Author name: CBCL

Right of Subrogation Under IBC: Impact on Market

Banking Law, Insolvency Law /

[By Gopal Gour] The author is a student at Maharashtra National Law University Mumbai. Introduction Guarantees play a pivotal role in any commercial transaction because the parties prefer to be secured if the other party fails to perform its obligation. For example, in a loan transaction between A & B; C stands as a guarantor of B, ensuring the repayment of the loan if B defaults. Guarantee is purely a contractual arrangement between/among the parties, and it can be drafted according to the transaction and needs of the parties. However, there are certain principles enshrined under the Indian Contract Act, 1872 (‘Contract Act’) that protect the rights of both, the parties, and the guarantor. Anything done, or promised to be done, in favour of the party is a sufficient consideration for the guarantor.[1] Further, the surety/guarantor is subrogated to all the rights of the creditor against the principal debtor viz. the guarantor steps into the shoes of the creditor, and is entitled to enforce all the securities that the creditor has against the borrower, on whose behalf the payment is made.[2] Recently, the issue of subrogation came to be discussed in the cases of Insolvency and Bankruptcy Code, 2016 (‘IBC’), wherein the right of subrogation was denied to the guarantor. In the very celebrated case of Essar Steel, followed by many, the Apex Court approved the resolution plan which denied the rights of subrogation to the guarantors. Subrogation is a right of equity and natural justice. Even though the Courts have been justifying the denial of right of subrogation citing cogent reasons, it is unjust on the part of the guarantor; besides, the principle borrower gets unjustly enriched in this set-up. This article discusses the concept of ‘Equitable Subrogation’ with the help of foreign jurisprudence, and analyses the impact of such denial of the right of subrogation of the guarantor on the Indian credit market. Right of subrogation under IBC It is established that the approval of the resolution plan and consequent extinguishment of the liabilities of the Corporate Debtor does not absolve the guarantor of its liability under the Contract Act.[3] The primary reason for this is that the discharge of Corporate Debtor’s liability is through the operation of law as the same is stemming from the proceeding under the Insolvency and Bankruptcy Code.[4] Now, once it is established that the guarantor is still liable to pay the principle creditor even though the Principle Borrower (Corporate Debtor) is absolved, the question of the right of subrogation surfaces naturally. The right of subrogation is an equitable and natural right of the guarantor against the Corporate Debtor on whose behalf he has paid the money. In the Essar Steel[5] case, the creditors of the corporate debtor sought to invoke the guarantees given for the remainder amount, after receiving the haircut amount through the Resolution Plan.[6] In the said case, the Supreme Court relied upon SBI v. V. Ramakrishnan[7] and held that the guarantor’s liability remains intact even after the approval of the resolution plan.[8] Further, the Court approved the resolution plan that rest the guarantors devoid of their right of subrogation and did not hold anything substantial, backed by reasoning in this regard. In the case of Lalit Mishra & Ors. v. Sharon Bio Medicine Ltd. & Ors.[9], the NCLAT discussed the issue of subrogation when the promoters, who were also the personal guarantors, sought to claim the right of subrogation under section 133 and 140 of the Contract Act. The NCLAT held that the resolution under IBC is not a recovery suit, and it was not the intention of the legislature to benefit the ‘Personal Guarantors’ by excluding the exercise of legal remedies available in law by the creditors, to recover legitimate dues by enforcing the personal guarantees, which are independent contracts. Further, NCLT Mumbai in the case of State Bank of India v. Calyx Chemicals & Pharmaceuticals Limited[10] and IDBI Bank Ltd. v. EPC Constructions India Limited[11] again approved a resolution plan that had not given the right of subrogation to the guarantors of the Corporate Debtor on whose behalf the payment was made. Subrogation: An Equitable Right The surety paying off a debt shall stand in the place of the creditor and have all the rights which he has, for the purpose of obtaining reimbursement. This rule here is undoubted, and it is founded upon the plainest principles of natural reason and justice.[12] Subrogation rests upon the doctrine of equity and is a settled common law principle.[13] In the case of Kundanmal Dabriwala v. Haryana Financial Corporation and Ors.[14] the High Court of Punjab & Haryana discussed the liability of the surety where the liability of the Principle Borrower stands extinguished through a sanctioned scheme of arrangement under section 391 of the Companies Act, 1956. The Court absolved the surety of the liability on the ground inter alia that the surety cannot be placed in the shoes of the creditor i.e. cannot have the right of subrogation. This case becomes significant as it stresses the importance of subrogation right, in absence of which, the liability of the surety stands pointless. The foreign jurisprudence considers the right of subrogation as one of the ways to cure the ‘unjust enrichment’ under the law of restitution.[15] In the case of Swynson Ltd. v. Lowick Rose LLP[16] the UK Court discussed the equitable subrogation and unjust enrichment in the following words, Equitable subrogation as a remedy for unjust enrichment …It belongs to an established category of cases in which the claimant discharges the defendant’s debt on the basis of some agreement or expectation of benefit which fails.[17] … …The cases on the use of equitable subrogation to prevent or reverse unjust enrichment are all cases of defective transactions. They were defective in the sense that the claimant paid money on the basis of an expectation which failed.[18] … …What this suggests is that the real basis of the rule is the defeat of an expectation of benefit which was the basis of

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Re–Examining the Domestic Tax Scenario in a Pandemic (Part 2)

