Author name: CBCL

Hinged Upon Conjectures: A Meticulous Study of WhatsApp Leak Case

Capital Markets and Securities Law, Company Law, Contemporary Issues /

[By Lakshya Garg and Vimlendu Agarwal] The authors are students at Gujarat National Law University, Gandhinagar. Background The social media platform is an all-pervading phenomenon[i] and despite of the developments that this platform has brought by providing easy access to the information it has still paved way for exploitation of the confidential information[ii]. This article, in pursuance of the objective to demystify the peculiarities in the Shruti Vishal Vora Case, is an attempt to discuss the SEBI’s Order No. Order/BD/NR/2020-21/7591-7592[iii]dated 29.04.2020 as it holds a lot of conjectures within itself. While pinning our hopes for a robust security law regime in conjunction with well-established data privacy laws the article constructively criticizes the Securities Appellate Tribunal’s (SAT) decision to penalize a person for releasing unpublished price sensitive information related to the financial result of a Company along with the challenges faced throughout the pronouncement. Factual Matrix The said case concerns itself with the circulation of Unpublished Price Sensitive Information (hereinafter referred as “UPSI”) [regulation 2 (n) of SEBI (Prohibition of Insider Trading) Regulations, 2015] through WhatsApp (group) Messages revealing sensitive information about big shot companies such as Ambuja Cement Ltd. Section 3 (1) of SEBI (Prohibition of Insider Trading) Regulations, 2015[4]prohibits communication or procurement of unpublished price sensitive information, relating to a company or security listed or proposal to be listed, to any person including other insiders except where such communications is in furtherance of legitimate purpose, the performance of duties or discharge of legal obligations. The eccentricity lies in the fact that to scrutinize similarities with the 3rd financial quarter results 2016-17 and the propagated information- about 190 devices, records, etc. were seized. To one’s surprise, the derived information closely matched with the messages circulated in WhatsApp group chats (retrieved from Shruti Vora’s device). The said Notice argued the information to be “Heard On The Street” in its defense. However, as per SEBI the mentioned figures were too accurate to be considered as estimates and held that the numbers can’t be associated with any brokerage or internal research. Hence Shruti Vora and Neeraj Kumar Agarwal both were considered as insiders and were penalized with 15 Lakh rupees each under Section 15G, 12A (d) & 12A (e) of the Securities and Exchange Board of India Act, 1992[5]for possessing and communicating unpublished price-sensitive information. Lacunae In The Method Of Investigation The method used to declare someone guilty of “insider-trading”[6]was quite simple in this case. The investigation authority looked for the information that was circulated through the WhatsApp groups and then compared it to the final declaration made by the company. However, while following the said procedure, the investigation authority faulted in the following: Due to technological restrictions, it was unable to establish the source of the information, thereby solving a case while covered with a blindfold. It didn’t focus on the possibility that the accused might have not known the information to be UPSI, thereby making the whole case an ignorance of facts. It failed to establish the thought-process that the accused might have while circulating the information. If he/she believed it to be a genuine result of market study then the whole case becomes a formality. For instance, the Bata order[7]wherein the Adjudicating officer acknowledged the communication of UPSI ahead of their official announcements but ruled out the fact that being financial analyst, brokerage firms often keep a close trace on a wide range of determining factors and are repeatedly accurate in accomplishing close estimates and figures. HOS V UPSI: The “Heard On The Street” Mockery The major argument contended in these cases was basically an attempt to prove the information that was circulated is an unsubstantiated gossip that was forwarded as a rumor or a general approximation. It further argued that these kinds of speculations are common parlances that were majorly based on financial modeling, management guidance, meetings with the management, and the other global factors. Likewise, HOS being a global formula was applied by the entire trading and investor community in the instant case to plan trades. An analysis of SEBI orders in the recent cases, solves the enigma of the information belonging to the category of UPSI as it mentions: The information was available in a closed chain group instead of being available to the public at large The information was not a result of any market research or publicly available data. Moreover, the ignorance pleaded by the market professionals regarding the nature and materiality of information is ignorance of law. The suspicion should have aroused when the information available matched with the announced result and hence should have been duly reported. Scrutinizing The SEBI Orders The basic questions such as ‘who is an insider (Section 2 (1)(g) of SEBI (Prohibition of Insider Trading) Regulations, 2015)’[9] or ‘what is UPSI’[11]: The subsequent announcements made should be the result of the leaked information. However, the inability to trace back the source is irrelevant in determining whether such information was UPSI. The evidence could not lead to the fact that the purported UPSI was a product of the field-based market information which is non-discriminately available in the public domain. The accused was a financially literate person who was well aware of the functioning of the securities market. Regardless of this, they were an instrument in the “chain of communication”. No alarm was raised by the accused, even when they found out that the circulated information matched the announced results accurately. When the SEBI applied the above facts to the settled legal positions, it found that accused were the insiders and the information was undoubtedly ‘UPSI’. In the end, the gist of the matter was the nature, possession, and a pattern of circulation of information. The Intricacy Of The Investigation: In various domains of law, we often observe an intersection between private rights of an individual and the decision making for the public interest at large[12] (in this case the investors). This creates a scenario where one cannot be achieved without disturbing the other. A similar encounter could be seen

