Author name: CBCL

Deconstructing the Supreme Court’s Ruling on Arbitrators’ Fee

1 Comment / Arbitration Law /

[By Anshritha Rai] The author is a fifth year student at ILS Law College Pune. In a recent landmark decision of Supreme Court in the case of Gammon Engineers and Contractors Pvt. Ltd. v. NHAI [i], it was held that where the arbitrators’ fee is already fixed by agreement, section 31(8) of the Arbitration and Conciliation Act, 1996 (hereinafter “the Act”) is inapplicable. Section 31(8) of the Act provides power to the arbitral tribunal to fix costs of arbitration in accordance with Section 31A of the same Act.   Facts of the case In the instant case, an arbitration clause was invoked by Gammon Engineers and Contractors Pvt. Ltd. (“Appellant”) pursuant to a contract entered into between the Appellant and NHAI (“Respondent”). Vide the contract, the parties had agreed on the fee payable to the arbitral tribunal (“Tribunal”). The fee structure was fixed as per the Respondent’s policy circulars. The Tribunal, however, passed an order stating that the fees shall be governed by the Fourth Schedule (“Fourth Schedule”) of the Arbitration and Conciliation Act, 1996. The Respondent, against this order, filed an application before the Tribunal to review its decision. In National Highways Authority of India v. Gayatri Jhansi Roadways Limited [ii], the Delhi High Court had held that the arbitral tribunal is competent to fix the fees notwithstanding the agreement between the parties. Relying on this judgment, the Tribunal dismissed the Respondent’s application. Aggrieved by this, the Respondent sought to terminate the mandate of the Tribunal. Accordingly, an application under section 14 of the Act was filed before the Delhi High Court (“Court”). The Court allowed the appeal, finding that the Fourth Schedule was not required to be mandatorily followed. Further, the dictum laid down in Gayatri Jhansi Roadways Limited was declared to be per incuriam. Thereafter, the Appellant challenged this decision before the Supreme Court by way of a Special Leave Petition. Issues framed by the Court (i) Whether the fee structure stipulated in the Fourth Schedule supersedes the fee fixed by agreement? (ii) Whether the termination ordered by the Delhi High Court is sustainable? Judgment Issue (i) The Supreme Court noted that the fee structure was mutually agreed between the parties. It was further observed that considering the time gap between the date of the agreement and the date of the disputes, the fee schedule was naturally bound to be updated. Section 31(8) of the Arbitration Act [iii] originally stated that “unless otherwise agreed by the parties”, the arbitral tribunal is competent to fix the costs of an arbitration. The Arbitration and Conciliation (Amendment) Act, 2015 omitted the expression “unless otherwise agreed by the parties” appearing in Section 31(8). The deletion of this expression was understood in Gayatri Jhansi Roadways Limited case to mean that the rates specified in the Fourth Schedule takes primacy over any agreement between the parties. However, the Court disagreed with the decision in Gayatri Jhansi Roadways Limited. The reason for this was that the judgment in that case had not taken the 246th Law Commission Report and relevant earlier decisions into due consideration. The apex court too found that the ratio laid down in Gayatri Jhansi Roadways Limited is not a correct view of the law. Accordingly, the Supreme Court overruled the judgment in the case of Gayatri Jhansi Roadways Limited. The Court had also observed that section 31(8) of the Arbitration Act governs costs, of which the arbitrators’ fee is only a component. In other words, section 31(8) deals with costs in general, and not the fee payable to the arbitrators. It was noted that section 31(8) will not apply if the fee is already fixed by agreement. The Supreme Court concurred with these findings. The rates stipulated in the Respondent’s circular dated 01.06.2017 was ultimately held to govern the fee schedule. Consequently, the apex court clarified that the arbitrators are entitled to charge their fees in accordance with the Respondent’s circular, and not the Fourth Schedule. Issue (ii) The division bench of the Supreme Court found that the Delhi High Court had erroneously terminated the mandate of the tribunal. The apex court affirmed that the tribunal was required to comply with the Gayatri Jhansi Roadways Limited decision which mandated that not the agreement, but the Fourth Schedule would apply. In light of this, the Supreme Court noted that the arbitrators cannot be said to have done anything wrong. The court reasoned that an arbitrator does not become de jure unable to perform his/her functions on account of having followed the law laid down by a court. On this account, the Supreme Court quashed the termination order. Analysis In the past, there have been instances of placing reliance on the fee structure mentioned in the Fourth Schedule notwithstanding that the parties have agreed otherwise. Vide its judgment, the Supreme Court has provided much-needed clarity on whether the rates specified in the Fourth Schedule overrides the fee structure mutually agreed between the parties. The agreement entered into between the parties has been given utmost importance under the judgment. This decision underpins the principle of party autonomy and sanctity of the contract entered into between the parties. In Gayatri Jhansi Roadways Limited, the Delhi High Court essentially permitted an arbitral tribunal to determine its fees irrespective of an agreement between the parties. By overruling this decision, the Supreme Court has given immense weightage to freedom of the parties. The apex court has set a precedent that the Fourth Schedule of the Act is not mandatory, but merely suggestive in nature. Arbitrators cannot demand that the Fourth Schedule shall be applicable unless the parties have mutually agreed to invoke the provision. Needless to say, the pro-arbitration approach adopted by the Supreme Court will be hailed by prospective litigants. It is now necessary for courts to set out guidelines applicable to parties when determining the fee structure. However, a matter of concern is when the agreed fee schedule is unacceptable to the arbitrator. In such a situation, the mandate is likely to be rejected by the arbitrators,

Deconstructing the Supreme Court’s Ruling on Arbitrators’ Fee Read More »

