Author name: CBCL

IBC & Guarantee Contracts: NCLAT Rules on Simultaneous Applications

Insolvency Law /

[By Shubham Nahata] The author is a student at the Hidayatullah National Law University. Introduction Post the enactment of the Insolvency and Bankruptcy Code, 2016(“Code”), the credit recovery mechanism in India has witnessed substantial growth in terms of improved resolution opportunities for ailing entities. However, there still exist certain anomalies in its jurisprudential framework which need correction either in the form of affirmative action by the legislature or purposive interpretation by the Judiciary. One such irregularity was addressed by the National Company Law Appellate Tribunal (NCLAT), in its recent judgment of State Bank of India v. Athena Energy Pvt. Ltd. The NCLAT while dealing with an appeal filed by a Financial Creditor against the Corporate Guarantor, settled the law relating to the simultaneous application for the same debt against the Principal Borrower and the Corporate Guarantor under the Code. This post discusses the law laid down by the NCLAT with reference to its previous judgment in Piramal’s Case and the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. Facts of the Case The State Bank of India (Financial Creditor) filed an insolvency application under Section 7 of the Code against Athena Energy Ventures Pvt. Ltd. (Corporate Guarantor) for a secured loan to Athena Chhattisgarh Power Ltd. (Principal Borrower), a joint venture company promoted by the Corporate Guarantor. The application against the Principal Borrower was admitted by the NCLT bench of Hyderabad. However, the application filed by the Financial Creditor against the Corporate Guarantor was rejected by the Adjudicating Authority following the dicta laid down in the case of Vishnu Kumar Agarwal v. Piramal Enterprise Ltd. In the Piramal Enterprises case, an application was filed by the financial creditor against two corporate guarantors for the same set of debt and default. The NCLAT while dealing with this issue held that under the scheme of the Code there exists no bar to the filing of simultaneous applications against the corporate debtor and the guarantor. However, the Tribunal deviated from the scheme of the Code and held, that once a Section 7 application is admitted against the corporate debtor then it places a bar on admission of the same application against the guarantor on the same set of debt and default. Similarly, a Section 7 application cannot be filed jointly against two corporate debtors on the ground of joint liability unless they are a joint venture company. Hence, while dealing with an application filed by two Corporate Guarantors, the NCLAT denied simultaneous insolvency proceedings on the same set of debt and default. In the present case, the NCLT relying on the dicta as laid down by the NCLAT ruled, that as the companies were not joint ventures (because of different MoA) they shall not be covered under the exception clause as given under the ratio of Piramal’s judgment. The decision of the NCLT was thus challenged by the Financial Creditor relying on the law laid down by the Supreme Court in State Bank of India v. Ramakrishna & Ors. and the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. It was also brought to the notice of the Appellate Tribunal that the judgment in Piramal’s case was stayed by the Apex Court in a subsequent appeal. Judgment and Analysis Financial debt under Section 5(8) of the Code has been defined as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money”. It also includes guarantee and counter indemnity obligations as provided under Section 5(8)(h) and (i) of the Code. Under Section 60(2) of the Code, when an insolvency resolution or liquidation process of the Corporate Debtor is pending before the NCLT then an application against a Corporate Guarantor or Personal Guarantor can also be filed before the NCLT. Similarly, when an insolvency resolution or liquidation process of a Corporate Guarantor or a Personal Guarantor is pending before the Court or the Tribunal then the same shall be transferred to the Adjudicating Authority dealing with the resolution or liquidation of the Corporate Debtor. Hence, under the scheme of the Code, an application for insolvency resolution of the Corporate Guarantor can be initiated even when an application has been accepted for the resolution of the Corporate Debtor. The Insolvency Law Committee Report of 2020, also discussed the conundrum surrounding simultaneous proceedings under the Code. The Committee suggested in its report that in case of different applications against the Corporate Debtor and the Guarantor under the Code, the amount of recovery can be revised based on the quantum of Creditor’s recovery in any one of the proceedings. The Committee referred to the NCLAT judgment in Edelweiss Asset Reconstruction Co. v. Sachet Infrastructure Ltd. & Ors., wherein simultaneous applications were allowed against the principal borrower and corporate guarantors under the Code. The Tribunal also referred to the Supreme Court judgment in State Bank of India v. Ramakrishna & Ors., wherein it was held that simultaneous applications can be filed as, under the contract of guarantee the liability of the surety is co-extensive. The Court emphasized that once a resolution plan is approved for the corporate debtor, the same becomes binding on the guarantor and it cannot escape liability under Section 133 of the Indian Contracts Act. Contracts of guarantee are usually governed by the principles as enshrined under Chapter VII of the Indian Contracts Act, 1872. One of the primary principles governing guarantee is that the liability of the surety is “joint and several” and “co-extensive with that of the principal borrower”. In Bank of Bihar v. Damodar Prasad &Anr., the Supreme Court has emphasized that joint and several liability is the key feature of the contract of guarantee. The fact that a creditor has proceeded against the corporate debtor doesn’t preclude him from an alternative remedy against the surety. However, the creditor is also not entitled to recover more than what is due and the amount of claim is adjusted based on the result of one of the proceedings. Conclusion Covenants in the nature

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A Conspectus on Vicarious Liability Of Non-Executive Directors