Hinged Upon Conjectures: A Meticulous Study of WhatsApp Leak Case Read More »

KMB v RBI: A Summary of a Decade Old Battle Over Ownership of Private Banks

Company Law, Contemporary Issues /

[By Rohan Aneja] The author is a student at Rizvi Law College, Mumbai The Reserve Bank of India (“RBI”) issued Guidelines for the entry of new banks in the Private Sector dated January 3, 2001 (“2001 Guidelines”) which required promoter contribution to be a minimum of 40% of the paid-up capital of the bank at any point of time with a 5 year lock-in period from the date of license; any excess of 40% had to be diluted within 1 year of commencing operations. The RBI revised the minimum promoter shareholding to 49% vide notification dated June 7, 2002. Pursuant to these guidelines, Kotak Mahindra Bank (“KMB”) was issued its license on February 6, 2003, with its promoter stake at 49%. Regulatory Dispute It is after this point that the RBI issue the Ownership and Governance Guidelines dated February 28, 2005, which capped the shareholding of any single / group of related entities to 10% of the paid-up capital and required any existing entity holding more than 10%. This was done to indicate a timetable for the reduction of the holding to the permissible level. KMB was asked to comply with the guidelines and it disputed the same on the grounds that it was contrary to the terms on which KMB’s license was granted. After several correspondences, KMB accepted RBI’s proposed timeline to reduce the promoter stake. Meanwhile, the RBI issued the revised Ownership and Governance Guidelines dated February 23, 2013 (“2013 Guidelines”) which provided that Promoter / Promoter Group will be permitted to set up a bank only through a wholly-owned Non-Operative Financial Holding Company (“NOFHC”). The restrictions on ownership were 40% of the total paid-up voting equity capital with a 5-year lock-in period, followed by a reduction of 20% within 10 years and 15% within 12 years from the commencement of operations. The RBI has also issued a Master Direction on Ownership in Private Sector Banks dated May 12, 2016, which permitted promoter/promoter group of all existing banks, shareholding in line with what has been permitted in 2013 Guidelines on licensing of universal banks, which is 15%. In 2016, KMB refused to comply with the above timeline since it merged with ING Vysya Bank, whereby its promoter shareholding reduced to 33.6%. Thus, the RBI extended the timeline to achieve a 30% reduction by June 30, 2017, 20% by December 31, 2018, and 15% by March 31, 2020. Issue of PNCPS On August 2, 2018, KMB, in an attempt to circumvent the RBI Guidelines, issued perpetual non-cumulative preference shares (“PNCPS”) worth INR 500 crore with a dividend of 8.10%, at which point its promoter shareholding which stood at 30% would be reduced to 19.7%.  