Author name: CBCL

Unlocking Capital and Control: Reforming Bank Acquisition Rules in India

Leave a Comment / Contemporary Issues /

[By Shashwat Shukla & Kumar Aryan] The authors are students of National Law University Delhi.   Introduction India is emerging as one of the world’s fastest growing economies incentivizing global markets to claim a piece of this pie. Foreign banks are keen on deals in India especially as it angles for regional trade agreements. Such pacts could open up new opportunities in India for global lenders elsewhere in Asia and the Middle East. Moreover, the Indian banking regulator has shown willingness towards the entry of these foreign banks in the Indian banking sector in order to introduce a fresh stream of long-term capital into the market. The RBI last month relaxed its rules to let a Japanese bank, Sumitomo Mitsui Financial Group Inc., acquire 20% stake in YES BANK amidst reports of two foreign institutions vying for a stake in IDBI Bank. In light of these developments, certain impediments can act as deterrents for such stake sales. We can trace the policy architecture when it comes to letting foreign banks enter the Indian market back to 1991 when Committee on the Financial System (CFS) was established to examine the existing financial system and make recommendations for reforms in India. One of the objectives of the CFS was to introduce competition into the banking system by encouraging the entry of new foreign banks and the expansion of existing foreign banks. This objective becomes all the more crucial to adopt and formulate a regulatory approach in alignment with the current economic ambitions of the state. While there are norms established by the RBI which puts a cap of 26% on voting rights of a promoter of a registered banking company, which serves as protection from excessive control by a single entity over a sector which is of national economic relevance. The same, as will be argued in this article, is not in consonance with the overall regulatory framework and the objective which the regulator seeks to achieve. Hence, an objective reconsideration of the quantum of these caps is required. This article is structured into four key sections, the next section examines the regulatory framework with a focus on RBI and FDI norms. Following this, the section critically analyses the rationale and drawbacks of the voting rights cap, drawing on the global best practises. The article concludes by offering a forward-looking perspective on recalibrating regulatory policy to align with India’s growth ambitions. Regulatory Framework Governing Foreign Ownership in Indian Banks When identifying structural regulatory flaws, it becomes crucial to look at the entirety of the regulatory framework governing any concerned transaction. In the case of foreign banks or entities seeking to acquire a stake in Indian private sector banks, FDI rules are the primary regulations that govern all foreign long term capital investments in Indian entities. While FDI rules do permit acquisition of up to 74% of any Indian private bank by a foreign entity with government approval (up to 49% through automatic route), the rules of RBI on holding and acquiring of Indian banks puts a cap of 26% of voting rights for promoters and a cap of 15% on investments by financial institutions. Furthermore, the SEBI Takeover Code mandates that if any company acquires a 25% stake in another company, then they will be required to further make an open offer to acquire 26% of that entity, effectively giving the acquiring company a majority stake of the acquired company. This is done to give other shareholders an opportunity to leave their stake in the company where the leadership is changing. However, in the context of the present transaction, the dilemma for foreign companies arises when they try to acquire an Indian bank, as soon as they hit the 25% mark, they will be mandatorily required to make an offer for majority stake meanwhile the RBI rules will not let them have voting rights proportional to the stake they will be required to acquire due to the 26% cap. Therefore, any increase in the 26% cap on voting rights, or the 15% investment threshold could encourage foreign bank investors. There could be opportunities for investments in India’s mid-sized banks by foreign banks looking to expand their presence in India, although it can be inferred that the RBI’s preference is for foreign banks with a strong performance and governance record to acquire stakes larger than 26% through wholly owned Indian subsidiaries regulated in India. Therefore, the current regulatory framework severely discourages any foreign entity to acquire a stake of more than 25% because of the takeover code, effectively defeating the objective RBI is seeking to achieve. Reforming the Cap: A Case for Phased Liberalisation The regulations were brought to ensure diversification and prevent the shareholders from dominating bank policy or ownership. This was in line with protecting financial stability and public interest. The regulator is trying to ensure bank governance remains dispersed by capping it acts as a shield against the takeovers and instability that may be created by the exit of a single investor. Though the RBI’s framework stresses on having a cautious approach to foreign control by the diversification route, the 26% voting cap is a unique feature, as major countries allow shareholders voting rights in sync with their equity. The capping, as a result, leads to a situation where even highly capable foreign banks cannot control the board decision and have to comply with strict voting limit requirements, and this deters them from entering the Indian ecosystem. The ownership restrains are codified in the Banking Regulation Act and the RBI Guidelines, which fit into a broader Indian framework, emphasising fit and proper test and RBI approvals for any significant bank investor. These legal safeguards have created major impediments for the burgeoning economy, which currently finds itself in a capital shortfall. As per one of the RBI reports, the credit to GDP ratio in India, i.e., 90% lags much behind the global average of approximately 113% highlighting the loan deficit market. Strategic investments by way of long-term infusion of capital

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Governance, Trust and Trouble: SEBI’s Scrutiny of AIFs