Company Law /

[By Aayush Akar and Aarushi Prabhakar] The authors are students at the National Law University, Odisha. The directors of a company hold a fiduciary role and are required to conduct the operation of the company in a way that is desirable to the interests of the company. Non-executive or independent directors are not responsible for day-to-day businesses and are generally active in the strategy and decision-making practices. The provisions on vicarious liability have a standardized language, provided that the person is liable if at the time of the commission of the crime he/she was accountable for the affairs of the company. However, these provisions do not differentiate between “Managing Directors (MDs) and Executive Directors (EDs) and Non-Executive Directors (NEDs) and Independent Directors (IDs)”. As a result, law enforcement agencies/trial courts were sometimes perceived to keep the whole Board accountable for all legal violations of the company. This piece of writing throws light on whether the non-executive directors be held liable for the day-to-day affairs of the company or not. Fundamental Principle  Supreme Court observed in the case of  “N Rangachari v. Bharat Sanchar Nigam Ltd”,  that unless explicitly laid out in the legislation, there would be no vicarious liability. If the provision of any statute gives rise to a criminal obligation, then the essentials set down for vicarious liability must be strictly complied with. The essentials to be fulfilled for a person to be vicariously liable of which the company is primarily accused is that he or she was involved in the incriminating act and he or she knows what is attributable to him or her to be made responsible for the incrimination. In other words, it is not appropriate to rope in an individual who has nothing to do with the issue. A company is a legal entity and all its activities and operations are the outcome of the acts of other individuals. Thus, the officers of the company responsible for the affairs of the company are made personally liable for the acts of the company. Each and every person, as well as the company accountable for the affairs of the company at the time offence, was committed is made liable. However, these essentials provide an escape route for people who are successful in proving that the crime was performed without their involvement or that they have exerted all due diligence to avoid the commission of the crime. It was observed in the case of “Gunmala Sales Pvt. Ltd v. Anu Mehta & Ors” that the directors shall not be held liable since they don’t have an active role in the day to day affairs of the company and it is essential to look upon the role of the director while deciding the liability of the director. Immunity Provided to Non-Executive Directors Section 149(12) of the Companies Act, 2013 provides immunity to non-executive directors and independent directors. But, this immunity is not available for offences under any other law and only for the offences under the Act. However, Section 149(12) of the Act doesn’t always provide a safe harbour to the non-executive directors as a director can be held liable when an offence has occurred with his consent, knowledge, and where he did not act in a diligent way.  Poonam Garg, who is an appellant in the case of “Poonam Garg v. SEBI”, was a promoter in the category of NED and Promoter, Managing director and compliance officer of the company was her husband. Securities Appellate tribunal held that Poonam Garg cannot take immunity for the breach committed by her husband ( MD, promoter and Compliance officer of the Company) by giving an excuse of ignorance about the PIT regulations. Therefore, Poonam Garg (NED of the company), was held liable for the day to day affairs of the company. The Ministry of Corporate Affairs, in March 2020, issued a circular to the Registrar of Companies directing them to not initiate civil or criminal proceedings against independent directors and non-executive directors until sufficient evidence is there against them. Non-executive directors / Independent directors are not responsible for keeping a check on the day to day affairs of the company. Accordingly, no liability can be claimed upon a non-executive director for non-performance of certain activities like minutes of meetings, filing of updates on statutory registers for such tasks that are beyond the scope of NED/ID A full-time director or KMP should be held liable for the breach of any company law since they are accountable for the day-to-day affairs of the company. Furthermore, it was directed that standard operating procedures provided by the MCA have to be followed for initiating proceedings against officials who have violated the law of the company. Vicarious Liability of NED’s for Dishonour of Cheque More often than not, the question of NED/ID’S liability for the dishonour of cheque has come under scrutiny in numerous cases before various courts of India. It was held in the case of “Sunita Palta v. M/s Kit Marketing Private Limited” that the non-executive directors are exempted from Section 138 of the Negotiable Instrument Act which attracts criminal liability for the dishonour of cheque. Vicarious liability was discussed in terms of Section 141 of the Negotiable Instrument Act by the court. It was held that an individual should be held accountable for the affairs of the company at the time crime was committed for being criminally liable under Section 141 of the Act. Each and every person associated with the company shall not fall within the scope of this Section. Henceforth, a director cannot be held liable under the provision if, at the time of the offence, he was not accountable for the affairs of the company. On the contrary, a person can be held liable even though he/she doesn’t hold any office or designation provided he/she was accountable for the affairs of the company at the time offence was committed Need for a Reform In the day-to-day business of the company, the NEDs do not continuously pay much attention and play an

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Direct Cross-border Listing of Indian Companies: An Analysis of the Companies (Amendment) Act, 2020