The issue was pursuant to the Master Circular on Basel III Capital Regulations dated July 1, 2015, which classify PNCPS as Additional Tier 1 Capital that does not have any put options but does have a call option after 5 years with RBI approval. Thus, assuming the equity base remains the same after 5 years and KMB decided to use the call option, the promoter stake would revert to 30%. The purpose of diluting the promoter shareholding to 15% was to avoid concentration of control with the promoters and as such the issue of PNCPS did not meet the promoter holding dilution requirement. KMB argued that the shares were perpetual, non-convertible, non-redeemable preference shares which do not carry any voting rights and are non-cumulative, essentially a mid-way between debt and equity. Moreover, KMB obtained RBI permission to amend its Memorandum and Articles to issue the PNCPS. Legal Dispute and Settlement The RBI issued a Show Cause Notice (“SCN”) dated October 29, 2018, to KMB on the grounds that KMB has not submitted a proposed plan for reducing the promoter shareholding as per the timelines. KMB replied to the SCN vide letter dated November 2, 2018, stating that it is without jurisdiction and not maintainable in law. On December 10, 2018, KMB filed a Writ Petition against the RBI before the Bombay High Court challenging the SCN as well as the restrictions on promoter shareholding, contending that the terms on which the license was granted cannot be altered and any changes in the Guidelines run prospectively. KMB withdrew the Writ Petition on January 30, 2020. KMB and the RBI reached a settlement whereby the promoters voting rights will be capped at 20% of paid-up voting equity share capital until March 31, 2020, and at 15% from April 1, 2020, which aligns with the 2013 Guidelines as well as Section 12(1) of the Banking Regulation Act, 1949 (“BR Act”). Further, promoter shareholding would be diluted to 26% within 6 months and promoters will not purchase any further paid-up voting equity shares till the percentage of promoters’ shareholding reaches 15% or such higher percentage as the RBI may then permit. On June 2, 2020, Uday Kotak sold 56 million shares held by him in KMB for INR 6,900 crore through a block deal which reduced his stake from 28.93% to 26.1%. This leaves a dilution of the excess 0.01% stake to comply with the settlement. Conclusion Although the issue of PNCPS was well within the bounds of the RBI Guidelines and Section 12(1)(ii)(b) of the BR Act, it violated their spirit as the promoter control over KMB would not be effectively reduced. In the SCN, the RBI could only challenge the issue of PNCPS without submitting the roadmap to RBI, and not the issue itself. If KMB succeeded before the Bombay High Court, the RBI would have likely challenged the circumvention of the Guidelines before the Supreme Court. Thus, the cap of 15% on promoter voting rights and the dilution of Uday Kotak’s stake to 26% was an acceptable compromise.