Arbitrability of IPR Disputes in India: Time for the Legislature to Step Up

Leave a Comment / Arbitration Law /

[By Saumitra Shrivastava] The author is a fifth year student of NLU Raipur. Introduction The issue of arbitrability of intellectual property rights (hereinafter “IPR”) disputes has always been a subject of great speculation and interest. This is partially because of the massive role of IPR in the world of commerce which eventually leads to a significant number of disputes. For a healthy functioning economy, it is imperative to resolve these disputes as soon as possible. This has necessitated the Indian courts, over the time, to acknowledge the arbitrability of a class of these disputes and reject the blanket ban on arbitration of same. This post analyses the position of Indian law and proposes certain amendments to Indian laws in order to clear the air on the issue of arbitrability of IPR disputes. Indian legal position on arbitrability of IPR disputes The first time the Indian courts dealt with this question was in Booz Allen & Hamilton Inc. v SBI Home Finance Ltd.(2011) where the Supreme Court gave a framework popularly known as “Booz Allen Framework” to determine the arbitrability of any dispute. It states, when the dispute is based on assertion of rights in personam, it is arbitrable. Otherwise, it is not. It further held: ‘Every civil or commercial dispute, either contractual or non-contractual, and which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless it is excluded either expressly or by necessary implication.’ Though the arbitrability of IPR disputes was not in issue, the Supreme Court included ‘disputes of patent, trademarks and copyright’ in category of ‘generally non-arbitrable disputes’. Since the question was not an issue of the case, it is argued that the above conclusion was an obiter dicta and not ratio decidendi. In Mundipharma AG Vs. Wockhardt Ltd., the Delhi HC categorically held that where copyright in any work is infringed, the remedies by way of injunction damages, account and otherwise as are or may be conferred by law for the infringement of such a right, cannot be subject-matter of arbitration. In IPRS v. Entertainment Network , the Bombay High Court set aside that part of award in which the arbitrator decided upon validity of copyright subsisting in one of the parties. Later, in Vikas Sales Corp, the Supreme Court held that these rights can be included in definition of movable property and are rights in rem. This reasoning would essentially make the Booz Allen Framework conclude that all IPR disputes are inarbitrable. However, in the landmark Eros v. Telemax (which has been followed in many subsequent cases), the Bombay HC allowed the arbitration of IPR disputes given they are contractual. It is to be noted that although Booz Allen Framework provided for adjudication of both ‘contractual as well as non-contractual disputes, of commercial/civil nature or those which are not barred by express or implied provision,’ yet in this case, the HC added a qualifier ‘contractual’ for adjudication of IPR disputes, thus contradicting the Supreme Court’s stance. These judgments show that the judiciary has been quite unable to provide a clear position of law on the issue. Coming to the statutory position of law in India, section 2(3) of the Arbitration and Conciliation Act, 1996 provides that: ‘This part (which deals with domestic arbitration) shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.’ Since Indian laws (including IPR laws) do not provide for any exhaustive list as to which disputes are arbitrable and which are not, it depends significantly upon the courts to decide upon arbitrability of the matter, giving courts discretionary power to adjudicate upon the same. Different Courts are either giving contradictory decisions or they are giving the same decisions with different reasoning, thus rendering the law not just unclear but also ambiguous. How do foreign jurisdictions approach the afore-said issue? The issue of arbitrability of these disputes has been dealt by different countries in different ways. Some countries almost put a blanket ban on it while some allow full arbitrability subject to a very small set of conditions. But most of the countries remain somewhere in the middle. For instance, Spain allows arbitration of disputes involving registration of trademarks with exceptions. Akin to India, several national legal systems like Germany and France traditionally reject the arbitrability of disputes concerning the validity of registered IP rights but have been moving towards arbitrability of contractual IPR disputes in the last few decades. Hong Kong (Amendment) Ordinance 2017 The government of Hong Kong brought the Hong Kong (Amendment) Ordinance in 2017, which adds a whole part (Part 11A) namely ‘Arbitration Relating to Intellectual Property Rights’. Part 11A provides that an IPR disputes are capable of settlement by arbitration as between the parties to the IPR dispute [i]. It further provides that the subject matter of a dispute is not incapable of settlement by arbitration under the law of Hong Kong, nor the award out of arbitration is against the public policy of Hong Kong only because the subject matter/award relates to an IPR disputes [ii]. Similar developments have been seen in countries like Switzerland, United States and Israel. Unnecessary litigation due to unsettled law on the issue According to a noted international scholar, Francis Russell, the question of arbitrability can arise at three stages of arbitration. In India, these are akin to the following sections of Arbitration and Conciliation Act, 1996 (“the Act“): (i) Application to stay arbitration (Section 8); (ii) Application to question the authority of the tribunal to entertain the subject matter of arbitration (Section 16); and (iii) Application to set aside the award (Section 34). In absence of a clear law and multiple opinions of the Supreme Court and various High Courts of India, Section 8 of the Act rarely bars all arbitral proceedings on the ground of non-arbitrability of the subject matter (which are later proved not arbitrable after lengthy litigation proceedings). The arbitral tribunal under Section 16 of the

Arbitrability of IPR Disputes in India: Time for the Legislature to Step Up Read More »

CCI’s Precedented Consumer Favouritism Approach Wanes in the Multiplex Antitrust Order