Capital Markets and Securities Law /

[By Akshat Dangayach] The author is a student at the National Law School of India University, Bangalore. In September of this year, the Government of India notified the Companies (Amendment) Act, 2020 in the official gazette. The move, which has been welcomed by corporations across the spectrum, comes in consonance with the recent series of reforms in response to the growing economic inconsistency in the country, especially in light of the COVID-19 pandemic’s devastating impact on commerce and industry. The amendment has introduced several key changes in the company law regime of the country with the aim of improving the ease of doing business and relaxing regulatory restrictions to a significant extent. This paper focuses on the amendment made to Section 23 of the Companies Act, 2013. The amended Section 23, by way of the addition of Sections 23(3) and 23(4), permits a certain class of public companies incorporated in India to issue a particular class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions. The move is sure to provide impetus to Indian start-ups and established corporates alike to raise capital through foreign investors. In the larger scheme of things, the initiative will also provide the necessary infrastructure for the integration of the Indian corporate landscape with the global capital market. In the context of this development, this piece seeks to argue that despite the various benefits of the development allowing the direct listing of Indian corporations in foreign jurisdictions, there are still a series of challenges in the Indian corporate regulatory framework which need to be adequately tackled before Indian companies are effectively able to reap the intended benefits of the policy advancements. Benefits of access to global capital markets for companies Before delving into a detailed analysis of the newly added provisions, it is pertinent to briefly contextualize the discussion by developing an understanding of the multiple routes available to corporations for raising capital through cross-border listing. There are primarily two ways in which companies can generate capital from overseas listing, besides opting for an Initial Public Offering in a foreign market: direct listing and indirect listing. A direct listing is when a corporation converts its existing ownership into stock and subsequently offers equity directly to the general public via a stock exchange. On the other hand, an indirect listing is executed through depository receipts (DR). Under this mechanism, the corporation is required to issue its securities to depository intermediaries (traditionally banks) and underwriters incorporated in a foreign jurisdiction which, in turn, issue DRs to investors in their jurisdiction. Prior to the latest amendment, the Indian regulatory framework only allowed for such indirect listing predominantly in the form of listing of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). In addition to this, corporations were also permitted to issue debt securities in the form of foreign currency convertible bonds and foreign currency exchangeable bonds on stock exchanges. While certain companies (such as Wipro and Infosys) do employ these mechanisms, there exist several hurdles that companies have to go through in order to take this route. In fact, due to allegations of malpractice and market manipulation, SEBI banned around 20 companies from using DRs to raise capital in the year 2017. Further, such actions are often under strict scrutiny from the regulators, given the lack of transparency involved in the indirect listing process.. Such regulatory restrictions, coupled with the overhead costs in the form of charges levied by underwriters and financial institutions, dramatically disincentivised Indian corporations from taking this route. On the other hand, direct listing provides regulators and corporations with a more transparent mechanism for transactions and an easier method of tracking said transactions, thereby streamlining the process of inviting foreign investment. In light of these concerns, SEBI constituted a high-level expert committee in 2018 to formulate a report and suggest policy changes to pave the way for cross-border direct listing of equity shares of companies incorporated in India. The 2020 amendment to Section 23 of the Companies Act comes in response to the report submitted by this committee which firmly advocated direct listing. The Road Ahead: Institutional Challenges and Hurdles However, despite the obvious benefits of the introduction of the new regime for Indian corporations, there are still a number of institutional inconsistencies and hurdles that must be resolved in order for companies looking to get directly listed abroad to realise the actual potential of these benefits. Primarily, the Indian regulatory and legal framework needs to be considerably overhauled to assist the cross-border functioning of corporations. For starters, under the present state of affairs, companies will have to comply with the laws and regulations of two distinct jurisdictions. For instance, companies seeking to list abroad will have to comply with the regulatory requirements of beneficial ownership and disclosure of the foreign stock exchange. Similarly, the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 impose strict requirements on how Indian companies may hold foreign currency. This will inevitably translate into drastically increased compliance costs, especially given that SEBI might also impose certain additional requirements as it has an extra-territorial jurisdiction as per the ruling in SEBI v. PAN Asia Advisors Ltd. and Anr. While this particular issue is ostensibly quite intuitive in nature, it merits some attention and might even require SEBI to substantially modify its own regulations to bring them in line with that of major foreign jurisdictions or even to relax some of its requirements for companies seeking to list abroad. Additionally, the Reserve Bank of India’s (“RBI”) Liberalised Remittance Scheme places restrictions on investments made by Indian residents on assets abroad. If these restrictions are not reconsidered, it would severely limit Indian investors from investing in Indian companies and put them at a considerable disadvantage relative to foreign investors. Further, the RBI must also address concerns regarding how equity shares that are rupee-denominated will be marketable in stock exchanges that are premised on other currencies. So far, the RBI has not released any guidelines in this regard.

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FTC vs Facebook and its Potential Impact on Facebook’s Indian Dominance