KMB v RBI: A Summary of a Decade Old Battle Over Ownership of Private Banks Read More »

Google’s Unfair Trade Practices: A Cause for Action

Competition Law /

[By Arjun Nayyar and Jayadeep Manchikalapudi]  The authors are students at NALSAR University of Law, Hyderabad and Hidayatullah National Law University, Raipur, respectively. Setting the Context Recently, allegations over Google’s actions have brought it under the scrutiny of the Competition Commission of India.[i] With an appeal against a previous anti-trust order still pending in the Apex court, the internet giant has been flagged this time for promoting its payment app Google Pay unfairly through the Google Play Store.[ii] This method allegedly utilises search manipulation, a practice that Google has been accused of in the past.[iii]Such manipulation of search results enables Google’s vertical payment partner to appear predominantly when searching for payment apps from the GooglePlay Store. This is a textbook case of an enterprise leveraging dominance in one relevant market to enter into or protect its product in another relevant market; a practice that is expressly proscribed under Section 4(2) of the Competition Act of 2002.[iv]However, such instances of anti-trust complaints are not limited to Google, with accusations being leveled against other internet giants as well. Apple also faced a similar issue recently, when Spotify filed an official complaint with the European Union against the discriminatory pricing policy adopted by the company’s App Store between Apple music and other music streaming services.[v] Both Apple and Google essentially have a dual role as a platform: They distribute their own apps (such as Apple Music and Youtube) on their app stores (App Store and Google Play Store respectively); and They provide a platform for apps where third-party app developers offer their products and services directly to users. Most of the complaints deal with the abuse of this dual role, whereby the powerful enterprises attempt to leverage their dominant position in an upstream market (here, the platform) via favoring their downstream division (the apps). This is done at the cost of the competitors in said downstream market, using pre-existing affluence in one market to bolster the success in another. For a complaint dealing with the abuse of dominance, the establishment of three things is necessary, which are: Proving the market is a relevant one(comprising of relevant product); The enterprise occupies a dominant position (using factors mentioned under Section19(4) of the Competition Act)[vi]; and The conduct amounts to an abuse of said dominant position. Relevant Market The test for determining the relevance of a market is elucidated in Section 2(r) of the Competition Act[vii] and is based on the products and/or services, along with the location at which these are provided. In the present complaint against Google, the appropriate relevant market would be the market for app stores for android mobile operating systems. This was established in the matter of Umar Javeed v. Google LLC,[viii] through which the Competition Commission of India listed a number of different app stores available for Google Android devices. These include the Play Store, the Amazon AppStore, Samsung’s Galaxy Apps store, Aptoide, the Opera Software ASA’s Mobile Store, and the Yandex Store. The Commission concluded that these different app stores for Google Android devices (“Google Android app stores”) belong to the same product market. Dominant Position While different app stores do exist in the market for android mobile operating systems, Google is the distinguished leader. The Dutch Authority for Consumers and Markets (ACM)conducted a market study of mobile app stores, with the twofold goal of understanding how app developers get their products in app stores, and the influence which these stores have on the selection of apps for the users.[ix]It concluded that the Apple App Store and Google Play Store have their “app-ecosystems” closed by design, leaving virtually no feasible app stores as alternatives within either of these ecosystems. This was reiterated by the EU Anti-trust regulator, stating Google clearly is a dominant player with over 90% of market share in a high entry barrier market.[x] Abusive Conduct If a firm holds a dominant position, it has a special responsibility to ensure that its conduct does not impair genuine and undistorted competition in the common market. This was established as a standard in the EU as early as 1983,[xi] and was extended by the Competition Commission of India to include online platforms and digital markets in Fast Track Call Cab Pvt Ltd v. ANI Technologies Pvt Ltd.[xii] Assuming the alleged conduct of Google to be true, a question arises as to whether the act of promoting its own app over others amounts to abuse under the Act. The answer lies in the regulatory stance adopted by the Competition Commission of India. The emphasis under section 4(1) of the Act[xiii] is on “abuse”, though the word itself has not been defined under the Act, with the legislature wisely choosing to leave it open to be interpreted on a case-to-case basis. Having said this, the Government of India in 1999 constituted a high-level committee led by Mr. SVS Raghavan to suggest changes to Competition Law framework in the country in order to bring it at par with the advanced international standard. In its report, the committee elaborated on the meaning of “abuse”, stating that “discriminatory behaviour and any other exercise of market power leading to the prevention, restriction or distortion of competition would obviously be included in the definition of abuse”.[xiv] In the present complaint, Google’s conduct of using its platform to promote its own payment app over others duly qualifies as discriminatory behaviour, thus falling under the definition of abuse under the Competition Act. The Lack of Possible Defences As per accepted EU law,[xv] there is no threshold for the purpose of determining abuse of a dominant position, as the mere misuse of the same is not justified. Moreover, the only defence available under the Competition Actis to prove the abuse by other market players, which is not the case in the present complaint. Also, the dominant enterprise in the first market need not possess a dominant market position in the second market. The Competition Act does not necessitate a high degree of associational link between the market in which a dominant

Google’s Unfair Trade Practices: A Cause for Action Read More »

