Author name: CBCL

NBFCs – Unravelling the Indian Shadow Banks

Leave a Comment / Banking Law /

[By Himani Singh] The author is an Advocate enrolled at Bar Council of Maharashtra and Goa Introduction ‘Non-banking Financial Companies’ (NBFCs) are financial institutions registered under the Companies Act, 1956(now Companies Act, 2013) and may engage in businesses such as loans and advances, acquisition of marketable securities, leasing, hire-purchase, insurance etc. To operate as an NBFC, the company must also have a valid registration under Section 45-IA of the Reserve Bank of India Act, 1934. Based on the type of business carried out, NBFCs can be classified into: deposit taking, non-deposit taking, non-deposit taking but with acquired securities in their group/holding/subsidiary company(ies). On the basis of their asset size, NBFCs can be classified into: systemically important (asset size above Rs. 500 Crore) and non-systemically important NBFCs. NBFCs or the Shadow Banks in India The gamut of NBFCs in India is exquisitely flavored – from housing finance and corporate lending to the more exotic infrastructure finance, promoter finance and core investment companies; and several distinct shades in between. The most attractive fragment of NBFCs that distinguishes them from traditional banks and attracts borrowers from around the world is the peer-to-peer lending segment. Just as NBFCs differ on their business, risk and leverage profiles, there are also multiple regulations and regulators governing them. But essentially, NBFCs are institutions that occupy the interstices in financial intermediation unfulfilled by banks; much like the shadow banks in United States and United Kingdom. The shadow banking system is made up of a multitude of banking and financial operators linked to each other by financial intermediation chains of varying lengths and degrees of complexity – from hedge funds, asset managers and pension funds to insurers, money market funds, real estate funds and many others.[i] The shadow banks perform the financial intermediation function in the same way as the traditional banking system. The main distinguishing characteristics of the shadow banking system are looser supervision and greater fragmentation between operators at each link in the intermediation chain.[ii] NBFCs were tagged as ‘shadow banks’ in India by Paul McCulley, the famous American economist, given their easy money lending nature and a separate regulatory framework governing them, distinct from the laws and regulations that govern banks. The shadow banking sector contributed significantly to the economic downturn and eventual financial crisis of the global economy in 2007-08. The crisis occurred since the shadow banks were largely unregulated. The minimal regulation resulted in negligible notice and left everyone blindsided even when shadow banks progressed towards a crisis. In India, the IL&FS fiasco and DSP offloading on DHFL[iii] sparked a similar fear like that of 2007-08 crisis and stressed on the fact that NBFCs were subject to lighter regulation in comparison to their traditional counterparts i.e. Banks. Regulation of NBFCs – Progress so Far For past few years, the Indian banking sector is facing multiplying systemic risks and there is a lack of supervision in the functioning of financial institutions especially the NBFCs. The disruptive challenges arising from technological advances and overarching impact of globalization add to the trouble. The Reserve Bank of India (RBI) has brought multiple reforms to regulate the NBFCs since the 1990s and the process is still underway. Between 1995 – 1998, the Reserve Bank of India (RBI) came up with several regulations such as exposure limits for lending by NBFCs, prudential regulations for their governance and also restricted raising deposits from public to an extent. Further, NBFCs were categorized based on their business model into deposit taking, non-deposit taking and core investment companies; along with specific directions regulating each category. In 2000, audit requirements for NBFCs were introduced and certain exemptions were also granted to NBFCs for charitable purposes (companies registered under Section 8 of the Companies Act, 2013 ( Section 25 of 1956 )), potential Nidhi Companies as well as government companies, from applicability of core RBI Act provisions. In 2001, the concept of asset management was brought in. In 2004, several associations formed a self-regulatory group called ‘Finance Industry Development Council’. In 2006, RBI devised a method to regulate NBFCs functioning on a large scale and identified systemically important and non-systemically important NBFCs wherein NBFCs with asset size above Rs. 100 crore were recognized as systemically important. Nearly 10 years later, in 2016, RBI increased the threshold of systemically important NBFCs to asset size of Rs. 500 Crores and also released master directions to govern each class of NBFC. In the interim, in 2008, the government had also set up a ‘Stressed Asset Stabilisation Fund Trust’ to address the liquidity freeze caused by global financial crisis. The Trust Fund was set up to purchase short term loans from eligible NBFCs, thereby increasing the liquidity. Next Steps As of 2018, there are approximately 12,000 NBFCs registered with RBI and they continue to operate on uneven grounds. The government has brought in several reforms in the financial framework governing NBFCs in the past. However, in comparison to traditional banks, the issue of regulation of NBFCs is only obliquely addressed and therefore, there is a need for further reforms in the array of NBFCs in India. It is important to re-visit the already registered NBFCs and check for qualification requirements. The license for any NBFC that does not meet the minimum eligibility criteria should be cancelled immediately. Further, it is pertinent to increase the threshold for minimum capital, especially for micro-finance institutions and asset reconstruction companies. The regulations should not be limited to asset size but also be inclusive of streamlining the liabilities of NBFCs. NBFCs with large assets sizes, especially the systemically important NBFCs should be exposed to standard statutory liquidity ratio and liquidity coverage ratios, set for NBFCs, amongst other things. The prudential norms concerning income recognition, asset classification and provisioning must be applicable to and tightened for all NBFCs to address the systemic risk plaguing the sector for long. The fair practices code and corporate governance norms of NBFCs should also be strengthened. Additionally, a uniform mode of risk management and settlement process should also be

NBFCs – Unravelling the Indian Shadow Banks Read More »

