Author name: CBCL

WhatsApp Pay: The ‘One-Stop Shop’ CCI DIDN’T STOP

Leave a Comment / Competition Law /

[By Shivek Sahai Endlaw and Tanya Aggarwal] The authors are students at Amity Law School Delhi, GGSIPU. Introduction In November 2020, WhatsApp announced the rollout of their new Unified Payments Interface (‘UPI’) enabled digital payments feature, ‘WhatsApp Pay’ in India. WhatsApp Pay will allow the users of WhatsApp messenger to send and receive monetary payments to their contacts, in addition to the existing instant-messaging, phone, and video–calling services. This feature will be automatically installed in the existing user’s WhatsApp Messenger and will come pre-installed as part of the WhatsApp messenger for all new and future users. The manner in which these two distinct services are offered as part of one application raises certain anti-competitive concerns. An information was filed before the Competition Commission of India (‘CCI’) accusing WhatsApp of technically tying its messenger services with its new payments feature. Technical tying refers to a process where a dominant entity offering a product (‘tying product’) integrates it with a separate and distinct product (‘tied product’) in order to gain an advantage in the ‘tied products’ market. Such an arrangement is prohibited by Section 4(2)(d) of the Competition Act, 2002 (‘Act’) as it can have an adverse impact on competition in the tied product’s market. The CCI ruled in favour of WhatsApp and refused to investigate these allegations for being premature among other reasons. In this post, the authors argue that a case of technical tying against WhatsApp is justified. Further, the authors argue that the decision of the CCI was contrary to anti-trust jurisprudence related to tying in other developed jurisdictions. Test to Establish Technical Tying  In order to establish a case of technical tying, a regulator must be satisfied that (i) the tied products are two separate products (ii) the offeror is dominant in the market for the tying product; (iii) customers do not have a choice to only obtain the tying product independently of the tied product; and  (iv) the arrangement can have anti-competitive effects in the market. The CCI held that the “market for Over-The-Top (OTT) messaging apps through smartphones” and the “market for UPI enabled Digital Payments Apps in India” are separate and hence the two services being offered by WhatsApp constitute two separate products. Further, the CCI held that though WhatsApp is a dominant entity in the market for OTT messaging applications, the other two conditions were not satisfied and hence a case of technical tying was not made. According to the authors, the CCI erred in holding that the third and fourth conditions to establish a case of anti-competitive tying are not met. Users Choice to Obtain the Tying Product Independently  The third condition to prove a case of technical tying states that customers should not have a choice of obtaining the tying product without the tied product. The CCI held that this condition is not met, since WhatsApp users are free to use any other UPI enabled digital payments applications available in India. The CCI reasoned that the element of coercion was missing since installing the WhatsApp messenger services does not mandate the consumer to use WhatsApp Pay exclusively. The reasoning afforded by the CCI for rejecting the presence of the third condition is flawed for two reasons. First, the CCI incorrectly applied the test to detect the presence of the third condition. The correct application to test the presence of the third condition is explained by the European Commission (‘EC’) in the Microsoft Windows Media Player case (COMP/C-3/37.792). In this case, the EC held that the third condition is met once the regulator is satisfied that the tying product is not available for purchase de hors the acquisition of the tied product. This aspect was not examined by the CCI. In the present case, the WhatsApp Pay feature has been automatically installed for all existing users of WhatsApp messenger and will come pre-installed as part of WhatsApp messenger application for all new users. Both the primary application stores from which the WhatsApp messenger can be downloaded/updated do not offer the messaging and the payment products separately. Therefore, the consumer is indeed forced to purchase the two products together and not independently. This satisfies the presence of the third condition to establish a case of tying. Second, the CCI erred by rejecting the presence of this condition basis the lack of coercion on consumers to use the payment feature. The rationale behind this is explained by the Court of First Instance in the Microsoft Internet Explorer Case (Case T-201/04). According to the Court, it is irrelevant whether the users are forced or coerced to use the tied product. This is because the automatic or free availability of the tied product itself has the capability to foreclose competition in the tied product’s market. Therefore, the regulator should only assess whether the consumers of the tied product are likely to use the tied product over the other similar products of competitors due to the technical tying arrangement. In the present case, the CCI should have investigated the possible foreclosure of competition in the digital payments market due to the automatic availability of WhatsApp Pay to millions of people who use the WhatsApp messenger. However, this aspect was also not examined by the CCI. Thus, the authors opine that the CCI erred in holding that the third condition to establish a case of tying was not met. The Tying Arrangement Can Have Anti-Competitive Effects in the UPI Market  The fourth condition to establish a case of tying states that the tying arrangement can have an anti-competitive effect in the tied product’s market. The CCI held that this condition was not met since there is a status-quo bias in favour of the incumbent UPI enabled digital payment applications like Google Pay, Paytm, Phone Pay, Amazon Pay. Status-quo bias is the propensity to stay the course instead of doing something different. Further, the CCI held that since the WhatsApp Pay feature was currently operating in beta version in India, the information furnished was premature and hence liable to

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A Self Regulatory dharmsankat: An Outlook on The Future of Fintech Through RBI’s SRO Policy