Leave a Comment / Capital Markets and Securities Law /

[By Prayas Das] The author is a student of National Law University, Odisha.   Introduction The Securities and Exchange Board of India (the Board), in recent times, has provided numerous investment options for the people, such as Mutual Funds, which offer stable returns with less risk to investors, thanks to tighter regulations under SEBI’s supervision. As temporal tides advance with the growth in the economy and increasing number of  High Net-worth Individuals (HNIs) who can afford to take more risk in terms of investment, SEBI introduced the SEBI  (Alternative Investment Funds) Regulations, 2012 to cater to the requirements and needs of the HNIs who wanted to invest beyond the stock market to gain more profit by taking more risk with less regulations from the board. The AIF is defined under Regulation 2(1)(b) as a privately pooled investment vehicle that collects funds from investors (Indian or Foreign). The minimum investment amount is Rs 1 Crore for investors, and for Directors, Employees, and Managers, the limit is Rs 25 Lakh. Recent SEBI investigations into HDFC Capital Affordable Real Estate Fund- I, which is a Category II AIF, sparked curiosity about the governance lapses, bias and influence of the sponsor, which can jeopardise the investors’ investment in the respective AIF. This article explores the structures of AIFs, SEBI’s governance rules, what went wrong in a recent case, and how the sponsor can influence the investment decision-making for its benefit at the expense of investors. Structure and Types of Alternative Investment Funds Under Regulation 3(1) of Chapter II, an AIF has to obtain a certificate of registration mandatorily from the Board, and only upon completion of that step can it perform as an AIF. Any entity shall seek registration as an AIF under three categories, which are given below: – Category I Alternative Investment Fund – This category is viewed as a nation builder, as it promotes socially and economically desirable sectors that the government or regulators want to encourage. The AIFs under this category are generally perceived to have a positive spillover effect on the economy, with the government considering providing such funds, incentives, or concessions. These funds include venture capital funds, social impact funds (SME Funds), etc. Category II Alternative Investment Fund – These types of funds do not fall under category I or III. They do not take on leverage or borrowing other than to meet daily operational requirements. These funds invest in long-term assets that offer good returns with manageable risks to knowledgeable investors. These consist of funds such as private equity funds (buying of shares in unlisted companies), debt funds (earning interest on capital, the funds used to buy bonds or debentures), etc. The funds registered under this category are ineligible to receive any specific concessions from the government. Category III Alternative Investment Funds – This type of fund is for those who want to employ diverse or complex trading strategies by employing leverage or borrowings. They are famous for their risk control strategies to make a profit during unstable market situations. One such fund is a hedge fund, which trades to make short-term returns with high risk. It also receives no specific concessions from the government. SEBI permits an Alternative Investment Fund under SEBI (AIF) Regulations, 2012 to be established as a trust, a limited liability partnership (LLP), or as a company. In these three structures, we can find trust as the most common mode of formation of an AIF, and popular due to the tax pass-through benefits it offers, where the investors have to pay taxes on the profit, not the trust under which as AIF is legally formed. Why AIFs Matter An AIF has a diverse portfolio as it invests in assets beyond the stock market, such as investing in unlisted companies, venture capital and infrastructure, which are not available through mutual funds or direct stock investing. With a high risk, it offers a higher return than other investment options due to the large pooled amount and flexible investment options with fewer regulations. The system of investments allows a company or organisation to seek investments, even if it is an unlisted one. This system of investment allows the investee and investors to grow more efficiently with less regulation from the regulator. The SEBI May 2025 Order: What Went Wrong Being a Category-II AIF is significant because such funds typically invest in long-term unlisted assets like real estate and private equity, and are subject to specific restrictions on leverage and regulatory exemptions that shape both their risk profile and fiduciary obligations.  In this context, HDFC Capital Advisors Limited (Applicant No. 1) acted as the Investment Manager for HDFC Capital Affordable Real Estate Fund – I (Applicant No. 2), which is categorized as a Category-II Alternative Investment Fund, with HDFC Bank Ltd. designated as its sponsor. Applicant No. 2 allocated Rs. 200 crores towards Non-Convertible Debentures (NCDs) of Acme Realties Pvt. Ltd (ARPL), in addition to Rs. 99 crores further invested in NCDs issued to ARPL by Ascent Construction Private Ltd. (ACPL). Both ARPL and ACPL were subsidiaries of Acme Housing (India) Pvt. Ltd (AHIPL), with HDFC Bank Ltd., as a sponsor of Applicant No. 2 being an existing lender to both subsidiaries of AHIPL. To simplify, both ARPL and ACPL (both subsidiaries of AHIPL) received funds from the AIF managed by HDFC Capital, which was sponsored by HDFC Bank, a creditor to all three entities. The amount invested by Applicant No. 2 in the NCDs of ARPL was transferred to the loan accounts (credit lines) of ARPL and AHIPL with HDFC (sponsor). These funds were utilized not only for the construction projects but also to repay existing loans and interest owed to HDFC Bank. It violates Regulation 21 (1) of the SEBI (AIF) Regulations, 2012, which mandates that the sponsor and investment manager must act in the best interest of the investors and disclose conflicts of interest. Redirecting investor capital to settle sponsor dues breaches fiduciary obligations and raises governance concerns. Why was this a governance

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Refund of Unutilized ITC on Business Closure: Progressive Ruling, Precarious Foundation