Contemporary Issues, Guest Posts, Taxation Law /

[By Mohit Gupta] The author is a PhD Researcher at Centre for the Study of Law and Governance, Jawaharlal Nehru University, New Delhi. To read Part 1 of the article, please click here. Now, if one talks about the indirect taxes in the country then there are various types of indirect taxes that were levied by Central Government and various State governments before the introduction of The Goods and Service Tax (GST), which are referred at the beginning of the discussion. However, the GST which came into effect on 1 July 2017, following the passing of The (Constitution 122nd Amendment) Bill, 2014 by the parliament of India, and an amendment to the constitution of India which changed the arrangement of powers of taxation between central and state government, and also subsumed a majority of then-existing centre and state-level taxes[1]. The need to re-examine the GST also stems from the fact that recently it completed three years of its implementation and the voices of unrest related to this tax reform are getting louder[2]. The key rationale for the introduction of GST was that it would broaden the tax base and remove the cascading effects of taxation. However, the realisation of these objectives was constrained by various facts which included; that the GST on a few important products like diesel, petrol, air turbine fuel, natural gas etc. were immediately not included in the scope of the GST at the time of its introduction while goods like alcohol for human consumption was kept out of the purview of the GST. The obvious reason was that GST took away the power to levy taxes like sales tax which are the single largest source of tax revenue for the states and the states were not ready to compromise on their autonomy to levy and collect the taxes on these goods immediately. This then takes to the debate between the apologists and critics of the GST around the issue of Efficiency Considerations with GST vs. Fiscal autonomy of the states. There were various reasons provided to support the efficiency rationale emanating from the implementation of the GST which included its ability to improve the competitiveness of the domestic industry in the international market, creation of a common national market for India, broadening of the tax base by expanding the coverage of economic activities and prevention of leakages from the system (Rao and Mukherjee, 2019). However, what has received less attention is the question that whether or not introducing GST was a desirable choice for a country like India where there are a federal structure and a lot of heterogeneity among states in their tax base. A few studies, at the time of introduction of GST, made a case against the introduction of this tax by pointing out the likely pitfalls of introducing this tax form – that it will significantly undermine the fiscal autonomy of the states in India, efficiency considerations were not the basis of its introduction in various jurisdictions around the world thereby cautioning against any attempt to transplant this form of tax from other jurisdictions and most importantly that it has not been adopted by the largest economy of the world with a federal structure- the United States of America (USA).[3] However, despite these cautions against the efficacy of GST in a country like India, it was adopted with haste in 2017. These concerns around the fiscal autonomy of the states getting compromised with GST have visibly surfaced over time and more cogently in the times of a pandemic. This is in so far as the central government and the state governments have now realised that with the introduction of GST – they are left with very limited or no space to manoeuvre around indirect taxation structure in emergencies like a pandemic; especially the resource-constrained state governments. Hence, when the revenues began to dry up because of the halt in economy induced by pandemic, both central and state governments levied hefty taxes on products which currently don’t attract GST – an increase in excise duty by the central government on petrol and diesel, increase in value-added tax and special cesses by state governments on petrol, diesel and alcohol for human consumption etc.[4] Following this surge in taxes, while one can always debate the case for an excess tax on alcohol because it is a sin good but an increase in taxes on fuel is surely not the desired way of filling the government coffers because the very nature of a regressive tax is to hurt the poor more and likely to push up food inflation as well. Further, the finance ministers of various states have now begun to echo the demand to overhaul the GST regime and finding out ways of increasing the revenue share of states in the GST[5]. Adding to the concerns of the state is also the fact that The Goods and Services Tax (Compensation to States) Act, 2017 that has assured states to protect revenue during the first five years of GST introduction (also known as transition period) is approaching its deadline in June 2022 and given the shortfall in GST collection and uncertainty associated with revenue on account of State Goods and Services Tax (SGST) collection, many states have approached the Fifteenth Finance Commission (FFC) for a possible extension of the GST compensation period by another three years, i.e., up to 2024-25 (Mukherjee 2020) and this was demanded even before the onslaught of the pandemic. The real conundrum here is that the centre may not have the fiscal space to provide the compensation beyond the transition period while states may suffer a major fiscal blow with the withdrawal of the GST compensation after the transition period. At the heart of all these developments lies a twofold  problem; one is that from the beginning GST debate abstracted away from the issues of intra-state disparity in its assumption of a uniform tax spread within the state in the projection of its potential gains, ignoring the structural constraints of intra-state

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Re–Examining the Domestic Tax Scenario in a Pandemic (Part 1)