Problems With Amicus Curiae Submissions In Investment Arbitration

Leave a Comment / Arbitration Law /

[By Sikander Hyaat Khan and Parina Muchhala] Sikander Hyaat Khan (4th year) and Parina Muchhala (2nd year) are students of Maharashtra National Law University Mumbai Transparency has assumed an important position in the contemporary international arbitration dynamic. A major aspect of transparency in international arbitration regime is that of third party or amicus submissions. This holds true even more in the realm of investment arbitration, where there is likeliness of some degree of public interest being at stake. Unlike commercial arbitrations, investment arbitrations deal with matters concerning various public sector services that implicate “government regulation aimed at the protection of public welfare [such as] human rights, health and safety, labor laws, [or] environmental protection.”[1]Another rationale put forth by scholars emphasizing on the need of transparency in investment arbitration proceedings is that any decision against the respondent will lead to rendering of a monetary award that will be paid out of public’s money.[2] Amicus interventions are therefore, said to bring about transparency and legitimacy to the process of investor-state arbitrations. Many institutional rules and treaty frameworks are now becoming increasingly welcoming towards this trend and coming up with provisions for third party submissions. The ICSID Arbitration Rules under Rule 37(2) and Additional Facility Rules under Rule 41 (3) provide for third party submissions. The amended SCC Rules of 2017 in its Appendix III have also made provision for third party submissions. These vest discretion with tribunal to allow third party submissions. Similarly, UNCITRAL Transparency Rules under Article 5 provides for third party intervention in issues of treaty interpretation. At the same time, it is pertinent to highlight that accepting such applications for submissions pose certain problems for the arbitral process. This post identifies certain problems with amicus submissions and provides alternatives that can help calibrate transparency through amicus submissions into the investor-state arbitration fold while minimizing its adverse implications. Pertinent problems with amicus submissions in today’s context Against confidentiality Confidentiality is one of the many pivotal characteristics of arbitration that make it a preferred mode of dispute settlement over the courtroom process.[3] Arbitrations are characterized by confidentiality at various stages: the stage of filing, the proceedings, documents and evidences filed and the award passed. These may however be made public pursuant to party consent but otherwise remain confidential. A major reason behind why confidentiality is essential is because there is confidential information belonging to investors and/or states that cannot be disclosed to non-disputing parties. Third party submissions are at direct odds with confidentiality. There is a general concern that third-party intervention could lead to ‘re-politicization of disputes, making arbitration a “court of public opinion.”’[4] Against the principles of timeliness and cutting down of costs One of the main advantages of arbitration is to resolve disputes quickly and cheaply. An arbitration adheres to strict temporal requirements that leads to faster settlement of disputes.[5] In the context of huge investor corporations or states, there are major policy decisions and huge sum of money involved at the heart of the dispute which require even greater expediency. Third party submissions would require additional time for deliberation by arbitrators. Moreover, most factual submissions would require cross-examination to check veracity of facts which again, is a tedious and time-consuming process. It has been highlighted that allowing greater third-party intervention in State-investor disputes could potentially lead to rising costs and delays.[6] Emergence of a fractured jurisprudence The current position of law on amicus submissions in investment arbitrations is erratic. Some institutions are devoid of any rules on amicus submissions. In cases where amicus submissions have been accepted, most grounds of acceptance of such applications have been similar. These are still susceptible to dispersion though. This leads to a scope of emergence of different standards of admission of amicus submissions which is somewhat similar to the disparity in standards of disqualification of arbitrators under ICSID as compared to other institutional rules. While the ICSID jurisprudence has developed to call for a strict standard of disqualification, other institutional rules call for a mere appearance of bias. The same is possible with amicus submissions wherein conflicting decisions on the standard of admissibility of such submissions will disturb the jurisprudence constante inadvertently. Forum Shopping Currently, many institutions and treaties do not have provision for third party submissions. While it may be a far-fetched argument to make, it is possible that parties may opt for institutions or draw up procedures that include rules which do not have provisions on third party submissions to deliberately avoid the same. Suitable course of action A friction is therefore created by allowing third party interventions. The Methanex v USA tribunal highlighted that there is a need to ensure that third party participation does not result in imposition of additional burdens on parties and the arbitral process. Most institutional rules and investment treaties provide for a somewhat similar metric for tribunals to administer its discretion in allowing amicus submissions. In cases where both the parties consent to such intervention in the form of submissions and/or access to proceedings, the tribunal by the means of a procedural order can allow the same. In some cases, as discussed above, institutional rules provide for third party interventions. These require the respective tribunals to solicit their discretion based on the metrics provided by the rules. Presumption against admission of third-party submissions Owing to the principles of timeliness and confidentiality being the core values of arbitration, the presumption should lie against admission of third-party submissions. The burden of proof should lie on the applicant to show why their submissions should be allowed. Developing a standard metric and introducing metric where absent It is imperative that a standard metric be developed for tribunals to practice their discretion. The criteria given under Rule 37 (2) of the ICSID Arbitration Rules suffice for appropriate grounds that should warrant amicus submissions. Institutional rules should therefore be amended in line with the ICSID rules to incorporate provision for amicus submissions. Such process of amendment varies over different institutions and instruments in the investor-state arbitration regime, but they

Problems With Amicus Curiae Submissions In Investment Arbitration Read More »

The Constitutional Validity of SEBI’s Search and Seizure in the ‘Whatsapp Leak Case’

