Author name: CBCL

GAFA – An Economy of Untamed Capitalism

Competition Law, Contemporary Issues /

[By Dhriti Mitra] The author is a student at Symbiosis Law School, Pune. Introduction GAFA, an acronym coined in France for Google, Apple, Facebook, and Amazon, identifies these Big Tech companies as an entity with expansive capital infrastructure and great customer reach. However, the fact that these companies can use their popularity to ensure that its products sit on top while suppressing competition in downstream markets, have repeatedly drawn the attention of the antitrust authorities. In today’s digital era where personal data is the currency to market power and expansion, GAFA has a tight grip over an abundance of user data. Google is the largest search engine in the world and has access to almost every search that we make with the help of the internet. Apple monopolizes through its mobile operating system platforms (iOS) and its downstream apps, for example, apple music. Facebook holds an advantageous position in the social network market, especially after it purchased Instagram and WhatsApp in 2012 and 2014 respectively. Amazon runs the most prominent e-commerce platform that allows consumers to purchase all kinds of goods from third-party vendors as well as its brand. It can be discerned from the above, that to protect competition, it is essential to have adequate legal regulation in this ‘winner takes all’ market system. GAFA poses multiple challenges to the overall competition existing in various global markets and the same has been discussed below along with the extant regulatory framework and the tenable courses of action that will help deal with the defined issues. Predominant Facets of GAFA It is an established fact that the aforementioned tech quadropoly dominates our digital spaces, but that in itself is not a breach of antitrust provisions. All digital markets have a unique set of characteristics that create significant barriers to entry, access to large amounts of consumer data, and often low cost or free. It is therefore important to understand them before we delve into exactly how their behavior is a threat to competition. Two-sided Markets: In a two- sided market, the size of the network determines the user utility. Due to the existence of economies of scale, the overall cost incurred in providing a service automatically reduces. Hence, the reduced cost allows companies to provide the services at a lower price or for free. GAFA is characterized by this form of market and accumulates a substantial amount of data, human resources, and technology, thereby enforcing its market dominance. Control over Data: Algorithms and data influence indeed make our lives infinitely easier, but it is also a matter of great concern how people who have access to this data, utilize it. For example, through software and devices such as Alexa, Google Home. and Siri, GAFA has complete access to our data usage on a day to day basis.  All in all, from the news we read, to the friends we add on our social media, are all influenced by a variety of cognitive biases that we are unaware of. Advertisement Income: Prima facie the four companies seem to diversify into different markets, but one thread that binds them all is their advertising revenue. In order to provide inexpensive or free services, it is essential that the revenue is earned from elsewhere. Advertisement helps in subsidizing their overall costs and allows GAFA to earn a substantial portion of their revenue. International Taxation: The traditional models of taxation that were directed towards brick and mortar businesses are not well equipped to handle the taxation of online businesses. GAFA is known to have made large revenues by shifting all its profits to low-tax jurisdictions. For example, Amazon received undue tax benefits of around €250 million in Luxembourg. Threats Posed by GAFA GAFA’s omnipotence helps them to impose their products and services on the masses, thereby creating multiple threats that may kill innovation and competition in such markets. Some of the threats have been discussed as follows; Firstly, in the case of data protection, GAFA’s algorithms have pressed us into conformity and laid waste to privacy. A great example of this is how Cambridge Analytica with the help of data collected from millions of Facebook users, were able to target messages in support of Brexit in the UK and Trump’s 2016 election in the US.  Although this episode in particular concerns Facebook alone, it has highlighted the excessive power of GAFA over our societies. Secondly, GAFA banks on its dominance in one market to enter new markets and gain substantial market share in that sector. For instance, Facebook introduced its cryptocurrency libra, and GAFA have their respective e-wallet platforms. With its significant investments in the provision of financial services, if unregulated, GAFA may become the future of finance. On the legal front, GAFA has often been charged for breach of antitrust provisions.  In the recent past, Google was fined €1.49 billion by the EU for abusing its market dominance for the brokering of online search adverts, Apple was fined $1.2 billion by the French antitrust authorities for the creation of cartels within its distribution network and abusing the economic dependence of its outside resellers. Germany’s top court declared that Facebook has abused its dominance in the social media sector by illegally harvesting user data for its benefit, and Amazon is under the EU’s radar for breach of antitrust provisions for its illegal use of data from third-party retailers that sell on its marketplace. Unfortunately, these cases account for only a few of the anticompetitive activities practiced by GAFA. Lastly, as GAFA indulges in a great deal of non- price competition, most of its services are primarily free for its users. So much so, that one could argue that they promote consumer welfare. However, GAFA earns its currency from the data that its users provide, and by concealing the full extent of its, they cause more harm than good. It is also important to note the loss that is caused to small businesses that do not have the resources or ownership of other vertical platforms in

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Online Dispute Resolution In Digital Payments– An Attempt To Read Consumer Protection In Digital Payments Framework In India