Leave a Comment / Taxation Law /

[By Ishtmeet Kaur] The author is a student of Rajiv Gandhi National University of Law, Patiala.   Introduction Since the introduction of GST in 2017, Input Tax credit (ITC) has consistently remained at the centre of litigation and policy debates. Although ITC was envisioned as a mechanism to avoid the cascading effect of taxes and provide relief to the taxpayers, however in practise, it has produced the exact opposite outcomes. In the past few years, a plethora of cases have come forward where ITC has been denied by the department to bona-fide purchasers either due to the default of the supplier or because of retrospective cancellation of supplier’s registration. In this context, the recent judgment of Sikkim High Court in the case of SICPA India (P.) Ltd. v. Union of India provides a ray of hope to the taxpayers who are facing uncertainties surrounding ITC entitlement. In this landmark ruling, a single-judge bench of the High Court has allowed the assessee to claim refund on unutilized ITC on the closure of business after the same was denied by the adjudicating and appellate authorities under the GST regime. While the judgment is progressive and aligns with the interests of the taxpayers, however the rationale given by the court appears legally inadequate and therefore deserves scrutiny. This article intends to critically examine the judgment of the court, contending that despite being tax-payer friendly it may not withstand appellate scrutiny due to the absence of a robust legal foundation. At the same time, through this piece the author advocates that the core idea underlying the judgment, which is the recognition of refund of ITC on business closure should be legislatively codified, subject to certain safeguards to ensure that such refunds are only granted in genuine cases. A Closer Look at the HC’s ruling In the present case, the petitioner upon shutting down its manufacturing unit in Sikkim, sought a refund of the unutilized balance of Input Tax Credit lying in its Electronic Credit Ledger (ECL). However, the same was denied by the Assistant Commissioner on the ground that exists no statutory provision which allows the refund of ITC on the closure of business. On an analysis of the provisions governing refunds, Section 49(6) of the Central Goods and Service Tax (CGST) Act, 2017 permits the refund of ITC but in accordance with the conditions laid down in Section 54. Specifically, Section 54(3) of CGST Act, 2017 clearly lays down two conditions in which the refund of unutilized Input Tax Credit can be claimed, i.e., (i) in case of zero-rated supplies and (ii) inverted-duty structure (rate of tax on inputs being higher than the rate of tax on outputs). Therefore, there is no express provision in the CGST Act which allows the assessee to claim ITC refund in situations like cancellation of registration or closure of business. Despite the absence of a legal provision providing for refund of ITC on business closure, the court allowed the refund by relying on Karnataka High Court’s judgment in Union of India v. Slovak India Trading Company Private Limited in the erstwhile regime. The rationale adopted by the Court was that there is no express prohibition either in Section 49 or 54 which does not allow such refunds. While the intention of the court may have been to prevent undue burden on taxpayers, however the judgment appears to be overstepping the judicial boundaries especially in absence of a statutory basis or even robust reasoning by the court. Fault Lines in the Judgment Flawed Interpretation of Section 54(3) The High Court in its judgment has held that Section 54(3) does not expressly prohibit the refund of unutilized Input Tax Credit on closure of business. However, this reasoning of the court appears to be erroneous. The language of the first proviso to Section 54(3) has been framed by the Parliament in the following terms: “Provided that no refund of unutilised input tax credit shall be allowed in cases other than”. The critical expressions used here: “no refund shall be allowed” and “in cases other than”, clearly indicate that the legislature intends to allow refund only in these two situations as provided. Hence, the construction of the proviso is prohibitory and exhaustive in nature. This interpretation has also been affirmed by the apex court in the case of Union of India & Ors. V. VKC Footsteps India Pvt. Ltd. where the court has clearly held that “A refund can be allowed only in the eventualities envisaged in clauses (i) and (ii). The expression “in cases other than” is a clear indicator that clauses (i) and (ii) are restrictive and not conditions of eligibility.” It remains uncertain as to how the High Court’s judgment would withstand judicial scrutiny when its interpretation of Section 54(3) clearly diverges from the one already laid down by the apex court. A case of Judicial Overreach Taxation statutes are required to be strictly interpreted. The rationale behind this is that the fiscal policy of the government is often shaped by various economic and administrative considerations which may not necessarily align with the broader principles of equity usually applied by the courts. In such a context, courts through their judgments must remain confined to the text of law and should not dictate fiscal policy making by the government. By disregarding the rule of literal interpretation, the High Court appears to have overstepped these boundaries, particularly when the intention of the Parliament was unambiguously expressed in the language of the proviso to Section 54(3). Introduction of an additional ground by the Court on which refund of ITC can be claimed serves as judicial encroachment on the powers of the legislature. This view also finds support in the decision of Supreme Court in the case of C.I.T. v. Calcutta Knitwears, where strict interpretation of a taxing statute was emphasized. “Common sense approach, equity, logic, ethics and morality have no role to play. Nothing is to be read in, nothing is to be implied; one can only look fairly at

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Transaction Fragmentation And Shadow Capital Arbitrage In Reverse Mergers