Leave a Comment / Competition Law /

[By Prerna Kapur] The author is a fifth year student of National Law University, Orrisa. Background The Competition Commission of India (“CCI”) vide order dated 28.02.2019 dismissed the allegations against one of India’s largest multiplex chains, Inox Leisure Ltd­. and its beverage partner, Hindustan Coca-Cola Beverages Private Limited (“parties”). The allegations concerned contravention of provisions prohibiting tie-in arrangement, exclusive supply and distribution agreements under Section 3(4)(a), 3(4)(b), and 3(4)(c)of the Competition Act 2002 (“the Act”) respectively. These allegations were two fold- First, that the agreement between the parties of selling Cola-Cola’s products with the exclusion of any of its direct competitors amounted to an exclusive supply agreement which crafted ‘Appreciable Adverse Effect on Competition’ under Section 19(3) & Section 3(4) of the Act. An informant revealed that difference between the price of Diet Coke and Minute Maid Pulpy Orange Can sold at multiplexes versus that sold other local retail stores in Hyderabad is approximately Rs. 22.00/- and Rs. 34.00/- respectively. Emphasis was also placed on the legislative intent of the Legal Metrology (Packaged Commodities) Rules 2011 which was recently amended to prohibit the mischief of dual pricing of identical products of the same brand and quality in India. The collusion between the two parties had resulted in vertical restraint since Inox (as a retailer) and Coca-Cola (as the sole supplier of beverages) fell into different levels of the supply chain. And second, despite the absence of a tie-in agreement in the literal sense, viewers were compelled to purchase essential commodities like packaged water bottles and other beverages of only one brand provided to them by the multiplex, thereby limiting their right to choose. Consequently, the informant sought relief before the CCI against the malpractice of execution of such anti-competitive agreements. CCI, however, decided to exculpate the opposing parties based on the flexibility of the agreement entered between them which was earlier characterised as an “exclusive supply agreement” by the informant. Not only was the term “Exclusive Partner of Beverages” omitted from the initially drafted agreement of the parties entered in 2008, but clauses like, “the agreement entered by the parties can be terminated by giving a 60 days’ notice” was also incorporated alongside. These adjustments were seen to decimate entry and exit barriers to eliminate any competition concerns. Hence the CCI observed that market power does not rest with the manufacturer simply because the distributor can switch to sell the brands of competitors, if it were offered a better commercial deal. However, it is worth mentioning here that the supply agreement between the parties has been lingering for over eleven (11) years now. Statistics further sided with Inox as it claimed to own only one hundred and twenty eight (128) multiplex properties with over five hundred and twenty (520) screens across India limiting the possibility of executing similar agreements. That said, its competitors like PepsiCo. by 2011 alone had entered into such agreements with a large number of multiplexes having about six hundred (600) screens (namely that of Big Cinemas, Cinemax and Waves Cinema) thereby distributing its market share to avoid a dominant status. CCI’s after thought that there is no explicit condition that consumers have to necessarily buy these goods to watch a movie were seen as attempts to justify its decision and to further that there is no tie in agreement within the realms of Section 3(4)(a) of the Act. Lock-In and Lock-Out Arrangement This decision could possibly stir into a catalyst of agreements between manufacturers and sellers encompassing lock-in of consumers and lock out of competitors. While CCI maintained its position that purchasing beverages is not indispensable to the “movie theatre experience”, let’s face it – how often do we really enjoy a movie without enjoying a beverage at hand? The agreement between Inox and Coca-Cola is moulded to portray fluidity but, Inox’s beverage partner has remained unchanged since 2008. The retailer’s ability to charge above-competitive prices for its aftermarket service product depends largely on the availability of substitutes provided to the customer. But in the present scenario there are none available. Competition law compels market players to search for better permutations and combinations for providing greater efficiency and fluidity in the market structure. Shuffling and re-shuffling of product resources results in output maximization paving way for the finest consumer valuation. In fact, in 2011, the CCI had expressed its concern on the issue that Inox and such other multiplexes enjoy complete economic power, in the sense that its consumers are completely dependent on the food and beverages they provide [i]. The US Supreme Court in the case of Eastman Kodak Co. v. Image Technical Services, Inc. defined market power as, “the power to force a purchaser to do something that he would not do in a competitive market.” It further held that in some instances one single brand product can constitute a separate market in itself. The narrative that CCI poses sits well only because the relevant market here has been extended to all multiplexes at large. Based on this, let’s assume that the relevant market in the CCI’s impugned order is not extended to all multiplexes at large but to those of a single multiplex brand like the aforementioned Supreme Court order permitted. Would that not resultantly increase the market share of Coco-Cola at any given Inox multiplex to a 100%? By broadening the horizons of Inox’s relevant market, CCI resultantly ignores the test of substitutability which has been the tombstone for numerous standards set by the CCI in its earlier decisions. When the question came before CCI in the Snapdeal case as to whether ecommerce websites shall exist as a distinct relevant market as that compared to the offline market, CCI embraced a neoclassical reasoning. CCI clarified that offline and online markets differ because they provide a different shopping experience in terms of discounts and customer service. Similarly, buyers weigh the options available to them in both the markets and decide accordingly. Therefore, if the price in the online market increases that would

CCI’s Precedented Consumer Favouritism Approach Wanes in the Multiplex Antitrust Order Read More »

Applicability of Arbitration (Amendment) Act, 2015 to Section 34 of the Arbitration Act, 1996