Contemporary Issues, Guest Posts, Taxation Law /

[By Mohit Gupta] The author is a Ph.D. Researcher at Centre for the Study of Law and Governance, Jawaharlal Nehru University, New Delhi. There are various types of taxes levied by the government which can broadly be categorized into two categories – Direct and Indirect Taxes. Direct Taxes are those taxes for which the burden and incidence of the tax fall on the same person- that is the tax cannot be shifted by a taxpayer on some else and it includes takes on Income, Wealth, Corporation Tax, etc. On the other hand in the case of Indirect taxes, the burden, and incidence of the tax fall on different entities which imply that tax can be shifted by the taxpayer to someone else and includes central excise duty, Valued Added Tax (VAT), customs duty, Goods and Services Tax (GST), etc. In the case of direct taxes like Income tax there is usually an increase in the percentage of taxes with an increase in intervals of a threshold level of income which is known as ‘progressive rate of taxation; whereas Indirect taxes may have to be paid by customers on commodities which are consumed by rich or poor irrespective of their income levels (like VAT on petrol, diesel or GST on eatables like biscuits, butter, etc.) and thus an increase in indirect tax hurts the poor more compared to the rich making them ‘regressive taxes’. It is important to keep this otherwise obvious distinction in mind regarding the nature of taxes. It is based on this difference and other important factors that we argue that there is an urgent need to re-examine the domestic tax scenario in the country in order to meet the economic challenges posed by the recent Covid-19 pandemic. This is more so because supply bottlenecks notwithstanding, what is a grave problem currently is a demand constrained economy. Thus, there is an urgent need for an expansionary fiscal policy that can revive domestic demand by an increase in government expenditure; more so because there is a near collapse of all other domestic activity following a negligible expenditure by household and private sector (Ghosh, 2020). In these difficult times, an impetus for such a policy can come from raising the tax revenues alongside other measures, especially when the government is reluctant to raise its borrowing (to fund any extra government spending)  to adhere to its objective of keeping the fiscal deficit in check. However, it is another matter of concern that the obsession of the government of keeping ‘fiscal deficit to Gross Domestic Product (GDP)’ ratio in check by not increasing government expenditure in times of a pandemic is a flawed economic policy because an attempt to do so by suppressing government expenditure, in turn, will lead to lower GDP which implies a lower denominator value in fiscal deficit to GDP ratio and thus an increase in the overall value of deficit ratio even with similar expenditure (Chandrasekhar and Ghosh, 2020). Be that as it may, let us shift our focus back towards gauging at ways resorted by the government for raising the tax revenues in the present times while struggling to keep the deficit ratio in check. In the present discussion, we shall keep our focus on two of the important taxes of the government and the need to re-examine their levy in times of a pandemic. One of these is a direct tax (Corporation tax) and the other is an indirect tax (GST). In addition to these two taxes being the key contributor to the overall tax revenues of the government, the need for re-assessing and focussing on these two taxes, in particular, emanates from the fact that there have been some key developments around them recently which requires a re-examination which is pointed out in the ensuing discussion. First, if one talks about the direct taxes then taxes on income is the main source of direct taxation in India. The rules for income tax in India are defined by the Income Tax Act, 1961. The rates of taxation for various entities (Individuals, HUFs, Firms, Companies, and Others)  laid down in this Act are amended every year through the Finance Act. These rates which are prescribed by law are called the ‘statutory rates of taxation’. These are defined in terms of tax slabs where a percentage of taxation is announced corresponding to a certain threshold income level. However, the income earned by the various assesses is not always subjected to this statutory rate of taxation. The total income that is subjected to taxation is reduced from the original income because of various deductions available as per law. Thus there is a distinction between the statutory rates prescribed by law and what actually the assessee end up paying as taxes because of these deductions. The actual payment of tax as a proportion of the total declared income of the assessee is the ‘effective rate of taxation’ (Bandyopadhyay, 2012; Rao, 2015).  Thus to put it simply, the effective tax rate paid by an assessee can be computed as the ratio of tax paid to the total income expressed in percentage terms. The effective rates of taxation by their very construct are thus lower than the statutory rates of taxation. It is important to understand this distinction in the backdrop of the recent changes in the corporate tax rates in India which were announced last year on 20th September 2019 through the Taxation Laws (Amendment) Ordinance 2019 by making amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. This amendment and the corresponding reduction in the corporate taxes were hailed as unprecedented structural reforms in the history of the country which were aimed at reviving a sluggish economy by boosting private investment[1]. After this amendment, the effective rate for existing companies was slashed to 25.17% (including surcharge and cesses) while that for new manufacturing companies (incorporated after 1st October 2019) the effective tax rate was slashed to 17.01% (including surcharge and cesses) subjected to the condition

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Indus Biotech Private Limited v. Kotak India Venture Fund-I: Arbitration Of Insolvency Proceedings?