2 Comments / Capital Markets and Securities Law, Contemporary Issues /

[By Aditya Anand] The author is a Third Year student at NLU, Delhi. He can be reached at aditya.anand16@nludelhi.ac.in   Towards the end of 2017, Reuters published a news report[i] in which it claimed that three days before Dr Reddy’s Laboratories Ltd announced quarterly results, a message was circulated on the popular social media platform, ‘WhatsApp’, stating that the company would be reporting a loss which in time proved to be true. In furtherance to the above-made claim, it named at least 12 more companies in which prescient numbers related to their financial results, and due for announcement were shared by the users on some of the WhatsApp groups. These 12 companies involved names like – HDFC Bank, Axis Bank, Tata Steel, Mahindra Holidays, to name a few[ii]. This lead to Securities and Exchange Board of India (“SEBI”) conducting an investigation which led to a search being conducted on 31 brokers and analysts in Mumbai, Delhi and Bangalore, by a team of 70 SEBI officials and they ended up seizing devices such as mobiles, laptops, computers and other documents with the intention of accessing the WhatsApp and other social media accounts, as well as the data that was stored in these devices.[iii] This was done because the leakage of the figures which were not yet declared by the Company, fell under the category of ‘unpublished price sensitive information’ and was in contravention of Regulation 3 of the Prohibition of Insider Trading Regulations, 2015 which states that no insider shall communicate, provide or allow access to any unpublished price sensitive information, relating to a company or its securities unless it is in furtherance of legitimate purposes, performance of duties or for discharging of legal obligations.[iv] Further Section 12A (d) and (e) of the SEBI Act[v] bars any person from indulging in insider trading and dealing with securities while being in possession of material or non-public information and also bars the person from communicating such information. Thereby, SEBI conducted an inquiry in this matter and even asked WhatsApp to share the specific data[vi], which was required in order to trace the origin of such messages that allegedly contained the Unpublished Price Sensitive Information and was crucial for the market regulator, in order to further its investigation. To SEBI’s disappointment, WhatsApp declined the same, citing its privacy policy[vii]. This entire incident was labelled as the ‘WhatsApp Leak Case’, but the real question that arises is whether this seizure of smart-phones can be justified or not, especially with the emerging jurisprudence of data security and privacy. The seizure of smartphones can be termed as a violation of the Fundamental Rights granted under Part III of the Constitution. Many experts argue that there is an urgent need to ensure that the privacy of the citizens is accorded and respected especially in this new and ever-growing era of cyberspace. The same has been opined by the Supreme Court in the case of Justice K.S. Puttaswamy (retd) and Anr v Union of India[viii] where the court opined that, ‘The existence of zones of privacy is felt instinctively by all civilized people, without exception. The best evidence for this proposition lies in the panoply of activities through which we all express claims to privacy in our daily lives. We lock our doors, clothe our bodies and set passwords to our computers and phones to signal that we intend for our places, persons and virtual lives to be private.[ix]’ In the same case, the Supreme Court held that the right to privacy is protected as an intrinsic part of the right to life and personal liberty under Article 21[x] and is guaranteed by the Part III of the Indian Constitution. Various legal systems around the world have prevented the attempt to extract such passwords or to gain access to the personal devices as an invasion of privacy and the United States Supreme Court in the case of Riley v California[xi] held that ‘a cell phone is unlike a physical lock box and is in a sense the extension of the person to whom it belongs as it is a vast repository of information pertaining to its owner.[xii]’ Therefore in the light of emerging jurisprudence relating to privacy, SEBI’s power to seize smart-phones and other electronic devices can be questioned. In addition to that, in the case of Indian Council of Investors v Union of India[xiii], SEBI had asked for the Call Data Records and the details related to the location of the towers from the telecom service providers in order to investigate a matter. The same was challenged but however, allowed by the Bombay High Court with a caveat that such a power should be used ‘carefully’[xiv] as it can lead to a situation wherein the privacy of a citizen can be compromised and stated that certain safeguards should be there in order to ensure the same. Talking about another Constitutional Law facet, Article 20 (3)[xv] guarantees protection against self-incrimination which basically means that no man, not even the accused can be compelled to answer any question, which may tend to prove him guilty of any crime, he is accused of. The concept of ‘personal knowledge’ was introduced in the case of State of Bombay v Kathi Kalu Oghad[xvi] and applying the same concept, it can be asserted that passwords, pass-codes etc. required in order to unlock such devices can be said to be a part of the personal knowledge of any given person, which he or she is not required to divulge during the course of investigation. But the real issue that exists is the absence of proper statutory framework, for the purpose of regulating the conduct of the social media platforms as observed by the Delhi High Court in the case of Karmanya Singh Sareen and Ors v Union of India[xvii]. Later the Supreme Court also constituted a committee of experts in the same case, under the leadership of Justice B.N. Srikrishna, to identify key data protection issues in India and to recommend methods for addressing the

The Constitutional Validity of SEBI’s Search and Seizure in the ‘Whatsapp Leak Case’ Read More »

The curious cases of L&T, Jet and Renuka Sugars & Indian regulators’ overbearing interference

