Author name: CBCL

Prepending the ‘Social’ to Social Stock Exchange: a Trump-Card for the Society

Leave a Comment / Capital Markets and Securities Law /

[By Jaskaran Singh Saluja and Khushi Sethia] The authors are students at the Institute of Law, Nirma University. Introduction The advent of The Working Group Report on the Social Stock Exchange (Report) is a gamechanger for restructuring the capital inflow of the social sector in the country. The Report got published on 1st June 2020. However, the idea of a Social Stock Exchange (SSE) was first proposed during the budget speech of 2019, wherein the Finance Minister Nirmala Sitharaman highlighted the need to strengthen the social enterprises by way of SSE under the aegis of the Securities and Exchange Board of India (SEBI). SSE is a fundraising structure following the principle of additionality. The organizations in each sector can be bifurcated into for-profit enterprises (FPEs) and non-profit organizations (NPOs). SSE is expected to provide a separate closed-ended fund structure under the current stock exchange. Pre-determined norms screens entities into FPEs and NPOs. SSE acts as an intermediary allowing the flow of capital from institutional investors to NPOs and FPEs by way of the market instrument. The investment funds are directed towards a social cause consequent to which outcome funders will payout following the social impact created by the entities. Such a mechanism of SSE will untangle the snag of capital-shortage, usually faced by the social enterprises in carrying out the activities for the betterment of societies. Thus, SSE will count as a trump-card for society. I.Financial Instruments & Its Operations a. For Non-Profit Organisations (NPO Zero-Coupon Zero-Principal Bonds: – Zero-coupon zero-principal bonds are capital raising instruments that remain active for a term equivalent to the span of the project and ends by writing-off the investee’s account by funds availed for the project. These bonds are appropriate for the investors, hoping to make any social impact without expecting back the principal funds. Mutual Funds: – An asset management company will act as an intermediary that accumulates capital from different individual and institutional investors. The gains produced by their investments will get directed towards financing the tasks of NPOs, working for social outcomes, in the form of grants. Lastly, the intermediary will restore the principal amount invested by the investors and offer certain tax-exemptions Social Impact Bond (SIB): – In SIB structure, an intermediary interposes between NPOs, investors, outcome funders, and independent evaluators. The intermediary unlocks the capital from investors and contractually connects it with NPOs. Further, only after observing the successful accomplishment of the outcome-metrics through evaluators, the outcome funders repay the principal amount and returns to the investors, or else, they withdraw their liability. Pay-For-Success: – In this apparatus, the outcome funders repay the principal amount and returns to the lending partners through the intermediaries, only after the successful completion of the set outcomes. However, if the set results will not get achieved, then the risk of economic loss will be dealt with by the lending partners. Moreover, the Pay-For-Success model is almost identical to the SIB model. The key difference discerned in this model is that the intermediary raises capital from the lending partners and through grants. Even the Report proposes that the SSE should lay down an aid fund for recovering the pandemic situations of COVID-19. It can be set-up in the mock-up of Pay-For-Success or SIBs or even through Zero Coupon Zero Bonds for CSR spenders, philanthropic donors, and various investors. Social Venture Funds (SVFs): – The umbrella of SEBI’s Alternative Investment Funds (AIFs) covers the instruments like SVFs. These SVFs already exist in the financial market by SEBI for FPEs, although it also acts as grants-in and grants-out apparatus for NPOs and other charitable enterprises. b. For For-Profit Enterprises (FPEs) Equity Issuance: – For FPEs, the issuing of equity through SSE will be the significant source of unlocking the funds from investors, subject to minimum reporting standards. It is akin to SEBI’s Innovators Growth Platform (IGP), which provides a separate locus for start-ups with its listing preconditions. Social Venture Funds (SVFs): – FPEs already deal with SVFs for its funding, with no social impact reporting. However, in SSE, these FPEs are subject to minimum reporting standards while raising funds through the channel of SVFs and other AIFs.   II. A Setout to Revamp the CSR The Report proposes to get rid of the requisite enrolment of Section 8 enterprises for Corporate Social Responsibility (CSR) commitment under the draft of CSR Policy Amendment Rules, 2020. However, in SSE, the listing of  NPOs on the SSE or the existence of recipient NPOs in the SSE catalog will be adequate for setting up the validity of transactions. The CSR capital must be permitted to pile-up in an escrow account for three years. Further, if the CSR funders observe that the NPO has achieved its outcome, then they unlock the CSR capital from the escrow account and repay the partial amount to the interim funding partner for recovering the latter’s cost for executing the program. The residual amount in the escrow account will get transferred to the NPOs in the form of accelerator grants. If the CSR funders feel that the NPOs have not accomplished the social outcomes, then following the same, the said account will get liquidated, and the CSR capital will get utilized under Schedule VII of the Companies Act, like PM’s Relief Fund, etc. Moreover, the SEBI board prescribes that the Ministry of Corporate Affairs (MCA) should be permitted to approve the dealings of CSR capital between companies with surplus CSR funds and those who have a scarcity of CSR funds. Even the expenses incurred by various companies for capacity strengthening of SSE will also be considered as CSR handouts by altering Schedule VII of the Companies Act. III. Make A Killing Via Taxation Policy The Working Group (WG) has proposed to allow various tax-benefits to every player who will be part of the SSE transactions. The Committee believes that such tax-benefits will act as a spur for all the players. The Report commends for the same as follows: – The WG has suggested allowing donors

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India’s Offshore Listing Regime – Examining The Regulatory Architecture