Arbitration Law, Insolvency Law /

[By Hitesh Nagpal] The author is a student at Maharashtra National Law University, Mumbai. In a recent decision, dated 9 June 2020, the National Company Law Tribunal(“NCLT”) Mumbai Bench in Indus Biotech Private Limited v. Kotak India Venture Fund-I, referred the financial creditor and the corporate debtor to arbitration while adjudicating a plea under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). In this article, the author contends that the decision of the NCLT is erroneous on two grounds; firstly, the disputes pertaining to insolvency are not capable of being referred to arbitration and secondly, the provisions of the IBC prevail over the provisions of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”). Factual Background In 2007, Kotak India Venture Fund-I (“Financial Creditor”) subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (“OCRPS”) issued by Indus Biotech Private Limited (“Corporate Debtor”). In light of regulation 5(2) of the Securities and Exchange Board of India (Issue of Capital & Disclosure Requirements) Regulations 2018, the financial creditor opted to convert OCRPS into equity shares to make a Qualified Initial Public Offering (“QIPO”). During the QIPO process, a dispute arose between the parties pertaining to the calculation and conversion formula to be followed while converting OCRPS into equity shares and while the dispute was ongoing, the financial creditor invoked the provisions of the Share Subscription and Shareholders Agreement (“SSSA”) pertaining to the early redemption of OCRPS. When the corporate debtor failed to redeem the OCRPS within the prescribed timeline, the financial creditor filed an application under section 7 of the IBC to initiate the Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor alleging that there was a default of ₹367,07,50,000/-. Subsequently, the corporate debtor filed an application under section 8 of the Arbitration Act contending that the SSSA contains an arbitration clause and therefore, the application filed by the financial creditor shall be dismissed and the parties shall be referred to arbitration.  Issue Will the provisions of the Arbitration Act prevail over the provisions of the IBC? NCLT’s Judgement By placing reliance on the decisions of the Supreme Court in Hindustan Petroleum Corporation Limited v Pinkcity Midway Petroleums and P Anand Gajapathi Raju & others v PVG Raju (dead) & others, it was observed that where an arbitration clause exists, the court has a mandatory duty to refer the parties to arbitration. Moreover, the NCLT pointed out that “the Corporate Debtor is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into insolvency, which is not a very desirable result at this stage.” In light of this, the NCLT dismissed the application filed under section 7 of the IBC and referred the corporate debtor and the financial creditor to arbitration.  Analysis Insolvency As A Subject Matter Is Not Arbitrable  In the present case, there is no dispute pertaining to the arbitration agreement as there is a specific arbitration clause in the SSSA. The pertinent question in the present case is whether the dispute is capable of settlement through arbitration. Even though section 8 of the Arbitration Act compels the court to refer the parties to arbitration, there are certain exceptions to the application of this rule. The Arbitration Act does not include any provision excluding a certain class of disputes terming them ‘non arbitrable’ however, section 34 and section 48 of the Arbitration Act provide that an arbitral award will be set aside if the court finds that “the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” In Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd., the Apex Court, while deciding the scope of section 8 of the Arbitration Act, held that:  “Sub-section (1) of Section 8 provides that the judicial authority before whom an action is brought in a matter will refer the parties to arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide.” The application for initiating CIRP belongs to the category of dispute which is not capable of settlement by arbitration. As held in Pioneer Urban Land and Infrastructure Limited & another v Union of India, these are matters in rem, which the arbitrator has no power to reward.  In the landmark case of Booz Allen and Hamilton Inc v SBI Home Finance Limited & others, the Supreme Court, while recognizing the mandatory duty imposed under section 8 of the Arbitration Act, stated that where the dispute is non arbitrable, the court should refuse to refer the parties to arbitration despite the fact that the parties have agreed upon arbitration as the forum for settlement of the dispute. In the aforementioned case, the Supreme Court explicitly stated that disputes pertaining to insolvency are not arbitrable even when there is an arbitration agreement between the parties. Therefore, the NCLT should have refused to refer the parties to arbitration as insolvency as a subject matter is not arbitrable. Overriding Effect Of IBC It is pertinent to note that the well-established principle of generalia specialibus non derogant i.e., special law prevails over general law, does not apply in the present case as both IBC and the Arbitration Act are special laws. In Engineering Enterprises v Principal Secretary, Irrigation Department, it was held that the Arbitration Act is “a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto.” Insofar as IBC is considered, section 238 clearly states that “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” In a plethora of cases such as Bhoruka Steel Ltd. vs. Fairgrowth Financial Services Ltd, it has been held that when there is a conflict between the provisions of two

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Standard Essential Patents: The Controversial FTC v. Qualcomm Judgement

Competition Law, Contemporary Issues /

[By Varsha Jhavar] The author is a student at Hidayatullah National Law University, Raipur. Introduction The world’s leading company in 5G innovation is embroiled in antitrust litigation with the United States Federal Trade Commission (hereinafter FTC), the US’ competition regulatory authority. On 21 May 2019, Judge Lucy Koh of the United States District Court for the Northern District of California held that Qualcomm was in violation of its antitrust obligations under the FTC Act. As the world is transitioning to 5G, the present case which lies on the interface between intellectual property law and competition law is of grave importance to holders and licensees of standard-essential patents(hereinafter SEPs). Qualcomm licenses its patented technologies to more than 340 companies, particularly to original equipment manufacturers (hereinafter OEMs) such as Apple, Samsung, Motorola. This article analyses the controversial 233-page decision in FTC v. Qualcomm as well as its potential impact, if the decision is upheld by the Ninth Circuit. Factual Background and Issues Qualcomm is engaged in the manufacturing of ‘modem chips’ that facilitate smartphone communication over cellular networks by utilizing industry standards such as CDMA, LTE. In 2017, FTC filed a complaint against Qualcomm alleging that through its unique business model the latter had monopolised two modem chip markets – CDMA(3G) and LTE(4G). The complaint was filed under section 5(a) of the FTC Act that prohibits ‘unfair methods of competition’. In November 2018, the District Court granted FTC’s request for The Court gave its final decision on 21 May 2019, where it primarily dealt with three issues – first, whether the Defendant followed a ‘no license-no chips’ policy; second, whether the Defendant had refused to license SEPs to its competitors in the modem chip market; and third, if the Defendant had coerced Apple into a de facto exclusive dealing arrangement. The FTC’s chief argument, the ‘no license-no chips’ policy, essentially states that Qualcomm abused its considerable market dominance in the modem chip segment, to strong-arm its chip buyers to enter into agreements for patent licensing and exclusive modem chip arrangements. Court’s Decision Judge Koh ruled in FTC’s favor, holding that Qualcomm by exhibiting ‘exclusionary conduct’ had acted in violation of the Sherman Act and thus, the FTC Act. The court found that Qualcomm had been involved in anti-competitive conduct against OEMs such as Apple, through the utilisation of its market dominance in the chip sector for securing higher royalty rates and also providing conditional rebates to OEMs who agreed to exclusive arrangements. With regard to licensing to competitors, the court citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp. held that Qualcomm had an antitrust duty to license to rivals such as Intel and MediaTek, and that its conduct had harmed competition. Further, it observed that the agreements between Apple and Qualcomm were de facto exclusive licensing arrangements, as Apple had been compelled into procuring a substantial portion of their chip supply from Qualcomm. Judge Koh found that Qualcomm’s anti-competitive conduct had not been discontinued, and issued an injunction requiring it to negotiate patent licenses in good faith and facilitate the availability of licenses to its rivals on FRAND terms. Analysis Judge Koh’s decision has been praised and criticised by many, but in my opinion, there are certain concerns that the judgement failed to address. The injunction granted against Qualcomm is broad in nature and might result in a change in its business model. The remedy should have been tailored according to the specific problem, taking into consideration the potential adverse effect on innovation. Judge Koh has also failed in territorially limiting the injunction, incorporating actions that would come under the purview of foreign antitrust authorities. In the US, a claim for monopolisation cannot be brought solely on the basis of excessive pricing, it requires the exclusion of rivals, which is not the situation in this particular instance. The Aspen Skiing case is not concerned with the licensing of patented technologies, thus the court’s reliance on it is questionable. The injunction is expected to have an effect on Qualcomm’s R&D spending in 5G technology and consequently, will affect its ability to compete with other players in the market. Conditional pricing and loyalty rebates should not be considered anti-competitive,as it is a part of the business model of many companies and this decision will have a negative impact on them. The District Court had evaluated the case under the law of California and the policies of the two specific SSOs of which the Defendant was a member. The court failed to clearly specify that its partial summary judgement only applied to this particular case and not to all SEP holders subject to FRAND terms under any SSO. Judge Koh erroneously qualified the royalty rate as being ‘unreasonably high’, failing to consider any established royalty rates for determining a reasonable royalty rate. Any diminishment of Qualcomm’s global leadership could potentially affect the US’s leadership in 5G. This judgement also raises national security concerns as the company is a trusted supplier of products and services to the US Department of Defense. Current Status Qualcomm filed an appeal to the US Court of Appeals for the Ninth Circuit and pending appeal, in August 2019 the court partially stayed the injunction ordered by Judge Koh. Amicus briefs have been filed by various organisations and individuals working in the sectors of economics and law, such as the Department of Justice (hereinafter DOJ), Retired Judge Michel, International Center for Law & Economics, Scholars of Law and Economics. The DOJ criticising this decision stated that it threatens ‘competition, innovation, and national security.’ It was even condemned by a sitting FTC commissioner, Christine Wilson, averring that the decision has created for SEP holders ‘a perpetual antitrust obligation to sell every product to every competitor.’ On 13 February 2020, the Ninth Circuit heard oral arguments and the DOJ had also been granted time to argue on Qualcomm’s behalf. The court mainly attempted to determine whether Qualcomm’s behaviour was hyper-competitive or anti-competitive, as the Sherman Act does not prohibit hyper-competitive behaviour. The