Leave a Comment / Capital Markets and Securities Law /

[By Adeeb Bakhtavar] The author is a student of Dr. B.R. Ambedkar National Law University, Sonepat. Introduction Early 2025 saw the ‘reverse flip’ of RazorPay from its US-based holding company to an indian parent entity after receiving the nod from the Ministry of Corporate Affairs. Zepto, a quick commerce startup, also received formal approvals from both the Singapore court and India’s National Company Law Tribunal to execute its cross-border merger, thereby becoming an Indian parent entity. According to a recent white paper published by Bay Capital shows that the value of India’s publicly listed digital-first firms is $90 million. While headlines celebrated it as a win for the startups and indian markets, what remained unsaid was that, how such structural shifts like these can cloak opaque capital arrangements under the guise of regulatory compliance? Reverse mergers that were once deployed as alternative IPO routes, are now being strategically used to embed shadow capital, exploit jurisdictional leniencies, and bypass regulatory gatekeeping. This blog will examine how the entities are leveraging the gaps in Indian corporate and securities law to channel shadow capital via reverse mergers. Conceptual Prelude: Reverse Mergers & Shadow Capital Reverse mergers, traditionally used as listing shortcuts (also known as reverse takeovers, RTOs) can be referred to as transactions where a private company acquires a publicly listed shell company. It allows the private company to bypass lengthy regulatory scrutiny and gain access to capital markets through corporate restructuring. According to the OECD Shadow Banking Report, “Shadow Capital” refers to the opaque, non-traditional sources of private capital that are not regulated, are often outside the regulated fund structure, and mimic institutional capital but are under grey zones. Shadow capital lacks fiduciary supervision as the investors may not be bound by LPAs (Limited Partner Agreements) or SEBI audit rules, which can be used to bypass the disclosures regarding the beneficial ownership or voting rights to SEBI, MCA, or the exchanges. The National Company Law Tribunal’s 2024 ruling in Hologram Holdings Private Limited v. NCLT introduced what is now referred to as the “Substantive Business Purpose Test” under Section 232 of the Companies Act, 2013. Moving beyond the formalities of statutory compliance, the Tribunal held that merger schemes must demonstrate a genuine business rationale or contribute meaningfully to the public interest. The court concluded that such arrangements constituted “merely accommodation entries or paper transactions” designed to “artificially increase the share prices and use the merged company as a vehicle of tax evasion and money laundering” 2025 Regulatory Framework Landscape The Stock Exchange Board of India (SEBI) amended the Issue of Capital and Disclosure Requirements (ICDR) regulations in March 2025, which marked the most significant regulatory evolution in reverse merger oversight since the original framework was established. As per the technical analysis of these amendments, the regulations struggle to be comprehensive yet contain some fundamental structural deficiencies that continue to enable sophisticated shadow capital deployment. The amended pre IPO transaction reporting framework, that is the regulation 58B(1): “(1) Every issuer shall, within twenty-four hours of such transaction, disclose to the recognised stock exchange(s) and simultaneously on its website, all pre-issuance placements of equity or convertible securities which aggregate to an amount in excess of ₹25 crore” Mandates all pre-IPO transactions exceeding ₹25 crore to must be reported to stock exchanges within 24 hours, despite this regulatory framework shadow capital operators can exploit the regulations through the method called “cascade structure” method, according to which a private entity involves structuring a transaction through multiple sub-₹25 crore tranches across different entities throughout a 12-month period in order to inject shadow capital into a listed shell company. While each transaction on its own is below the requirement for reporting threshold, the total amount of shadow capital deployed is significant. Such structured transactions are not recognised by SEBI’s current monitoring systems simply because of their lack in real-time aggregation capabilities. This is the concept of “connected transactions,” that very crucial in determining shadow capital but is not defined in ICDR regulations, and is not included by amended Regulation 58B(1). The subsidiary companies can subsequently merge with their parent company through simplified merger procedures under Section 233 of the Companies Act 2013, which can effectively infuse substantial shadow capital without triggering enhanced disclosure obligations. The enhanced materiality thresholds under the regulation 32A(4) introduce tiered materiality thresholds which includes ₹10 crore or 2% of net worth (whichever is lower) for companies with net worth below ₹500 crore, and ₹25 crore or 1% of net worth for companies with net worth exceeding ₹500 crore. In contrast, the U.S. Securities and Exchange Commission’s Aggregation Rule under Section 13(d) of the Securities Exchange Act codified in 17 C.F.R. § 240.13d‑3(c) mandates the disclosure of beneficial ownership by aggregating holdings across related entities and coordinated investors, while the European Union’s transparency regime under the Shareholder Rights Directive and Disclosure Regulation (EU 2017/1129) requires consolidated reporting of financial exposures, thereby preventing circumvention through fragmented sub-threshold structures, a safeguard currently absent in India’s regulatory framework. As per the subsidiary parking strategy, for example, any XYZ Limited, a listed shell company with net worth of ₹450 crore, can create multiple wholly-owned subsidiaries. Then, shadow capital is injected through transactions of ₹9.5 crore each into different subsidiaries over a 18-month period. Each transaction remains below the 2% materiality threshold, avoiding consolidated disclosure requirements. This successfully infuses shadow capital through reverse mergers, without triggering SEBI regulations. Furthermore, the amended LODR Regulation 27B Related Party Transaction (RPT) requires disclosure of all RPTs exceeding ₹1 crore on a consolidated basis, quarterly monitoring of cumulative RPT exposure, and an Independent director certification of arm’s length pricing. The current RPT disclosure requirements focus on individual transaction materiality rather than cumulative economic impact.  For example, A sophisticated shadow capital scheme involving Entity A (shadow capital source) creating apparent arm’s length transactions with Entity B (reverse merger target) could include Entity A providing “consultancy services” to Entity B at inflated rates (₹95 lakh per quarter to remain below disclosure thresholds). Then, Entity B could lease

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Material Adverse Change Clauses in M&A: Navigating Risk Allocation, Materiality, and Enforceability