Leave a Comment / Contemporary Issues /

[By Adarsh Vijayakumaran] The author is a student at the National University of Advanced Legal Studies, Kerala. In the last few years, financial technology (or FinTech) has revamped the working of finance in India’s evolving legal system. It has changed the landscape of traditional investment instruments and brought newer fleshier techier tools and varieties at the same time, making finance look simple and faster. While for sometime FinTech instrument remained people’s favorite romp, the news of alleged data leaks in Google Pay and the great Indian crypto Ponzi schemes have created a challenging picture for the working of FinTech, thereby, calling forth the regulators of all kinds to regulate these hagfishes to protect the innocent investors. It was in light of this huge stakeholder outcry that on October 22, 2020, the Reserve Bank of India (RBI) exercised its powers under the Payment and Settlements Act, 2007 to introduce a framework for the recognition of Self Regulatory Organization (SRO) for payment system operators. But a question that needs to be answered is if self-regulation, the most viable option for regulating FinTech? More so, if the RBI’s present policy (even though at its nascent stage) will adequately address the risks and concerns that FinTech since its inception possessed? And finally If not SRO, then what should be next? Self-regulation represents a social organization whose origin could be traced back to the ancient time of medieval guilds, and merchants were a group of men joined together to form a pact envisaging their rights and obligations. In today’s world, self-regulatory bodies exist in different fields including law, medicine, vendors’ guild and many other sectors. The primary reason for the existence of self-regulation has always been a challenge against the government monopoly created through complex asymmetrical informational flow. The introduction of SRO for FinTech in India was not completely blindsided. In fact, the formulation of SRO could be traced back to the report submitted by “Inter-Regulatory Working Group on Fintech and Digital Banking” dated November 2017, wherein the committee suggested that a body comprising of representatives of various FinTech companies should be formed for addressing the regulatory lacuna that it was posing. Further, this suggestion was reiterated by many other working groups until the RBI announced its intention to form such an organization in February 2020, and a policy was introduced in August for public comment in the same year. The present framework is based on the comments received after these public consultations. The RBI’s policy framework for SRO stipulates certain touchstones for making of an SRO body and details out the governance framework and functions of SRO. The policy states the SRO should find behavioral and professional standards in the sector and enforce them based on mutual agreements. It says that SRO is answerable to the RBI and should act as the representative voice of its members in consultations with the RBI. The SRO is also asked with the duty of providing RBI with periodic reports. And further, the SRO is expected to play a constructive role in supplementing and complementing the existing regulatory frameworks. Now, regarding the governance of the SRO, the RBI has specified that one-third of the board of SRO should be independent members and all memberships should be at the satisfaction of RBI based on the relevant-fit-and proper criteria prescribed by the former. The framework provides that the SRO will be financially viable for fulfilling its objectives, and each member will be required to pay a uniform fee for membership. Moreover, SRO will remain as a not for profit organization following a transparent practice for governance. The promoters of the idea of self-regulation in finance based market space consider the formation of SRO to be a significant advantage over the direct government regulation as it exemplifies a market environment that is responsive, flexible, informed, and targeted. They emphasize its potential to create shared values among private players, thereby cultivating a sense of ownership and participation in rulemaking. But the reality is often bleaker than what it seems. To evaluate a policy of an SRO in fintech, one must first understand the purpose and objectives of fintech. Fintech companies stand as a blend of technology and finance to improve and automate economic services. They fill a void in market space that legacy institutions like banks have created in catering to the needs of the wider audience at the expense of customer experience. The primary objective of fintech is to either disrupt the traditional economic space or replace it with a new financial model. On this note, self-regulation for fintech fundamentally means self-serving. Because giving the halters of the future of fintech legal space to private players indicate a transition of power from public interest to private lead. Thereby, making what one would call an illusion of regulation where the profit-seeking enterprise wanders the field as a feral maverick. The next question that poses a threat to the working of the SRO is whether the independent directors of the SRO will truly be independent? If one was to follow section 149 (6) of the companies, Act in both the letter and spirit an obvious conclusion that will flow from it is that most of the independent directors of the companies are not really independent. The Indian experience of the working of companies over the past several years has shown that most of the independent directors are not really independent and have only been onlookers nominated by the board to witness the tussle between industrial heads. This is true in the case of SRO as well. Even though the policy in its present form stipulates a one by third independent membership, the members will not be truly independent in taking policy decisions as their minority interests could easily be thwarted by the two-third majority held by the private players. Another significant problem faced in the working of SRO is its lack of power in enforcing policy decisions. Even though SRO will be formed under the supervision of the RBI, the policy stipulates

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The Taxation of the Subscription Fees for the Online Database in India