Competition Law /

[Giri Aravind] The author is a student at the National University of Advanced Legal Studies. Introduction On December 9th, the Federal Trade Commission, (FTC) as well as dozens of states in the US, sued Facebook alleging that the company was involved in anti-competitive conduct by illegally maintaining its social network monopoly. The suit focuses on two major aspects – anticompetitive acquisitions and anticompetitive platform conduct. The federal regulator is seeking a permanent injunction in the federal court that could potentially break up Facebook. The statement by the FTC’s Bureau of Competition Director had stated that the actions of the company deny consumers the benefits of competition. He added that the aim of the suit was to roll back Facebook’s anticompetitive conduct and so that innovation and free competition can thrive. How does Facebook operate? To get a better idea of how Facebook established its presence and continues to dominate the industry, one must look at how the company stops an emerging competitor in this sector. Facebook usually resort to one of the three methods – buy the competitor, or deny access to its data, or copy and apply. The former simply involves spending billions to purchase any company that might be a threat to their dominance. The acquisition of Instagram in 2012 for $1 billion, and WhatsApp in 2014 for $19 billion, are two big examples of the aforementioned in the last decade. Although investors were quite skeptical about the latter as WhatsApp was a mere messaging app that provided no ads and costs less than a dollar a year, Facebook had effectively neutralized the prospect that these companies might enter the personal social networking market and threaten their share. When buying a company doesn’t work, Facebook simply denies access to users’ data on third-party software applications. When users sign up on a new website, Facebook often gives the option of following their Facebook friends — a feature enabled through Facebook’s application program interface (API). However, Facebook has made key APIs available to third-party apps only on the condition that they refrain from providing the same core functions that Facebook offers. When Twitter launched Vine in 2013, Facebook locked out their social API functions, reportedly at the direction of Mark Zuckerberg himself. And when buying out a company or denying access to user data doesn’t work, Facebook simply copy and apply new features into their existing social networking applications. In 2013, when Snapchat turned down a $3 billion offer from Facebook, they introduced a host of new features including face filters and stories in Instagram, turning them into a potential Snapchat-killer. Similarly, allowing users to upload short videos on Instagram eventually led to the end of Vine. Big Tech and Antitrust Law The suit against Facebook isn’t going to the final legal action the FTC or the Department of Justice (DOJ) will be made against the big tech giants. Since 2019, Amazon, Apple, Google, and Facebook have been the target of various governmental authorities who are investigating whether these four companies have used their size and wealth to quash competition and expand their dominance. Amazon has been accused of favouring its own products by taking advantage of data it collects from sellers to develop its offerings. Apple has been alleged to have exploited its control over the app store by excluding rivals and charging app developers high fees, while Google’s monopoly over the online search and marketing industry has been questioned. Although these investigations had only led to Congressional hearings and committee reports, the suit against Facebook marks the beginning of a major action taken by FTC against the Big Tech in recent years. Previously, The United States v. Microsoft Corporation, 253 F.3d 34 (D.C. Cir. 2001), was the most prominent case against a major tech company. Microsoft was sued by the DOJ and a coalition of 20 state attorney generals for violating federal antitrust law. Microsoft was the most dominant software firm in the 1990s, but they hadn’t initially ventured to the internet browser market. But in 1995, Microsoft released their own free browser, the Internet Explorer, and the next year they bundled it with the Windows 95 operating system. Within a year, they gained a 10% market share and there were allegations that Microsoft had made it increasingly hard for users to use other web browsers. Microsoft lost the case against the government and the court ordered a breakup of Microsoft as its remedy. But Microsoft appealed and by June 2001, a federal appeals court decided to reverse the order. By November, Microsoft and DOJ had reached a settlement. Interestingly in 2014, Novell, another American software company lost its antitrust case against Microsoft when the US Supreme Court declined to hear an appeal by the company. Novell had originally filed the case in 2004 alleging that Microsoft had deliberately withheld Windows technical information in order to prevent any competition in the applications market. This was brought out to light vide a 1994 memo from Bill Gates, who directed that the company should withhold namespace extension APIs in their operating system from its competitors in order to gain market advantage for Microsoft Word. However, the Court held that a monopolist company had no duty to cooperate with its competitors, and Microsoft’s act did not constitute antitrust behaviour. Thus, the two cases involving Microsoft are really in great tension with each other. The earlier US v. Microsoft had held that a firm with market power does have a duty to deal fairly and non-competitively with those who used their platform, while the court took a contrasting view in the Novell case. The decision in the suit against Facebook would depend on which of the two cases the ruling judges give credence to. Facebook’s dominance in the Indian Marketplace The sheer volume of users and the untapped market potential have made South Asia a favourite marketplace for most of the Big Tech companies. This region, especially India, has seen a surge in usage of in smartphone use and Internet access and

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Skill Loto Solutions v. Union of India: Ingredients of a Perfectly Legislative Cake

Taxation Law /

[By Tanya Rathod] The author is a student at the National Law University, Odisha. Layers after layers of retrospection, judicial pronouncements, and amendments are the key to make any legislative policy a successful one. GST (Goods and Service Tax) regime is always on a path to unravel, widening the scope of jurisprudential interpretation. One such attempt was made by the Hon’ble Supreme Court of India recently, in the case of Skill Lotto Solutions v. Union of India[1]. The three-judge bench held that the levy of GST on Lottery, betting, and gambling is not in violation of any fundamental right. In doing so the court also said that such activities are ‘res extra commercium’; rendering such levy of GST on lottery, betting, and gambling lawful. The author in this article analyzes the skill lotto judgment to comprehend the sovereignty of the legislature in making the laws pertaining to taxation when the goods in question are not objects of private rights. Background The Apex Court was approached by Skill Lotto Solutions Pvt. Ltd. who was an authorized agent of sale and distribution of lottery in Punjab. The writ petition was filed impugning the definition of goods under §2(52) of Central Goods and Services Tax Act, 2017 (CGST) and notifications to the extent they levy  tax on lotteries. The writ challenged the practice of levying GST on lottery, betting and gambling on the ground that it is not only discriminatory but also violative of the Articles 14, 19(1)(g), 301, and 304 of the Constitution of India. Prior to the introduction of GST, through the One hundred and first Amendment in the Indian constitution, Article 246A was inserted which gave the Central Government or respective states the power to levy GST, in furtherance of which central and state legislations transpired. §2(52) of the Central Goods and Services Tax Act, 2017  defines ‘goods’ as, every kind of movable property other than money and securities but includes actionable claim.  However, it must be noted that the Entry III Schedule 6 of the 2017 CGST Act exempts levy of tax on all actionable claims meanwhile creating an exception for lottery, betting, and gambling. This exception with respect to lottery, betting, and gambling was challenged to be inconsistent with the jurisprudential rule of intelligible differentia under Article 14 of the Indian Constitution. The petitioner primarily contended that the definition of ‘Goods’ under §2(52) of the (CGST) Act is not inclusive of the lottery. Adjudicating upon the above contention as laid down in the petition, the Apex Court ruled the following. A. Conflict of Definition: The Crust of the Cake The petitioner challenged that the definition of ‘goods’ in the CGST Act 2017 stands in conflict with the definition given in the Constitution of India as under Article 366 (12) to include all materials, commodities and articles. The article thus fails to contain the term actionable claim rendering the levy of GST on actionable claims such as lottery, betting, and gambling unconstitutional. Reaching for the crumb of the cake, the court held that the power of the legislature to make laws under article 246A of the Constitution is plenary and the definition of goods so made under Section 2(52) of the CGST Act 2017 is ‘inclusive’ rather than restrictive in nature, making way for the legality of inclusion of lottery in the definition of actionable claims. The court relied on the case of Sri Krishna Das v. Town Area Committee, Chirgaon, which stated that- the legislature or the taxing authority determines the question of need, the policies and selects the goods or services for taxation and Courts do not have the power to review those decisions B. Reasonable Classification: The Frosting The petitioner called into question the discriminatory proviso under Item no. 6, Schedule III which creates an exception for the activities or transactions which are treated neither as the supply of goods nor supply of services to include all actionable claims; and on the contrary leaving out lottery, betting and gambling as taxable. It was contended that there was no intelligible differentia in including actionable claims like lottery, betting, and gambling for tax purposes when all other actionable claims are free from levy of GST. The Supreme Court in this regard stated that firstly, the activities of the lottery, betting, and gambling are res extra commercium i.e. things outside of commercial intercourse or the things which are not available for ownership, trade, or commerce. In the State of Bombay Vs. R.M.D. Chamarbaugwala and Anr the court said that; “activities of trade, commerce or intercourse doesn’t include activities which inherently promote the susceptibility of man towards earning money by chance and steer him towards losing hard-earned income which further gives rise to a state of indebtedness to be made the subject-matter of a fundamental right guaranteed by Article 19(1)(g).” Relying on the said judgment the bench in Skill Lotto case held that there is sufficient nexus for the legislature to levy GST on those who carry the activities which are inherently res extra commercium and such regulations with regard to levy of tax on gambling activities are primed keeping in mind the welfare of society as a whole. The idea of the makers of the constitution was in no way to promote gambling activities and in doing so, the levy of tax on such activities is clearly not in contravention to the doctrine of equality as laid down in Article 14 of the Constitution. In the case of State of West Bengal v. Anwar Ali Sarkar case, the court held that the differentia or classification must have a rational nexus with the object sought to be achieved by the statute in question. The reasonable classification of goods on the basis of what falls within the category of trade and commerce; and activities that do not trade and rather pernicious is justifiable. Consequently, it cannot be said that the exemption made for actionable claims from the tax net apart from three actionable claims; lottery, betting, and gambling is discriminatory