2 Comments / Arbitration Law /

[By Rahul Kanoujia and Venkata Supreeth Kesapragada] The authors are third year students of Gujarat National Law University, Gandhinagar. Introduction In the present case [i], the appellants, Ssangyong Construction Co. a construction company registered under the laws of the Republic of Korea, entered into a contract with the respondent National Highways Authority of India (“NHAI”) a government undertaking overseeing the construction of highways across the territory of India. Under the contract, the parties had agreed to payments for base materials such as cement, bitumen, petrol, chemicals and tar based on a formula decided mutually, involving the Wholesale Price Index (“WPI”) as published by the Ministry of Industries. At the time of entering into the contract, the parties had agreed to the old WPI series of 1994, however, the contract permitted for change in the formula, subject to the contractor’s approval. The NHAI had issued a subsequent circular in 2013 making a unilateral change in the WPI series from the 1994 version to 2007 version and raised invoices of pending dues under the new series starting from 2007. Aggrieved, the appellants referred the matter to arbitration for a three-member tribunal where the majority decided the matter in favor of the respondents, while the dissenting arbitrator awarded in the favor of the appellants, basing his reasoning on the ground that the new WPI series was de hors to the contract. Upon reaching arbitration, the appellant moved to the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter “Act”) to set aside the award on the ground of “patent illegality”. The learned judge did not find a reason to interfere with the award as the view of the majority was drawn on a plausible interpretation lying within the contract. The court opined that unless patent illegality has been established the court shall not interfere with the substantive decision of the tribunal. Hence the application was dismissed, leading to an appeal before the Supreme Court. Examination of the grounds of judicial interference as laid down under section 34 of the Arbitration Act, 1996 The Supreme Court took upon to examine the applicability of section 34 of the Act and to decide if in the present case, such a unilateral novation is permissible. In the case of Associate Builders v. Delhi Development Authority [ii], relying upon the case of Renusagar Power Co. Ltd. v. General Electric Co. [iii], interpreted the term “public policy “as comprising three elements: Fundamental Policy of Indian Law Interests of India Justice or Morality Though reliance was placed on Renusagar judgment, the interpretation was made in the context of the term “public policy” as provided in Section 48 of the Act for the enforcement of foreign judgments. A fourth element, “patent illegality” had been constructed by the court for the application of Section 34 of the Act in the case of ONGC v. Saw Pipes Ltd. [iv]. The Court further elaborated its position in the case of Associate Builders v. Delhi Development Authority wherein it was held that a quasi-judicial authority must adhere to the most basic tenets of justice such as principles of natural justice and fairness. Infraction of these principles attracts the court’s attention to the defects apparent on the face of the decision of the arbitral tribunal. However the court has, by policy, not adopted an expansive construction of the permissible grounds of judicial intervention as laid out under Section 34 of the Arbitration Act. In the instant case, the court invoked its plenary powers under Article 142 of the Constitution to set aside the arbitral award and elevate a minority judgment of a sole dissenting arbitrator to the status of the award so as to bind the parties, in order to avoid a fresh set of arbitration proceedings, which would defeat the provisions for speedy resolution as envisioned under the Arbitration and Conciliation (Amendment) Act, of 2015 (“2015 Amendment Act”). In the instant case, the court opined that the decision to implement the new WPI series had been taken unilaterally by the NHAI. The respondents placed reliance on documents and material, which were not accessible to the appellant company. In doing so the court felt that the principle of Audi Alteram Partem was violated. Further the court did not place the said infraction as a violation of the basic notion of justice. The award delivered was within the competence of the arbitral tribunal. The Court gave an extreme caution in the handling of applications under Section 34 of the Act wherein if the appellant alleges a violation of the basic notion of justice, the violation should be such that the conscience of the court must be shaken at the infraction of any of the basic tenets of justice or fairness, in line with the Supreme Court’s holdings in the Associate Builders’ case. The court also relied on the 246th Law Commission report [v] which highlighted the necessity for independent, faster dispute resolution mechanism free from excessive judicial intervention to ensure the protection of money claims. Hence, in providing for applications under Section 34 of the Act, the courts must bear in mind the delay factor that is likely to cause irreparable losses to the parties. The 2015 Amendment has effectively overruled the widened scope of intervention as provided by the Saw Pipes & Western Geco [vi] judgment, where ‘Interests of India’ is no longer recognized as a possible sub-category of a public policy violation. Further an erroneous application of law by the arbitral tribunal is not recognized as a valid ground for setting aside the arbitral award, so long as such an application is within the tribunal’s competence. Analysis In the light of the court’s judgment in BCCI v. Kochi Cricket Pvt. Ltd. and Ors.[vii], the application of the provisions of the 2015 Amendment Act was held to be prospective. However in the instant case, the Supreme Court has provided that the application of the provisions of the amendment shall be made only in those cases where the arbitration proceedings have

Applicability of Arbitration (Amendment) Act, 2015 to Section 34 of the Arbitration Act, 1996 Read More »

Shares with Differential Voting Rights: A New Life?