Contemporary Issues /

[By Vanya Chhabra & Sadhvi Chhabra.] Vanya is an associate at AZB & Partners, Delhi and Sadhvi is a student at National Law University, Jodhpur. The blog post seeks to address the introduction of ODR by the RBI as the need of the hour on account of increased digitalization and growth in the digital payments ecosystem. It traces and attempts to capture the transition in approach to a consumer-friendly mode to deal with the disputes online considering conventionally the industry has seen onerous consumer litigation. The blog in detail explores the contours of RBI policy to address concerns related to failed transactions while using ODR in digital modes of payment. The blog also touches upon the challenges involved in the evolution of the RBI policy and how innovation may come to rescue dispute resolution with fintech solutions. India is rapidly moving towards a digital economy. E-commerce has captured large segments of the Indian population making the online market space more complex and information rigorous due to the rising number of digital transactions. The RBI has shown quick adaptability to hold onto the speed of the steadfast moving financial technology with the introduction of online dispute resolution for digital payments. The increased digitisation has radically altered the relationship between the customer and the financial institution. This blog aims to analyse RBI’s attempt to introduce the online dispute resolution mechanism for the digital payments ecosystem in India. Post-demonetization, the digital payments ecosystem saw a sharp acceleration and growing malleability towards online cash-less payments. The major contributors to this success and growth in digital payments are the flagship government initiatives inter alia Digital India, etc. Furthermore, in order to address the growing COVID- 19 concerns, digital payments appeared as one of the most promoted method of payment. Keeping in mind the increase in transactions, the questions of faster dispute redressal remained prominent and unanswered. In the past, the banking industry adopted a hands-off approach while dealing with disputes that arose out of digital transactions. As a result, it was seen that in a plethora of cases, the realm of disputes had always been onerous with the burden of proof on the consumer to fight for their rights through the means of litigation. In order to address the rising concerns relating to digital transactions, the Reserve Bank of India (“RBI”) introduced a policy of “Online Dispute Resolution (ODR) for Digital Payments” vide its statement on developmental and regulatory policies dated August 6, 2020 (“Policy”), which aims to enhance and ease the digital payments framework in India. The purpose of introducing such a Policy with mandatory compliance for payment system operators is to encourage an easy and accessible online dispute settlement for cases arising out of digital transactions. The effort of addressing online disputes through the means of this  Policy is a welcome step to match the global outlook on FinTech policies. Furthermore, in order to accommodate the rapid digitisation of courts, Niti Aayog is also exploring avenues for advancing online dispute resolution in India. The Policy is in consonance with the RBI’s mission to ensure that all payments and settlement systems operating in India are inter alia primarily safe, secure, efficient, and accessible. Through this Policy, the RBI seeks to use customer friendly online dispute resolution to address concerns related to failed transactions while using digital modes of payment like Net Banking or E-wallets or any other grievance as raised. The ease of dispute resolution even though dependant on the design and structuring of applications by the payments system operators, shall be a significant step to boost to digital payments ecosystem in India. Online Dispute Resolution in Digital Payments Online Dispute Resolution (“ODR”) could be simply defined as an online method of dispute resolution using the means of technology to facilitate the dispute resolution between parties. The various schools of thought bifurcate multiple dispute resolution techniques between involving absolute control over the process to reach an amicable solution (negotiation) and the parties being mere spectators to a process led by third parties in fiduciary relationships (arbitration).. ODR for digital payments would involve ‘technology-driven redressal mechanisms’ that are rule-based, transparent and involve minimum (or no) manual intervention to deal with the disputes in an effective manner within a specified timeline. In India, the payment systems are governed and regulated by The Payments and Settlement Systems Act, 2007 (“PSSA”). Regulatory Regime of ‘Payment System’ Under The Payments and Settlement Systems Act, 2007 A ‘payment system’ under PSSA means a system that enables payment to be effected between a Payer and a Beneficiary. The essentials to qualify as a ‘payment system’ would involve performing three major functions – clearing, payments or settlement services or all of them; the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations (Section 2(1)(i), PSSA), while categorically excluding stock exchanges (Section 2(1)(i)  r/w Section 34, PSSA). The RBI is a statutory regulator of payment and settlement systems in India (Section 4 of PSSA), while the Board for Regulation and Supervision of Payment and Settlement Systems (“BRSPSS”), a sub-committee of the Central Board of the RBI, is the highest policy-making body on the payment and settlement systems. Before the introduction of the Policy, the RBI had a fast- track and cost-free dispute resolution mechanism for complaints regarding digital transactions undertaken by customers of the system participants vide the As per Clause 9 of the Scheme, the complainant for redressal of any grievance must first approach the system participant concerned. “If the system participant does not reply within a period of one month after receipt of the complaint or rejects the complaint, or if the complainant is not satisfied with the reply given, the complainant can file the complaint with the Ombudsman for Digital Transactions within whose jurisdiction the branch or office of the system participant complained against would be located.” As per the RBI, there has been ‘a concomitant increase’ in the number of disputes and grievances due to the steady rise in the

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Debunking the Constitutionality of the NFRA