Leave a Comment / Capital Markets and Securities Law /

[By Pratyush Hari and Meghana Gudluru] Pratyush is a student at Jindal Global Law School and Meghana is a student at Symbiosis Law School, Pune. On 4th March 2020, the Union Cabinet announced that it approved an amendment to the Companies Act, 2013 (“the Act”) which would allow Indian companies to list on foreign stock exchanges. Soon after, the Companies (Amendment) Bill, 2020 was introduced in the Lok Sabha seeking to amend, inter alia Section 23 of the Act, which would allow for offshore listing by Indian companies. Currently, the only way Indian companies can access foreign equity markets is through the American Depository Receipt (ADR) and Global Depository Receipt (GDR) regimes.  Indian companies can also list their debt securities on foreign stock exchanges through ‘masala bonds’ (Rupee denominated bonds), foreign currency convertible bonds (FCCB), and foreign currency exchangeable bonds (FCEB). Allowing direct offshore listing has been perceived to be a move that opens new doors of opportunity for Indian companies seeking to access global capital. However, certain aspects need to be considered in light of the regulatory changes surrounding the novel offshore listing framework. This post seeks to understand the background of the offshore listing framework and shed light on certain nuances of the framework that need further consideration. SEBI Expert Committee Report Recognizing the benefit behind Indian companies accessing global capital, the Securities and Exchange Board of India (“SEBI”) constituted an expert committee in 2018 to assess the viability of offshore listing for Indian companies. Additionally, the expert committee considered the listing of companies incorporated outside India on Indian stock exchanges. In December 2018, the expert committee released a report (“Report”) that delved into the economic implications of allowing offshore listing by Indian companies along with changes required to existing regulation. Some of the major takeaways from the Report are discussed below. Permissible Jurisdictions   The Report states that in the interest of security, offshore listing by Indian companies will only be allowed on certain pre-determined stock exchanges (“Permissible Jurisdictions”). The Permissible Jurisdiction must be a member of the Board of International Organization of Securities Commissions (“IOSCO”), whose securities market regulator is either a signatory to the IOSCO’s multilateral memorandum of understanding or shares a relationship with SEBI for information sharing arrangements[i]. Moreover, the Permissible Jurisdiction must be a member of the Financial Action Task Force. The Report emphasizes on stringent eligibility criteria for Permissible Jurisdictions. Presumably, to avoid potential misuse of this framework for illegal transactions like round-tripping of funds. The list of Permissible Jurisdictions in the Report under Annexure C includes NASDAQ, New York Stock Exchange, London Stock Exchange, and Shanghai Stock Exchange, amongst others. Changes to the Foreign Exchange Regime At present, the foreign exchange regime does not consider the listing of equity shares by an Indian company on a foreign stock exchange. The Report contemplates changes to the erstwhile ‘FEMA 20R’ which was subsequently superseded by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules”). Amongst these changes, the Report suggests the addition of ‘Part B’ to Schedule 1 of FEMA 20R, addressing the purchase of equity shares of an Indian company listed on a foreign stock exchange by a person resident outside India. The equity shares of Indian companies listed abroad will, however, continue to be subjected to the Indian foreign exchange regime namely compliance with sectoral caps, entry routes, prohibited sectors, etc. Companies Act & SEBI Compliance According to the Report, Chapter III of the Act about prospectus and allotment of securities should not apply to the listing of equity shares of Indian companies on foreign stock exchanges. Certain listing obligations like the issuance of a prospectus are broadly similar across most Permissible Jurisdictions. Indian companies directly listing abroad are likely to be subject to the listing obligations of that Permissible Jurisdiction. Consequently, subjecting these Indian companies to Chapter III of the Act may prove to be redundant. This seems to be the underlying objective behind rendering Chapter III inapplicable to companies directly listing abroad. Additionally, Indian companies directly listing in Permissible Jurisdictions will not be subject to the rules and regulations laid down by SEBI. Such companies, however, will be bound by the listing framework of the Permissible Jurisdiction itself. On the other hand, listed Indian companies seeking to cross-list (list in India and abroad) will be bound by the listing framework in the Permissible Jurisdiction in addition to SEBI rules and regulations. Key Considerations The Report has addressed primary issues that arise while contemplating offshore listing such as regulatory changes, Permissible Jurisdictions, taxation etc. However, a regulatory change of such proportion is bound to uncover facets of the law that need further deliberation. Some of these legal aspects that need further thought are briefly discussed below. Access to Indian Investors  Resident Indian investors are bound by a cap on investments in overseas assets which will include equities of Indian companies listed abroad. Under RBI’s Liberalised Remittance Scheme (“LRS”), Indian residents are only allowed to remit $250,000 annually towards a foreign capital or current account transaction. While Indian residents would be subjected to the annual LRS cap, foreign investors are not subject to these monetary limits. They are however subject to restrictions on sectoral caps, entry routes, and prohibited sectors as prescribed by the NDI Rules. The difference in investment thresholds between Indian and foreign investors indicates a lopsided playing field. The situation gives rise to the peculiar problem wherein Indian investors are barred from investing more than the LRS limit in a company incorporated and headquartered in India. RBI will have to intervene and clarify its stance on the issue in order to curb this irregularity. Presumably, this LRS cap will have to be done away in order to increase access to these equities for Indian investors[ii]. Uniformity of Shareholder Rights For Indian companies seeking to cross-list their shares, it must be ensured that their equities represent the same rights entitlement to all shareholders, regardless of the jurisdiction. While Indian regulations do permit the issuance of shares with

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Conundrum of Intermediary Liability in Light of Consumer Protection (E-Commerce) Rules

