also ensuring compliance with regulatory requirements. The inclusion of KMPs in the new due diligence obligations underscores SEBI’s emphasis on personal accountability for regulatory compliance at all levels of AIF management. All of which is aimed at preventing any attempted circumvention of regulations or laws administered by SEBI and other financial regulators.  Temporary reprieve to select AIFs by SEBI  In addressing concerns, SEBI has provided much-needed reprieve by allowing one-time flexibility for select AIFs. This flexibility is provided for schemes that have already expired or are expiring by 24 July 2024, and do not have any investor complaints pending concerning the non-receipt of funds as of 25 April 2024, wherein, upon meeting such conditions, an additional liquidation period until 24 April 2025 will be granted.  All of this is carried out to make sure that AIFs can fully liquidate their investments, carry out in-specie distribution, or opt for the dissolution period that has been brought into the picture via the recent amendments. Further, the circular, which was issued by SEBI on 26 April 2024, also acts as a guiding light in implementing the various changes that SEBI has brought in through the amendments.  Balancing Flexibility and Oversight: Implications and Analysis  The recent amendment represents how the landscape of alternate investments is evolving in India by showcasing the steps taken in the right direction to address the challenges faced by AIFs and their investors in trying to balance flexibility provided to AIFs and investors with the regulatory oversight over them by regulators. The newly brought-in dissolution period acts as a pragmatic and streamlined approach to the problem of unliquidated investments and the handling of unsold assets at

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Google’s Third-Party Cookie Ban: Privacy Shield Or Market Power Play?

Leave a Comment / Competition Law /

[By Satyam Mehta] The author is a student of National Law University, Jodhpur.   Introduction Google has effectively blocked third-party cookies for 1% of Chrome users beginning this year, a move that has been delayed multiple times and was announced a couple of years back. However, despite this, the move has met with criticism from different stakeholders alleging that it strengthens Google’s already well-established monopoly. Consequently, Google has come under scrutiny from the UK watchdog Competition and Markets Authority (CMA). This article is an attempt at carefully analysing the paradigm Google is invariably trying to push, its ramifications and if there is a need for further scrutiny from different watchdogs around the world, especially in India.   Ramifications of the move Firstly, it is imperative to understand what third-party cookies are and what is the difference between third-party and first-party cookies. First-party cookies are what are treated as essential cookies by the Data Protection laws and they are vital to the functioning of the site. They are installed by the website you visit to store some important information, for example your language preference or your login information. Therefore, they are significant because they ease  user experience. On the other hand, third-party cookies can be installed by anyone, for example the ad tech companies, for the purpose of tracking the users across websites and profiling them to sell ads. The data can be accessed by anyone by logging into the third-party server code. Thus, third-party cookies are primarily used for tracking the users across websites and profiling them to display relevant advertisements. It is a no-brainer that these are not exactly privacy-centric and leak the users’ data to the ad tech companies that allow them to sell ads as a result of which the ad tech industry has burgeoned into a 600Bn $ a year behemoth. A 2019 GDPR ruling therefore made these cookies optional and mandated explicit consent to be required failing which a fine will be imposed.  Google aims to effectively phase out these cookies by the end of 2024 and follow in the footsteps of its competitors Firefox and Apple’s Safari that blocked these cookies way back in 2019 and 2017 respectively. Google claims that this is a privacy-centric move that will allow users’ data to be safeguarded from multiple stakeholders especially now that the privacy laws landscape is evolving. An obvious question springs then, why is there such rampant criticism of the move and why is Google being investigated for the same when it is just following the footsteps and the mandates of its competitors and watchdogs respectively. For starters, Chrome has 66% market share and while Apple has historically had a closed ecosystem, chunk of Google’s revenue comes from the advertising business. Google has had a monopoly in the ad tech business so much so that it has been sued by the Justice Department with Attorney Generals of various States coming on board. Thus, the paradigm that Google is pushing for has to be seen with a cautious approach from the side of both the users as well as the advertisers. While the majority of users either don’t really understand cookies or do not care whether their ads are relevant or not as long as the tech companies are not intrusive, this is a concern for the ad tech companies as this would change ad targeting dynamics, probably, in Google’s favour.  With the removal of the third-party cookies, the advertisers have to rely on first-party cookies and while Google has this data in abundance, thanks to its various owned and controlled entities such as YouTube, Maps, etc. the small ad tech companies don’t have such enormous amounts of data as they have traditionally relied on third-party cookies for the same. Thus, it will give Google a chance to strengthen its already strong position in the ad tech industry as the websites are not allowed to track users while the browser still logs their information. This doesn’t exactly promote a level-playing field and instead of promoting user privacy, it just makes Google the sole owner of the user data and to do with it as they please. Subsequently, Google promoted their privacy sandbox initiative that it claims will balance the privacy of the users and the needs of the ad tech companies. It is a no-brainer that there needs to be antitrust scrutiny into Google’s actions as what it is effectively doing is stopping the ad tech companies from collecting their own data while making them reliant on the Privacy Sandbox initiative and small ad tech firms will have to enrol to stay relevant because they do not have the enormous amounts of data that Google has as already discussed. There has been an investigation by the UK watchdog CMA that is ongoing and it has gotten Google to make some commitments but no other regulator has batted an eye as they think that the Britts have got it.  Analysis In the opinion of the author there has to be further scrutiny of Google’s actions and motives, especially in the Indian context as its Privacy Sandbox initiative has also been criticised at length but first, it becomes vital to understand the functioning of the Privacy Sandbox initiative. The browser will group people into different sets using different Application Programming Interfaces on the basis of their interests based on their browsing history. The data will never leave the browser and individual user targeting will be minimised as they will be targeted in sets while sharing generic information with the advertisers. However, upon examining this, it becomes apparent that it is disruptive of the level playing field as Chrome has access to user data at the granular level while the advertisers don’t which might allow it to give preferential treatment to its products. Therefore, Google committed to the CMA that it will not use personal user data in its ad system or discriminate in favour of its own products. However, there hasn’t been the same scrutiny by any other

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