1 Comment / Capital Markets and Securities Law, Contemporary Issues /

[By Rohan Kohli] The author is a 5th year student of NLIU Bhopal and the Co-convenor of CBCL. The Indian corporate story that took off in the 1991 liberalisation reforms to its success today has had a great part to thank the paradigm shift in the Indian regulatory behaviour. From the License-Raj era protectionist and red-tape bureaucracy to today’s times where the regulators actively engage in consultations with stakeholders, the Indian regulator has morphed into a modern beast that has by and large kept in-tune with the changing times, even if a little belatedly. However, a slew of recent examples in the past few months has threatened to undo these years of liberal outlook that the regulators have developed at great pains. I will analyse three such recent examples playing the devil’s advocate to the regulators. Larsen & Toubro (L&T), which is currently in news for a hostile takeover bid by one of its subsidiary L&T Infotech in IT company Mindtree, was earlier also in news for a stunning derailment of its ambitious buyback attempt. L&T Board on 23 August 2018 approved a buyback proposal of 4.29% of its shares amounting to INR 9000 crore, the first in the company history. [1] The draft letter of offer was submitted to SEBI, which inexplicably took 102 days to reject this buyback proposal with the reason that the post-buyback debt-equity ratio would exceed 2:1. [2] This decision has taken the corporate world by surprise and been widely criticized by foreign and Indian media alike, the unanimous opinion being that the regulator erred in its opinion. The reason why this is being questioned is because neither section 68, Companies Act, 2013 nor SEBI Buyback Regulations make any mention of whether the consolidated group financials or the standalone financials of the entity be taken to calculate the ratio of secured and unsecured debts vis-à-vis paid-up capital and free reserves (which both mandate it to be maximum 2:1). SEBI took the former approach – where L&T Financials (one of the group companies), which has a debt-equity ratio of 6:1, brings the group’s debt-equity ratio to above 2:1 both pre and post-buyback – which is a very strict and literal interpretation and contrary and singularly opposite to its past practice. L&T has accordingly filed for a review of the decision instead of approaching SAT. If this does not fall through, L&T may have to go ahead with a special dividend to return money to its shareholders, which attracts significantly higher tax implications. The troubled aviation giant Jet Airways recently saw a resolution plan under the 12 February RBI Circular [3] with equity infusion for the lenders and exit of its promoters and other management (nominee of Etihad Airways) from the Board. [4] While it promises to be a close-knit fight now for the company once the bidding deadline are invited on 9 April as banks exit the company, [5] this entire process could have been pre-empted if not for the regulators’ hawkish and unyielding stance. When the first reports of Jet’s troubles began to emerge, it was Etihad who was expected to step in and assume the majority of the equity in Jet by increasing its 24% (at that time) stake. But SEBI’s move to deny open offer exemptions changed the story and finally pulled the plug on Etihad’s plans. SEBI declared that any exemptions from applicability of conditions for preferential issue and making a mandatory open offer under Takeover Code for corporate debt restructuring made other than under IBC, will only be given to banks and financial institutions. [6] This effectively removed Etihad’s option of seeking an open offer exemption by referring to SEBI under Regulation 11 of the Takeover Code. Further, SEBI also removed any exemptions pursuant to scheme of arrangement pursuant to order of competent authorityunder any law, removing Etihad’s option of seeking open offer exemption under Regulation 10 (1) (d) (iii). The latter seems to be a belated admission of SEBI’s earlier mistake to SpiceJet’s open offer exemption done under similar circumstances in 2015 that brought Ajay Singh in majority of the company. [7] SEBI’s present move makes it difficult for Etihad to even make a future bid for Jet Airways, since the FDI Policy allows for a maximum of 49% FDI under automatic route [8]. This would mean that Etihad cannot make an open offer for singlehandedly replacing the lenders (since 26% offer beyond the threshold of 24% would breach the 49% mark), and thus Etihad would have to make a joint bid with another Indian entity to keep them with in the 49% mark. If Etihad would still want to make an individual bid without attracting open offer obligations, they would have to structure the transaction as an internal corporate restructuring under Section 230, Companies Act which would mean seeking approval of NCLT and fulfilling the condition of a scheme of arrangement pursuant to order of Tribunal under Regulation 10 (1) (d) (iii). [9] All this process could have been pre-empted if not for SEBI’s outdated approach in this regard. This entire process of lenders’ having to take up equity, then opening up bids would not have been needed to be done in the first place if Etihad would have been allowed to increase its stake, saving substantial amount of time and legal and economic costs. However, we will see in the example below that another regulator may make it even more difficult for Etihad to do this. Renuka Sugars is another classic ongoing case that continues in the same vein of regulatory overreach as above. Shree Renuka Sugars was a company undergoing debt restructuring in 2018, in Wilmar Sugar Holdings increased its stake from 27.24% to 38.57% as part of the restructuring process and finally to 58.34% through an open offer. [10] Interestingly, this restructuring was done after the 12 February 2018 RBI Circular came into force, which mandates all accounts above INR 2000 crore (the present case falls under this bracket) and where restructuring may have been initiated under

The curious cases of L&T, Jet and Renuka Sugars & Indian regulators’ overbearing interference Read More »

Related Party Transactions and Arm’s Length Transactions in Company Law: Surrounding Ambiguity and Unsettled Dust

Leave a Comment / Company Law /

[By Suvam Kumar & Harsha Menon ] The authors are Second and First-year students respectively, of NLU Jodhpur. Introduction: With the advent of globalization and boom in India’s economy, as ease of doing business has escalated to a great rank, it is very much imperative to have an efficient regime governing the corporate affairs. Keeping the abovementioned view in mind, the Companies Act, 2013 [“Act”] was enacted to ensure reliability and confidence in the corporate world. One such important concept which requires more importance is related party transactions. In the previous Act of 1956, this concept was not dealt specifically. However, with the increasing challenges in the field of corporate affairs, related party has been specifically dealt under Section 188 of the Act. However, the concept of related party transactions is still shrouded under ambiguity and nebulousness. The authors have tried to highlight the existing paradox and vagueness in the law related to related party transaction with the help of various judicial precedents. What is related party transactions: Before understanding related party transactions, we must know who is a related party. A related party means any person who is relative of the director or the key managerial personnel in a company.[i]Section 188 of the Act bars the related party transactions except when such transaction is made after taking consent from the Board of Directors or when the transaction is an arm’s length transaction.[ii]Section 188(1) of the Act specifies seven types of transactions which require prior approval of the Board of Directors.[iii]Among these, the transactions related to the appointment of related party to an office of profit has been always the most contentious and has raised several legal and practical issues with regard to the transparency in the company. Rationale: The director of a company has a fiduciary relationship with the company. Hence, it is important to examine whether there exists a conflict between the personal interests and the duty of a director. Hence, it is very much clear that the rationale behind having a provision like Section 188 is to prevent any conflict of interest in the functioning of the company. More often than not, the related party transactions are considered to be influenced by ulterior motives of profiting the persons who are involved in such transactions. Such transactions diminish the transparency and disclosures norms in the company and are against the spirit and objectives of the Companies Act. Exceptions to the related party transactions: It is pertinent to note that not all related party transactions are prohibited per se. There are two exceptions to it. Firstly, transactions where prior consent from the Board of Directors have been taken and the procedural requirement has been fulfilled.[iv]Secondly, transactions which are entered on an arm’s length basis.[v] Arm’s Length Transaction: An Unsolved Ambiguous Concept. Arm’s length transactions are those which are conducted between two related parties as if they were unrelated, so that there is no conflict of interest.[vi]A very little effort has been put to provide clarity as to what exactly arm’s length transactions mean. There is a serious dearth of the interpretation to the meaning of arm’s length transactions and there seems to be a contradiction in the provisions when they use related party and lack of conflict of interest at the same time. Such casus omissusopens the space for different interpretations.[vii]It can be interpreted as one forming strict procedural requirement given under Section 188. On the other hand, it can also be construed in a more liberal sense, by looking at the intent of the transaction and comparing it with the market conditions rather than stressing on the procedural requirement. However, there is no consistent application of any of abovementioned interpretation. Hence, there is a need of clarity regarding the criterion when a transaction despite being related does not cause conflict of interest. The Courts had met with several occasions to deal with the existing ambiguity but no satisfactory results have come out. Cases dealing with Arm’s Length Transactions: One of the very few cases which have tried to give some clarity regarding arm’s length transaction is Madhu Ashok Kapur v. Rana Kapoor.[viii]The Court was dealing with the issue of whether the reappointment of the Managing Director was a related party transaction or whether it was protected under arm’s length transaction. The Court was penchant for liberal interpretation of the arm’s length transaction and emphasized on the fairness of such transactions by comparing them with the market        value of such transaction. The Court held that the appointment was made at an arm’s length basis where it looked at the nature of prerequisites which the Managing Directors are ordinarily entitled to rather than emphasizing on the procedural requirements.[ix]Similar interpretation have been observed by the Apex Court in case of A.K. Roy v. Voltas Ltd.[x]However, there is still some unsettled dust surrounding the interpretations of arm’s length transactions which needs serious review and clarity. Conclusion: Considering the serious nature of the related party transactions and its exceptions, any kind of vagueness in its interpretation would lead to serious consequences in the regime of corporate affairs. It is the transparency which gives credibility to any company and boosts the client’s confidence in corporate world. Hence, an objective interpretation of the related party transactions is imperative. At the same time, the Courts have to be very cautious while interpreting the concept of related party transactions and abstain from the mechanical application of the same. As pointed out above, the Courts should be more inclined towards applying arm’s length transaction as a substantive rule rather than looking it as a procedural necessity. The Courts ought to look at the intent of the transactions rather than focusing on the procedural requirement of the transaction. A related party transaction can be related yet protected. For instance, appointment of a person on the basis of related party transaction can be termed as valid if such appointment is fair and objective as per the requirement of the market value of such transactions. Therefore, a transaction should not be declared