Company Law /

[By Ridhi Arora and Hitoishi Sarkar] The authors are both students at Gujarat National Law University. On 22 July 2020 the former head of Deloitte Haskins and Sells LLP, Udayan Sen was banned from being appointed as an auditor or internal auditor for any company for a period of seven years in an order passed by the National Financial Regulatory Authority (“NFRA”) The NFRA found him guilty of professional misconduct in his audit of the fraud-ridden IL&FS Financial Services Ltd (“IFIN”) and also imposed a monetary liability of Rs 25 lakhs.  Interestingly, Mr. Udayan Sen had challenged the constitutionality of the NFRA vide Writ Petition W.P (C)  no. 1524/2020 before the Delhi High Court. Despite the same being sub judice before the Delhi High Court, the NFRA went ahead with its proceedings and passed an order dated 22 July, 2020. This post seeks to analyse the constitutional issues surrounding the NFRA, while also analysing it vis-à-vis the provisions of the Chartered Accountants Act, 1949 (“CA Act”) and the Supreme Court jurisprudence. Background The NFRA is established under Section 132 of the Companies Act, 2013. The NFRA aims to regulate the conduct of chartered accountants in the country and draws heavily from section 22 of the CA Act, which conclusively lays down the definition of what constitutes professional misconduct. Evidently, the NFRA comes in direct conflict with the Institute of Chartered Accountants of India (“ICAI”), which grants licenses to the Chartered Accountants and is the regulator for the profession of chartered accountants in India. The ICAI had expressed their reservations over the constitution of NFRA and the same was noted by  the Standing Committee On Finance in its 37th Report as follows: “a) Multiple Regulatory Bodies: Creating NFRA would result in two regulatory bodies (ICAI and NFRA) governing the same audit profession. This would result in duplication of efforts, added huge costs with no significant incremental benefits. This would also change the self-regulated profession to an externally regulated body. b) The ICAI Context: NFRA might seem necessary to ensure that standard-setting and enforcement are not carried out by the same body (ICAI). However, it would be pertinent to mention that the ICAI, has been created by an Act of Parliament for this specific dual role (like SEBI). The constitution of NFRA needs to be re-examined in the mentioned contexts where relevant mechanisms and units have been enabled by and/or within the ICAI organization to deliver the twin objectives of robust policy-making and unbiased enforcement in a timely manner. c) Relevance of NFRA in the context of the Companies Act 2013: The objective of NFRA is to regulate audit quality and protect the public interest. These, in any case, are also the main objectives of ICAI which strives to be a world-class regulator.” Interestingly, the Committee opined in its Report that the CA Act should be streamlined and strengthened without needlessly adding to regulatory levels and the Centre could simply amend the CA Act to grant it more power if the need arose. However, the Ministry of Corporate affairs went ahead with the constitution of NFRA. Demystifying the Constitutionality The NFRA presents a significant challenge from the standpoint of constitutionality when looked at through the prism of several fundamental rights such as the freedom of profession, guaranteed under Article 19 (1) (g) of the constitution. An authority which has not issued the license to practice to an individual should not exercise the power to investigate a person for professional misconduct. The law on this point has been well settled by a Five Judge Bench of the Supreme Court in Supreme Court Bar Assn. v. Union of India & Anr., when it ruled that “since the jurisdiction to grant a licence to a law graduate to practice as an advocate vests exclusively in the Bar Council of the State concerned, the jurisdiction to suspend his license for a specified term or to revoke it also vests in the same body.” [i] Juxtaposing the aforementioned judgment with the functions of the NFRA, it seems that the authority operates in contradiction to principles of law laid down by the Court. The notion of the unconstitutionality of the NFRA further stems from its considerable overlap with the CA Act. This is due to the Supreme Court’s generally broad interpretation of the CA Act. For instance, in Council of the Institute of Chartered Accountants v. B. Mukherjea, a Three-Judge Bench of the Supreme Court held that “any violations by a Chartered Accountant even as a liquidator will also be dealt with under the CA Act because the legislation is aimed at regulating the CA profession in totality.” [ii] Furthermore, the regulatory tussle between the ICAI and the NFRA will be unavoidable considering that section 22 of the CA Act clearly lays down grounds of misconduct for the CAs. Thus, the operation of both the ICAI and the NFRA will add to the already labyrinthine Indian regulatory framework. It is no longer res integra post the Supreme Court’s ruling in Ashoka Marketing Ltd. v. Punjab National Bank and Ors., that “when general enactment covers a situation for which specific provision is made by another enactment contained in an earlier Act, it is presumed that the situation was intended to continue to be dealt with by the specific provision rather than the later general one.” [iii] Thus, considering that the CA Act is a special act to regulate the conduct of Chartered Accountants, even after the enactment of the later general enactment i.e , section 132 of the Companies Act, 2013 the specific provisions of the CA Act are likely to prevail.  The Supreme Court has in its ruling in Maganlal Chhaganlal (P) Ltd. v. Municipal Corpn. of Greater Bombay frowned upon such a practice and opined that “where there are two procedures for determination and enforcement of liability, be it civil or criminal or revenue, one of which is substantially more drastic and prejudicial than the other, and they operate in the same field, without any guiding

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Blockchain and Competition: Anti-Trust Practices and (In)Sufficiency of Legal Regime