Leave a Comment / Taxation Law /

[By Harshita Agrawal] The author is a student at the Ms. Ramaiah College of Law, Bangalore. Background In the current tech world, most companies share data online with their stakeholders to provide details of the company’s performance or in some cases to provide research reports in exchange for consideration. Post globalization, the supply of data is not bound to one territory but has widened to worldwide. These data or reports being copyrighted has created ambivalence between the tax authorities in India, for the royalty tax on the consideration received by the non-resident company in exchange for database used by customers in India. This created a lot of uncertainty on consideration received by these non-residents in the form of subscription fees and has prolonged since the advent of subscription fees started in India. This article will strive to give an outline of the current dispute between the tax authorities and non-residents relating to royalty tax on the sharing of an online database with the Indian customer. The article derives its contemporary relevance in light of the recent order of the Income Tax Appellate Tribunal (“ITAT”), Mumbai Bench in the case of IMS Ag, vDcit (Intl.Tax) Range 2(2)(1) (“IMS Ag case”). Factual Matrix of IMS Ag Case For better understanding, it is pertinent to delve into the facts of the case. IMS Ag (hereinafter referred to as “Assessee”) is a company incorporated and lodged in Switzerland. The Assessee’s primary business is providing subscription-based marketing research report of the pharmaceutical sector to its customers worldwide. The company delivers the data collected and processed by it through an online IMS knowledge link. For providing the review reports (“IMS reports”), the company enters into a service agreement with its customers to set out the details of the required modules to be accessed by the customers and the consideration received for these services. The dispute, in this case, was on the consideration received allowing the non-transferable and non-exclusive access to the IMS reports which was before the ITAT Mumbai. The learned Assessing Officer passed an order commanding the assessee to pay royalty tax on the above-disputed sum under Section 9(1)(vi) of the Income Tax Act, 1961 (“IT Act, 1961”) read with Article 12(3) of the Indo-Swiss Double Taxation Avoidance Agreement (“DTAA”). Aggrieved by the above order, the assessee approached the Mumbai ITAT to challenge the impugned order. The Mumbai ITAT while dealing with the aforesaid case has answered the two issues but our discussion will be limited to the issue of the requirement of payment of Royalty tax for the subscription fees paid by the Indian customer under Section 9(1)(vi) of the IT Act, 1961 read with Article 12(3) of India-Swiss DTAA. Judicial Advancements before IMG Ag Case Royalty tax on subscription fees has sprouted in the legal industry since the means of delivery of research reports shifted from physical mode to online mode. The tax authorities passed different views on this issue. At the outset, the ITAT Bangalore bench in the case of Wipro Limited v. ITO(2005), wherein the appellant had subscribed for the business data of Gartner Group.  The Tribunal while discussing the amplitude of both domestic laws and DTAA observed that the database was copyrighted and hence do not form royalty under Section 9(1)(vi) of the Act. In addition to this, the services were provided outside India and payment was also received outside India through banking channels, therefore, no tax would be levied in India.  This business income cannot be taxed in India as there is no business connection or Permanent Establishment (“PE”) of the non-resident, hence DTAA will also be not applicable. The Tribunal, in this case, have narrowed down the scope of royalty by connoting that web-based database is not included under Section 9(1)(vi) of the Act. On appeal, the Hon’ble High Court of Karnataka decried the dicta of ITAT Bangalore in the case of The Commissioner Of Income Tax(CIT) v. M/S Wipro Ltd (2011) wherein it reversed the order of ITAT. It was observed by the CIT that the subscription fees would be treated as royalty tax under Section 9(1)(vi) of the IT Act, 1961 read with Article 12 of India- Ireland Double Taxation Avoidance Agreement (DTAA).  According to the Hon’ble High Court, the payment of subscription grants the user a right over the data, thereby giving them royalty over the online database. . In the above case, the Hon’ble High court did not take into consideration Section 90(2) of the Act, which provides that in case of conflict between domestic laws and DTAA, whichever is more beneficial to the assessee will apply. In this case, DTAA will supersede the domestic laws as DTAA is more favorable to the respondent as it was not having PE in India. Arguments Advanced In IMS Ag Case The Revenue placed reliance on the ruling of the Karnataka High Court by claiming the taxability of subscription fees as royalty tax as per the domestic laws and India-Swiss DTAA. The Mumbai ITAT dissented from this view of the Revenue and placed reliance in the matter of DIT v. Dun and Bradstreet Information Services (DBIS) India Pvt Ltd[(2012)][i] (“DBIS Case”). In this case, the taxpayer imported business information reports (“BIRs”) from DBIS and made remittances without deducting tax at source under Section 195 of the IT Act, 1961.  The Advance Ruling (“AAR”) distinguished this case on the parameter that the payment made by the DBIS for the purchase of BIRs does not constitute a case of royalty as defined under Article 13(3) of the India-Spain DTAA. There was an illustration drawn in this case that right to use BIRs is similar to buying a copyrighted book in which the person has no right to change it. In the above facts, the AAR was of the view that such payment for the availing BIRs would not constitute royalty under Article 13(3) of the Indian-Spain Treaty. The same was upheld by the Mumbai High Court in DBIS Case. Order Passed by Mumbai ITAT in IMS Ag Case The ITAT of Mumbai per-curiam upheld

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AT-1 Capital: The Perpetual Problem