Related Party Transactions and Arm’s Length Transactions in Company Law: Surrounding Ambiguity and Unsettled Dust Read More »

Board of Control for Cricket in India [BCCI] to Athletic Federation of India [AFI]: An Evolving Jurisprudence on Sports-Competition Law

Leave a Comment / Competition Law, Sports Law /

[Pradyumna Yadav] The author is a 2nd year student of UPES, Dehradun. Introduction Sporting Regulatory Authorities or SRAs are established in India with a primary objective of controlling, promoting, regulating and selecting teams for their specific sports. Amongst all SRAs, the most prominent one is Board of Control for Cricket in India or BCCI, a society registered under Tamil Nadu Society Registration Act, 1975 and established for the purpose of administering the game of cricket in India. Surinder Singh Barmi v. Board of Control for Cricket in India[i]was the first Indian case wherein the Competition Commission of India or CCI was posed with question of interpreting the provisions of our anti-trust law with that to our sports industry, the chronology of cases[ii]brought forth to CCI post-Barmi adjudication developed a jurisprudence in parlance with global trends, especially to that of European Union [EU]. The question which was very important for the commission to answer in Barmi and succeeding case was with regard to applicability of Competition Act, 2002 to such authorities. If competition act is applicable to such bodies then what is the mechanism for determining relevant market of such regulatory bodies? It is imperative to state that Competition Act, 2002 aims to promote healthy competition in the economy rather than curbing monopolies, a legislative intent of it’s preceding legislation. The reason why SRAs are in dominance in India is because usually the International Sports Affiliation recognises one domestic SRA. So, dominance per se cannot be form of anti-competitive allegation, it is only through abuse of dominance an SRA can be brought under the net of our anti-trust law. Lastly if there is abuse of dominance by SRAs, it has to be carefully examined and construed in such cases whether such abuse of dominance was carried out while performing regulatory function or ‘economical’ function as interpreted under the Competition Act.  Guiding Principles Post-Surinder Singh Barmi, the law on the subject of sports and competition law has diversified, in order to evaluate the position of BCCI or any other SRAs in near future with current standpoint of law, the general principles can be summarised as follows: SRAs would fall within the ambit of ‘enterprises’ only if it exercises its function of facilitating its concerned sport. Facilitation for this purpose means organising, promoting and educating about the concerned sport through sporting tournaments or events. Profit or not-for-profit motive in conducting events holds no relevance. [This principle is derived from all Indian Cases in this context and MOTOE v. Elliniko Dimosio, [2008] C-49/07, (European Court of Justice, Grand Chamber)] While determining the relevant market of SRA, emphasises should be laid upon demand substitutability and ascertaining who is the relevant consumer, through the analysis of multitude relationship that regulator shares, for example, while granting of media rights by SRA to broadcasters, the broadcasters in this case forms the relevant consumer in media right market. [Barmi case just restricted itself to demand substitutability, whereas subsequently Dhanraj Pillay case propounded determination of relevant consumers through ‘principle of multitude relationships’] Dominance should be derived from the governing powers and objectives of the SRA, governing power is implied from its memorandum, bye-laws, rules and regulation, also laws from its affiliated international governing body. If the governing power is vested in such a way so as to cater SRA’s dominance in the relevant market, then SRA would have dominance in that relevant market. Abuse of dominance in relevant market would not amount to abuse when the restrictive condition (alleged anti-competitive conduct) is in consonance with the objectives of SRA and the effect arising from such condition is proportionate to the legitimate sporting interest, then condition so imposed by SRA cannot be termed as anti-competitive. If restrain is a necessary requirement for development of sports or preserving its integrity, then the same cannot be also classified as anti-competitive. International Affiliation Body would be also liable for any abuse of dominance on the part of SRAs if it has full knowledge and supported such abuse. [ Principle derived from Hockey India Federation and Chess Federation Case, due delay in propounding this principle ICC scouted free from its liability in Barmi’s case] Conclusion Apart from EU’s Competition Law, Competition Act, 2002 has borrowed it’s essence from U.S. Anti-Trust Law, interpretation of competition law and sporting industry in America initiated from the case of Federal Baseball Club of Baltimore, Inc v. National League of Professional Baseball Clubs,259 U.S. 200 (1922, Court of Appeals, Columbia), wherein court held that sports and anti-trust law are different, both of them cannot be construed together, thereby holding a sports exception in which competition regulator cannot scrutinise the activities in sporting industry. Efforts and diligence of commission needs to applauded for recognising the difference in Indian sports environment to that of America’s, this is the reason why CCI did not adopt the exception because regulatory and organising role is carried out one entity in India whereas in U.S., it is in the hands of private individuals or bodies. Ever since 1991, India has seen a surge in globalisation and commercialisation of every industry, it is only a matter of time that such surge is going change whole of dynamics of Indian sports industry as well the economy at large, there would challenging and new anti-trust issues in sports- competition law but given the way commission has evolved its take on these issues and developed a jurisprudence, it’s only a matter of time when India will surpass EU’s Sports-Competition Law. [i]Case No. 61 of 2010, (Competition Commission of India, 8/2/ 2013). [ii]Dhanraj Pillay & Others v. M/s Hockey India, Case No. 73 of 2011, (Competition Commission of India, 31/05/2013). Hemant Sharma & Others v. All India Chess Federation (AICF), Case No. 79 of 2011 (Competition Commission of India, 21/02/2018). Ministry of Youth Affairs and Sports v. Athletics Federation of India, Reference Case No. 01 of 2015 (Competition Commission of India).