Leave a Comment / Contemporary Issues /

[By Megha Shaw and Mrunal Mhetras] The authors are students at the WB National University of Juridical Sciences (NUJS), Kolkata. The government of India has recently replaced the old Consumer Protection Act, 1986 with the new Consumer Protection Act, 2019 ( “CPA” ) that came into effect from 20th July 2020. Accordingly, the Ministry of Consumer Affairs, Food and Public Distribution introduced the  Consumer Protection (E-commerce) Rules, 2020 ( “Rules” ) on 23rd July 2020. These legal developments took place during a period of increasing reliance on E-commerce entities caused by the pandemic. The new Rules aim to protect the rights and interests of consumers in the digital age in order to curb unfair trade practices of the e-commerce entities. This post seeks to, firstly, shed light on the significant changes brought upon by these Rules; secondly, discuss the dilemma of exemption of liability of marketplace E-commerce entities under the Information Technology Act, 2000 ( “IT Act” ) , and lastly, the impact of these Rules on the prior settled position of law. Highlights of Consumer Protection (E-Commerce) Rules Scope and Applicability  The CPA 2019 extends the scope of consumer protection to e-commerce businesses and online services as such changes were necessary to expand the realm of consumer protection to digital consumers. The new E-commerce Rules apply to all goods and services bought or sold digitally, all models of E-commerce, all forms of E-commerce retail, and all foreign entities selling to Indian consumers.[1] These rules are expressly made applicable to online service providers as well. Hence it is clear that it also includes service providers such as cab-hailing or sharing companies, event management or ticket vending platforms, food delivery companies, content streaming platforms, etc. Thus, it thoroughly encompasses goods as well as services available online. Obligations of Platforms The Rules have imposed certain duties and liabilities on the marketplace E-commerce entities and some of such key duties and liabilities are discussed below- Consumer Grievances- The Rules introduce a time-bound grievance redressal mechanism and impose a duty on E-commerce entities to appoint a grievance redressal officer to ensure that complaints are acknowledged within forty-eight hours and redressal is provided within one month of the date of receipt of the complaint. Information Disclosure- The Rules make it mandatory for E-commerce companies to provide details of the sellers and any other information required by the consumers to make informed choices. They need to take an undertaking from their sellers, ensuring that they display accurate information about their goods and services. They are also required to reveal the country of origin for the goods sold on their platform. However, the rules lack clarity on how the country of origin of a good is to be determined, especially for goods assembled from different countries, repackaged goods, or goods manufactured in one country, under license, by another company in a different country. Ranking and Differential Treatment Disclosure- The Rules make it incumbent on marketplace e-commerce entities to explain the main parameters used to decide the ranking of goods or sellers. The relative significance of such parameters should also be made available to the public. They are further required to disclose any differential treatment given to any of their sellers. This compliance requirement is aimed at those E-commerce entities which directly indulge in product targeting by providing differential treatment to certain companies by displaying them in top search results. This disclosure requirement aims to bring about greater transparency.  Pricing, Consent, and Cancellations- The Rules specify that the platforms are prohibited from engaging in any unfair trade practices and from manipulating the price of goods or services sold on these E-commerce entities. The Rules also mandate that E-commerce entities can record consent for purchase by a consumer only when it is expressed explicitly through affirmative action. Thus, the practice of automatic deduction of charges from the consumers without their affirmative consent has to be done away with. E-commerce entities are also restricted from imposing cancellation charges on consumers unless they are willing to bear similar charges on unilateral cancellations made by them. However, it is pertinent to note that the Rules are applicable from the date of their notification, so there is no window for compliance to these Rules given to E-commerce entities. And, in case of any violation of these Rules, penal provisions of the CPA are applicable.[2] The Conundrum of Exemption of Liability of Marketplace E-commerce Entities While these rules impose substantial obligations on E-commerce entities, the liability on non-compliance of these obligations by E-commerce entities remains a grey area. Even though liabilities are created by the E-commerce rules under the CPA, there remains uncertainty due to the exemption of liability provided to the intermediaries under section 79 of the IT Act.  Applicability of IT Act on Marketplace E-Commerce Entities Section 79 (1) of the IT Act provides an exemption from liability to intermediaries for any third party information posted by them. This provision is applicable notwithstanding any other law except for Sections 79 (2) and 79 (3) of the IT Act. As per section 2 (w) of the IT Act, an online marketplace is included in the definition of an intermediary. Under the Rules, a marketplace E-commerce entity is defined as “an e-commerce entity which provides an information technology platform on a digital or electronic network to facilitate transactions between buyers and sellers”. So it is clear that the definition of a marketplace E-commerce entity fits into the ambit of the ‘online marketplace’ which is defined as an intermediary under the IT Act. The Conundrum of Intermediary Liability  In addition to this, Rule 5 of the E-commerce Rules allows the marketplace E-commerce entity to avail the exemption from liability under section 79 of the IT Act, if they comply with sections 79 (2) and 79 (3) of the IT Act.[3] However, in contrast, Rule 8 states that in case of any violation of the e-commerce Rules, provisions of the CPA will apply. Therefore, there is some uncertainty as to whether the marketplace e-commerce entity

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Reviewing the Standard of Liability of Independent Directors