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Amendments to the Indian Stamp Act – Ushering into a New Regime

Contemporary Issues /

[By Saksham Shrivastav and Urvisha Kesharwani] The authors are students at the National University of Study and Research in Law, Ranchi. To retrench the needless overlaps of liable stamp duties in the earlier regime and provide a more uniform and centralized collection system, the Government of India (“Government”) last year introduced certain legislative amendments. The amendments brought in by  Chapter IV of the Finance Act 2019 (“Amendment”) to the Indian Stamp Act, 1899 (“Stamp Act”) along with the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules 2019 (“Rules”) finally came into force from July 1, 2020. However, this Amendment comes into effect after facing several delays as it was originally supposed to be implemented from January 9, this year. Since the power of imposing stamp duties falls under all the three lists depending upon the nature of the transaction, it allows different states to levy different stamp duty rates for the same instrument. Thereby in the prior regime, multiple incidences of duty were allowed, this not only caused varying rates for the same instrument but also raised the transaction cost in the securities market thereby impeding capital formation. Through these reforms, the Government aims to create a more cost-effective, zero-evasion centralized mechanism by harboring a uniform approach and curbing down the unnecessary transaction costs. This is not only expected to enhance capital formation but also minimize jurisdictional disputes. Following is an analysis of some of the major reforms that have been introduced in the new regime. a) Streamlining the Definitions The Amendment has brought about changes in some existing definitions and has introduced some new definitions in order to keep up with the ever-changing securities market. Following are some of the key inclusions: Instrument: The definition of ‘Instrument’ has further been broadened by the Amendment and now encompasses, a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. Securities: A more inclusive definition for ‘securities’ has also been introduced. The prior exposition of the term ‘securities’ given under section 8A of the Stamp Act was drawn from the definition in the Securities Contract (Regulation) Act, 1956 (“SCRA”) for the purposes of that section. The Amendment has introduced the definition of ‘securities’ which now includes: Securities as defined in clause (h) of section 2 of the SCRA; ‘Derivative’ as defined under the Reserve Bank of India Act, 1934; Certificate of deposit, commercial usance bill, commercial paper, repo on corporate bonds and such other debt instrument of original or initial maturity up to one year; and Any other instrument declared by the Central Government, by notification in the official gazette. It is a, however, essential to bring to attention the fact that despite the amendment, there remain several instruments that lack clarity on whether they would come under ‘securities’. These include Warrants, Units issued by Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvIts), and Alternate Investment Funds (AIFs) governed by the Securities Exchange Board of India (SEBI), under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FDI Rules), these were categorized by the RBI as ‘Non-Debt Instruments’. Debentures: Under the previous regime, the term ‘debentures’ was not defined under the Stamp Act and only ‘debentures’ that came under marketable securities were stamped as per Article 27 of the Stamp Act. Further, the amendment has also excluded the ‘debentures’ from the definition of ‘bonds’ thereby, preventing any state government from charging stamp duty on the issuance of debentures under the classification of bonds. Market Value: Prior to the Amendment the stamp duty was collected on the value of the security according to the average price or the value thereof as on the date of the instrument. However, now the stamp duty will be calculated on the ‘market value’ of security to ensure that the stamp duty is levied on the price it is transacted rather than the average price of the day. According to section 12(h) of the Amendment ‘market value’ is defined as, in relation to an instrument through which: Any security is traded in a stock exchange, means the price at which it is so traded; Any security that is transferred through a depository but not traded in the stock exchange means the price or the consideration mentioned in such instrument; Any security dealt otherwise than in the stock exchange or depository means the price or consideration mentioned in such an instrument. b) Integrating the Stamp Duty Laws The main purpose of this Amendment was to bring uniformity in the imposition of stamp duty across the country. With the insertion of sections 9A and 9B in the Stamp Act, the provisions relating to the issue, sale, or transfer of securities have been consolidated. This has been the most significant of all the changes since earlier, different state governments would have different rates on the same instrument, which lead to ‘rate shopping’. These rate differences were heavily exploited by the companies, which resulted in widespread rate shopping, thereby causing loss to the exchequer. Apart from this, uniform stamp duty rates have been prescribed for issuance and transfer of securities. The stamp duty will now be paid by only either the buyer or the seller. For example, according to Section 9A (read with the Rules), in the case of sale of securities through stock-exchange, the stamp duty will be collected only from the buyer and in the case of sale of security otherwise than through a stock-exchange or depository, from only the seller. This will remove the double imposition of stamp duty on buyer and seller, which was happening under the previous regime. c) Centralized Collection Mechanism One of the key changes brought by the Amendment is the introduction of a Centralised Collection Mechanism (“CCM”). Under CCM the stamp duty on securities will be collected on behalf of the state government by the authorized stock exchanges, clearing corporation, or depositories. The stamp