1 Comment / Company Law /

[By Deeksha Gabra and Shivam Gupta] Deeksha is a Chartered Accountant and Shivam is a fifth year student of RGNUL, Punjab  1. Background Shares with Differential Voting Rights (hereinafter “DVR Shares”), also known as Dual Class Shares internationally, are shares with rights disproportionate to their economic ownership. The concept of DVR is not new to India. It can be traced back to 2000 when the then Companies Act, 1956 was amended by Companies (Amendment) Act, 2000 to inculcate Section 86, which allowed the Indian companies to issue DVR Shares. The Consultation Paper on DVR Shares released by SEBI categorized DVR into two types: Shares with Superior Voting Rights (hereinafter “SR Shares”) which carry superior voting or dividend rights in comparison to ordinary shares. The minimum votes to share ratio in SR Shares should be 2:1 which can reach up to maximum of 10:1, implying a shareholder holding one share will have 10 votes. Shares with Fractional Voting Rights (hereinafter “FR Shares”) which carry inferior voting rights in comparison to ordinary shares. The minimum votes to share ratio in FR should be 1:2 which can reach up to maximum of 1:10, implying a shareholder holding 10 shares will have one vote. Till 2009, there were only few listed companies that issued shares with differential rights. For instance, in 2008, Tata Motors issued DVR Shares carrying 1/10th voting right and 5% higher dividend on these shares as compared to ordinary shares; and in 2009 Pantaloons Retails (now, Future Enterprises Ltd.) issued DVRs with 1/10th voting rights to the existing ordinary shares and offered 5% additional dividend. Later in 2009, SEBI amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to bar listed companies from issuing DVR Shares with superior voting or dividend rights, meaning that only FR Shares could be issued by listed entities. Since then, the use of DVR Shares in the Indian corporate sector is almost negligible, which can be attributed to various reasons including low awareness about the concept of DVR shares, inadequate corporate governance measures which may lead to minority oppression and lack of legal framework for regulating the DVR Share market. The release of Consultation Paper on DVR Shares by SEBI followed by the hostile takeover of Mindtree by the L&T, being the first hostile takeover in the Indian IT sector ignited a debate in the corporate arena regarding the importance of DVR Shares to avoid such hostile takeovers. Thereafter, SEBI in its Board Meeting on 27th June, 2019 approved the Framework for issue of DVR Shares. This article briefly discusses how DVR Shares would have helped to prevent the hostile takeover of Mindtree and makes an attempt to analyze the new approved framework for DVR Shares and the provisions inculcated therein. 2. Mindtree’s Hostile Takeover The whole mishap can be attributed to the bizarre shareholding pattern of Mindtree. The four promoters of the company held only 13.32% of the shares collectively. The first step taken by L&T was to acquire 20.32% stake held by coffee tycoon, V.G. Siddhartha, in Mindtree. Then L&T further purchased 15% from open market before making an open offer of 31% under the Takeover Code. In the end, L&T gained a control of 60% after it further purchased 10.61% stake from Nalanda Capital. Mindtree tried to prevent the hostile takeover by using various defense mechanisms. The main tactics included proposal to announce increased dividends, raising of a contention that both the companies have dissimilar work culture, proposal for buyback of shares. The last effort made by Mindtree was to facilitate an intervention by its largest institutional investor, Nalanda Capital. However, Nalanda Capital also recoiled by selling its stake after SEBI issued a show-cause notice for acting in concert with the promoters of Mindtree and spurring Mindtree’s public shareholders to abstain from selling their shares at L&T’s offered price. Had there been DVR Shares in place, it could have helped the promoters to defend against the hostile takeover as a large percentage of voting rights would vest in the hands of promoter group. 3. Need for a New Framework The Indian start-up market is witnessing a boom. These start-up companies depend majorly on the promoters/founders for their growth, vision and sustenance. Also, these companies are in requirement of funds/capital frequently which is fulfilled by equity capital. This results in erosion of promoter’s stake, thereby weakening their control. This is particularly significant for new technology firms with asset light models. DVR Shares as a paradigm for procuring capital can tackle this concern meritoriously, consequently operating as a defence mechanism to fight hostile takeovers. 4. New Framework The SEBI Consultation Paper proposed a detailed framework for issue of both SR shares and FR shares. According to the framework, a company with SR shares is permitted to list its ordinary shares by an initial public offer subject to certain conditions prescribed under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009: The company should necessarily be a tech company, i.e. companies that intensively use technology such as information technology, intellectual property, data analytics, bio-technology or nano-technology. The Promoter Group (excluding corporate & non-executive promoters) is only eligible to hold SR shares. The collective net worth of the promoter group should not exceed Rs 500 Cr. (notwithstanding the investment of SR shareholders in the shares of issuer company). A Special Resolution is passed for issuance of SR shares. The SR shares are held by the promoter group for at least last 6 months prior to filing of Red Herring Prospectus (“RHP“). After the listing of the ordinary shares, the SR shares shall also be listed on the stock exchanges. However, SR shares shall subject to sunset clause according to which the SR shares will be converted to ordinary shares. Furthermore, provision relating to lock-in will prohibit the trading/ transfer and creation of encumbrances on the SR shares. The coat tail provision is one of the main highlights of the new framework along with the sunset clause. The coat tail provision provides for the circumstances where the SR

Shares with Differential Voting Rights: A New Life? Read More »

Ishaan Chopra of NLIU Bhopal on his experience at the 4th NLIU Trilegal Summit, 2018

Leave a Comment / Promotion /

(Ishaan Chopra is fourth year student at NLIU, Bhopal and can be reached at [email protected]) Last year, in July 2018, the Centre for Business and Commercial Laws (CBCL) announced the prizes for the 4th NLIU-Trilegal Summit on Corporate and Commercial Laws. My mind processed and captured three pieces of information from the poster put up by CBCL – a paid foreign trip, an internship at Trilegal and an Eastern Book Company (EBC) publication.  The above mentioned prizes definitely motivated me to write for the Summit but I had little idea about the intellectually enlightening journey I was about to depart on. To start with, I gauged the scope of legal issues and the themes that the Summit sought to cover. The theme for the Summit was “commercial laws” which effectively covered everything that was trending in the corporate law sector. After some preliminary readings, I delved deeper into these issues to zero down on something in my interest area. The indicative themes were insightful and guided my research into different topics.  The Summit’s wide range of themes provided by the summit gave it an edge over other similar summits and conferences which are organized in the law school circuit. One simply cannot jump into preparation for the Summit. Given the variety of themes and stiff competition for publication, brainstorming over prospective topics is a must. If one is in the Second or Third-year of law school, these readings will probably be their first exposure to a web of corporate laws that actually have widespread implications on various areas of our lives. Reading through various topics and researching on them actually helps us understand the complexities of these laws and even gauge our interest in the field. After choosing a theme, one must strategize on the structure of the paper and then begin the process of putting it into words.  None of the above is possible without setting out the objective and scope of your research. It is a sine qua non. And while you are at it, it is always a great idea to take research and drafting advice from seniors who are relatively more well versed with the developments in the field of corporate law. The Summit ensures that all the effort put into research and drafting is appreciated, and sufficiently awarded. Each research paper undergoes two stages of technical review and is further reviewed by experienced lawyers working at Trilegal. After a rigorous assessment of the papers a total of 15 papers are shortlisted for the presentation at the NLIU Bhopal campus.  The lucrative prizes bring with them intense competition among the participants. It is this level of competition and the satisfaction attached to it, that has made law students (including me) across the country strive for the opportunity to present their paper at the Summit.  I was fortunate enough to write for the Summit and get shortlisted in the top 15. The next challenge was the paper presentation. The panel for the Summit consisted of Trilegal partners, academicians and reputed in-house counsels. This is because Trilegal truly ensures the presence of excellent panelists. The very idea of speaking in front of such experienced professionals for eleven minutes, on an issue they have a practical insight into, was daunting. I started my preparation by getting the basics in place. Subsequently, I developed a structure for the presentation and read up on the current issues pertaining to the presentation. This process helped me comfortably put forth my views on an issue of commercial laws and approach it with a commercial perspective. The preparation for the presentation involved focus on advocacy skills as well. Cohesion and eloquence are key to systematically presenting a corporate law issue, which should be a prime focus for all presenters. Last year, Mr Sumeet Malik (Director, EBC) visited the NLIU Bhopal campus and inaugurated the Summit with his session on legal research for junior law students. The students were elated to be learning the basics of the simple yet crucial concept of research. His mantra to teach students not the law – but to think like a lawyer and to know where to find the law, has been extremely impactful on a personal level. This session was immensely beneficial for participants, the students of NLIU Bhopal and anyone else aiming to understand the art of research.  On the next day of the Summit, CBCL warmly welcomed the participants with hampers. I distinctly remember the first presentation that took place. The instant the presentation ended, there were series of questions that followed. Interestingly, the panelists were heavily inclined towards engaging in commercial realities of the issues raised other than the position of law itself. The audience and the participants were also keen on asking questions and the panel engaged in an interactive session with the students. This unique opportunity of interacting with reputed practitioners is another factor which makes this Summit one-of-a-kind. While the questions asked were intriguing, what grabbed my attention most was that the participants were thorough with their respective topics. The competition was tough and the panelists were all praises for the effort put in by the students. Additionally, CBCL arranged for scrumptious meals and additionally it was a great environment to network with peers from across India.  Even though my presentation was post lunch, I felt intimidated by the panel and my peers who had given excellent presentations prior to that of mine. During my presentation, the panel patiently heard my views and asked questions, which I answered on the basis of my preparation. The interaction was extremely insightful and my analysis and perspective were appreciated. The panelists relied on simplified examples to explain their practical experience to all presenters, including me. Post my presentation, I witnessed the remaining presentations of the Summit and asked questions, which were appreciated by the members of the panel and this resulted in me securing an internship with Trilegal. Having developed a keen interest in commercial laws by the end of the Summit, the internship