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Impact of COVID-19 on International Trade in India

Trade Law /

[By Vanshika Chansoria and Raj Aryan] Vanshika is a student at the National Law Institute University, Bhopal, and Raj is a student at the Lloyd Law College, Greater Noida. Introduction International trade is the movement of commodities, goods, services, and intellectual property across the national borders of one’s own country. Trade has been taking place across borders since the time when there was no form of formal body regulating such trade. During the earlier 16th and 17th century the first kind of structured trade started in Europe which came to be known as “mercantilism”. Mercantilism is based on the idea to maximize the exports of the country by imposing restrictions on imports. The export of goods and services accounted for 19.74% and import accounted for 23.64 % of Gross Domestic Product (GDP) of India during the pre-COVID- 19 era. The advent of COVID- 19 brought disruption in the global import-export market and curtailed free trade between countries. According to the World Trade Statistical Review 2019, India is one of the developing economies in Asia whose role in international trade has been increasing in the global value chain. But the impact of COVID-19 on trade in India is estimated to be 348 million dollars and India falls under the category of 15 most-affected economies of the world as per the United Nations Report. Since International trade has curtailed, its great time to encourage domestic products and producers and boost domestic production, by implementing the theory of protectionism. Protectionism  The theory of Protectionism aims to increase exports and decrease imports by imposing various kinds of trade barriers so that the domestic industries can get a fair chance to fight with international products and services. India was a protectionist country until the 1990s. But in the late 20th century India opened its market for international trade as a part of the Liberalisation, Privatisation, and Globalisation (LPG) model. COVID-19 has spread in all major countries of the world resulting in the reduction of trade all across the world. This knowingly or unknowingly has led the countries to use their own products due to reduction of trade. The point to be considered here is if developing countries like India are ready to face such challenges of Covid-19 and use domestic products. The theory of protectionism can be enforced in various ways: Impose heavy taxes on imports from other countries. A restriction on commodities to be imported. Provide subsidies to domestic producers. Make rules and regulation which can make it difficult for foreign producers to obtain license. Decrease the cost of domestic products in foreign markets by exchanging rate controls. Come up with Anti-dumping policies. The current decision of the Indian Government to boycott Chinese goods and stopping trade practices with China encourage them to adopt the theory of protectionism. Adding to the same, further, the Indian Government has banned 59 Chinese mobile applications and later banned 118 Chinese Apps, including PUB-G, on the surge of National Security, Sovereignty, and Integrity of India. As a result of this step taken by the government, various substitute apps came up front, and people were encouraged to use the same along with domestic products with the aim of becoming self-reliant, i.e. Atma Nirbhar. In the gaming sector, Bollywood actor Akshay Kumar has announced the launch of the FAU-G game, keeping in view the vision of Atma Nirbhar, in which 20% of the generated revenue will be donated to BharatKeVeer Trust. Atmanirbhar Bharat In order to overcome the problem of lack of local production, Prime Minister, Shri Narendra Modi in his speech on 11 May, 2020 announced the idea of Atma Nirbhar Bharat.  The vision envisages the production of goods and raises India’s capacity. It is not just to ‘Make in India’ but for the world. There are 5 essential features of the Atma Nirbhar Policy which include – economy, structure, technology-driven system, vibrant demography, and demand. Prime Minister’s vision of Atmanirbhar Bharat is to make India a self-sufficient country. This does not direct India to be in isolation or anti-global. India has a great opportunity to emerge as a manufacturing hub and has the capacity of producing ready and consumable goods on a large scale. India provides a large market size for the whole world. The objective behind this vision is to make India competitive with the rest of the world. Even during the peak of COVID – 19, India has attracted $38 billion of foreign direct investment. The vision expands to not produce goods only for the domestic market only but for the global market as well. The New Education Policy (NEP) which was launched this year will enlarge the scope of the education sector in facilitating greater exposure for Indian students and will establish India as a global education hub. It will make the youth capable enough to make India the global leader in science, technology, and other sectors; shaping the vision of Atmanirbhar Bharat. The theory, vision, and steps taken to achieve the Atmanirbhar Bharat are promoting the theory of Protectionism. CHANGES AND RELAXATIONS MADE BY THE GOVERNMENT OF INDIA AFTER THE ADVENT OF COVID – 19: A recent report which has been released by the World Trade Organization (WTO) said that international trade in 2020 will drop sharply with a rate of 32%. The government of India in order to mitigate the loss accrued by the economy affecting trade has come with new programs in order to facilitate international trade. Firstly, the government has launched an Incentive program of Rs 10,000 crore for stimulating the local Active Pharmaceutical Ingredients (API) production. In the near future, the imports and exports of API could also be considered for ramping up manufacturing for domestic use and exports. Secondly, in order to recover the economic impact on the economy of the country and boost the MSME sector, the government has come up with some new economic packages to transfer income to the poorer segments in the economy along with complementary liquidity enhancing measures of the monetary authority. Thirdly,