Leave a Comment / Mergers & Acquisitions /

[By Anushree Srivastava & Shravasti Yadav] The authors are students of Gujarat National Law University. Introduction In 2020, LVMH sought to withdraw its $16.2 billion acquisition of Tiffany & Co., citing a Material Adverse Change (“MAC”) and breaches of conditions due to the COVID-19 pandemic’s effect on retail. The dispute ended with a $425 million price reduction, highlighting the influence of such provisions on deal outcomes. MAC clauses are provisions in a contract that allow a buyer in a merger and acquisition (“M&A”) deal to walk away from the transaction if a material adverse event happens to the target company between when the agreement is signed and the transaction is completed. MAC clauses protect a buyer against unexpected detrimental alterations to the business of a target company. However, these provisions in the M&A contract must be read in conjunction with other contractual provisions therein, as they collectively provide for the buyer’s possible grounds for withdrawal. Specifically, those clauses which are similar to MAC clauses, for instance the clauses addressing conditions for execution, backing out and damages in the event of backing out from the contract.  It is in light of this that, this blog examines three critical intersections that shape modern MAC clause drafting: its interplay with break fee provisions, bring-down conditions, and the debate between quantifiable versus subjective materiality thresholds. Indian jurisprudence on the MAC clauses is limited, given that they are rarely litigated and often lead to price renegotiations rather than a termination, which can lead to litigation. However, Delaware courts have continuously refined their interpretation of MAC clauses, making it crucial for M&A practitioners to understand these relationships. Risk Allocation Mechanism in M&A: Break Fees and MAC Clauses A Break Fee, or a termination fee, is a penalty paid in M&A transactions if the seller withdraws from the deal, compensating the buyer for the time and resources invested in negotiating the deal. The existence of a break fee and MAC clause in a contract provides the parties with opportunities to develop timing strategies. For instance, buyers may deliberately delay closing of the contract to see if market conditions trigger a MAC (additionally, a MAC claim requires the proof of adverse change over a period of time) while knowing the break fee provides a financial safeguard if their MAC claim is unsuccessful. Conversely, sellers might rush to close the transaction before potential adverse circumstances may materialize, to avoid MAC disputes altogether. It has been observed that MAC clauses are more frequently enforced during periods of high market volatility, as was evidenced during the 2008 financial crisis and the COVID-19 outbreak. Conversely, break fee clauses are typically invoked in stable market conditions. This is so because, in case of market volatility, the buyers face higher uncertainty about the target’s future performance, making MAC clauses more valuable as an “insurance policy” against deterioration. In case the market is stable, break-fee clauses are enforced because there are fewer opportunities to invoke MAC. This reflects the optimal relationship between break fee size and MAC clause scope. Further, does a more restrictive MAC clause (harder to invoke) correspond with a larger break fee? Usually, a higher break fee is paired with a broader MAC clause, as issues are expected to be addressed under the MAC clause without triggering the fee payment. This higher fee protects against third-party offers and incentivizes sellers to enforce the contract, enabling the buyers to exit without significant penalties during extraordinary events like COVID-19. For instance, in some highly volatile market periods, we’ve seen larger break fees tied to MAC clauses to discourage opportunistic deal abandonment. On the other hand, a reverse break fee is a penalty that a buyer pays if they cannot complete the transaction due to reasons within their control. The inclusion of a reverse break fee with a MAC clause provides buyers a clear monetary framework for evaluating the risk of invoking the MAC clause. This fee acts as a cost of exercising the MAC “option” if market conditions deteriorate, serving as a de facto limit on their deal risk. Moreover, courts also tend to construe these provisions cumulatively rather than in isolation. For example, some jurisdictions such as the Delaware Courts consider a higher break fee combined with a wide MAC clause as an unconscionable penalty rather than a legitimate liquidated damages provision. In such cases, the MAC clause is viewed merely as an attempt to avoid paying the break fee. This was the case in Sallie Mae Litigation where the purchaser sought to trigger the MAC clause to escape paying higher reverse break fee. Conversely, a broad MAC clause with a low break fee provides buyers more flexibility to exit under adverse conditions. Risk Management through Intersection of MACs and Bring-Down Conditions A bring-down condition requires parties to confirm that the representations and warranties in an agreement remain accurate on the closing date. MAC clauses allow buyers to escape unforeseen crises, while bring-down conditions ensure a seller’s representations remain accurate until closing. Their interplay influences negotiations and transaction risks. The standards of evidence to prove a breach of representation differ significantly from those required to establish a MAC, creating a strategic option for buyers: pursue the more specific representation breach or establish the more general but higher-threshold MAC. Courts in different jurisdictions interpret the interaction of these provisions differently. Delaware courts tend to interpret them as complementary but distinct provisions, while some international jurisdictions, such as the England Courts view them as more integrated concepts. M&A agreements often include a MAC provision to adjust the bring-down conditions regarding its business operations by specifying that nothing material enough to cause a MAC has occurred, thereby establishing a materiality threshold. This is usually done through negative modification or affirmative modification. The MAC clause qualifies a negative statement as “The holding’s records contain no inaccuracies except for those not expected to result in a MAC.” On the other hand, an example of affirmative modification is that “The Holding is not a party to any litigation

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Analysing RBI’s Digital Lending Directions 2025: A Positive Step Towards Responsible Lending?