Leave a Comment / Capital Markets and Securities Law /

[By Devansh Parekh and Yuuvraj Vaidya] The authors are students at the Government Law College, Mumbai. Introduction In October 2020, the Securities and Exchange Board of India (“SEBI”) issued a circular[1] with respect to the issuance, listing, and trading of perpetual non-cumulative preference shares and perpetual debt instruments (“SEBI Circular”). The special focus herein is on certain instruments by the name of perpetual non-cumulative preference shares (“Perpetual Non-Cumulative Preference Shares”) and perpetual debt instruments (“Perpetual Debt Instruments”) which are issued as part of the additional tier of capital. This article centers on the provisions of the guidelines for implementation of Basel III which deals with instruments that form the layer of additional tier capital in a bank.   These instruments form a part of the special layer of capital that banks are permitted to issue which is commonly referred to as the regulatory capital. The SEBI Circular on the recommendation of the Corporate Bonds and Securitization Advisory Committee (CoBoSAC) proposed additional guidelines noting that the discretion under AT1 Instruments is reserved by the issuer and that retail individual investors may not be fully able to understand the true form of these instruments. This has become relevant after the recent Yes Bank controversy and the ensuing case of Piyush Bokaria vs Reserve Bank of India [1] which have been analyzed in this article. Implementation of Basel III Capital Regulations In India Due to globalization, there has been a great integration of international banks and interdependence of financial markets that prompted the birth of the Basel Accord, which brought in standardized measurements. It is imperative to understand the Basel Accord and how it functions. The Basel Accord was set up by the Basel Committee on Bank Supervision that provided recommendations on banking regulations. It has three series of recommendations – Basel I, II & III. The Basel III capital regulations were implemented in India from April 1, 2013, in a phased manner. The Reserve Bank of India published its Master Circular dated July 1, 2015, consolidating guidelines pertaining to the Basel III norms along with guidelines for implementation of Basel III. (“Basel III Framework”) The accords were drafted to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.[2] Tier 1 capital deals with the primary funding of banks that are disclosed on financial statements, such as common shares, free reserves, statutory reserves, etc. Tier 2 capital includes general provisions and loss reserves, debt instruments, share premium, etc. Not until a long time ago, there existed a third layer i.e., Tier Capital 3 that had a great variety of debt but was of inferior quality than the above tiers and has been abrogated. These instruments are distinguishable from ordinary securities because of certain peculiar rights the issuer has upon them which could be considered onerous for the holder, viz., loss absorption capacity which has been discussed in further detail below. Loss Absorption of Non-Equity Regulatory Capital Instruments  As per the Basel III Framework, non-equity instruments, which form the additional tier of capital for banks, shall have the inherent characteristic of absorbing losses of the bank even as the entity remains a going concern. As per the Basel III Framework, the terms of issuance of Perpetual Debt Instruments and Perpetual Non-Cumulative Preference Shares in Additional Tier 1 (collectively referred to as “AT1 Instruments”) shall include provisions for either (1) conversion to common shares at the occurrence of a pre-specified trigger point or (2) a write-down mechanism allocating the losses at the occurrence of a pre-specified trigger point. The Based III Framework stipulates that upon the capital conservation buffer [3] falling below a certain threshold it will trigger a write-down/conversion of the AT1 Instruments, described hereinbefore, to ensure the bank is operating above a certain CET 1 ratio.[4] The conversion/ write-down is intended to replenish the equity which is depleted due to losses. The risk under these AT1 instruments is evidently amplified by the fact that if the bank goes into liquidation after the AT1 instruments have been written down permanently, there shall be no claim remaining upon the liquidator for recovery of the principal under these instruments. The write-down will essentially mean that the AT1 instruments have been erased from the balance sheet and existence and all rights and obligations have ceased. The repercussions of write off or conversions arise in a situation of non-viability of the bank which means “A bank which, owing to its financial and other difficulties, may no longer remain a going concern on its own in the opinion of the Reserve Bank unless appropriate measures are taken to revive its operations and thus, enable it to continue as a going concern.”[5] Therefore upon the occurrence of ‘Point of Non-Viability Trigger Event’ which could be (1) the RBI directing the write off/conversion of the AT1 instruments or (2) decision to infuse public sector capital without which the bank would not be able to sustain its going concern status, as determined by the relevant authority, the appropriate action of write-down or conversion shall be initiated. SEBI Circular  The pertinent changes proposed by the SEBI Circular include: (1) All issuance is to be done on the electronic book platform. (2) Only Qualified Institutional Buyers (“QIB”) shall be allowed to participate in the issue. (3)The minimum allotment size for an investor shall be INR 1 Crore. (4) An important disclosure that would be required as per the SEBI Circular is the disclosure of risks, particularly the discretion in terms of writing down the principal/interest, to skip interest payments, to make an early recall, etc. without commensurate right for investors to legal recourse, even if such actions of the issuer might result in a potential loss to investors.[6] QIB such as scheduled commercial banks, mutual funds, FPIs, AIFs, etc are perceived to bring in sophisticated capital and have the financial wherewithal and understanding to commit investments in complex and/or sizeable transaction, as they undertake comprehensive legal and financial due diligence on their investee targets. YES Bank Case

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Need For Multilateral Framework In Investment Arbitration For Dispute Resolution