Competition Law /

[By Abhinav Gupta] The author is currently a student at National Law University, Jodhpur. Introduction The ever-increasing integration of technology with daily functions has led to better innovations and has revolutionized commercial transactions. One such prominent innovation is Blockchain Technology. It has varied applications and has the potential to impact the functioning of a wide array of commercial activities, from a small It is expected that the Blockchain Technology will significantly. Most of the financial institutions have shown great interest in blockchain technology because of its and significantly reduce processing time. Despite this, the businesses using the blockchain technology for their operations need to be very careful of anti-trust issues, especially in cases where they have to interact with their competitors. However, blockchain does not pose any inherent competition threat to the firms. It has to be analyzed on the basis of each situation, judging by the information that was exchanged. In this article, the author seeks to explore the anti-trust challenges posed by the use of blockchain and whether the current provisions of the Competition Act, 2002 (hereinafter “the Act”) are sufficient to tackle these challenges. Blockchain Technology Blockchain is a ledger of transactions. It is a distributed ledger that resides on each participant’s device. In order to complete a transaction on a blockchain network majority of the participants need to consent. This is known as a consensus mechanism. Each copy is updated whenever a transaction or set of transactions is completed. By using the blockchain, the stakeholders are placing their trust in a technological platform and this rules out the need for intermediaries such as banks, governments, brokers. In order to better understand the underlying anti-trust challenges, it is important to understand the types of blockchain networks. Public/Open Blockchain: Public Blockchain is based on an open network. The information on the network can be accessed and joined by anyone, as it is available in the public domain. For e.g. Bitcoin Blockchain is a public blockchain, where anyone can read the data on available on it. Private/Permissioned Blockchain: As the name suggests, a private blockchain or permissioned network requires a permission/invitation for access, hence restricting the participant pool. The essential feature of private blockchains is that it cannot be accessed and identified by outsiders and only parties to a particular transaction can access the information available over such a network. Anti-Trust Practices Collusive Behavior: A major issue posed by the advent of blockchain technology is that it might lead to collusion among the competitors in a market. The major players in the market might come together and form a blockchain consortium. Concern has been raised that blockchain is merely a means of colluding and getting away with it. A discussion paper on ‘Blockchain Technology and Competition Policy’, issued by the Organization for Economic Co-operation and Development states that the most essential enabling factor behind the blockchain technology is ‘authentication’.  This paper also analyses whether there is a possibility of collusion via the use of Blockchain. There is a possibility of collusion when all the competitors start using the same blockchain network. In this scenario, it will become easier for the cartel participants to identify deviations due to the increased transparency. An additional benefit is that as most of the contracts entered into between the competitors will be smart contracts backed by blockchain. Hence, in case a cartel participant deviates from the agreement there will be automatic punishments. Blockchain’s transparency can facilitate the exchange of information between the participants of the blockchain. Due to this, price coordination may emerge between the members as they will get to know about price changes as soon as it happens and can adapt to such change accordingly. Moreover, due to increased transparency provided by a market-wide blockchain, the firms in an oligopolistic market may coordinate without any explicit agreement or direct contact. A blockchain application works in different ways and hence, there cannot be a straitjacket formula of finding out if there is collusion or not. Ordinarily, where there is no exchange of personalized consumer information or disclosure of price information, it cannot be considered anti-competitive.  This means that an investigation for an alleged anti-competitive agreement over blockchain would largely be fact-based, investigating the information that was shared between the blockchain participants. Abuse of Dominance: The blockchain consortium formed by the firms in the market by coming together might acquire a dominant position in the market. If this is the case, the consortium may refuse to provide access to a new entrant. Such refusal can be considered as ‘abuse of dominance’. There can be instances where the owner of the private blockchain network does not directly refuse access to the new entrant but imposes a certain set of requirements that needs to be fulfilled in order to be part of the consortium indirectly deterring new entry into the market. The risk of exclusionary conduct is higher in private blockchains as it requires invitation or permission to access, unlike public blockchain which is open to all. This will not only hamper the competition in the market but would also deter new players from entering the market, slow down innovation and prevent the emergence of new products in the market. The (In)sufficiency of Current Legal Regime The biggest problem regulatory authorities may face while dealing with blockchain is in conducting investigations. The issue arises here due to difficulty in the detection of anti-competitive practices and the identification of the organizations involved in such practices. Considering the fact, that blockchain is based on the concept of pseudonymity it will be a daunting task for the regulators to identify the perpetrators and impose penalties on them. Furthermore, it will be difficult for the authorities to obtain the data shared over the blockchain network to conduct an investigation. The blockchain participants might share data over permissioned networks. Considering only people who have received authorization can access the network, authorities have to find a way to compel the organization to share the data to conduct the investigation. Moreover, as

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Invocation of Bank Guarantees: Conflicting Opinions Adding to the Uncertainty