Board of Control for Cricket in India [BCCI] to Athletic Federation of India [AFI]: An Evolving Jurisprudence on Sports-Competition Law Read More »

The Unconventional ‘Reverse Piercing of Corporate Veil’: Applicability and Implications

1 Comment / Company Law /

[Jayesh Karnawat] The author is a 3rd year student of NLU, Jodhpur. Introduction The doctrine of piercing of corporate veil, whether forward or reverse, is an exception brought about to achieve the ends of justice and fairness. Corporates were given their status of separate entities to serve the ends of justice and not subvert them. However, the courts have time and again adopted the alter ego doctrine to prevent corporations from misusing this protection for deceptive practices. The separate legal existence of a corporation has to be protected for economic growth and when that form is abused by individuals to escape the existing liabilities, the court may resort to traditional or reverse piercing of the veil. Overview of the doctrine In the traditional piercing of corporate veil, a creditor of the corporation tries to hold the shareholder personally liable for the debts of the corporation whereas, in reverse piercing of corporate veil, the creditor of the shareholder of a corporation attempts to hold the corporation liable for the debts of the shareholders.[i]The doctrine of reverse piercing the corporate veil is very less established. Also, it has been rejected by several states at several instances.Reverse piercing has been widely used by the governments, most commonly to obtain payment of taxes owed by individuals. A classic example is G. M. Leasing Corporation v. US.[ii] As discussed in the case of Shamrock Oil & Gas v. Ethridge,[iii]the doctrine of reverse piercing of the corporate veil is based on the principle, “the mereabstraction of the corporate entity should never be allowed to bar out and pervert the real and obvious truth.” One of the classic examples is the case of W.G Platts Inc. v Platts,[iv]wherein the court allowed the plaintiff to reverse pierce the corporate veil by imposing the liability on the corporation to satisfy her debts as per the divorce decree. Requirements for the application of the doctrine For applying reverse piercing of corporate veil, generally four elements are considered, called the hybrid test, firstly the degree of identity between the shareholders and the corporation by considering alter ego doctrine, secondly, public policy being whether piercing will harm any other parties or not by using cost-benefit analysis and thirdly whether there was any fraudulent intention or not and lastly whether any other remedy can be sought if not, then the equitable doctrine can be invoked to promote justice. However the application of the doctrine is very subjective and depends upon facts and evidence of the case, no strait jacket formula can be used. Satisfying the Alter Ego doctrine The distinct legal entity of the corporation is ignored when it so dominated by an individual that it mainly transacts the dominator’s business rather than its own. In such case, the corporation will be called alter-ego of the individual. For maintaining an alter ego claim, it is not necessary to establish complete ownership and the test of “control” can be applied. Reverse piercing is appropriate in those limited instances where there is the existence of an alter ego relationship so that justice may be promoted. Injury to other innocent shareholders Equitable results mean that neither the innocent shareholders nor the corporate creditors should be prejudiced by allowing reverse piercing. The court in the case of Trossman v. Philipsborn,[v]held that to permit reverse piercing an insider must own all, or substantially all, of the stock. In Floyd v. Internal Revenue Service,[vi] the court refused to accept the theory of reverse veil-piercing for the reasons that there is the possibility of unfair prejudice to third parties, such as third-party shareholders. The problems associated with a reverse pierce are less serious where there is only a single shareholder because no other shareholders would be unfairly prejudiced. Courts have at times rejected the theory of reverse piercing of veil taking into consideration the interests of non-culpable shareholders as done in the case of Kingston Dry Dock Co. v. Lake Champlain Transportation Co.[vii] This is because creditors who extended credit to the corporation in reliance on its assets would be left unprotected if those assets were sold off to satisfy a judgment un-related to the corporation. Fraudulent Purpose In the case of Select Creations, Inc. v. Paliafito America, Inc,[viii] the court declared that to apply the alter ego doctrine in ‘reverse’ it is necessary that the controlling party uses the controlled entity to hide assets or secretly runs a business in order to evade his/her pre-existing liability. Nevertheless, the application of this doctrine should not be the norm but only be used in certain specialized situations, wherein individuals take advantage of a corporation’s separate legal existence in order to carry out fraudulent activities. In the case of State v. Easton,[ix]the court opined that promotion of fraud is one of the major requirement of the doctrine of reverse piercing. It must be shown that the plaintiff used the corporation to evade a personal obligation, to perpetrate fraud or a crime. Non Applicability of the doctrine to voluntary creditors Several courts have criticized this doctrine as it allows or permits voluntary creditors of an individual, or corporation, to recover from another corporation. One classic example is the case of Cascade Energy & Metals Corp. v. Banks[x]. Courts have added disdain for reverse piercing when the plaintiff is a voluntary, contractual creditor as opposed to an involuntary, tort creditor. The underlying principle is that voluntary creditors choose the parties with whom they deal, they can take precautions necessary to protect their interests and to permit reverse piercing would un-necessarily favour the creditor’s failure to take such precautions, at the expense of other creditors.[xi] Indian Scenario The doctrine of ‘reverse’ piercing is less prevalent in India, unlike the UK. The Indian courts demonstrated inordinate reluctance in bluntly accepting this jurisprudence. Slowly, the courts started to recognize the principle of alter-ego for the purpose of this doctrine. In the case of Iridium India Telecom Ltd. v. Motorola Incorporation and Others[xii], while applying the doctrine of alter ego the court observed that the criminal intent/ mens rea of the individuals or group of persons who are the alter-ego of the