Leave a Comment / Arbitration Law /

[By Sourav Verma and Sunil Singh] The authors are students at the Hidayatullah National Law University, Raipur. Introduction In the last two decades of the 20th century, due to globalization as well as liberalization, there has been an increase in the free-flow of foreign investments, especially in developing countries. Due to this, great changes have taken place in the foreign investment regime, mainly in the form of Bilateral and Multilateral Investment Treaties. These treaties have had a significant impact on aspects such as national sovereignty, federalism, and public policy decisions that relate to the health and environment of the host countries. With the tremendous rise in the number of BITs and MITs, there is also an increase in the amount of investment treaty arbitration. However, concerns have arisen with respect to inconsistent arbitral awards, lack of transparency, parallel arbitration proceedings, impartiality and diversity in the appointment of arbitrators, and delay in the award making process[i]. In the past two decades, there have been some inconsistent awards delivered by tribunals in Investment treaty arbitration, which in turn have faced criticism from academicians, sovereigns, investors. However, while absolute consistency in any legal system is not possible, at least a minimum level of consistency is necessary in any legal system to attain certainty. This article specifically focuses on the SGS arbitrations[ii] and Lauder arbitrations involving similar facts and circumstances in which tribunals reached contradictory conclusions, which attracted a great deal of public attention. SGS Arbitrations The SGS arbitrations involved two arbitration proceedings, (i) between SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan (‘SGS v. Pakistan’)  and (ii) SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (‘SGS v. Philippines’), in which tribunals came to different conclusions regarding the interpretation of the umbrella clause which is also known as “observance of undertaking” involving almost similar facts. SGS v. Pakistan was the first investment treaty arbitration in which the tribunal considered the meaning of an umbrella clause. SGS, by relying on Article 11 of the Switzerland-Pakistan BIT, claimed that it was the duty of “every state to observe all the obligations that it should enter in relation to foreign investments”.[iii] The tribunal in that case held that the claimant failed to provide evidence “that the parties to the BIT intended that umbrella clause transmute a contractual breach to the level of a treaty breach. The tribunal on the basis of lack of evidence rejected the broad interpretation and denied the claimant’s claim. Only after the gap of five months, SGS sued the Republic of Philippines and the factual matrix of the SGS v. Philippines was almost similar to that of SGS v. Pakistan. Despite this similarity, the tribunal reached a different result which is the opposite of the previous decision through a different analysis. Article X(2) of the Switzerland-Philippines BIT  provided that every Sovereign “shall observe all the obligations undertaken with regard to investments in its territory by the investors of other Sovereigns. By relying on the article X (2), the tribunal observed that it was the “duty of every Sovereign to observe all the obligations it has accepted or will, in future, accept with investments under the purview of the BITs”. The tribunal concluded that due to the umbrella clause, “Philippines breached the binding and contractual commitments that it has presumed under the BIT, with regard to the specific foreign investments. The Philippines award is diametrically opposite to the Pakistan award. While the decision of the tribunal in SGS V. Pakistan is based on a narrow interpretation of the treaty, the tribunal in SGS v. Philippines concluded its decision on rather a broad interpretation. Therefore, it is undeniable that one of the decision is based on an incorrect interpretation of the treaty, that leads to confusing all the stakeholders regarding the correct implementation of the umbrella clause. The Lauder Arbitrations Lauder v. Czech Republic and CME v Czech Republic are two arbitral proceedings that were initiated against the Czech Republic for the violations of Czech Republic-USA BIT  and Netherlands-Czech Republic BIT respectively. Both the tribunals reached very conflicting, and therefore opposite conclusions in relation to each other, even though the underlying facts were the same. The Lauder tribunal held that the Czech Republic engaged in discriminatory and arbitrary treatment of investments.  Further, the tribunal noted that there was neither expropriation nor violation of either the duty to provide fair and equitable treatment (FET) or the obligation to provide full security and protection. Finally, the tribunal concluded that the Czech Republic had not breached its obligations under the investment treaty and therefore owed no damages to Lauder. Only after a gap of ten days, the CME tribunal reached a conclusion that was the exact opposite of the Lauder tribunal. The CME Tribunal held that the Czech Republic had not fulfilled its obligations related to fair and equitable treatment, full security and protection of investments, obligation to treat investments in conformity with principles of international law, and obligations not to impair investments by unreasonable or discriminatory measures. The tribunal awarded CME damages worth US $269,814,000. Later, Czech Republic moved Sweden’s Svea Court of Appeal to vacate the award of the CME tribunal. The Svea Court of Appeal refused to set aside the award opining that it had very narrow review power and only in exceptional circumstances could an award be set aside[iv]. The Svea Court of Appeal accepted the existence of parallel proceedings by the Lauder tribunal in London but refused to interfere on the ground that it had no jurisdiction and also refused to apply res judicata or lis pendens because the two awards involved different parties under different BITs entered between different Sovereigns. The contradictory decisions rendered in the Lauder cases result in undermining the legitimacy of investment arbitration, particularly where disputes related to public policy, environmental and human rights, and public health are at stake. Analysis Various academic literature, practitioners, etc. of this discipline have already discussed numerous approaches to resolve this issue of inconsistency. A common

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High Frequency Trading: A Switchback for Indian Capital Market

Leave a Comment / Capital Markets and Securities Law /

[By Ananya Sahu and Ketan Priyadarshee] The authors are students at Maharashtra National Law University, Aurangabad. High-Frequency Trading (HFT) is a wide term with no precise definition in any statute. It is usually explained as a subset of algorithmic trading that uses “latency-sensitive strategies”, “co-location”, “high-speed networks”, and deploys technology to place orders and execute it as trades in a fraction of a second. This technology in the realm of securities has drawn notable consideration of investors and regulating bodies with respect to its responsiveness to the directives and accurate decision making which manually could have never been thought of and concerns regarding defeating fairness in the market respectively. Ever since COVID-19 has hit the Indian capital market, banking on technology to help sustain and fuel the growth would be a good call. However, it has its downsides and risks associated. Securities and Exchange Board of India (SEBI) as a regulating body has proposed measures, some of which might turn out to be far-reaching, while others might undermine the potential of HFT. This article attempts to highlight the opportunities and obstacles algorithmic trading is chained with. While discussing it the article tries to emphasize how the most controversial form of algorithmic trading can be appreciated and adopted by the market players to triumph over the menace of COVID. Benefits and Obstacles of HFT The advent of technology in the stock market has had many benefits over the years. HFT has played a huge role in improving the traditional market quality measures like depth and liquidity; it has the potential to reduce market volatility and trading costs. HFT has had an important role in reducing the bid-ask spread and tends to skim less off each trade when compared to old school market makers. It is a competitor to itself and therefore the claims that it will make markets one-sided is false. Markets are always fixed in favor of those with the best information and it is with the enhanced use of computers that the informational advantage has somewhat been neutralized. Academics are divided about whether HFT is beneficial or harmful. There is a potential to lose control of computers. There have been instances of software malfunctions that have wiped off millions from the market within hours. The high speed of HFT also raises the potential for more vigorous market manipulation and acts like spoofing. Many contend that HFT provides pseudo-liquidity to the market. Others believe that HFT only operates for short term profit and has no meaningful contribution to the markets. There are various ways to keep HFT in check and reduce the risks associated with it and a lot of these have already been put in place or are being used in markets and exchanges globally. Technological innovation is crucial for market development but there must be a simultaneous adoption of safeguards at the same pace as technology develops. SEBI’s Functions as a Check Post  SEBI was established essentially to regulate the capital market of India. One of its primary functions under section 11 (e) of SEBI Act, 1992 is, prohibiting fraudulent and unfair trade practices associated with the market. In pursuant to that SEBI has released numerous guidelines addressing the potential threats and widespread concerns of HFT since 2012, the latest of which came in June 2020; to regulate the functioning of HFT in the Indian capital market. It strives to set up a level playing field for the market players. At the very outset, the discussion paper has identified the following proposals: To hold back the algo traders from placing huge orders and canceling them within a very short span of time, it has introduced a “minimum resting time” with respect to orders taking place through HFT. Resting time appertains to the period between the actual execution of the orders and the receipt of the orders by the respective exchanges. This step shall lower down the instances of frequent cancellation of orders by the traders that intends to create phantom liquidity in the. Co-location is one of the major advantages of HFT where traders are present in close proximity and the information and signals travel fast to the other trader. This has caused more harm than good since only a handful of the traders can afford this facility. To stricture such activity, SEBI has proposed to match orders in a system where the exchanges would first accumulate all the orders for a specific duration of time later matching orders of that batch. The substantial difference which this technology has given rise to is with respect to time. Transactions are completed within a blink of an eye, which seems to be unattainable if the trading is restricted to human intelligence. To make sure that speed, as a discrete strategy does not help, SEBI has suggested incorporating a delay of few milliseconds while the processing of orders is in transit. This would hardly affect the non-algo traders. However, authors believe that time plays a significant role in algorithmic trading, and measures that defeat the purpose of bringing technology into use might discourage the traders involved in HFT. A large number of orders take place and are canceled the next moment. SEBI proposes to limit the Order to Trade Ratio (OTR). It refers to the ratio between orders taking place, modifications, and cancellations to the actual execution of orders that generates confirmed trades at any exchange. For securing a minimum of one trade for a set of orders, capping on OTR is suggested. Traders exceeding the ratio shall be penalized while placing the next set of orders. SEBI has taken drastic steps to curtail the shortcoming of HFT. However certain proposals in the discussion paper have overshadowed the incentive of time enjoyed by the users of HFT and should also take the prospect of issues like insider trading associated with algo trading into consideration. Any set of regulations shall strive to provide a comprehensive solution, which while addressing the potential threats simultaneously, preserve the quintessence of HFT. The Road Ahead