Banking Law, Uncategorized /

[By Talin Bhardwaj] The author is a student at Rajiv Gandhi National Univerisity of Law, Patiala. Introduction: Bank guarantee is a type of guarantee under section 126 of the Indian Contract Act, 1872 (“ICA”) in which the bank becomes a guarantor to reduce the risk in a commercial transaction between parties. The Supreme Court in various cases while considering the judgments given by the Courts of the United Kingdom (“UK”), has held that the invocation of bank guarantees ideally should not be restrained as it may act as a detriment to trust in internal and international commerce. However, the Supreme Court, at the same time, through various judgments has also held that the invocation of bank guarantees may be restrained in two cases: Firstly, in cases of egregious fraud which vitiates the entire transaction and secondly, in cases where there is a risk of an irreparable harm/injustice to one of the parties. These grounds were in furtherance to the judgments given by the courts of the UK and the USA.  Additionally, the High Court of Calcutta in the case of Texmaco Ltd. v. State Bank of India & Ors. added a condition of “special equities” for restraining the invocation of bank guarantees. The condition of “special equities” was to be considered as a measure for providing relief to the parties due to the harm suffered in exceptional circumstances and was also accepted by the Supreme Court recently in the case of Standard Chartered Bank v. Heavy Engineering Corporation Ltd. These conditions have become particularly pertinent in light of the catastrophic financial distress brought about by the COVID-19 pandemic. The Delhi and the Bombay High Courts have presented conflicting opinions on whether COVID-19 can act as ground under “special equities” to restrain the invocation of bank guarantee in recent times. The author through this article seeks to analyze the conundrum posed by the recent judgments and provide some clarity on the question of whether COVID-19 constitutes a valid ground for restraining the invocation of bank guarantees. The saga of conflicting judgments: As mentioned earlier, both the Delhi and the Bombay High Court have presented diverging opinions on whether COVID-19 could act as a ground for the court to restrain the invocation of bank guarantee. The Bombay High Court in the case of Standard Retail Pvt. Ltd. v. GS Global Corp. & Ors., denied granting an injunction to restrain a party from invoking the bank guarantee. On account of the financial impact of the pandemic, the petitioners contended that the commercial contracts that were entered between the parties were frustrated, and thereby, the encashment of the bank guarantees should be prohibited. The Bombay High Court, however, refused to restrain the respondents from encashing the letters of credit and the bank guarantees even in the circumstances emanating from COVID-19, majorly due to the nature of the contract. On the contrary, the Delhi High Court in the case of M/S Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. restrained the encashment of eight bank guarantees due to the pandemic. The parties entered into a contract for the construction of walls. On account of certain differences arising between the parties pertaining to the completion of the project, the petitioner moved to the Delhi High Court pursuant to section 9 of the Arbitration & Conciliation Act, 1996. The petitioner claimed that COVID-19 had adversely affected the completion of the project as a nation-wide lockdown was announced by the government to tackle the transmission of the virus, which consequently led to a shortage of labor due to their migration. The Delhi High Court, in consonance with the Standard Charted Bank judgment, upheld that special equities and irretrievable harm are two separate grounds on which the court can interfere with the encashment of a bank guarantee. The court, while reviewing the facts and circumstances of the case, finally came to the conclusion that the unprecedented circumstances brought about by the pandemic would validly constitute “special equities”, which thereby, entitles a party to seek interim relief for restraining the invocation of bank guarantees. Increasing complications to an already persisting conundrum: The verdict of the Delhi High Court in the case of Indirajt Power Private Ltd. v. Union of India & Ors. has added fuel to the already persisting conundrum. In the present case, the petitioner was assigned the responsibility for the completion of a thermal project. The petitioner thereby, contended that due to the adverse circumstances brought by the pandemic, the court should stay the invocation of the bank guarantees, in furtherance to the judgment given by the court in the M/S Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. case. The Delhi High Court in this case noticed that the project was to be completed in April-May 2018 and was repeatedly delayed by the petitioner. On these grounds, the court held that the petitioner cannot be entitled to an interim relief on the ground of “special equities”. Further, the court while relying on the judgment of Umaxe Projects Private Limited v Air Force Naval Housing Board & Anr., held that the court shall not interfere in the case of encashment of bank guarantees even if a party would suffer damages unless these damages are irreparable. Recently, the opinion of the Delhi High Court again oscillated in the case of Technimont Pvt. Ltd. & Ors. v ONGC Petro Additions Ltd., whereby, it restrained the respondent from encashing the bank guarantees because of the pandemic and due to the fact that these guarantees remain valid for a period till December 2020 which shall balance the interests of both the petitioner as well as the respondent. Understanding the juxtaposing Delhi High Court judgments: A closer look at the initial two juxtaposing judgments of the Delhi High Court has clearly made the applicability of the “special equities” more complex to understand. Both the cases involved the completion of a project in which the deadline for completing the project was much before the outbreak of the pandemic and thereby, time

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Nascent Acquisitions Turning into Killer Acquisitions – A Potential Competitive Threat