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Algorithmic Collusions and the Implications of Hub-And-Spoke Cartels

Competition Law /

[By Srishti Suresh] The author is a student at NALSAR University of Law, Hyderabad. Introduction The recent National Company Law Appellate Tribunal (“NCLAT”) ruling in the case of Samir Agrawal v. Competition Commission of India & Ors.[i], effectively upheld the previous CCI Order[ii], in holding that the algorithms used by cab aggregators such as Uber and Ola, do not result in the creation of a hub-and-spoke cartel. In its decision, the NCLAT laid emphasis on the form of arrangement between the cab aggregator and the independent drivers, as against the substantial effect such a scheme could have on free-market competition. In the appeal, the contention raised by the informant was in relation to the centralized power of the aggregator in fixing prices for the drivers though the App, thereby effectively barring them from competing with the prices in the market. Whilst possessing asymmetric information related to personalized rider data and other crucial information such as surge demand, traffic etc. gathered from AI-fueled algorithms, drivers engaged by the aggregators were required to charge their customers, a price determined by the App (which is based on preset factors). Scope for potential negotiation and bargain is stripped away, and the market forces of demand and supply are artificially distorted. This, it was alleged, leads to a potential increase of the fares and leads to price-fixing by the aggregator. At the helm, cab aggregators operating as intermediaries between the drivers and the riders, have the leverage to fix prices, distort free competition between similarly situated service providers, and effectively violate Section 3 of the Competition Act, 2002 (“the Act”). A striking aspect of the ruling, which assumes importance for the purpose of this article, is the “connectivity” between drivers. The scheme of arrangement between the drivers and the aggregator is as follows: each driver enters into a vertical agreement with the aggregator, and each driver is well aware of the fact that multiple competing drivers are simultaneously entering into an analogous agreement with the same aggregator. No driver enters into a direct agreement with the other. The process works on an implicit acknowledgement of the role played by each driver, as well as the aggregator. NCLAT in its order, focused on the absence of connectivity between drivers inter se. For a collusion inhibiting healthy market competition to exist, an understanding or agreement between each party, with the other, is a vital necessity.[iii] However, owing to the vertical arrangement between the parties, the possibility of an anti-competitive collusion was rejected. Understanding the Hub-and-Spoke Model of Cartels Cartels conventionally involve communication between cartel participants, agreeing to engage in illicit conduct. However, in the wake a more stringent antitrust regime across jurisdictions, the hub-and-spoke model has assumed great importance[iv]. In this model, the hub is either an upstream supplier or a downstream customer, and the spokes are the various colluding competitors. Each spoke enters into a separate vertical agreement with the hub and offers sensitive information.[v] The same information is disseminated by the hub to the other spokes, while engaging with them vertically. In essence, the information that is stored centrally with the hub is schematically disbursed to the spokes, without them having to communicate with each other directly. The Shortcoming of the NCLAT ruling In analyzing the narrow approach taken by the CCI and the NCLAT, one needs to steer clear of any ambiguity that might exist in understanding Section 3 of the Act, in the context of algorithmic collusion. First, the deemed provision prohibits any agreement, which among other aspects, relates to the provision of services causing an adverse appreciable effect on competition (“AAEC”) in India.[vi] A textual interpretation of the provision seen through a human prism[vii] (conventionally), prohibits agreements that cause a direct or indirect effect on competition. But AAEC is not restricted to an exhaustive list of agreements, the form of which cannot be delineated with clarity and certainty. Any arrangement with the potential to cause economic consequences, operating to the prejudice of public interests and unduly restricting competition, can be construed to pose AAEC on the market. In the present case, the information that is curated by the algorithm creates a resource and data pool, that is commonly accessed by all the drivers. By analyzing rider data, their frequency in hailing services, and any surge in a given locality, the algorithm has the potential to reduce its output in terms of services, while escalating prices for the same. By offering drivers a lucrative opportunity to earn more, by the way of increased fare charges, the aggregator’s app is at the helm of unilateral “price fixing”. While no horizontal agreement between the drivers exists, the multiplicity of analogous arrangements with the aggregator (the “hub”), coupled with a common pool of information and resource sharing among drivers (the “spokes”), increases the possibility of collusion vis a vis a hub-and-spoke agreement. In addition, given that all the drivers are aware of other competing drivers entering into similar agreements with the aggregator, for the same purpose, makes the agreement a perfect candidate for a hub-and-spoke model. The need for a proactive approach Technological advancements in service sectors have transformed the competitive landscape. The rate at which information is accessed, analyzed and processed, has increased manifold[viii]. Algorithms have a peculiar characteristic of allowing sellers to shadow their customers, by harvesting data on their consumption behaviour.[ix] While the traditional route taken by most competition regulators mandates a concurrence of understanding through a tacit or explicit agreement between participant themselves, the new age of algorithms might not follow the traditional route of concurrence.[x] OECD in its Report has acknowledged the highly uncertain and complex nature of algorithms, but it has also issued a caveat for regulators. A lack of an interventionist approach and over-regulation, could impose a high cost on the society[xi]. Algorithms have proven to be excellent automotive tools in increasing market efficiency. In reviewing the current framework, the Competition Law Review Committee (“CLRC”) Report has highlighted the broad ambit of Section 3. ‘Algorithmic collusions’ could very