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Anup Dubey v. NAFED: NCLAT includes Lease and Rentals as Operational Debt

Leave a Comment / Insolvency Law /

[By Aashna Shah] The author is a student at the Institute of Law, Nirma University. Indian courts have pronounced inconsistent judgements regarding the classification of dues arising out of Lease and rentals as Operational Debts. With contradictory reasoning, courts had earlier put the creditors at a great disadvantage, thus neglecting the objective of the Insolvency and Bankruptcy Code, 2016 (“IB Code” or “the Code”) to balance the interests of all stakeholders. Finally, this ambiguity was settled in the case of Anup Dubey v. National Agricultural Co-operative Marketing Federation of India Ltd. & Ors., wherein the court stated that Lease and License agreements shall come within the ambit of section 5(21) of the IB Code i.e., they shall be construed as operational debts. Hence the adjudicating authority deviated from its judgement in Ravindranath Reddy v. G. Kishan, wherein it had excluded Lease and Rentals as Operational Debts. In this article, the author shall provide an analytical account of the present case. Additionally, the author will explain arguments that could have been used by the NCLAT to strengthen its decision. Factual Background M/s. National Agriculture Co-operative Marketing Federation of India Ltd. (“Operational Creditor”) entered into a leave and license agreement (“Agreement”) with Umarai Worldwide Private Limited (“Corporate Debtor”) to use cold storage facilities for three years. The corporate debtor started defaulting in the payments as stipulated in the agreement from September 2017. The operational creditor contended that despite repeated reminders to pay the ‘outstanding debt’, and serving an eviction notice, the Corporate debtor did not pay the outstanding debt. Subsequently, the Operational creditor sent a demand notice under section 8 of the IB Code. The Corporate debtor, in its reply, denied all the claims and requested for renewal of the agreement. Thereafter, the Operational creditor initiated insolvency proceedings against the Corporate debtor under section 9 of the IB Code, which was accordingly admitted by the National Company Law Tribunal, Mumbai (“MNLCT”). While admitting the application, the MNCLT stated that the Corporate debtor vide two letters had confirmed to pay the outstanding dues for rent as established by the agreement. Hence, the Corporate debtor has committed a default by not paying the debt due to the Operational creditor. The Corporate debtor’s suspended board member challenged this order of MNCLT before the National Company Law Appellate Tribunal (“NCLAT”).  The NCLAT upheld the order of MNCLT and stated that lease rentals which arise due to the use and occupation of a cold storage unit for commercial purposes shall come under the ambit of section 5(21) of the IB Code i.e., it shall be considered as an ‘Operational Debt’. Analysis The adjudicating authority examined section 5(21) of the code which states that for a debt to be construed as an ‘Operational debt’ it should arise out of any of the following: (a) Claim in respect of provisions for goods and services (b) Employment or debt in respect of dues and (c) Such repayment of dues which should arise under any law in force at that time What Operational debt can be construed as has been interpreted by the courts time and again because the legislature has not defined the term ‘goods and services.’ This lacuna in law has given rise to the varying application of this provision. In Ravindranath Reddy v. G. Kishan, NCLAT wrongly observed that there is no difference between ‘essential goods and services’ under section 14(2) of the IB Code and ‘goods and services’ under section 5(21) of the Code. Hence, the goods and services stated under section 14(2) shall only be construed as Operational debts. This incorrect position of law was rectified in the present case, where the same tribunal refused to consider the contention of the Corporate debtor that section 14(2) read with Regulation 32 (Insolvency Resolution Process for Corporate persons, Regulation 2016) do not include rental dues from cold storage facilities, which is why it should not be considered Operational debt. The adjudicating authority rightly differentiated between ‘goods and services’ and ‘essential goods and services’ because the latter only comprises of those goods and services whose supply is not to be terminated during Corporate Insolvency Resolution Proceedings. Also, it is nowhere mentioned in the Code, that essential goods and services under Section 14(2) are the same goods and services under section 5(21). .The adjudicating authority rejected the reasoning provided by the Tribunal in Ravindranath’s case for excluding dues out of lease agreements as Operational Debt. In the aforementioned case, the tribunal had stated that for the determination of dues arising out of a lease agreement, the court will have to rely on evidence. But the tribunal will not be able to investigate as it exercises a summary jurisdiction, hence dues arising out of lease agreements are not considered to be Operational debts. Instead in support of its decision, the court relied on the judgement of the Supreme court in the case of Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd, wherein debts arising out of lease rentals were included under Operational debt. The judgement of the apex court was pronounced by relying on recommendations of the Bankruptcy Law reforms committee report (BLRC) which stated that the liability of Operational creditors arises due to transactions on operations. Hence, in Lease and Rentals which are included in the operations, any debt arising thereof should be considered as an operational debt. The only issue on placing reliance on the report is that despite the suggestions of the committee, the Legislature never expressly included Lease and Rentals as an Operational debt. Additionally, the adjudicating authority in the present matter did not state that in cases of Operational debts, the very reason that the Corporate Debtor can claim the defence of the existence of a dispute is because of the lack of evidence relating to the ‘Existence of Debt’. This completely negates the reasoning of the tribunal in the Ravindranth case related to the investigation of the evidence for the existence of debt and would have strengthened the decision of the tribunal to