Leave a Comment / Company Law /

[By Raagini Ramachandran] The author is a student at NALSAR University of Law. Introduction With several scams on the domestic as well as global front, the role of an Independent Director assumes significance so as to serve as a tool of corporate governance by exercising objectivity, impartiality and ensuring shareholder protection in their functioning. On March 2, 2020, the Ministry of Corporate Affairs (‘MCA’) released a circular (‘Circular’) clarifying the standard of liabilities of an Independent Director under the Act. This article reviews the existing standards of liabilities imposed on an Independent Director (‘ID’)  under the Companies Act, 2013 (‘The Act’) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations,2015 (“LODR Regulations”) in the backdrop of this Circular. Companies Act, 2013 The provisions of the Companies Act are applicable to companies incorporated under it. Section 2 (60) of the Act imposes a general liability on an “officer in default” who is liable to pay a penalty or be punished. An “officer in default” is defined as a director who participates in any of the board proceedings and has active knowledge of the default thereby providing his consent or connivance. In SEBI vs. Gaurav Varshney it was held that “liability arises from being in charge of and responsible for the conduct of the company at the time when the offence was committed and not on the basis of merely holding a designation or office in a company.” Thus, liability depends on the role one plays in the affairs of a company and not merely on designation. This sort of a broad interpretation by Courts on the liability of the board of directors is traced to their functional undertaking as opposed to a titular immunity. In Pritha Bag v. SEBI the Hon’ble Securities Appellate Tribunal (“SAT”) differentiated the liability of directors on the basis of those directors who were identified as “officer in default” from the remaining directors of the board. The court interpreted that the former were responsible for those acts of company regarding which liability has been fastened on under S.2 (60) of the Act. The scope of liability under S. 2 (60) is narrowed down by Section 149(12) of the Act which states that liability can be extended to an ID only to the extent of “such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.” It is imperative to break-down the language of this section to comprehend the underlying meaning of it. “Board Processes” The term “broad processes” assumes a centrality in this provision. Yet, there is no statutory definition of this term. The Oxford Handbook on Corporate Governance states that “board process” is understood as the decision-making activities of the board. The interpretation of this term in the Indian context by judgements and orders is “involvement in the decision-making process” as a criteria to hold an ID liable. In an order passed by the SAT, it was held that an ID will be held liable in case of active knowledge of the default attributable through the decision-making process of the board. Section 149 (12) highlights that apart from board process, two crucial factors that ought to be assessed before imposing liability on an ID are:  “consent or connivance and due diligence”   “Consent or Connivance” This term has been interpreted in the SEBI order concerning Amazan Capital Ltd. wherein it was held that the liability of a director is “to be rooted on the conduct of the director in knowingly permitting an omission or commission to take place.” “Diligence” The standard of diligence expected from an ID is to be aware of the actions of the board and take active measures to correct the same. In the SEBI Order concerning Finserve Ltd., it was held that irrespective of whether an ID is not a part of the day-to-day management of the company, the onus lies on them to remain diligent and take “concrete corrective measures with regards to the violation committed by the board.” This position can be traced back to Official Liquidator v. P.A. Tendolkar, wherein the Supreme Court held that “A Director cannot shut his eyes to what must be obvious to everyone who examines the affairs of the Company even superficially”. Thus this jurisprudence lays emphasis on the constructive knowledge of an ID on the affairs of the company, as well as the active efforts he makes to resolve potential defaults. Expansionist Reading by Courts The Courts in several judgements have premised the role of an ID on being an “officer in charge”. In Pooja Ravinder Devidasani v State of Maharashtra, the Supreme Court held that if it is proven that an ID “was at the helm of affairs of the company at the specific time when the decision was taken, he may be made liable.” Such an expansionist reading of the liability of board of director highlights the primacy on the conduct and function of an ID. An order passed by the SEBI states that where “active steps” towards prevention of the default has been made, and board process is used as a “platform to conduct function in a diligent manner”, an ID will not be held liable. In certain cases, the courts impute vicarious liability on a director for the wrongs of the corporation. In Sunil Bharti Mittal v. CBI, the Supreme Court held that the “criminal intention of directors can be attributed to the company on the principle of ‘alter ego’”. Several special legislation such as the Negotiable Instruments Act, 1881 and Prevention of Money Laundering Act, 2002 provides for vicarious liability by stating that “persons in charge of the company” are liable for offences by the company. LODR Regulations as a “narrowing framework” The LODR Regulation is a framework for listed entities. Under regulation 25(5) “An  ID  is  liable,  for omission  or commission  by listed  entities  which  had  occurred  with  his  knowledge,  attributable through processes of board of directors,  and with his consent or connivance or

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The Dilemma Of Acknowledgment Of Debt Through Balance Sheet: An Unending Saga