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THE DRAFT NATIONAL E-COMMERCE POLICY OF INDIA: HARMS MORE THAN IT BENEFITS

Contemporary Issues /

[By Antara Deshpande]  The author is a student at National Law University, Odisha. In the last few years, India has attracted many global e-commerce giants like Amazon, Alibaba, Google, etc., with a growth rate of 17% in the financial year 2018-19. The rapid demand and progress in the e-commerce market have gradually increased the government’s inclination to regulate and maintain fair competition. With various ongoing government programs floated to digitalize Indian commerce, the need to regulate the sector was felt even more after Walmart Inc. acquired a 77% stake in the Indian e-commerce company Flipkart. The Indian Government, in February 2019 released the Draft National E-Commerce Policy (“Draft Policy”) prepared by the Ministry of Commerce and Department for Promotion of Industry & Internal Trade (“DPIIT”), and consumers with the aim of forming a regulatory framework, to check dominant e-commerce giants and ensure fair competition. It covers broad issues of the e-commerce space separated by i) Data ii) Infrastructure development iii) E-Commerce marketplaces iv) Regulatory issues v) Stimulating domestic digital economy and v) Export promotion. The move is directed towards developing a strong ecosystem for Indian apps, however, it has also raised concerns for established entities in the field. The overall narrative of the Draft Policy revolves around personal data privacy, consumer protection, and creating a level playing field between domestic and international players, however, the strategies through which the proposed policy aims to reach these objectives seem to blur the ultimate purpose. The Draft Policy which was supposed to be enacted in 2020, has been put on hold in view of COVID-19. While the policy is focused on personal data, a separate committee has been created to study issues related to non-personal data. Key Particulars of the Draft Policy: Data security or processes sensitive data shall not make it available for entities outside India or any other third party, even if the customer consents to it. Infrastructure development– An appropriate authority will take steps to develop the capacity for data storage in India. E-commerce entities will require to localize or mirror certain data as per the required guidelines, which shall be invigilated over periodic audits. A time frame will be provided to e-commerce companies to adjust to the data storage requirements. Disclosure & monitoring– The government will reserve the right to seek disclosure of source code and algorithms on demand, with the view of striking a balance between commercial interests and consumer protection issues. The proposed policy will allow the government to review, investigate, and take any action as a security measure. Business registration requirement – All e-commerce websites or apps that are available for download in India to have a registered business entity in India as the importer on record. Export promotion– The policy will aim to streamline logistics and strengthen India’s post. It shall also reduce administrative restrictions to promote exports. A specialized cell and support policy will be created to encourage MSME export activities, along with the creation of E-commerce Export Zones (EEZ), for storage, certification, customs clearance, etc. Consumer protection– A clear representation of the country of origin on imported products shall be made. All seller details shall be made available on the marketplace website. Creation of a rogue e-commerce entities list – A list of ‘Rogue E-commerce Entities’ will be created, which will include websites or apps that sell pirated content. After verification, such websites will face stringing actions like disabled access to their website, prohibition by payment gateways, etc. under the ‘Infringing Website’s List’. Grey Areas: Definition of E-commerce The Draft Policy uses the terms ‘e-commerce’, ‘electronic commerce’, and ‘digital economy’ interchangeably. It has defined e-commerce as buying, selling, marketing, or distribution of (i) goods, including digital products and (ii) services; through an electronic network. It has, therefore, expanded the generally accepted definition given under the Foreign Direct Investment Policy (“FDI Policy”) and Consumer Protection Act, 2019, which have restricted the definition of buying and selling goods and services, over digital and electronic networks. The expanded definition could potentially qualify all web services like e-commerce, even the websites providing information services, email services, or file storage services. Considering the broad definition and the requirement for every downloadable app or website to establish a registered business entity in India, many existing global services could step back from providing their services due to the increased compliance burden. This would ultimately affect the availability of choice and quality to consumers. Hence, the current ambiguity calls for the streamlining of the definition which is in sync with the other applicable laws. Cross-border data flow The Draft Policy has emphasized time and again on its intention to restrict cross-border data flow from India to any other nation. Such a step will unnecessarily disturb the existing mode of operation and can increase the expense of established multinational companies that transfer and process data in their jurisdiction. Additionally, it will also hurt Indian startups, which extensively require data analytics services amongst many other services that global distributors deliver at affordable prices. Presuming that domestic market entrants develop a data processing infrastructure, the additional cost of data storage will consequently affect the final price of the service or product, making it more expensive for the consumers and failing the purpose of the policy. The Committee of Experts report under the chairmanship of Justice B.N. Srikrishna extensively discussed the free transfer of personal data across borders and recommended against unjustifiable prevention of international transfer of data. Moreover, a complete prohibition on cross-border data flow, seemingly avoids the provisions of the proposed Personal Data Protection Bill2019, that prescribes for monitoring of cross-border transfer of personal data under section 49, and allows the authority to discontinue such transfer, only after a proper inquiry is made on reasonable grounds, under section 54. Therefore, rather than an absolute ban on international data flow along with the requirement of data localization, a sector-specific restriction of sensitive data will be a beneficial option. Foreign Direct Investment. The Draft Policy has laid down the extant FDI norms for e-commerce