Ishaan Chopra of NLIU Bhopal on his experience at the 4th NLIU Trilegal Summit, 2018 Read More »

Trade Union As “Operational Creditor”: Critical Analysis of the Judgment

Leave a Comment / Insolvency Law /

[By Suprabh Garg] The author is a third year student of National Law University, Odisha. INTRODUCTION The Insolvency and Bankruptcy Code, 2016 [“IBC”] empowers the Operational Creditors to initiate Corporate Insolvency Resolution Process [“CIRP”] against a Corporate Debtor, if it defaults in payment of ‘operational debt’. However, the ongoing debate whether Trade Union constitute as Operational Creditors, has been finally settled by the Apex Court in the case of JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Company Ltd. [“Jute Mill”] [i]. The Apex Court by clearing one of the grey areas of IBC provided employees an efficacious weapon to recover their hard earned labour from the insolvent Corporate Debtor. However, there are several unresolved issues which have arisen subsequent to this judgement, which have been dealt by the author in the later part. TRADE UNION CONSTITUTE AS OPERATIONAL CREDITORS: JUDGEMENT ANALYSIS The Supreme Court overruled the impugned order of the National Company Law Appellate Tribunal [ii], which had affirmed the order of National Company Law Tribunal Delhi [iii], holding that trade union was not an operational creditor since they did not qualify as ‘persons’ under IBC and further that no service are rendered by the Trade Unions to the Corporate Debtor. The Apex Court in a contrasting opinion held that Trade Unions constitute Operational Creditor on two grounds, firstly that Trade Unions fell within the definition of ‘person’ under IBC and subsequently qualified as Operational Creditor [1] and secondly that filing of individual petitions by employees would be burdensome and costly affair [2]. Trade Union Fell Within the Definition of Person under Section 3(23), IBC Operational Creditor is defined under Section 5(20) of IBC as a ‘person’ to whom an operational debt is owed. Further, the term ‘operational debt’, defined under Section 5 (21), IBC inter-alia, includes claim in respect of services rendered including employment. The term ‘person’ for the purpose of IBC has been defined in Section 3(23), IBC, which in sub-clause (g) inter-alia, includes ‘any other entity established under a statute’. The Court held that the Trade Unions fall under the definition of ‘person’ under Section 3(23)(g) since they are ‘entity established under a statute’ viz. The Trade Union Act, 1926 and therefore, they constitute as Operational Creditor under Section 5(20) read with Section 5(21), IBC. Filing of Individual Petition by Employees – Burdensome and Costly Affair The Court held that instead of filing one petition by Trade Union, if all the employees filed an individual petition, it would not only be burdensome but also a costly affair. Each employee would have to thereafter pay various costs, inter-alia, insolvency resolution process cost, the cost of interim resolution professional, the cost of appointing valuers etc. [iv], which were mandatory requirement. In such scenario, the processual law of IBC would become tyrant and deprive the employees of justice, thus increasing the burden of the courts. The Apex Court then, to support its contentions, reiterated its judgements in Kailash v. Nanhku [v], Sushil Kumar Sen v. State of Bihar [vi], State of Punjab v. Shamlal Murari [vii] wherein it was held that processual law should not be a tyrant, but an aid to justice. The Court thus, held that such a stringent approach of processual law that would deny the employees opportunity of justice, should be rejected. Therefore, the Court held that a registered trade union which is formed for the purpose of regulating the relations between workman and their employees [viii] could maintain a petition as an Operational Creditor. UNRESOLVED/DISPUTED ISSUES: A CRITICAL ANALYSIS The Court in Jute Mill on the other hand also raised plethora of unresolved issues listed below. Whether or Not a Trade Union Can File an Application Under Section 9, IBC Conjointly? One of the issues that arose is whether or not a trade union can file an application under Section 9, IBC conjointly on behalf of its employees? [ix] According to the procedure established by IBC, an Operational Creditor to initiate CIRP has to file an application under Section 9, IBC in compliance of Rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (hereinafter “Rules”) [x], which mandates the filing of application in the format prescribed by Form 5 [xi]. Now, Section 8 and Section 9, IBC do not expressly talk about class action suits or joint petitions. However, ‘Note’ to Form 5 under Rule 6 allows for workmen/employees who are operational creditors to file in his/her individual or joint capacity. The ‘Note’ states: “Note: Where workmen/employees are operational creditors, the application may be made either in an individual capacity or in a joint capacity by one of them who is duly authorized for the purpose.” [xii] There renowned rule of interpretation, sententia legis which was discussed by the Apex Court in Vishnu Pratap Sugar Works v. Chief Inspector of Stamps [xiii], held that a statute is to be construed according to the intent with which it was made and the duty of judicature is to act upon the true intention of the legislature –the mens or sententia legis. In the view of the aforementioned ‘Note’ it appears that the legislature intended to allow joint suits by employees under Section 9, IBC and subsequently, it can be inferred that registered Trade Unions can file an application under Section 9, IBC co-jointly on behalf of one or more employees. However, more clarification is needed on this issue, which would continue to be a grey area until there is a judicial interpretation or a subsequent amendment to that effect, Whether the Minimum Threshold of Rs. 1 Lakh would apply Individually or Collectively to Employees in Cases where the Application is Filed Conjointly? A Trade Union as per Section 9 read with Section 4, IBC can file a CIRP application only when there is a default of minimum of rupees one lakh. However, one question which remains unresolved is whether the minimum criteria of rupees one lakh apply to the debt of an individual employee or will it apply collectively to the debt of more than