Leave a Comment / Insolvency Law /

[By Vishesh Jain and Sahiba Vyas] The authors are students at National Law University, Odisha. Introduction The 89th Law Commission Report subserves that no one should live under the menace of a plausible action for an indefinite period. When the Insolvency and Bankruptcy Code, 2016 (IBC) was instituted, there was no explicit provision regarding the application of Limitation Act, 1963 until the Hon’ble Supreme Court (SC) ascertained the applicability of limitation period for filing of an application under IBC. The Apex Court, in the matter of Innoventive Industries Ltd. vs. ICICI Bank Limited (2018), adjudged that, “a debt may not be due if it is not payable in law or in fact”. Thus, Section 238A was inserted into IBC which states that, “The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or Appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Appellate Tribunal, as the case may be.” The interpretation of the same has become misty after the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT) have given contradictory judgements on the same question of law. The authors through this post comment on the differing views of the adjudicating authorities and try to establish a conclusion to encounter the disparate views with the help of foreign jurisprudence. NCLAT & NCLT at Odds The whole conundrum started when recently in the case of Syndicate Bank v. Bothra Metals and Alloys Limited, NCLT held that an application under Section 7 of IBC  is not barred by limitation. The case dealt with a Company Petition filed under Section 7 of IBC by Syndicate Bank (Financial Creditor), seeking to initiate Corporate Insolvency Resolution Process (CIRP) against Bothra Metals and Alloys Limited (Corporate Debtor). The Corporate Debtor (CD) failed to pay the principal and interest of the loan availed by the Financial Creditor (FC). The CD raised the contention that the present application of the FC is barred by limitation but the Tribunal, held that “an acknowledgement in the Balance Sheet of the company satisfies the requirements of Section 18 of the Limitation Act, 1963, leading to a fresh period of limitation commencing from each such acknowledgement.” The contradictory views on the impugned issue can be observed from various rulings of NCLAT. In 2019 in case of Gautam Sinha vs. UV Asset Reconstruction Company Limited, the Tribunal ruled that though a default in the form of NPA is reflected in the Balance Sheet, it was not an acknowledgement of the debt by the Corporate Debtor and the default was time-barred for filing of an application under Section 7 of the IBC. Further, in February 2020 in the case of Sh. G Eswara Rao vs. Stressed Assets Stabilisation Fund, the Appellate Tribunal reaffirmed the same rationale and stated that under Section 92(4) of the Companies Act, 2013, the filing of Balance Sheet/annual return is mandatory notwithstanding which penal action might be initiated under Section 92(5) and 92(6) of the same Act. Thus, the filling of Balance Sheet/ Annual Return cannot be considered as a ground for acknowledgement of debt under Section 18 of the Limitation Act, 1963. In March 2020 again in case of V. Padmakumar v. Stressed Assets Stabilisation Fund, the AA relied on the same contradictory premise as stated in above-mentioned cases. In this case an application was filed under Section 7 of IBC by M/s. Stressed Assets Stabilization Fund (SASF) for initiation of CIRP against M/s. Uthara Fashion Knitwear Limited. A five-judge bench of NCLAT, with a ratio of 4:1, favoured barring limitation to file an application under Section 7 of IBC. The impugned case discussed the legal perspectives with regards to the acknowledgement of the debt using Recovery Certificate reflected in the Balance Sheet. The one dissenting opinion of Justice Cheema, in this case, favoured the acknowledgement of debt through the Balance Sheet. While deciding the case, the Adjudicating Authority (AA) relied on the judgement delivered by the Apex Court in the case of Jignesh Shah and another v. Union of India and another, where the Hon’ble court cited the prima facie objectives of IBC i.e. an insolvency proceeding is a proceeding ‘in rem’ and not a recovery proceeding; thus, a winding-up petition must trigger the date of default and not on the day of acknowledgement of debt. Thus, the contradictory views adopted by various Adjudicating Authorities have left the interpretation of the provision in a lurch. Acknowledgement of Debt and Foreign Jurisprudence Under the English Law, Atlantic and Pacific Fibre Importing and Manufacturing Co. Ltd is considered as one of the first cases on the acknowledgement of debt and Balance Sheet conundrum wherein the court opined that recording debenture debt in the Balance Sheet of the company is sufficient acknowledgement of debenture debt. The next most notable and celebrated decision on the Balance Sheet conundrum was rendered in Jones v. Bellgrone Properties, wherein the Court of Appeals held that once the chartered accountant and directors of a company sign the Balance Sheet, it constitutes as an acknowledgement of debt within the meaning of applicable limitation statue. The current legal position in English Law can be derived from the decision of Gee & Co.(Woolwich) Ltd., where the Court observed that there is no requirement in English law that debt must be due at the time when it is acknowledged. The Court further held that when the director duly signs the Balance Sheet, then it can be efficiently considered as acknowledgement of debt and the cause of action for the same is deemed to have accrued on the date of signing of the Balance Sheet by the director. This has also been upheld by the Court in the case of Overmark Smith Warden Ltd. If we look upon Australian Jurisprudence, the Courts have settled the position in the case of Stage Club v. Miller Hotels wherein it was held that the signed Balance Sheet is enough to constitute an acknowledgement for the debt for Statute

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RBI’s New Plan for PSOs: Eliminating Hurdles Through Self-Regulation

Leave a Comment / Contemporary Issues /

[By Sushmit Mandal and Pratim Majumder] The authors are students at National Law University Odisha, Cuttack. The substantial growth of the digital payment ecosystem in India has enhanced the need for more effective implementation of a framework to govern digital payments. In an attempt to strengthen and ensure better compliance of regulations and to foster the best practices on system security, pricing, customer protection measures and grievance redressal mechanisms, the Reserve Bank of India (‘RBI’) on August 18, 2020, published the Draft Framework for grant of recognition to an industry association as a Self-Regulatory Organisation for Payment System Operators(‘Draft Framework’). The establishment of a Self-Regulatory Organisation (‘SRO’) for the digital payment ecosystem is in line with the RBI’s Payment and Settlement Systems in India Vision 2019-21. Further, the establishment of an SRO for Payment System Operators (‘PSOs’) was also one of the major recommendations set out in the Report of the High Level Committee on Deepening of Digital Payments published on May 17, 2019. Based on such recommendation, the RBI expressed its intention to draft a framework for establishing an SRO for the digital payment system in the Statement on Developmental and Regulatory Policies published on February 6, 2020. It is expected that the SRO by virtue of being developed by the industry itself, would lead to more practicable standards and encourage better compliance. The article traces the application of SROs in an Indian context with a look at their success in some other jurisdictions. Second, the terminology and context of the Draft Framework are scrutinised to recognise potential benefits and lacunae with a final take on the way ahead to the final framework as an anticipated new development in our PSO regulatory space. Background and Rationale With the introduction of the new Framework, the RBI has decided to recognise and constitute an SRO that would be responsible for making and enforcing rules for PSOs, subject to their membership. The proposed SRO, as seen in clause 1.4 and 3.1, shall be a non-governmental and not-for-profit company, which would collaborate with interested stakeholders to protect customers and encourage ethics, equality and professionalism in the market. Further, the single-most crucial function of the SRO would be to act as a link between the RBI and its members. The RBI believes that the establishment of the SRO would allow the implementation of self-regulatory processes through an impartial mechanism which would, in turn, enable the members to operate in a disciplined environment without undue pressure from the regulator. The SRO model is not unconventional and has been earlier witnessed in India. The RBI has earlier issued a framework for establishing SROs for NBFC-Microfinance Institutions. Similarly, the Securities Exchange Board of India (‘SEBI’) has issued specific regulations, namely the SEBI (Self-Regulatory Organizations) Regulations, 2004 (‘SEBI SRO Regulations’) for SROs requiring recognition from SEBI. The concept of industry associations in the digital payment sector is a recognised phenomenon globally as well. In Australia, the Australian Payments Network (‘AusPayNet’) acts as an SRO and is responsible for developing practices governing the payments, clearing and settlement where the Reserve Bank of Australia only intervenes when the SRO fails to address the public interest. The AusPayNet played a pivotal role in the formation of the New Payments Platform. Further, in Singapore, the Singapore Payments Council (‘SPC’) formed by the Monetary Authority of Singapore (‘MAS’), consists of banks, payment service providers, businesses and trade associations. The SPC inter alia seeks to promote cooperation amongst the e-payment entities and adoption of e-payments. Expected Benefits and Potential Pitfalls The formation of the SRO can be a positive step towards a more grassroot level approach to govern market players. It can show the willingness of the regulator to work along with the industry towards developing a robust digital payment ecosystem. Further, SROs due to their technical expertise and more in-depth understanding of the market can supplement the work of the regulator and help in framing practical standards for the industry, unshackled from weighty regulations. However, legitimate concerns of transparency and accountability cannot be denied and must be properly laid down in the final framework. One of the potential pitfalls is the existence of undue influence in an SRO where the constituting members are the PSOs themselves; therefore, the final framework must lay down the provision to exercise checks and balances over any potential conflict, which may arise between their business and regulatory duties. However, the Draft Framework relays that the SRO will have the legal authority to enable it to set and enforce policies/standards for members with the caveat that any such mandates may not replace applicable laws or regulations. Further, the Draft Framework fails to flesh out the ownership and governance structure of the proposed SRO. Therefore, the final framework must introduce a relevant provision for maintaining the balance between the SRO’s independence in exercising its authority in tandem with the regulatory oversight of the RBI. A balancing act needs to be undertaken to introduce an adequate amount of accountability without undermining the SRO’s authority. An important component of any regulatory body’s arsenal for enforcing discipline is adequate penalties, which are presently left to formulation and enforcement to the SRO itself. It is perhaps more prudent for the RBI to provide basic structural pointers in terms of minimum quantifiable penalties and a non-exhaustive list of trigger events which might cause the levy of such penalties. The SRO thus shall retain the power to frame penalties for its members with its keener insights into the members whereas remaining bound towards implementing the broader dictum of the RBI. A case in point is Regulation 15(3) of the SEBI SRO Regulations which provides a general framework of penalties for SRO members such as expulsion from membership or suspension from membership for a specified time, but noteworthy is the explicit specification of non-monetary penalties which might not be the best deterrent even in the case of PSOs. The Draft Framework falls a tad bit short of defining specific word usages, which can negatively impact interpretation