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Analysis of D&O Liability Insurance vis-a-vis Companies (Amendment) Act, 2020

Leave a Comment / Company Law /

[By Varun Akar and Ashuthosh V] The authors are students at the Institute of Law, Nirma University. Introduction Directors[i] and Officers[ii] (D&Os’) are considered to be the heart and soul of the company as they make crucial decisions for running the company smoothly. Such people are highly qualified, experienced, and well-versed with the affairs of the company. In the aftermath of the Kingfisher, PNB, L&T scams, etc., the role of D&Os’ has been given importance to improve corporate governance and reduce the possibility of financial fraud. They undertake the responsibilities which are in the interest of the company for maximizing its profits. However, while carrying out such functions, they are susceptible to certain risks which may make them jointly or severally and personally liable for the losses or harm suffered by the company. Moreover, they also have the duties towards various stakeholders such as shareholders, creditors, customers, etc. as mentioned under Section 166[iii], breach of which would result in claims against them. Hence, there arises a need to protect them from unnecessary claims. Companies Act, 2013 provides for D&O Liability Insurance under Sections 197(13) and 149(8) r/w Schedule IV. The provisions do not mandate a company to take the insurance, however, it is recommended to have a D&O Insurance to indemnify the injuries suffered except for fraud, wilful misconduct, bribery, insider trading, etc. Section 197(13) enables a company to take insurance on behalf of D&Os’ to indemnify them against any liability arising out of default, misfeasance, negligence, breach of duty & trust. Also, premiums paid by the company to the insurer shall not be considered as a part of the remuneration paid/payable to the D&Os’, however, if they are proven guilty for acting contrary to any provision given under the Companies Act, 2013, the same shall be considered as a part of their remuneration.[iv] Section 149(8) provides for the manner of appointment of Independent Directors which may or may not consist of D&O Insurance. Key Features of D&O Insurance Policy: A D&O Insurance covers the repercussions arising out of decisions or actions taken by D&Os’ in the natural course of business, i.e, managing trade in the normal routine[v] as per the object clause in the memorandum. However, in some cases, the benefits of these policies are extended to the employees by including them in the definition of ‘Insured Person’. Such policies are available to current, incoming and retired D&Os’ of a company or its subsidiaries. The company receives the money from the insurer only if the claim is made during the policy period within which the policy is in effect and therefore, enforceable. Such a policy period is usually for 12 months but it may extend on the mutual agreement between the parties. A D&O Insurance policy shall have the following indemnification clauses; For the protection of the personal assets of D&Os’ from being used to satisfy the claims against the company. This clause shall be enforceable when the company does not indemnify its D&Os’ against any claim. Therefore, such cover directly protects personnel from personal liability. For indemnifying a company to the extent that it covers the litigation expenses and cost incurred by the company on behalf of its D&Os’. For providing indemnification to a company for its securities claims. This is the only clause that protects a company for its liability, distinct from the liability of its D&Os’. It provides coverage only against claims made by shareholders against the company because of an action of offer, sale, or purchase of securities. Therefore, such cover is often taken by listed public companies. Benefits of D&O Insurance Policy: It enables the company to hire and retain qualified and experienced D&Os’. Protects the directors and the company from the unprecedented and high litigation cost and expenses against claims made by the stakeholders and also prevent invocation of personal liability in case of defaults. It facilitates the personnel to take risky decisions with confidence in the interest and growth of the business. Improving better corporate governance practices by providing coverage only in cases of genuine defaults or negligence, and not wilful defaults or fraud. It provides compensation for the harm caused to the reputation of the personnel during the litigation. Lastly, the amount of coverage shall vary in each D&O Insurance policy based on relevant factors such as the nature and size of the business, the line of business, industry or market conditions, associated risks, and “penalties provided in the Companies Act, 2013“. Possible Impacts on D&O Insurance after enforcement of Companies (Amendment) Act, 2020 The Ministry of Law and Justice on September 28, 2020, brought in significant changes through the Companies (Amendment) Act, 2020 in the penalties of the personnel under a variety of sections of Companies Act, 2013. Few of which are mentioned below[vi]: The penalties provided under Section 135 of the officers has been amended from the imprisonment up to 3 years and fine which may range between Rs 50,000 – Rs 5,00,000 to a new reduced penalty of 1/10th of the amount required for the CSR or Rs 2,00,000 whichever is less and with no imprisonment. The penalties in case of delay in filing of financial statements with the registrar under Section 137 has been reduced from a minimum of Rs 1,00,000 and a maximum of Rs 5,00,000 to Rs 10,000 and Rs 50,000 respectively. Penalties under Section 167 for vacation of Office of Director has been reduced from imprisonment of one year or fine of Rs 5,00,000 or both to only fine of Rs 5,00,000. For the contravention of the provisions of Chapter XI, the penalties under Section 172 have been reduced from a maximum of Rs 5,00,000 to Rs 1,00,000. Similar reductions in penalties have been made under various sections. The above reductions constitute a material change in the policy. Materiality is the basis on which the insurance company decides whether or not to go ahead with the policy. Every fact which has an impact on the risk-bearing shall constitute a material fact. Further, any