Leave a Comment / Contemporary Issues /

[By Atish Biswas] The author is a student of The West Bengal National University of Juridical Sciences. Introduction Digital lending, through websites and applications, has transformed the way individuals borrow money by integrating technical innovation with traditional banking services. This has resulted in easy and simple borrowing, quicker loan disbursement with fewer paperwork, and increased credit availability for a wider range of individuals. However, several concerns were raised regarding the business operations and conduct of these platforms, data privacy breaches, and misuse of data collected. To investigate these issues, the Reserve Bank of India (“RBI”) had set up a Working Group in 2021. Pursuant to the RBI’s Working Group’s Recommendations on Digital Lending[1], the RBI released Guidelines on Digital Lending in September 2022. The Digital Lending Guidelines, along with the Default Loss Guarantee Guidelines and other Circulars, formed the existing Digital Lending Framework in India. On 8 May 2025, the RBI released the Digital Lending Directions, 2025 (“2025 Directions”), consolidating, streamlining, and updating the regulatory framework that governs digital lending.[2] This article analyses the new Digital Lending Directions and suggests some future reforms. Key Changes The Reserve Bank of India’s 2025 Directions on Digital Lending broaden the regulatory scope and tighten compliance to enhance customer protection, data privacy, and institutional accountability. The definition of “Digital Lending” remains unchanged, referring to “remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service”. However, its applicability has been expanded. In addition to commercial banks, co-operative banks, and NBFCs, All-India Financial Institutions are now covered under the framework. Furthermore, Digital Lending Apps (DLAs) now include any web or mobile app offering digital lending services, either standalone or as part of a larger suite. The definition of Lending Service Providers (LSPs) has been expanded to include not just agents of Regulated Entities (REs) but also those acting as LSPs for other REs, provided they are involved in the digital lending process. The 2025 Directions impose additional compliance obligations on REs. REs must enter into written contracts with LSPs, clearly defining their roles, rights, and responsibilities. REs have to periodically review the conduct of LSPs and enforce accountability. If LSPs serve multiple lenders, REs must ensure neutrality and transparency in loan offers. Creditworthiness assessments must, at a minimum, consider the borrower’s age, occupation, and income. REs have been allowed to process data outside India is now permitted, but processed data must be repatriated and deleted from foreign servers within 24 hours. The 2025 Directions lay down various measures to protect borrowers. REs are required to publicly display key details on digital products, grievance redress mechanisms, and privacy policies, along with links to the RBI’s CMS and Sachet Portal. All DLAs must be reported on the RBI’s Centralised Information Management System (CIMS). Any increase in credit limit must be explicitly requested by the borrower and recorded. Lending apps are barred from accessing sensitive mobile data, and LSPs may only retain borrower data as long as necessary. Camera and microphone use is restricted to onboarding with borrower consent. Borrowers can exit loans without penalty within a board-determined “cooling-off” period (minimum one day). Increased Scrutiny: A Positive for the Digital Lending Sector? The 2025 Directions brings digital lending participants under the ambit of a risk-based framework, balancing innovation with consumer safeguards. It consolidates fragmented guidelines into a unified framework and removes ambiguities in earlier definitions. The change in definition of LSP clearly lays down who is covered under the new Directions. By explicitly mentioning that only agents involved in the Digital Lending process are to be covered under the Directions, it clarifies that the Directions are not applicable to agents involved in non-digital loans, who would be covered under the RBI’s Directions on Outsourcing of Financial Services. Expanded definitions bring previously unregulated fintech intermediaries under scrutiny. The 2025 Directions is a positive step towards ensuring transparency and accountability in the Digital Lending Sector in India. It reduces the possibility of misrepresentation or deception in loan offers and enables productive cooperation between REs and LSPs while protecting borrowers’ interests. Furthermore, the Directions align data collection, processing, and storage with the DPDP Act. However, the success of these Directions will depend on monitoring by the RBI and implementation of the Directions. One of the most significant changes brought about by the Direction is the creation of the CIMS Portal, a public repository of authorised DLAs. The proliferation of unauthorised DLAs has posed a significant challenge to regulators and the industry. With new digital lending apps appearing frequently, it is challenging for consumers to distinguish between legitimate and dubious platforms. The rise of unauthorised DLAs erodes consumer confidence in Digital Lending. To counter this problem, the RBI Working Group had proposed a ‘Whitelisting Framework’. It recommended setting up an independent nodal agency named Digital India Trust Agency, which would verify DLAs and maintain a public repository of authorised DLAs. The RBI has adopted a modified version of this framework, with the RBI being the nodal agency. The public repository will serve as a reference point for individuals seeking loans, allowing them to confirm whether a digital lending app is officially recognised and regulated. The New Digital Lending Framework: A Missed Opportunity? Despite the positives, the new Digital Lending Framework misses certain issues. Borrowers have been left unprotected against potential data breaches and the pitfalls of automated decision making. Furthermore, there are no changes concerning regulations relating to Short-Term Credit Products. Baseline Cybersecurity Standards to Prevent Data Breaches The RBI Working Group recommended the formulation of baseline digital hygiene guidelines and technology and cybersecurity standards for LSPs and DLAs. Uniform technical/cybersecurity standards and baseline digital health guidelines are necessary for safeguarding sensitive borrower data. With digital lending apps handling large volumes of personal and financial information, the use of outdated security and technical measures can increase the risk of data breaches and misuse of customer information.[3] Algorithmic Fairness DLAs are relying increasingly on automated decision-making (“ADM”) for

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Abnormally Low Bids in Indian Public Procurement: Need for Regulatory Clarity

Leave a Comment / Contemporary Issues /

Abnormally Low Bids (ALBs) challenge India’s public procurement by risking fairness, quality, and sustainability. The General Financial Rules 2017 lack specific ALB provisions, leading to inconsistent practices. ALBs may signal collusion or predatory pricing, violating constitutional fairness under Article 14. This article proposes a unified Public Procurement Act to standardize ALB handling, ensuring transparency, constitutional compliance, and value-for-money, drawing from global best practices.