Competition Law /

[By Pragya Dixit] The author is a student at ILS Law College. Introduction In contemporary times, it is an evidentiary fact that the core stimulus of any economy is its Nascent firm industry. It is an industry that is a representative of new and developing ventures by novice entrants to bring new operations, products, and value addition into the market. They are a hub of fresh talent, ideas, disruptive innovation, and with their non-conformist approach, they become a flag bearer of evolution and development in the industry.  But what makes their existence all the more crucial is their role in maintaining balance and healthy competition in the market. They do so, by breaking into the concentrated markets and forcing the incumbent firms to either keep up with the innovations to co-exist or accept defeat in the race of competition and exit the market. As significant as their presence is for the market, it surely acts as a hurdle for the incumbent dominant firms, as they are a source of potential future threat for them. It is this fear and threat which persuades existing firms to engage in acquisitions of such novice firms. Nascent Firm Industry a Threat – But Why?  The most prominent reasons for the companies to perceive this industry as a threat are:- The Nascent firms are in a position to accrue various benefits from the government in the form of subsidies, tax cuts, etc, which gives them an advantage over others to develop. They generally possess such technologies that have the potential to knock down an entire line of product of a dominant player. Also, their gradual entry into market space takes away the consumer base of the incumbent players. Thus, contributing to monetary losses. The above-mentioned factors inter alia lead to an undesirable increase in the competition in the market for the incumbent firms. Sometimes, it also results in their complete elimination. So, as a way out, the dominant firms adopt the practice of acquiring such firms. This practice not only helps them in lessening the future competition but it also provides them with added benefits by giving them access to the resource bank of the target firm. Thus, this practice is widely followed and for some time now we have seen a surge in another trend, where Nascent Acquisitions are turned into “Killer Acquisitions”. What are “Killer Acquisitions”?  In such cases not only the competitor is killed but also the product. Hence, it is detrimental to both market competition as well as consumer welfare. The most common reasoning used behind Killer Acquisitions is that the big firms find it more convenient to buy and shut down a new firm rather than carrying on with it at a risk of putting the sales of its own product in danger or suffering a loss of revenue that it was expecting to earn from the sale of the product that it might substitute. Every industry has the potential for such acquisitions but the major prey are the firms that are specifically acquired for their potential know-how or technological advancements like pharma industries and digital markets. In a study report of  Cunningham et al(2018), it has been found that 6% of the acquisitions that take place in the pharmaceutical industries with drug projects are Killer Acquisitions. An example of such acquisition in the United States was the “acquisition of a pharmaceutical firm Mallinckrodt by Questor, who was a dominant player in the category of ACTH drugs(with its product named Acthar). In the mid-2000s, the Mallinckrodt started working on the development of a new synthetic called Synacthen, having the potential of being a direct competitor to Acthar. Sensing this threat, in 2013 Quesctor acquired the US development rights in Synacthen and followed the path of killer acquisition, acquired Mallinckrodt rights, and did not develop Synacthen at all”. The same adverse impact can also be seen in the purchase of US-based Newport Medical Instruments by Covidien, which is an established ventilator manufacturer, used in cases of viruses like flu or Covid-19. In 2010, Newport received a tender from the US government to produce ventilators for any future emergency that may arise. But, in 2012 when Covidien acquired Newport, they reached out to the government citing the reasons they needed extra funding for the completion of the deal. Later, in 2014, they rescinded the contract on account of unprofitability from the deal,  and the government had to later award the deal to Philips. This single act of Covidien delayed the supply in general, we can see its impact on the masses. The situation in cases of digital Market are no better, In 2020, a study by the world-famous researchers showed that recently companies like Google, Amazon, Facebook, and Microsoft are engaged in some 175 acquisitions, out of which 105 brands of the target firms were discontinued within a year. What Measures Does India Have In This Regard? In India, competitive matters related to acquisitions are dealt with under the Competition Act. But the competition law regime of our country is inadequate in deterring such acquisitions. Currently, only the acquisition of shares that meet the monetary and asset level thresholds which are mentioned in section 5 of the Competition Act is needed to be mandatorily notified to the CCI. The nascent acquisitions are way beyond such prescribed limits. Thus, these limitations make the scrutiny of such acquisitions impossible. Does “Competition Amendment Bill, 2020” Offer a Solution? In 2018, the government set up the Competition Law Review Committee (CLRC) to review the competition act. Committee in its report while deliberating over the issue of acquisitions in the digital markets, opined that the business models in the digital world are asset-light and have lesser turnovers, thus they easily escape the radar of the competition authorities. These regulatory gaps are a major lacuna and somehow leave a place for anti-competitive activities to flourish. Thus, there is a need for stringent regulations. With this thought in mind, the amendment bill proposed to provide powers to the

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Decoding the SEBI (Investment Advisers) (Amendment) Regulations, 2020