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Calcutta HC Holds Nature Of Section 7(3)(A) Of The IBC To Be Directory

Leave a Comment / Insolvency Law /

[By Soham Banerjee] The author is an Associate (Dispute Resolution) at Vashi and Vashi – Advocates and Solicitors, Mumbai. Introduction: The National Company Law Tribunal (“NCLT”) by way of its Circular dated May 12, 2020 (“Impugned Circular”), directed all new and pending insolvency applications filed by Financial Creditors under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to be mandatorily accompanied by a record of the Financial Default from an Information Utility (“IU”). Accordingly, Univalue Projects Ltd. and Cygnus Investments and Finance Pvt. Ltd. (“Petitioners”) challenged the vires of the impugned Circular invoking the writ jurisdiction of the Calcutta High Court. Grounds of Challenge: Being Financial Creditors with a pending/prospective applications under Section 7 of the IBC, the Petitioners alleged that the impugned Circular would adversely affect the substantive and vested rights of the Petitioners that had accrued upon them as a creditor under the IBC, prior to the publication of the impugned Circular. Additionally, the Petitioners also claimed that the impugned Circular was issued in gross contravention of the IBC, the Companies Act, 2013 (“CA 2013”), and regulations under the Insolvency and Bankruptcy Board of India (“IBBI).  Petitioner’s Submissions: a)Kompetenz – kompetenz of the NCLT to issue the Circular Section 424 of the CA, 2013 lays down the powers of the NCLT and the NCLAT. Accordingly, the Petitioner submitted that upon a bare reading of Section 424 of the CA, 2013, it is ex facie evident the scope of the NCLT’s jurisdiction is limited to the regulation of day to day procedure and such procedure that may be followed for the administration of justice. Section 424 of the CA, 2013 does not confer jurisdiction upon the NCLT to alter and/or contravene the basic structure of the CA, 2013, or the IBC. b)Statutory interpretation of “as may be specified” under Section 7(3)(a) Attention was drawn to Section 3(32) of the IBC on the definition of the term ‘specified’ which means specified by regulations made by the IBBI. Accordingly, relying on the term “as may be specified” under Section 7(3)(a) of the IBC, the Petitioners submitted that the power to make regulations under Section 7 of the IBC vested with the IBBI and not the NCLT. c)Presumption of implied delegated legislation The Petitioners submitted that where a statute expressly provides for delegation of power to a subordinate authority, exclusive jurisdiction vests with that subordinate authority to make rules and regulations under the statute. Accordingly, since the IBC had expressly delegated the power to make regulations to the IBBI, the NCLT traversed beyond the ambit of the statute in issuing the impugned Circular. d)Disjunctive nature of Section 7(3)(a) The Petitioners submitted that Section 7(3)(a) of the IBC envisaged proof of financial default through other modes of documents and evidence. Attention was drawn to the usage of the term “or” in Section 7(3)(a) of the IBC to argue that the intention of the legislature was to make Section 7(3)(a) disjunctive, and not limit proof of financial default to only furnishing of record of default with the IU. Reliance was also placed on Regulation 8(2) of the IBBI Regulations, 2016 to highlight that the said regulation also lists four other categories of documents, in addition to the record of default with the IU to establish financial default. e)Inherent powers of the NCLT and AA Rules, 2016 In conclusion, the Petitioners pre-emptively submitted that even under the NCLT’s inherent jurisdiction under Rule 11 of the NCLT Rules, 2016, the NCLT could not have issued the impugned Circular. A comparison was made with Section 151 of the Code of Civil Procedure, 1908 (inherent powers of a Civil Court) to submit that even a Civil Court cannot resort to its inherent jurisdiction to issue rules and regulations, ultra vires the parent statute [See KK Veluswamy v. N. Palanisami, (2011) 11 SCC 275]. Additionally, reliance was also placed on Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“AA Rules, 2016”), which deals with procedural aspects of an application filed by a Financial Creditor. It was contended that the ‘Form – I’ which had to be filed along with the documents evincing financial default also made provision for accommodating other sources of documents and evidence, apart from the record of default with the IU. Respondent’s Submissions: Per contra, the Respondent argued that Section 424 of the CA, 2013 vested NCLT with the jurisdiction to regulate their own procedure. Further, the Respondent raised strong objections to the furnishing of record of default with the IU as a mere formality and contended that it was an essential feature of the IU to authenticate and verify the information submitted by a financial creditor. Additionally, the Respondent also argued that new disabilities and/or obligations have not been foisted upon financial creditors by way of the impugned Circular since Section 7(3)(a) of the IBC specified, at the outset, that a financial creditor is required to submit the record of the default with the IU, along with the application. Since there exist no specific regulations that govern the submission of other evidence/documents as proof of financial default, the record of default to be furnished to the IU is the only way to establish financial default, and hence mandatory. Findings: a)On jurisdiction of the NCLT: On the NCLT’s jurisdiction to publish the impugned Circular, reliance was placed on Government Of Andhra Pradesh & Ors v. Smt. P. Laxmi Devi [(2008) 4 SCC 720] to expound upon the hierarchy of legal norms when it comes to rules and regulations governing the field of Insolvency laws, as under: (i)Provisions of the CA, 2013 and IBC; (ii)Rules enacted by the Central Government and regulations made by the IBBI; and (iii)NCLT/NCLAT regulating their own procedure subject to Section 424 of the CA, 2013 (iv)Accordingly, while the NCLT has been vested with the jurisdiction to regulate its own procedure, such regulations are subservient to the provisions of the CA, 2013, the IBC, and regulations made by the IBBI b) On implied delegated legislation:

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Open Offer Price: A Constant Tussle between Acquirer and Shareholders

Leave a Comment / Capital Markets and Securities Law /

[By Aayush Khandelwal and Abhinav Gupta] The authors are students at National Law University, Jodhpur. Introduction Valuation of share during an open offer has been a constant subject of disputes. The acquirer and shareholders are often at loggerheads in relation to the offer price. Where the acquirer seeks to reduce its cost of acquisition, shareholders seek to extract most out of the exit opportunity.  This has led to multiple instances where the offer price was challenged by the shareholders before the Securities and Exchange Board of India (‘SEBI’). In this article, the authors seek to explore this conundrum surrounding the valuation of shares (offer price) during open offers. In doing so, we discuss the process of valuation of shares in case of open offers. Moreover, we discuss some recent cases where the valuation was challenged by the shareholders, and the price was revised by the regulator. Towards the end, we propose certain changes that can be accommodated in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) to provide better protection to shareholders. Process of Offer Price Determination In case of acquisition of control,[i] or voting rights beyond the prescribed limit in a company,[ii] the acquirer has to provide an exit opportunity to the shareholders of the company. The price of the open offer has to be determined in accordance with Regulation 8 of the Takeover Regulations. The above-mentioned Regulation categorizes the shares into two categories to calculate the offer price. One category is of the shares which are frequently traded on the stock exchange, and the other category is of shares that are infrequently traded on the stock exchange. The shares of a company are considered as frequently traded when the traded turnover of the company on the stock exchange in the last one year is more than ten percent of the total shares of the company.[iii] There arises no difficulty in determining the offer price of the company whose shares are frequently traded as it is determined from the stock trading data of the company.[iv] Whereas, a difficulty arises in determining the offer price of the company whose shares are not frequently traded. The merchant banker, to determine the offer price, is required to take into consideration certain factors such as book value, comparable trading multiple, or parameters as are customary for the valuation of such companies.[v] Book value is not useful for companies that have human capital as a primary asset. Further, the book value of a company can reduce during the time of recession. Therefore, the methods prescribed under the Takeover Regulations for such companies may not give the accurate value of the shares. In such circumstances, the SEBI has the power to appoint an independent merchant banker or chartered accountant to determine the valuation of shares.[vi] There have been many instances where the SEBI has appointed independent valuers to determine the fair price of a share and has directed the acquirer to revise the offer price accordingly. Challenges to Offer Price In this section, we have discussed certain recent cases where the shareholders have challenged the offer price provided by the acquirer. A leading case on the issue regarding the determination of the offer price is Tenneco Inc. v. SEBI,  before the Securities Appellate Tribunal (‘SAT’). In this case, Tenneco Inc. indirectly acquired Federal-Mogul Goetz (India) Limited, whose shares were infrequently traded. The acquirer appointed two valuers that determined the fair value per share at INR 372.10 and INR 397.66. Accordingly, the acquirer made an open offer with an offer price of INR 400 per share. Later, SEBI appointed a chartered accountant for the computation of the fair price of the share, per the powers conferred upon it by the Takeover Regulations. SEBI directed Tenneco Inc. to revise the offer price to INR. 608.46. Aggrieved by the direction of SEBI, the acquirer filed an appeal before the SAT. The SAT dismissed the appeal and upheld the direction of SEBI. Another instance where the open offer price was challenged was the merger of Praxair Inc. and Linde AG which triggered an open offer for the shareholders of Linde India Limited. Upon failure of the delisting offer, the acquirer commenced the open offer again and appointed a merchant banker to determine the offer price as the shares of the company were infrequently traded. The merchant banker arrived at a valuation of INR 276.09 per share. Later, SEBI appointed an independent chartered accountant to determine the fair price of the equity shares of the company. The valuer appointed by SEBI arrived at a valuation of INR 376.63 per-share value of the company. Recently, an indirect acquisition of ABB Power Products and Systems India Limited has triggered an open offer under the Takeover Regulations. The shares of the company were not frequently traded on any stock exchange, as the offer was announced on the day the company got listed. Accordingly, the independent valuers appointed by the acquirer have determined INR 851 per-share value of the company. Reports suggest that SEBI is scrutinizing the price offered by the acquirer and examining whether the valuation is fair for the investors. It remains to be seen whether SEBI will appoint an independent valuer to protect the interest of the investors. Way Forward Increasing the role of directors and appointment of independent adviser: One major reform in the valuation process during open offers could be providing clarity with respect to the role of directors during a takeover bid. Currently, only a committee of independent directors of the target company has to provide ‘reasoned recommendations’ on the open offer.[vii] Even the role of the board of directors (‘BoD’) is very limited to facilitating the verification of shares,[viii] and providing information on competing offers to shareholders.[ix] In our opinion, current provisions are ambiguous and do not ensure optimum protection to the shareholders. The regulator should consider providing more elaborate criteria for assessing an open offer by independent directors and increase the duty of BoD. We believe that changes can be made