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Digital Taxation: A Clarion Call

Taxation Law /

[By Neha Mehta and Mahek Shah] The authors are both students at the NMIMS Kirit P. Mehta School of Law. As a response to the outbreak of COVID-19, businesses across the globe have adopted digital models. ‘Digital India’, a government initiative, got a big boost with the demonetisation move four years ago. A 2019 report by the Ministry of Electronics and Information Technology (MeitY) in association with McKinsey & Co. predicted India’s digital economic value to surpass US$ 1 trillion by 2025. With the changing business models, value – creation is becoming less dependent on the physical presence of people or property. However, the current Indian taxation regime is based on conventional notions of physical existence and these concepts are now being challenged. The digitalisation of the economy is raising questions regarding the effectiveness of existing international taxation rules. The intergovernmental economic organisation, the OECD has expressed deep economic and societal impacts with rapid digitalisation and the absence of a global consensus on aspects of international taxation regulations which make a fertile ground for tax disputes. The business models are undergoing a complete technological revolution at full throttle while facing challenges with the effectiveness of outmoded global tax systems. Keeping these transformations in mind, the article canvasses the conflict between the existing  Indian taxation regime and the Equalisation Levy – a direct tax that is withheld by the service recipient at the time of payment to a non-resident service provider. Flashback: OECD’s Action Plan and India’s Equalisation Levy In 2015, the OECD and G20 nations concertedly aimed to come up with a global solution to specifically deal with tax challenges of the digital economy by the end of 2020. It was in the backdrop of the Base Erosion and Profit Shifting project (hereinafter referred to as the “BEPS Project”) that OECD released the Action Plan 1. Despite failing to provide concrete solutions, it has guided countries to structure their tax laws as per the changing digital landscape. Limitations of the existing Permanent Establishment rules (hereinafter referred to as the “PE rules”) and the ability of MNC’s to avoid taxes through profit shifting strategies create concerns for countries like India that follow source-based taxation. India is an active member of the OECD and has staunchly expressed the need to eliminate tax uncertainty and stimulate global trade. Drawing an inference from the 2015 Action Plan 1, India was amongst the first countries to implement the ‘Equalisation Levy Rules’ in 2016 (hereinafter referred to as “EL 1.0”).   Primarily, the imposition of this direct tax vide the Budget 2016 was limited to only non-resident companies engaged in providing digital advertising services and digital space. However,  the Finance Act, 2020 broadened the scope of Equalisation Levy 1.0 to contain all e-commerce supply of services known as Equalisation Levy 2.0 (hereinafter referred to as “EL 2.0”) Equalisation Levy 2.0: What does it seek? Unlike EL 1.0 that sought to uprightly tax online digital advertisement services at a rate of 6%, EL 2.0 imposes a 2% tax on e-commerce operators for supplying or providing services over INR 2 Crores: i. Indian Resident; ii. Persons availing online services using an Indian IP address; iii. Non – Residents in the following cases: Only those sales of advertisement services that target a resident of India or a user having IP address located in India. Sale of data that is collected from a resident of India or a user having IP address located in India. Challenging the Status Quo The introduction of EL 2.0 certainly is a step in the right direction. However, the expansion in its scope poses numerous challenges. a. Lack of Clarity on Definitions EL 2.0 fails to explain several terms such as “operate,” “digital,” “electronic facility,” “platform,” “online sale,” “goods” and “online provision of services” that are mentioned in the statute. This creates room for wide interpretation and could be disputable. For instance, situations where sales could be concluded online through emails or messages but the deliveries are undertaken in an offline mode. The failure to define terms like “online sale” creates confusion in determining whether the levy would have applicability to a combination of online and offline sales. Therefore, it is unclear if the levy is applicable on every transaction with a component of digital dealing. b. Impediments with Extra-Territorial Application As per  Section 92F(iii)(a) read along with Section 92F(iii) of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreements (hereinafter referred to as “DTAAs”), non-resident entities need to generate profits that can be attributable to a fixed place of business or demonstrate sufficient business connection in India for their income to be assessed in India. However, owing to the digital economy, it has become difficult to show a PE of business models that relies on intangibles such as cloud- computing, algorithms, etc. They have enabled the capability to conduct business through foreign jurisdictions. Therefore,  concepts like Place of Effective Management (POEM) that are based on corporeal and tangible aspects have now proved to be redundant. In its Action Plan 1 Report, the OECD identified three plausible options amongst which was to establish nexus through Significant Economic Presence (hereinafter referred to as “SEP”). Despite deferring the applicability of SEP in India, it may prove ineffective due to the treaty override. c. Fiscal Shortfall The committee on Taxation of E-Commerce headed by Chairman Akhilesh Ranjan, Joint Secretary (FT & TR-I), CBDT, Department of Revenue, Ministry of Finance released a report in 2016. The report highlighted fiscal constraints on governments due to violation of tax neutrality. Fiscal deficits are often reimbursed through local residents who pay increased taxes on income earned, goods and services, etc. This adversely impacts businesses and disrupts the existing market equilibrium. d. Characterisation of Income Firstly, there is a possibility that transactions may be assessed as Royalty/ Fees for Technical Services (FTS) / Fees for Included Services (FIS) by the Assessing Officer in a tax audit, much after the payment of the Levy. As the Levy falls outside the ambit of