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Garden Leave Clause: A Win-Win Scenario

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[By Aparajita Marwah and Saavni Kamath] The authors are students at the National Law Institute University, Bhopal. Introduction Gardening Leave is a measure taken by the employer when an employee is terminated or tenders resignation and denotes the period of time between service of notice of termination and actual termination. A garden leave clause may be effected at any stage of an employee’s course of employment, but is largely restricted to being imposed during the notice period. In such a scenario, companies generally take steps to ensure that during this period, the employee undergoing the process of termination is no longer an active part of their workforce and has no access to clients, co-workers, or sensitive information pertaining to the organization, while still being paid a regular salary with benefits. During such leave, the employee would bound by the employment contract nonetheless and would have to refrain from any act that could hamper the interests of the employer. The reasons for imposing a gardening leave clause upon an employee are manifold. Firstly, these clauses prevent an outgoing employee from being employed by a rival organization during that period, thereby effectively restricting the sharing of any confidential information. Secondly, limiting the employee’s access to company data, clients, or other employees during this transition period, reduces the threat of any possible informational leak once the employee is free from their contract. Further, in terms of the etymological roots of the expression, it essentially means that the employee in question would bide this period by engaging in hobbies such as gardening or could also be negatively perceived in the sense that the employee in question could not even be considered fit to garden. It is imperative to point out that employers may not place an employee on garden leave without such a clause as a part of their employment contract. In the event there is an existing clause, wrongfully place such employee under leave without any wrongdoing on the latter’s part. Alternative to Non-Compete Clauses While both Garden Leave and Non-Compete Clauses are invoked during the termination of employment in order to prevent the employee from engaging with another employer for a period of time and essentially seek to serve the same end, the means used are vastly different. The latter is utilized when employment is terminated and prohibits the employee, for a stipulated period, from being employed with a rival company or engaging in a rival practice. Non-Compete Clauses are also harsher in terms of the conditions set forth and employees are not provided with salary or bonus benefits throughout this duration, resulting in stricter judicial scrutiny regarding the fairness of these terms. In comparison, Garden Leave clauses provide greater leeway and are not particularly disadvantageous to the employee being terminated. Although the employees’ access to the market is restricted during this period, they still owe a fiduciary duty to the employer and enjoy salary benefits. This subsists until the employee in question has not been terminated. Additionally, it is pertinent to distinguish between paid non-compete periods from garden leave clauses as there is a tendency to consider the two as the same. Paid non-compete periods begin only after the termination of employment and share the same advantages that a garden leave clause might grant. Judicial Perspective within the Indian Spectrum Garden Leave Clauses along with Non- Compete Clauses are generally considered within the ambit of restrictive covenants. As a result, they are often subject to rigorous judicial scrutiny, to determine whether these clauses prohibit the freedom of trade and business granted to the employee, by way of Article 19 of the Indian Constitution. Moreover, contracts that impose restrictions upon the person’s freedom to trade or business are rendered void. While there has been no statutory recognition accorded to Garden Leave Clauses in any Indian legislation, there have been several judicial decisions discussing its validity and applicability. One of the first judgments regarding the application of Garden Leave Clauses was tendered by the Bombay High Court in VFS Global Services Private Limited v. Suprit Roy. The case was filed in lieu of execution of an agreement which contained a Garden Leave Clause. However, the errant drafting of the clause wrongfully imposed garden leave upon the employee, after the termination of employment was considered void within the ambit of Section 27 of the Indian Contracts Act, 1872. The Court added that Garden Leave Clauses themselves are not restrictive of trade and if applied in the manner prescribed, could prove to be beneficial for both the employee and the employer. In subsequent judgments such as that of Niranjan Shankar Golikari v. Century Spg. & Mfg. Co. Ltd. and Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr., the Court distinguished between garden leave and non-compete clauses, and established that the employee may be restricted during the term of employment but not after termination. Further, the Court by its decision in Kouni Travel Pvt. Ltd. v. Ashish Kishore and Tapas Kanti Mandal v. Cosmo Films Ltd., upheld the validity of Garden Leave Clauses and affirmed that they can be invoked to ensure the protection of trade secrets, as long as the employee in question is remunerated during the specified period. Effect of the COVID-19 Pandemic The ongoing health crisis has exacerbated the process of decline of both the economy and the job market. It has triggered a string of consequences including reductions in employee remunerations and large-scale layoffs. With employment rates at an all-time low, the question of applicability of restrictive covenants such as garden leave clauses is a poignant one. There are two diverging opinions with regard to whether or not a Garden Leave Clause, as a part of an employment contract, should be invoked during the current scenario. The first opinion and more widely asserted contention against invoking Garden Leave Clause is the fact that tough exit clauses make it all the more difficult for employees to seek employment elsewhere, in lieu of the current environment. Considering such clauses are widely

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