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The Google-Android Antitrust Dilemma

Leave a Comment / Competition Law /

[By Anchit Nayyar] The author is a student at Symbiosis Law School, Pune. The Competition Commission of India (“CCI”) vide its prima facie order dated 16th April 2019 in the case of Umar Javed v. Google LLC has initiated investigations into potentially anti-competitive practices adopted by Google with respect to the Android Operating System(“OS”) and its suite of proprietary mobile applications. The investigation is closely modelled after similar proceedings before the European Commission (“EC”), wherein Google was fined $5.4 Billion for leveraging the dominance of Google Play Store to unfairly benefit its proprietary mobile applications, and to foreclose the development of rival mobile OSes This article seeks to analyze the multi-faceted nature of the issues before the CCI, and the consequent need to find a middle ground in antitrust enforcement in the Big Tech sector. Facts of the Case Android is an open-source mobile OS, meaning that it can be freely used as well as customized by anyone. Android’s open-source code enables third-party manufacturers to potentially customize and develop their own modified versions of Android (also knows a Forked OSes). Google also acts as an app developer and offers a suite of its proprietary apps in a bundle called Google Mobile Services (“GMS”). These apps include a total of 9 Mobile applications including the Play Store, Google Search, Chrome etc. While the Android OS can be licensed by device manufacturers by entering into simple android license agreements, to install the GMS and get access to Google’s proprietary Application Programming Interface (“APIs”), the manufacturers have to enter into two additional agreements: Mobile Application Distribution Agreement (“MADA”) which obligates the device manufacturers to pre-install the entire bundle of mobile applications in the GMS, and place them at prominent locations on the device; and Android Compatibility Commitment (“ACC”), which places restrictions on the extent to which device manufacturers can customize the Android OS. Challenging these two agreements, it was alleged that by way of tying certain Google applications which are considered irreplaceable (e.g. Play Store) with other applications for which reasonable alternatives exist (e.g. Play Music, Google Search etc.), Google is preventing the development of rival mobile applications. Further, it was alleged that by imposing the ACC restrictions, Google is unfairly reducing the incentives of third-party developers to make their own modified Android Forks, thereby restricting innovation in the market. Google’s Counter-Arguments Google argued that the restrictions and obligations imposed under the two agreements did not cause foreclosure in the market and were not anti-competitive. Some of its main submissions were as follows: The device manufacturers are not obligated to sign the two agreements to license the Android OS, which remains open-sourced; The pre-installation obligations were limited in scope and the device manufacturers were free to pre-install other rival applications as well; The end-users remain free to install any other mobile applications on their phones, and can easily move or disable the pre-installed apps; The restrictions imposed in ACC were justified by the fact that if companies make modifications to the source code beyond a certain extent, it could create incompatibilities with apps developed for Android, making it less attractive for both the app developers and the users. CCI’s  Observations The CCI defined the primary relevant market as the “Market for licensable smart mobile device operating systems in India”, thereby distinguishing Android from other non-licensable OSes like Apple’s iOS. Thereafter, the CCI relied on the 80% market share held by Android in the primary relevant market to hold that it possessed a position of dominance. Further, the Commission defined two associated relevant markets i.e. the “Market for Online General Web Search” and the “Market for app stores for Android Mobile OSes” and also prima facie held that each mobile application available in the GMS would constitute separate relevant markets. On the issue of the abusive conduct, the CCI was of the prima facie opinion that Play Store is a must-have app on each Android Mobile phone, a lack of which severely hinders the device’s marketability. Thus, while Google had contended that the two agreements were not mandatory for licensing the Android OS, Play Store’s essentiality de-facto rendered the agreements compulsory for the device manufacturers. Making pre-installation of proprietary apps like the Play Store conditional upon signing the ACC thus reduced the incentives and ability of the device manufacturers to produce forked versions of Android, thereby limiting scientific and technical development in violation of Section 4(2)(b) of the Competition Act (“the Act”). Further, the CCI prima facie held that Google abused its dominant position and imposed unfair conditions on the device manufacturers in contravention of Section 4(2)(a)(i)  by making pre-installation of its must-have apps like the Play Store conditional on pre-installation of the entire GMS suite. The same also amounted to Google leveraging Play Store’s dominance to protect the competitive position of its proprietary apps in contravention of Section 4(2)(e), while also leading to a denial of market access to its competitors in violation of Section 4(2)(c) of the Act. Analysis The case against Google revolves around it leveraging the dominance of the Play Store to unfairly benefit its own proprietary apps, while also limiting the development of Android forks. This case has brought the CCI face to face with some very pertinent economic issues that will potentially shape the antitrust enforcement in India’s digital economy. Pre-Installation Bias v. Multi-Homing The CCI was of the opinion that Google is leveraging the dominance of Play Store to unfairly benefit its other proprietary apps by making pre-installation of the entire suite of GMS apps in order to get access to Play Store. This issue, however, requires a multi-faceted consideration. Firstly, the finding is based on the presumption of the existence of a pre-installation bias, wherein users who find apps pre-installed on their devices are likely to “stick to them”. Similar findings were made by the EC in its case against Android, wherein it found that such practices adopted by Google reduced the incentives of manufacturers to pre-install competing apps. Further, such practices ensure an inherent

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