Capital Markets and Securities Law /

[By Deepanshu Agarwal] The author is a student at the University of Petroleum & Energy Studies (UPES), Dehradun In July 2020, the Securities & Exchange Board of India (SEBI) notified the Investment Advisers (Amendment) Regulations to bring some regulatory changes to the Investment Advisers Regulations, 2013 (the Regulations). SEBI received a plethora of complaints from the investors regarding the malpractices done by the investment advisors (like charging excess fees, making fake promises for higher returns, non-disclosure of the complete service fee, extracting money in the name of various charges) due to which it became necessary to bring these changes. Thus, the main objective behind this new regulatory amendment is to give primary importance to the interest of investors over the interest of the investment advisors (IAs). As per regulation 2(m) of the  Regulations, ‘investment adviser’ means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons and includes any person who holds out himself as an investment adviser, by whatever name called. Investment advice in this regard means advice relating to investing in, purchasing, selling, or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products for the benefit of the client (regulation 2(l)). Putting it in simpler terms, investment advice means advising the client regarding the best suitable investment options he can avail, by looking at his risk appetite and long term goals. With this backdrop, this post analyses the key highlights of the new amendment brought by SEBI and the way it affects the advisory market in India. Segregation of Advisory and Distribution Services Advisory service refers to the investment advice given by the IAs to the clients, whereas distribution service refers to making a product (or a scheme) available to the clients. Prior to the amendment, individual and partnership firms were not allowed to provide distribution service along with the advisory service. Only banks, NBFCs, and corporate entities (Non-individual entities) were authorized to do so subject to the condition that the IA shall maintain an arms-length relationship between its activities as an investment adviser and distribution services. This had to be achieved by ensuring that in such cases, the investment advice is given through the Separate Identifiable Division or Department (SIDD). According to the new amendment in Regulation 22 of the Regulations, non-individual entities are now required to segregate the advisory and distribution services at the client level itself. This means that even though such entities have different departments for both the advisory and distribution services, they cannot provide both of these services to a single client. An Individual adviser, on the other hand, shall have the option to register as an IA or provide distribution service as a distributor. This change brought by SEBI is a positive step towards ensuring the protection of investors. An investment adviser should act in the best interests of his/her/their clients when providing advisory services and should disclose to the client any actual or potential conflicts of interest. Due to the multiple roles played by the entities, it was necessary to segregate both the activities so as to minimize any such conflicts. This segregation will ensure the availability of complete information with the clients and the same may result in informed investment decisions by them. Moreover, there may be cases where the IAs distribute products on which they could earn higher commissions, thus leading to a serious conflict of interest with the client’s goals. In such cases, the advice given by the IAs may not be in the best interest of its client. Therefore, in order to tackle this issue arising out of the dual roles played by the IAs (both as adviser and distributor), it was imperative to segregate both the activities. No Consideration for Implementation Services Prior to the amendment, it was observed by SEBI that the IAs were charging extra consideration from the clients in the name of implementation (execution) fees. This practice followed by the IAs has been banned by SEBI. Now, the IAs are allowed to provide the implementation services only through direct schemes/products, without charging any consideration for the same. Agreement Between Investment Adviser and Client Unlike the erstwhile regulations, the requirement of an advisory agreement between the client and the adviser has been made mandatory by the new amendment. This will make the clients aware of the terms and conditions, provide transparency in the process, and would also ensure that the clients are able to prove their claim and exercise their rights with much ease. Fees As per the code of conduct specified under the Regulations, the IAs were required to charge a fair and reasonable fee for the advisory services given to its clients. There was no cap upon the fees to be charged and thus the amount of ‘reasonable fee’ was kept subjective. Thereafter, SEBI received more complaints from the investors regarding exorbitant fees charged by the IAs. In order to solve this issue, SEBI has prescribed two ways to calculate the amount of fees. IAs can charge either 2.5% of ‘Asset under Advice’ (AUA) or a fixed fee of INR 75,000 per annum. As per the regulation 2(aa) inserted by the new amendment, AUA means the aggregate net asset value of securities and investment products for which the investment adviser has rendered investment advice irrespective of whether the implementation services are provided by an investment adviser or concluded by the client directly or through other service providers. Practically, this model is very difficult to follow. There are certain portfolios that contain high-risk products that require more skills and essential time to provide any investment advice. These cases are to be treated differently, and therefore, fixing a maximum ceiling to be followed in every case may not be a good option. Net Worth Before the amendment, the IAs which are body corporate were required to have a net worth of not less than twenty-five lakh rupees and IAs who are individuals were required to have

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An Analysis Of NCDRC Rulings on Insurance of Lifestyle Diseases