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Financial Institutions as Promoters: The SARFAESI-RERA Conundrum

Banking Law, Capital Markets and Securities Law /

[By Aman Saraf] The author is a student at the Government Law College, Mumbai. Introduction Through a recent decision in Deepak Chowdhary v.PNB Housing Finance Ltd. & Ors, the Haryana Real Estate Regulation Authority (“HARERA”) delivered a significant order vis-à-vis the status of lenders (especially banks and Non-Banking Financial Companies (“NBFC”)). It affects those lenders that take over a development project in the event that the original developer is unable to repay his debts to a financial institution. Such financial institutions will now assume the status of a promoter under the Real Estate (Regulation and Development) Act, 2016 (“RERA”), thus making them liable to protect the rights of allottees. Further, the lenders are not permitted to auction and sell the project or land, as the case may be, without first obtaining the consent of two-thirds of the allottees as well as a Real Estate Regulatory Authority. This Order will have far-reaching consequences for all the financial institutions that are a source of “bailout credit” to real estate development agencies. In the author’s opinion, the decision of the HARERA is flawed with a glaring contradiction – the scope of lenders and promoters are fundamentally different and any effort to create an overlap renders the Order vulnerable to future challenges. Consequently, the direction passed by the authority mandating certain approvals from the allottees and HARERA before selling the land/project creates an inherent conflict between the RERA and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”). According to the author, the erroneous reading of RERA and the obstruction of the financial institutions’ ‘right to enforce securities’ under SARFAESI call for a review of this decision. Lenders and Promoters: The Conflict HARERA, through its decision, has deemed lenders as promoters via Section 2(zk)(i) of RERA, by which a promoter is defined as “a person who constructs or causes to be constructed an independent building or a building consisting of apartments, or converts an existing building or a part thereof into apartments, for the purpose of selling all or some of the apartments to other persons and includes his assignees”. HARERA has placed reliance on the term ‘assignees’, stating that lenders that takeover projects from the developers in essence transform to assignees of the developers as they ‘cause the construction’ of the project. Firstly, a bank or a non-banking financial institution that advances a loan cannot be said to have caused the construction of the project in question. The purpose behind extending a loan to a developer in distress is to lend and generate interest on the same, not to construct the land and project – construction still remains the onus of the developer. In Bikram Chatterji v. Union of India, the Supreme Court held that if the real estate business has to survive in India, the builders must be answerable and liable to the homebuyers, authorities and the bankers. Further, in Ferani Hotels Private Limited v. the State Information Commissioner, Greater Mumbai, the Apex Court held that a major public element of RERA is of “making builders accountable to one and all.” This clearly emphasizes the fact that promoters and lenders can under no circumstance be considered as overlapping. Secondly, the definition of ‘assignment’ is the transfer of either the whole or part of any property, real or in action or in rights. This by no means translates to the inclusion of banks as assignees of the promoter – a loan cannot automatically impose the obligations of a borrower on a lender. Should this logic be accepted, banks will have to step into the shoes of each and every individual that borrows monies from them. HARERA also used the argument that the developer in effect assigns his rights to the lender by way of mortgage loans, thus bringing the transaction under the purview of an ‘assignment’. This line of reasoning is based on an erroneous reading of the law, as Section 11(4)(g) of RERA expressly states that the payment of mortgage loans is an obligation of the promoter.  This clearly portrays the fact that the title of promoter does not transfer to a lender. Thirdly, it must not be forgotten that Section 2(d) of the National Housing Bank Act, 1987 reaffirms the true purpose of house financing companies that turn lenders in such situations – entering into transactions of providing housing finances. A cumulative reading of this Act as well as the regulations of the Reserve Bank of India shows that lenders are categorically separated from promoters. Lastly, it must be noted that had the legislature intended to include lenders within the scope of promoters, there would have been no separate provisions mandating the disclosure of mortgages, liabilities, interests etc. by the promoters, like section 4(2)(l)(B) of RERA . Section 4(2)(b) also calls for a detail of all past real estate projects carried out – a clear indication that lenders such as banks were not envisaged to come within the scope of a promoter. Furthermore, Section 15 of RERA expressly deals with the transfer of a promoter’s rights to a third party. This section clearly states that such a transfer is based on the caveat that the intending promoter does not take any extra time to complete the real estate project. A simple interpretation of this indicates that the legislature could not have deemed banks and NBFCs as suitable parties to complete the project. As held in Nathi Devi v. Radha Devi Gupta, the main interpretative purpose of Courts is to ascertain the true intent of the legislature. Therefore, the words ‘causes to be constructed’ and ‘assignee’ cannot be read in isolation but must be realigned with the remaining provisions of RERA to determine the intention of the Act. SARFAESI Rights Section 9(d) of SARFAESI provides that the relevant company can take the requisite measures for the enforcement of their security interests. Should banks and NBFCs be considered as lenders under RERA, it would constitute a direct overlap and conflict between the two acts. MahaRERA, via