Trade Union As “Operational Creditor”: Critical Analysis of the Judgment Read More »

RBI’S Prudential Framework for Resolution of Stressed Assets – Modus Operandi, Analysis and Implications

Leave a Comment / Banking Law /

[By Suprabh Garg and Arshit Kapoor] The authors are third and second year students of National Law University, Odisha BACKGROUND The Reserve Bank of India (“RBI”) has finally released the much-awaited circular for dealing with stressed assets named Prudential framework for Resolution of Stressed Assets (“Framework”) [[i]]. This circular is a replacement for the earlier circular on Resolution of Stressed Assets dated 12th February 2018 (“Earlier Circular”) [[ii]]. The earlier circular had been struck down by the Hon’ble Supreme Court in Dharani Sugar and Chemical Ltd. v. Union of India [[iii]]. The Framework is released by the RBI with a view for providing early recognition, reporting and time bound resolution of stressed assets. This Framework and Direction is issued by the RBI without prejudice to Section 35 AA of The Banking Regulation Act, 1949 which empowers the RBI to direct banks for initiation of insolvency proceedings against specific borrowers [[iv]]. APPLICABILITY The Framework has expanded the scope of applicability and covers in the definition of “lenders”: Scheduled Commercial Banks All India Term Financial Institutions Small Finance Banks; and Systemically Important Non- Deposit taking Non- Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D). MODUS OPERANDI-FRAMEWORK FOR RESOLTION OF STRESSED ASSETS The modus operandi of the Framework can be fragmented into the following systematic and sequential steps as under: Early Identification and Classification Of Stresses Assets The lenders, upon default have to recognize and classify the emerging-incipient stress in loan accounts and classify them into Special Mention Accounts (“SMA”). The word ‘default’ has been assigned the same meaning as defined under Section 3 (12) of IBC The classification of debts into Special Mention Accounts shall be done as per the following categories: In case of stress other than revolving credit facilities like cash credits, the SMA sub-categories will be as follows: SMA Sub- Categories Basis for Classification- Principal/ Interest Payment/ Any other amount wholly or partly overdue between SMA-0 1-30 Days SMA-1 31-60 Days SMA-2 61-90 Days   Whereas in case of stress revolving credit facilities like cash credits, the SMA sub-categories will be as follows:     SMA Sub- Categories Basis for Classification- Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of: SMA-1 31-60 Days SMA-2 61-90 Days   Reporting Of Stresses Assets The lenders have to then, report to the Central Repository of Information on Large Credits (“CRILC”) regarding the credit information, including the classification into SMA, of all borrowers having an aggregate exposure of ₹ 5 crores or more, with them. The lenders in this regard have to submit CRICL-Main Report on monthly basis and a weekly report of the instances of default by all borrowers having an aggregate exposure of ₹ 5 crores or more, with them. Resolution Plan As per the Framework all the lenders have to place a board RP which would contain the action, plan and reorganization of stressed assets. The RP may also include the reorganization of the accounts by payment of all over dues, sale of exposures to other entities, change in ownership, restructuring etc. All the RPs have to be well-documented by all the lenders concerned [[v]]. Review Period In cases, where any default is reported by any of the Scheduled Commercial Banks, All India Term Financial Institutions or Small Finance Banks, they have to take a prima facie review of the borrower account within thirty days of such default. (“Review Period”). The Framework has given complete discretion to the lenders to decide on the resolution strategy, the nature of the resolution plan and the approach for implementation of resolution plan. Inter-Creditor Agreement The lenders have to then enter into an inter-creditor agreement (“ICA”) during the Review Period to finalize the ground rules and their strategy for implementation of RP.  Furthermore, the ICA has to inter-alia provide for rights and duties of majority lenders, duties and protection of dissenting lenders etc. The Framework provides the threshold of 75% by value of total outstanding credit facilities and 60% of lenders by numbers, for the decision to be binding on all the concerned lenders. Time Period for Implementation The Framework mandates the implementation of RP within 180 days from the end of review period. Further, with respect to existing defaults, the review period shall commence from 7th June, 2019 for all the defaults having an aggregate exposure of ₹ 2,000 crores and 1st January, 2020 for all the defaults having an aggregate exposure between ₹ 1,500 crores to ₹ 2,000 crores. Additional Provision For Delayed Implementation of Resolution Plan The Framework has provided for mandatory making of ‘additional provision’ of 20% by the lenders in cases where a viable RP is not implemented within the stipulated time i.e. 180 days from the end of review period and a further 15% (i.e. total of 35%) if the delay crosses a time limit of 365 days from the end of review period. These additional provisions have to be made above the already held provision or provisions required to be made as per the status of the asset classification of the borrowers account, whichever is higher. Situations Where Additional Provision May Be Reversed The framework provides that when the RP involves restructuring or change in ownership outside IBC, the additional provisions may be reversed upon implementation of the RP. However, the additional provision may also be reversed in cases where RP involves payment of overdues by the borrowers and the same has been cleared. Further, where RP is pursued under IBC, half of the additional provision made may be reversed upon filing of insolvency proceedings under Section 7 [[vi]] and another half may be reversed upon the same being admitted by the respective NCLT. Furthermore, in all cases where assignment of debt or recovery proceedings are completed, the additional provisions may be reversed. ANALYSIS OF THE FRAMEWORK FOR RESOLTION OF STRESSED ASSETS Striking a Balance The Framework not only gives liberty and ample discretion to lenders to strategize and proceed with the