The Unconventional ‘Reverse Piercing of Corporate Veil’: Applicability and Implications Read More »

India’s New E-Commerce Policy: Leveling the Playing Field for Online Retailers

Leave a Comment / Contemporary Issues /

[ Himanshu Shembekar ] The author is a 2nd year student of NLU, Odisha Introduction The Department of Industrial Promotion & Policy (DIPP) on 26thDecember, 2018 released a notification revising the policy on the Foreign Direct Investment in e-commerce. The new notification has shocked the big e-retailers like Amazon, Flipkart, etc. This notification has affected the way B2B business activities take place in the e-commerce industry. The new notification has taken effect from 1stFebruary, 2019. Through this post, the author intends to analyze the impact of the new notification of DIPP on the e- commerce industry in India. Provisions of the notification The DIPP has retained the policy of allowing 100% FDI in the E-commerce sector but it imposed new conditions on foreign-owned market places. The following are certain new and important set of rules: “An e-commerce entity cannot have complete control or exercise over the ownership or the control over the inventory. A vendor’s inventory shall be treated to be controlled by an e-commerce marketplace if more than 25% of its purchases are from the marketplace entity or its related companies.” “An entity having equity participation by any e-commerce entity or any of its related company or having control over its inventory by e-commerce market entity or related company, then it shall be not permitted to sell its product on platform run by such marketplace entity.” “E-commerce entity providing marketplace will not be allowed to directly or indirectly influence the sale price of goods and services. Provision of any service to any vendor on certain terms which are not available to other vendors in certain circumstances will be deemed to be unfair and discriminatory.” “E-commerce marketplace entity shall not mandate any seller to sell any product to sell any product exclusively on its platform only.” “The e-commerce companies have to furnish a certificate along with the report of a statutory auditor to the Reserve Bank of India to confirm the compliance of guidelines, by 30thSeptember, every year for the preceding fiscal year.”[i] Necessity for the changes These regulations have come up after the complaints which have been made by the small and medium Indian retailers, accusing the giant e-commerce companies for creating unfair marketplace, as these companies keep control over the inventory through affiliates and exclusive agreements.[ii] In addition to these complaints, the All India Online Vendors Association (AIOVA) had filed a petition to the Competition Commission of India (CCI), accusing that Amazon favored merchants  it partially owns such as the Cloudtail and Appario.[iii] It is a fact that Cloudtail India Pvt Ltd is the biggest retailer of Amazon. Prione Business, which is a joint venture between Amazon Inc. (48% stake) and Infosys co-founder N R Narayana Murthy’s Catamaran Advisors (51% stake), holds 99.99% of the shares of Cloudtail India.[iv] The other retailer is Appario Retail, which is a subsidiary of the Frontizo Business Services. Frontizo Business Services is a joint venture between Amazon India Ltd and Ashok Patni, the co-founder of Patni Computer Systems.Thus, it can be seen that how the big e-commerce companies through their subsidiary companies enter into such agreements which results in their capturing majority of the market share and adversely affecting other businesses. How new rule has impacted the big E-commerce companies? It is not surprising that the new regulations have brought all the big rivals in the e-commerce industry like Flipkart and Amazon together to fight against these new regulations which have threatened their business strategies. Due to the new rules, the e-commerce companies can get impacted in the following way- The affiliate sellers of the big e-commerce companies have to shift 75% of their business to other retailers, to ensure that affiliate sellers are able to continue with their business activity to provide goods and services. The big e-commerce companies have to bring in major changes in their equity structure so as to ensure that they are able to continue business with the sellers. As the big e-commerce companies cannot get the benefit of bulk purchases and selling their goods and services at low prices, this shall result in an end of big discount sales. The new rules also put an end to the flash sales in which the e- commerce companies can exclusively promote or sell their products on their platform. As the e-commerce companies are no longer able to buy majority of inventory through their affiliates, their costs shall increase. History of cases challenging E-commerce companies There have been many cases in which e-commerce companies have been accused of practicing non-competitive market practices. Few of the cases are as follows: Ashish Ahuja v. Snapdeal.com In this case, the complainant had accused Snapdeal and SanDisk of colluding with each other. Snapdeal had imposed a condition that to sell SanDisk products through online platform one must be authorized dealers i.e. must be recognized as an authorized dealer by Snapdeal as well as SanDisk, thus violating section 3 and 4 of the Competition Act, 2002 which provide for anti-competitive agreements and abuse of dominant position.[v] The Commission after enquiry held that the condition that SanDisk products sold through online portals must be bought through authorized dealers is no way an abusive conduct. This decision was within the scope of the company to protect its sanctity of its distributive channel.[vi]It was considered as a normal practice of business. M/s Mohit Manglani & Others Versus M/S Flipkart Pvt Ltd In this case, the publisher of Chetan Bhagat’s new book ‘Half Girlfriend’, Rupa publication had entered into an exclusive sale agreement with Flipkart, thus granting Flipkart exclusive right to sell the book. It was claimed by the competitors that this led to unfair trade practices as the consumer is given no choice. Flipkart had the 100% market share for the product for which it had exclusive dealing rights, therefore leading to dominance. In this matter CCI stated that an arrangement between manufacturer and an e-portal did not create any barrier for the new entries. Rather, it stated that with the emergence of the new e- commerce companies,