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SEBI’s Informant Mechanism: Impact of the Incentives on Internal Compliance Programs

Capital Markets and Securities Law /

[ By Tushar Oberoy] The author is a student at NALSAR University of Law, Hyderabad. Last year, the Securities and Exchange Board of India (SEBI) introduced the informant mechanism for insider trading violations. The mechanism incentivizes whistleblowers by rewarding them with monetary sums in exchange for their knowledge of insider trading violations.  This step by the securities market regulator is inspired by the US Securities & Exchange Commission’s (SEC) whistleblower bounty program incorporated under the Dodd-Frank Wall Street Reform and Consumer Protection Act[i]. Since then, several concerns have been raised regarding the SEBI’s informant mechanism like maintenance of confidentiality, increment in the probability of frivolous complaints, etc. Apart from these, one of the concerns that arise is what will be the effect of incentivizing whistleblowers on the internal corporate compliance programs implemented by companies for tackling and preventing such violations at the internal level. This has also been pointed out in the SEC’s whistleblower bounty provisions and this post aims at analyzing the same in the Indian context. Issue: SEBI’s informant mechanism is based on giving monetary incentives to people, who may be privy to insider trading violations, to come forward and report them to SEBI. Considering the fact that a company’s employees are most likely to know of any insider trading activity by the management, incentivizing them to come forward will also help SEBI to achieve its objective of tracking down insider trading cases. However, companies are also mandated to implement internal compliance programs for curbing insider trading by implementing checks and reporting to SEBI in case of a breach. [ii]. These internal compliance programs also require companies to frame a whistleblower policy to enable employees to report a leak of unpublished sensitive information (UPSI) or any violation internally[iii]. Since the informant mechanism gives monetary incentives to informants, an employee is more likely to report a violation directly to SEBI’s informant hotline, rather than making use of the internally established structures. Moreover under Regulation 7B of SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), an informant is rewarded only if he provides SEBI with “original information”[iv]. One of the important features of “original information” is that the Informant should be the sole source of information for SEBI and SEBI should not have knowledge of the insider trading violation from anywhere else[v]. Thus, employees who come to know of any insider trading violation in their organization would be in a race to first report the information to SEBI for successfully obtaining the reward. The implications of this would be that companies wouldn’t get a fair chance to self-investigate and self-report the violation to the market regulator, which goes against the crucial objective of developing a corporate compliance program. Carrying out an internal investigation of the alleged violation would also become difficult, as companies will not receive the required cooperation from its employees who might have crucial information regarding the breach. There are also cases where there may be a lapse from the side of the company itself (eg. failure to close the trading window, non-disclosure of the required information, etc.) that amounts to a violation of the PIT Regulations. Due to a lack of cooperation from employees, companies might not be able to self-report, self investigate and assist SEBI in probe of any alleged breach. A probable consequence of this would be that mitigating circumstances for determining settlement amounts under SEBI (Settlement Proceedings) Regulations, 2018[vi] (example- applicant’s conduct during the investigation) would become inapplicable to them. This would result in higher settlement amounts being passed against them if they choose to settle the matter with SEBI. From the above, it can be seen that the informant mechanism might undermine companies’ internal compliance programs, as the informant’s and the companies’ objectives will be at crossroads. Undermining of internal controls would also render useless the effort and monetary investment that a company had made for developing such institutional compliance programs. However, another question, equally pertinent that arises is whether such internal programs can be completely relied upon by SEBI for the prevention of insider trading or are external checks like the informant mechanism needed despite institutional controls. Can companies’ internal compliance programs and processes be sufficiently relied upon to curb insider trading? Observations from the Whatsapp Leak Case: One of the foremost failures of internal checks and compliance programs in matters of insider trading can be seen from the Whatsapp leak case. In this case, UPSI in the form of financial results of various companies was circulated through Whatsapp before they were publicly released. During the probe of the same, SEBI had also criticized the internal checks put in place by Axis Bank Ltd., which was one of the entities whose financial results had been leaked and also called it to improve its internal compliance mechanisms. In its order, SEBI observed that: “Such leakage is prima facie attributable to the inadequacy of the processes/controls/systems that Axis Bank as a listed company had put in place. While procurement or communication of UPSI by any person is identified as a violation of reg. 3 of PIT Regulations and section 12A(e) of the SEBI Act, it becomes incumbent upon every listed company to put in place processes/controls/systems that would ensure that such procurement or communication of UPSI does not take place.” Ineffective management of whistleblower hotlines by Indian companies: In a survey carried out by global consultancy firm Deloitte, it was found that Indian companies were merely following a “tick in the box” approach regarding the maintenance and implementation of internal whistleblower programs. The survey reported that only 68% of the firms were equipped with proper whistleblower programs/hotlines. The survey results further mentioned that in the majority of Indian companies, whistleblowing programs are often not functional, are failing to promise confidentiality to users, and are being run by without a dedicated team and mostly by persons of the human resources department. Hence, due to the casual approach adopted by Indian companies in implementing whistleblower systems, the regulator cannot expect to receive information about

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