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From Flexibility to Formalism: The CCI’s Evolving Approach to Cost in Competition Law

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[By Akanksha Sharan] The author is a student of Hidayatullah National Law University.   Introduction On May 6 2025, the Competition Commission of India (“CCI”) notified the CCI (Determination of Cost of Production) Regulations 2025 (“2025 Regulations”), came into effect the same day and replaced the 2009 regulations. Since the current competition law regime does not address challenges such as predatory pricing and strong digital platforms, the revision is needed now more than ever. The 2025 Regulations move away from assessing costs in each sector and introduce a common framework that addresses the needs of India’s developing and digital economy, following international standards. The main focus of the new framework is the use of efficient and economical cost measures. The introduction of Average Total Cost (“ATC”) and Average Avoidable Cost (“AAC”) is meant to make it simpler for regulators to find below-cost prices and review the effects on the market. It is now possible to use Long Run Average Incremental Cost (“LRAIC”) for multi-product companies and digital businesses, given that fixed, variable, sunk and common costs are now included in the definition. Now, total cost also includes depreciation which lets companies estimate costs over a long period, without counting financing overheads, since these can be different for every firm. In particular, not including market value is meant to ensure that the assessment depends on a company’s own costs rather than its changing value in the market. Since large tech and conglomerate firms can impact both cost and supplies, a standard and clear way to determine prices is necessary to ensure that competition remains fair. Ensuring a proper cost analysis is important when deciding on abuse of dominance in Section 4 of the Competition Act, 2002. Through this article, the author explores the 2025 Regulations in this article by highlighting its main changes, identifying its shortcomings and proposing plausible solutions. The discussion ends by considering how this framework could impact the way competition law is enforced in India. A Structural Shift: Unpacking the Innovation in Cost Determination The 2025 Regulations, introduces a new way for the CCI to review cost in abuse of dominance matters under Section 4 of the Competition Act, 2002. The new regulations replace the 2009 framework and use a streamlined, economic approach to ensure the new rules are consistent, fair and adaptable. Four key shifts are at the heart of this new structure:- Firstly, switching to a framework that is not limited to certain sectors. The framework under the 2009 Regulations was not formally sector-specific, but it was largely used in the traditional sectors such as manufacturing, telecommunications and pharmaceuticals where cost structure were more transparent and easier to quantify. Because of the flexible rules in 2009, each industry had different views about possible dangers which resulted in inconsistent assessments. Since manufacturing and digital sectors have their own cost standards, similar pricing actions might be understood differently. The 2025 Regulations solve these problems by introducing a single method that all sectors must follow. Therefore, it promotes certainty, helps control competition avoidance and brings Indian competition enforcement in line with the rules of the European Union (“EU”) and the OECD. Secondly, the regulations officially include ATC and AAC as primary measures for tracking costs. ATC includes the total cost of each unit made which consists of fixed and variable costs. It provides a better overview of a firm’s costs and how its prices are likely to stand the test of time. Unlike average cost, AAC points out the amounts a firm could save simply by not creating additional units which is why it is useful for spotting predatory pricing. If the price is lower than AAC, it’s likely the company aims to remove competitors instead of competing on quality. Together, these metrics remove subjective and unreliable cost benchmarks and provide useful, proven tools instead. Thirdly, the new definition of LRAIC now covers sunk and common costs, in addition to the usual fixed and variable costs. The importance of this has grown lately, since many companies participate in several product or service areas. Looking at the company as a whole makes it hard for a leading firm to move losses from one area to another, as everything is visible. It also supports the detection of cross-subsidisation, a way for bigger companies to push out smaller rivals. Fourthly, when the elements of total cost are clearly identified, cost evaluation becomes more reliable and unbiased. The inclusion of depreciation allows long-term assets particularly in capital intensive sectors like infrastructure and manufacturing to be appropriately accounted for. Meanwhile, excluding financing overheads avoids the inclusion of costs like interest expenses, which vary significantly not only cross firms but also based on internal financial strategies rather than market dynamics. Additionally, by excluding the market value of assets – which tends to fluctuate and is influenced by investor sentiment – the Regulations emphasis the actual costs incurred by a company. This shift ensures that assessments are grounded in measurable, verifiable internal metrics rather than unstable external valuations. All in all, these changes bring India’s competition system up to date and allow the CCI to address changes in the digital economy with more accuracy and fairness. Flexibility or Fragility? Gaps in the New Regulatory Framework While the 2025 Regulations are a significant improvement to India’s competition rules, they still have a few issues. Moving toward a technical, cost-based analysis introduces challenges that could affect both market fairness and regularity consistency. Though the framework shows promise, its application – especially across market structures requires deeper scrutiny. One key issues is the lack of specificity regarding digital markets. Although the CCI acknowledges features like network effects, low marginal costs and scale economies, it has not issued any sector-specific guidance. While this flexibility was meant to help the system adjust, it actually leaves a gap. When there are no set limits, sample cost models or clear guidelines, regulators have a lot of power and large digital firms can organize their costs to escape review. For instance, there is