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Arbitrating WTO Disputes: A Temporary Solution to the Appellate Body Quagmire

Trade Law /

[By Ashuthosh V] The author is a student at the Institute of Law, Nirma University. Introduction The Dispute Settlement Body (‘DSB’) is a forum that resolves disputes between the World Trade Organization (‘WTO’) members. Such disputes must be a subject matter under any WTO agreement arising out of the Final Act of the Uruguay Round. The Dispute Settlement Understanding (‘DSU’), a WTO agreement, lays down a specific set of rules and procedures that govern the functioning of the current Dispute Settlement System (‘DSS’). It ensures that obligations are enforced against the signatories when they fail to comply with such obligations. It is considered one of the most successful international dispute resolution systems. The Appellate Body (‘AB’) is a part of the DSS that reviews an appeal against the proceedings conducted by a panel established by the DSB. The AB reviews only legal questions surrounding trade conflicts between the Member States. The AB consists of seven members and requires a minimum quorum of three members to hear an appeal. On December 11, 2019, the terms of two of the last three members expired and the United States (US) has been blocking the appointment of new members to the AB. With only one judge left, the AB cannot adjudicate upon any appeal pending in the WTO. This has led the WTO-DSS to a grinding halt and created an AB crisis within the WTO framework. The author in this article shall analyze arbitration under Article 25 of DSU as a potential alternative to AB proceedings till the crisis remains. The author shall also explain how the ad-hoc arbitration mechanism under the WTO framework is not a permanent option to the WTO Members. The Appellate Body Crisis The US has criticized the AB for undermining US sovereignty by engaging in judicial activism. Further, the AB was claimed to have other issues such as long delays, reversing factual findings of the panel report, and creating new obligations in an existing dispute that has not been approved by the Members. The AB ignores existing rules and adds new rules which undermine WTO as a forum for negotiation. It is perceived by other WTO members such as India, Canada, Australia, China, and European Union, that the AB passes decisions that amount to judicial overreach, thus, rendering trade remedies less effective at addressing several issues such as unfair dumping, the imposition of tariffs, unfair subsidies, and restriction of trade. The current status of the AB is that there is one judge left and the US is using its veto power to block the appointment or reappointment of new members to the AB. Until such vacancies are filled, ongoing trade disputes and future disputes would be left pending, as a result of which, countries would have to rely on an alternative mechanism outside the WTO framework to adjudicate the matter between them and seek a remedy. According to the DSU rules, the DSB cannot adopt a panel report before its appeal is resolved. Since the AB is not able to hear any appeal due to non-fulfillment of the quorum, any WTO member could use this loophole to block the enforcement of a panel report by appealing against such findings under DSU rules. It is imperative to understand that the AB is not able to hear any appeal but the WTO rules do not restrict any member from filing such an appeal before the AB. Therefore, the ability of WTO to enforce binding decisions on parties has been temporarily paralyzed subject to the appointment of members. Arbitration Mechanism under Article 25 of DSU: An Analysis Arbitrating trade disputes within the WTO framework was widely considered by several member states. Article 25 of DSU provides for an option to settle the dispute through arbitration. This clause could be invoked even at the stage of appeal against a panel report. The effect under Article 25 is that the award passed by the arbitrator is binding and enforceable against the disputed parties similar to the Panel and AB decisions that are adopted by DSB and further implemented. The parties mutually agree to the process, and there is no influence or involvement of any outside party unless permitted by the disputing parties. The US will be prevented from blocking the functioning of the Arbitration panel because it is not allowed to interfere with its proceedings involving other Members. The Arbitration panel would apply both substantial and procedural rules of WTO agreements to resolve a dispute, thereby enforcing obligations under multilateral agreements between the Member States. To ensure that Article 25 is effective to be considered as an alternative to the AB, member states must mutually agree on drafting a plurilateral general arbitration agreement that shall lay down the procedures of arbitration, the scope of subject-matter of arbitration, and ensure that the rulings are binding on the parties. On April 2, 2020, the European Union along with 15 other WTO Members entered into a Multi-Party Interim Arbitration Agreement (MPIA). The objective of the agreement was to strengthen arbitration under Article 25 to replace the AB for WTO members till it is inoperative. The agreement proposed reviewing panel decisions through arbitration with the mutual consent of the parties under Article 25.2 of DSU. It also provided for certain agreed procedures to facilitate arbitration under Article 25. The objective of the agreement is to enable Arbitration as an alternative within the WTO framework to resolve existing trade disputes until the AB is inoperative. Therefore, once the minimum quorum of the AB is established, i.e, three members are present, the AB would be able to hear appeals against the panel findings. In 2001, the US and European Union in the United States- Section 110(5) of the US Copyright Act agreed to apply Article 25 to use arbitration to determine the level of benefits impaired to the European Union. Arbitration was used as the parties could not agree on the level of benefits within a reasonable period to implement the panel report. Thus, Article 25 can be used

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