Contemporary Issues /

[By Koshy Mammen and Shabna Stephen] The authors are students at Jindal Global Law School. Introduction In the case of Neelam Chopra v. Life Insurance Corporation of India (2018) handed down by the National Consumer Disputes Redressal Commission (“NCDRC”), it was settled that common lifestyle diseases cannot be a ground to repudiate insurance claims. The petitioner’s husband, who was suffering from diabetes for the past 3-4 years, issued a life insurance policy in 2003 from LIC. However, while filling the proposal form, he failed to report his disease. He died of a cardiac arrest, non-related to diabetes, in 2004. The NCDRC was of the opinion that even though the insured was diagnosed with diabetes, the disease was under control at the time of filling up of the proposal form. Consequently, the apex commission concluded that the non-disclosure of information regarding common lifestyle diseases such as diabetes, will not totally disentitle the insured from claiming the policy amount and may only suffer a reduced claim amount. This judgment was relied on by NCDRC as a precedent in several cases including the recent Reliance Life Insurance Co. Ltd. v. Tarun Kumar Sudhir Halder (2019) to decide that diabetes is a lifestyle disease in India and the entire of an insurance claim cannot be rejected only based on its non-disclosure. In light of these judgments, this article advances the argument that the NCDRC has made an apparent error in the primary precedent case – Neelam Chopra v. LIC. The crux of the issue before the NCDRC in the case was whether the fact that the insured was suffering from diabetes at the time of taking out the policy was “material fact”. And on account of non-disclosure of this fact in the proposal form, whether the insurance company was justified in avoidance of the insurance contract. By going through the established principles of insurance law, the failure of the NCDRC to notice certain nuanced aspects of insurance law in Neelam Chopra v. LIC is highlighted. Duty of Utmost Good Faith According to Section 19 of the Marine Insurance Act, 1963, an insurance contract is a contract of utmost good faith, and if good faith is not observed by either party, the contract may be avoided. The duty of utmost good faith was aptly summarized in Carter v. Boehm (1905) and reiterated in several Indian judgments in the following words: – “The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the assured only and the underwriter trusts to his representation…Good faith forbids either party, by concealing what he privately knows…” Thus, it needs little emphasis that when required in the proposal form, the insured is under a solemn obligation to make a true and full disclosure of all information, which is within their knowledge. Applying this doctrine to the case in the discussion, the insured did not disclose the fact that he was suffering from diabetes in the medical history section of the proposal form. Therefore, it would appear that there is a violation of the duty of disclosure by the insured. Material Fact The next issue for consideration would be as to whether diabetes for the past 3-4 years was a “material fact” for the purpose of a life insurance policy. Section 20 of the Insurance Act, 1938 states that every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether they will take the risk. The term “material fact” has been further explained in Pan Atlantic Insurance Co v Pine Top Insurance Co (1994), relied on in several Indian cases, as any fact which goes to the root of the contract of insurance and has a bearing on the risk involved. Whether or not a fact is material, is a question of fact. The question does not depend upon what the insured thinks or even what the insurer thinks, but whether a ‘prudent and experienced’ insurer would be influenced in their judgement if they knew it (The Prudent Insurer Test). Further, in Satwant Kaur Sandhu v New India Assurance Co Ltd  (2009), it was emphasized that any inaccurate answer will entitle the insurer to repudiate his liability because there is a clear presumption that any information sought for in the proposal form is material for the purpose of entering into an insurance contract. Applying this to the case at hand, all past and present health of the insured is a material fact as no prudent insurer would underwrite the life of a person with diabetes and without diabetes, on the same terms. Diabetes adversely affects the chances of longevity of the insured and the insurance company in the case was unable to assess the real risk as all facts were not disclosed. Further, any contention that the insured was medically examined by a panel of doctors authorized by the insurance company has no merit since this is a standard procedure that happens in all cases. It cannot be employed as an excuse to absolve the duty on the insured to disclose material facts. Therefore, the fact that the insured had diabetes is unquestionably a material fact as any prudent insurer would take this into account when assessing the risk. Suppression of Material Facts The next issue is whether the non-disclosure tantamount to suppression of material facts enabling the insurance company to repudiate its liability under the policy. It would be impossible to contend that the insured was not aware of the fact that he was suffering from diabetes, more so when he was diagnosed 3-4 years back. His diabetes was a material fact and answers given in the proposal form were definitely factors that would have influenced and guided the insurance company to enter into the contract of life insurance with the insured. Judged from any angle, the statement made by the insured about his disease in the proposal form was palpably untrue to his knowledge. There was clear suppression of material facts regarding his

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Corporate Board Gender Diversity in the Shadow of the Controlling Shareholder

Company Law, Contemporary Issues, Guest Posts /

[By Dr. Akshaya Kamalnath] The author completed her graduation from NALSAR University of Law, Hyderabad, and her post-graduation from New York University (NYU). The author is currently a lecturer at Auckland University of Technology, Law School, New Zealand. Dr. Kamalnath runs a blog named The Hitchhiker’s Guide to Corporate Governance which can be accessed here. In an article co-authored with Professor Annick Masselot, I examined corporate board diversity in the Indian context. In this blog post, I will introduce some of the arguments in the article and build on them with ideas from other articles. India introduced a mandatory quota that requires companies to have at least one woman director on their board of directors in 2013. Since then, India’s market regulator, Securities Exchange Board of India (SEBI) has required listed companies to have at least one woman director who is also an independent director. In terms of numbers, the percentage of women on boards rose from 5.5% in 2010 to 12. 7% in 2017. But do these numbers have the potential to improve corporate governance? Corporate board gender diversity has been canvassed for two reasons – business benefits and gender equality. The most convincing reason for board gender diversity to yield better results seems to be that diverse boards are more effective monitors of management. In other words, the corporate governance case is the most convincing aspect of the business case. Drawing from the analogy of independent directors who are meant to improve corporate governance, we focused (in the article) on the effectiveness of board gender diversity as a corporate governance measure in India. Since controlling shareholders influence board nominations, independent directors in India are not likely to be effective monitors. Some reputed directors have also pointed out that even where independent directors take their monitoring role seriously, the problem is that management does not share adequate information with them. While this is also a problem in countries like the US, the concentrated ownership model makes information flow even more challenging. Could gender diversity be one way in which the structure of the independent director institution is enhanced? Studies in various countries have shown that gender diversity does indeed enhance board functioning in terms of board processes. There could be gains even beyond just enhanced board processes. A recent news article reported Biocon’s Biocon, Kiran Mazumdar-Shaw recounting her experience on a company board which was dealing with a sexual harassment complaint lodged by an employee: “The men on the board, she says, described the complaint as “silly”, “rubbish” or “an exaggeration”. Mazumdar-Shaw says it took her, a woman director, to object to this “flippant” approach, put her foot (down)”. Despite Mazumdar-Shaw’s story having a happy ending, it is not easy for a single board member to change the board culture or even quality of decisions. We have to rein in our expectations in terms of what can be achieved by one woman director on the board. The controller dominated firm structures means that we cannot expect too much from independent directors, let alone a single women director. Further, the mandatory law means that in many cases, companies are merely appointing women directors to comply with the law rather than to enhance board processes and governance. Such a lack of genuine motivation to improve governance would impose a burden on the incoming women directors in terms of having to deal with an unwelcoming board. Ultimately, solutions to improve corporate governance, including board culture, should go beyond a requirement for companies to appoint one woman independent director.

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