India’s New E-Commerce Policy: Leveling the Playing Field for Online Retailers Read More »

Case Analysis of Appeal Mechanism under Insolvency & Bankruptcy Code 2016

Leave a Comment / Insolvency Law /

[ Rahul Kanoujia ]   The author is a 2nd year student of GNLU, Gandhinagar. Introduction: The most important feature of Insolvency and Bankruptcy Code, 2016[i] (hereinafter referred to as “IBC”) is the time bound resolution process, which tries to make sure that the process of resolution and liquidation does not suffer the trauma of never ending litigation. Such time bound resolution has been made possible through the introduction of limitations under various provisions of the Code, such as those given under Section 61and Section 62. These limitations are going to be the primary focus of this article. Section 61 of IBC,provides that the Appellate authority for filing an appeal from final order of the National Company Law Tribunal shall be National Company Law Appellate Tribunal. Similarly, Section 62 of IBC provides that an appeal from the order of National Company Law Appellate Tribunal on a question of law shall lie before the Supreme Court. Such appeal shall be filed within a period of 90 days. [ii] The year 2018 saw a multitude of case laws directly addressing appeals, significantly developing the law. The following section deals with some of those cases and the issues that they address. Issues before the National Company Law Appellate Tribunals: Whether an appeal filed beyond the maximum prescribed period of 45 days under Section 61 of the Code is maintainable? In the matter of State Bank of India v. MBL Infrastructure Ltd.[iii]the NCLAT Delhi held that Section 61 clearly stipulates that an appeal has to be preferred within 30 days from the order of the adjudicating authority. A delay not exceeding 15 days can be condoned in filing the appeal if the appellant is able to satisfy the appellate authority that there was sufficient cause for not filing the appeal within the prescribed period of 30 days. Thus, the maximum time frame for preferring an appeal is 45 days, which cannot be extended further on any ground whatsoever. Whether Appellate Tribunal has jurisdiction to condone delay beyond 15 days apart from the 30 days for preferring an appeal, as prescribed under section 61(2) of the I&B Code? In the matter of Sunil Sharma v. Hex Technologiesand Industrial Services v. Electrosteel Steels,[iv]the NCLAT held that Appellate Tribunal has no jurisdiction to condone delay beyond 15 days apart from the 30 days for preferring an appeal, as prescribed under Section 61 (2) of the Insolvency and Bankruptcy Code. Whether the Insolvency and Bankruptcy Board of India (IBBI)has the standing to challenge the findings of the adjudicating authority? In Insolvency and Bankruptcy Board of India v. Wig Associates,[v] the Insolvency and Bankruptcy Board of India (“IBBI”) challenged an interpretation accorded to Section 29(A) which allegedly resulted in approval of an ineligible resolution plan. The NCLAT Delhi held that under section 30(2), the resolution professional is duty bound to ensure that resolution plans are in conformity with the provisions prescribed thereunder. If the resolution plan submitted by an applicant is contrary to Section 29A, in view of Section 30 (2) (e) read with Section 30(3), the resolution professional should not have placed such resolution plan before the committee of creditors. In any case, if the legal interpretation accorded by the adjudicating authority contravenes the provisions of the Code, it is duty of the resolution professional to bring the same to the notice of the appellate authority by preferring an appeal. Further, it was also held that the IBBI does not have the locus standi to challenge a finding of an adjudicating authority under Section 61 of the Code. However, it is empowered under Section 196(g) to monitor the performance of the insolvency professionals and in appropriate cases, pass any direction as may be required for compliance of the provisions of the Code. Therefore, the appeal filed at the instance of the IBBI was dismissed. The tribunal however also clarified that the IBBI was at the liberty to inform the resolution professional to move an appeal under S.61. Scope of appellate jurisdiction of NCLAT vis-à-vis the power conferred on the central government under section 242 of the Code. In the matter of Principal Director General of Income Tax v. M/s. Spartek Ceramics Indiaand National Engineering Industries Ltd. v. Cimmco Birla,[vi]The NCLAT held that the NCLAT is empowered to hear the appeal under the Companies Act, 2013, the Code and the Competition Act, 2003only. The central government by exercising the power under section 242 cannot empower the NCLAT to hear an appeal pursuant to a Notification which granted ninety days’ period to prefer an appeal under section 61(1). Grant of ninety days’ period was in clear violation of section 61(2) of the Code, which clearly prescribed a time limit of 45 days only. Thus, while the central government is empowered under section 242 to make any provision to remove the difficulty in giving effect to the provisions of the Code, the provision cannot be in violation of any of the substantive provisions of the Code. Distinction between the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 as regards the period of limitation for an appeal before the NCLAT. In the matter of Prowess International Private Limited v. Action Ispat & Power Private Limited, the NCLAT drew a distinction between the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 as regards the period of limitation for an appeal before the NCLAT. In an appeal preferred under Section 421 of the Companies Act, 2013, the period of limitation is counted from the date on which a copy of the order is made available by the tribunal pursuant to sub-section (3) of Section 421 of the Companies Act, 2013. [vii] Under Section 61 of the Code, the appeal is required to be filed within thirty-days, means within thirty-days from the date of knowledge of the order against which appeal is preferred. Conclusion The above judgements provide much needed clarity with regard to the Appeal Mechanism under Section 61, that appeal is to be filed within thirty days. However, as per proviso

Case Analysis of Appeal Mechanism under Insolvency & Bankruptcy Code 2016 Read More »

Scroll to Top