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NCLAT’s Order in NCC Ltd: Analysing the Approval of inter se OC Subclassifications

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[By Atharva Kulkarni] The author is a student of Maharashtra National Law University, Mumbai.   Introduction On 24 December 2024, the National Company Law Appellate Tribunal (NCLAT) pronounced its decision in NCC Ltd. V. Golden Jubilee Hotels Pvt. Ltd. Through this order, the tribunal has tackled a long-standing debate on inter-se classifications of Operational Creditors (“OCs”) and has permitted the Committee of Creditors (“CoC”) to conduct such classifications provided doing so is crucial for the existence of a Corporate Debtor (“CD”). This article aims to deconstruct the order in light of the pre-existing jurisprudence on sub-classification of OCs and the supremacy of the ‘Commercial Wisdom’ as employed by the CoC while modifying and approving a resolution plan (“RP”). Facts Golden Jubilee Hotels Pvt. Ltd. had leased land from Telangana State Tourism Corporation Limited and Shilparam Arts & Crafts Society Ltd. (hereinafter “Special OCs”) for the construction of a Hotel Trident in Hyderabad. After being admitted into CIRP, the CoC through the Successful Resolution Applicant (“SRA”) had determined that the liquidation value (“LV”) of the OCs as per Section 53 of the Insolvency & Bankruptcy Code 2016 (hereinafter “IBC”) was nil and thus their original submitted claims were not admitted by the SRA. As per the RP, FCs were allocated Rs. 949 Crores which was almost the entirety of their claims, whereas the claims of the OCs were Rs. 112 Crores, of which only Rs. 50.02 Crores were admitted, everyone except Special OCs was allocated nil payments, and the latter ones were paid their entire claim. However, in the approved RP, special OCs had been allotted all of their payments. Leading to the plan being challenged in NCLT, which in turn upheld the RP and rejected the challenges lodged. Following this order multiple petitions were filed in the NCLAT against the RP primarily by the OCs. The NCLAT bench clubbed all these petitions together and adjudicated on them in the present case. The gravamen of the allegations of NCC Ltd. lies in the RP allocation, they argue that such a differential allocation of payments among the OCs is invalid under law, and that there is no provision in the code approving the existence of special OCs or the discrimination suffered by them. Deconstructing the Order The bench noted that Section 21 makes the CoC the primary supervising body managing the insolvency resolution process of a corporate debtor, under Section 30(4) it is also empowered to approve, reject or modify a resolution plan as submitted by the resolution applicant. In Swiss Ribbons v. Union of India, the apex court had observed that the CoC exclusively consist of FCs who, as per the Court’s rationale, are better equipped at governing the insolvency resolution of a corporate debtor owing to their vested interest in keeping the its business a going concern. The OCs on the other hand are not privy to the workings of the CoC, therefore, to safeguard their interests, Section 30(2)(b) mandates the allocation of minimum payments to such OCs which are proportional to their LV as detailed under Section 53. The bench observed that as per Section 5(21) of IBC, an ‘operational debt’ is any claim spawning out of trade credits, employment dues, or any other dues owed to the state or Central government whereas under Section 5(8) financial debt arises when money is disbursed against consideration of time value of money. It cited the judgement of the SC in Pratap Technocrats v Monitoring Committee of Reliance where the court had held that a standard of fairness and equity needs to be employed while distributing payments to the OCs in a resolution plan, as per the explanation 1 attached to Section 30(2), distribution of payments in accordance with the LV of OCs would be considered to be fair and equitable. NCC Ltd. relied on the ratio of Akashganga Processors v Ravindra Kumar Goyal to argue that such a subclassification of OCs is invalid, the tribunal had held that inter se classifications among the OCs who are similarly placed cannot be made in a resolution plan, this as per the tribunal was in keeping with the principles laid down in Committee of Creditors of Essar Steel v Satish Kumar Gupta & Ors (Essar Steel). However, the NCLAT ended up disagreeing with the objections of NCC Ltd. and upheld the RP, thereby approving the subclassification. Analysis In Binani Industries v Bank of Baroda the apex court observed that no subclassification and its resultant differential treatment can be allowed among similarly placed OCs as the objective of the IBC is not sole profit and asset maximization of the CD but also to satisfy the interests of all the stakeholders involved in the debt-ridden CD. The aforesaid bar is applicable to creditors who are similarly placed. An identical stance was echoed by the NCLT in the recent case of Amit Goel v Piyush Shelters India Pvt. Ltd. where it observed that creditors in similar situations cannot be discriminated against in RP. Implying that the CoC is allowed to make such differential payments to OCs not similarly placed. The criterion for such a differentiation is the capacity of the creditor to keep the CD a going concern. Although the IBC does not explicitly categorize OCs into classes, it does recognize the existence of separate classes among them on the basis of their claims. It has also been argued that such classes of creditors are distinct even within the definition of OCs. The NCLAT in Gail India v Ajay Joshi used this reasoning to argue that the Code does not inflict an embargo on the CoC from classifying OCs in separate classes in order to determine the distribution and priority of payments. It is up to the ‘collective commercial wisdom’ of the CoC to determine the method and quantum of payments to the creditors, even in this case, the CoC chose to pay in full the dues which were essential for the corporate debtor to remain a going concern. In Essar Steel the court observed a

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