RBI’S Prudential Framework for Resolution of Stressed Assets – Modus Operandi, Analysis and Implications Read More »

Position of Cryptocurrencies under the Indian Taxation Regime

Leave a Comment / Taxation Law /

[By Prakhar Khandelwal and Rachita Shah] The authors are third year students of National Law Institute University, Bhopal Introduction Almost twenty-five years ago, the world was introduced to the internet, which poised us towards a new era of technological excellency. Today, with cryptocurrencies and its related technology at rise, we are at the starting point of yet another such revolution. The cryptocurrency industry is still in its premature stage, with skewed knowledge available regarding its working which complicates its classification and therefore its categorization under India’s taxation system. Now, while there is no legal definition for “cryptocurrency”, it can be described as: “a digital representation of value that (i) is intended to constitute a peer-to-peer (“P2P”) alternative to government-issued legal tender, (ii) is used as a general-purpose medium of exchange (independent of any central bank), (iii) is secured by a mechanism known as cryptography and (iv) can be converted into legal tender and vice versa”[i] In the recent years, cryptocurrencies are gradually becoming an acceptable digital currency around the world and countries like Russia and Japan are working towards its regulation. As a result, it becomes pertinent to acknowledge the requirement to define the legality and taxability of cryptocurrency in India. The authors shall attempt to lay out the Indian Government’s present position on cryptocurrency as well as provide a brief overview of its treatment under the current taxation regime. The Government of India’s position The Reserve Bank of India, (hereinafter “RBI”) on December 24, 2013[ii], February 1, 2017[iii] and December 05, 2017[iv] had cautioned persons dealing in virtual currency about the potential risks that they are exposing themselves to as well as clarified its non-authorization to any entity dealing with such transactions. These notifications gave rise to a petition filed on October 31, 2017 which demands emergent steps for restraining the sale and purchase of cryptocurrency in India.[v] The case is tentatively listed to be heard on July 23, 2019. On April 6, 2018, entities regulated by the RBI were prohibited from dealing with cryptocurrencies and those which already provided such services were compelled to exit the relationship within three months.[vi] It was against this notification that the Internet And Mobile Association of India (hereinafter “IAMAI”) filed a writ petition on May 15, 2018 in the Supreme Court of India under Article 32 of the Constitution of India.[vii] However, a stay order was not approved for the above notification. Therefore, the April 6, 2018 position subsists today. The case is likely to be listed on July 23, 2019. In November 2017, a panel headed by Economic Affairs Secretary, Subhash Garg had been constituted to oversee India’s policy on cryptocurrency. According to a report released on June 07, 2019,[viii] the bill concerning cryptocurrency which is being looked into by the panel contains a provision for punishment of imprisonment up to 10 years to anyone who deals in cryptocurrency. Therefore, the events between 2013 and June, 2019 strengthen the government’s disapproval to regularising the use of cryptocurrency in India. Treatment under Direct Taxation System: At the outset, it is important to note that the illegal nature of income does not bar its taxability. Therefore, although the Government has consistently disapproved the use of cryptocurrency, it is crucial to have a regulatory framework for its taxation. The Income Tax Department sent notices to individuals for non-declaration of investments in cryptocurrency in early 2018 and emphasized that such investments shall be taxable.[ix] As per the notices, the Income Tax Department levies tax on cryptocurrency under two heads.[x] Firstly, under the head “profits or gains from business or profession” under Section 28 of the Income Tax Act, 1961 (hereinafter “IT Act”) and secondly, under the head “capital gains” under Section 45 of the IT Act. Therefore, since cryptocurrency is not declared as legal tender and “money” by itself is not taxable under the IT Act, the Income Tax Department treats cryptocurrency as “goods” or “property”. i. As profits and gains of business or profession under Section 28 of the Income Tax Act, 1961 The IT Act gives an expansive definition for “business” under Section 2(13) of the IT Act, encompassing any concern in the nature of trade, commerce or manufacture. As a result, profits earned by way of trade in cryptocurrencies falls within the ambit of taxable income under Section 28(i) of the IT Act. Cryptocurrency earned by way of consideration for sale of goods and services as well as when they are held as stock-in-trade comes within the ambit of profits and gains from business or trade. ii. As Capital gains under Section 45 of the Income Tax Act, 1961 One of the modes of acquiring cryptocurrency is through mining. Mining is a method wherein computer algorithms are solved to produce a cryptocurrency. As a result, this cryptocurrency is a self-acquired capital asset[xi] and is taxable under “capital gains” as given under Section 45 of the IT Act. The capital gains tax is either long term or short term, based on the duration for which the cryptocurrency is held.[xii] While the above methods may prima facie seem to solve the confusion among cryptocurrency dealers, one of the primary problems faced by the Income Tax Department and tax payers is the very valuation of cryptocurrency. Since the transactions of cryptocurrency are peer to peer, there is no regulatory authority to control the volatile prices. Moreover, the market for cryptocurrency, although fast expanding, is small and therefore, results in fluctuations in supply and demand.[xiii] The IT Department has not stepped in to explain the computation of its prices. With countries ascertaining their stance on the use of cryptocurrency, the volatility of cryptocurrency may reduce due to growth in the market. Treatment Under Indirect Taxation System Goods and Services Tax, (hereinafter “GST”) which was implemented with effect from July 1, 2017, across India, subsumes most of the indirect taxes, barring few.[xiv] The implications of GST on cryptocurrencies and the Government’s rumoured decision to allow the state to tax it at a maximum rate of 20%[xv]

Position of Cryptocurrencies under the Indian Taxation Regime Read More »

Scroll to Top