Break Fee Agreements in M&A: Regulatory Challenges

Mergers & Acquisitions /

[By Aniket Singh and Pranav Mihir Kandada] The authors are students at NALSAR University of Law, Hyderabad. Introduction In M&A transactions, a “break fee” agreement is an arrangement between the target company and the potential acquirer. In this arrangement, the target company promises to pay a certain fee to the potential acquirer in case the offer from the acquirer does not go through for any given reason. Such agreements are often looked upon favorably as beneficial deal-protection devices.  However, the quantum of the break fee is regulated in several jurisdictions through varying approaches. This article seeks to explain the concerns associated with break fee arrangements and examine how various jurisdictions regulate it. Uses and Concerns For target companies and stockholders, a break fee arrangement can induce competition between the bidders. By assuring potential acquirers that they will be compensated for various costs undertaken prior to effectuating a transaction (identification and assessment of the target, fees for due diligence, etc.), a break fee would encourage bidders to spend on such assessments and make better bids. As potential acquirers are now assured of compensation for their efforts, more of them can enter the fray thereby increasing competition and providing better options to the shareholders. In this manner, break fees facilitate M&A transactions. However, break fees are deal protection devices that invariably function by preferring one bidder over the other. Although a break fee’s impact on the net asset base of the company is negligible, it could potentially wipe out the annual revenue of the target. This would make the target less attractive to subsequent bidders. Hence, a high break fee could serve to reduce competition. Further, a high break fee amount could constrain shareholder choices. Shareholders are coerced when they are forced to vote for transactions backed by the management. A vote would be structurally coercive when the directors “have created a situation where a vote may be said to be in avoidance of a detriment created by the structure of the transaction … rather than a free choice to accept or reject the proposition voted on.” When a high break fee amount assured by the management is disclosed to the shareholders, the shareholders get to know the exact cost to be borne if the merger does not go through. Voting against such a proposition becomes unviable and costly for the shareholder. Thus, a higher break fee empowers the company’s management to influence voting. Despite this influence, it is contentious whether a break fee arrangement is structurally coercive. In Brazen v. Bell Atlantic Corp., the Delaware Supreme Court stated that mere knowledge that voting against the merger would result in activation of the fee does not by itself constitute shareholder coercion. Further, the arrangement would not be coercive, as the shareholders would only vote against the merger in favour of a better price from another bidder. In the Indian context, however, this reasoning may not be applicable given the minority shareholders who would remain in the company with diminished value due to activation of the break fee. How US Deals With Break Fees A characteristic feature of the shareholding in US is its dispersed nature. Due to this feature, the board and management act as agents for the shareholders and are empowered to take various decisions, which determine the outcome of an offer. They have to make these decisions in light of the interest of the company and owe duties of care and loyalty to the shareholders. The Delaware jurisdiction has especially favoured the exercise of such powers by the management. Further regulation has also been developed in such a manner. The various standards of review in the US should not be readily applied in other jurisdictions because the nature shareholding in many jurisdictions is concentrated and not dispersed (e.g., the jurisdictions of India, Japan, Korea, Singapore, and China). These jurisdictions have adopted the rule of Board Neutrality, which finds its origin in the UK. The Board Neutrality Rule makes the shareholders and not the management of the primary decision-makers regarding an offer. The management has little to no leeway to enter into deal protection devices once an offer is made. Only with prior approval of the shareholders, can the management undertake any such act. A judgment rule, which is predicated on management’s freedom and power to take decisions without shareholder approval, would hardly make sense in these jurisdictions. How the UK and Most Asian Countries deal with Break Fee The UK in furtherance of its board neutrality rule provides for a de minimis limit to deal with break fees. A de minimis limit is the standard percentage value of transaction value against which all break fees are adjudged (1% in the case of UK). Apart from the UK, de minimis limits are now an accepted standard in jurisdictions of Australia, Hong Kong, etc. However, de minimis limits have multiple issues. Firstly, they favor rigidity and certainty over flexibility. Even though certainty leads to a more predictable market, flexibility allows managers to structure the fee to custom-fit the specific conditions their companies face.  Secondly, given the dual nature of break fees as inductive as well as anti-competitive, the quantitative standard of a de minimis limit would not be ideal to distinguish and adjudge the permissibility of such arrangement. These concerns have been raised in multiple jurisdictions. The Australian Business Community has argued that a target might have to go beyond a de minimis limit considering the various specific circumstances an enterprise might face. The reason for not using a de minimis limit in the US was held to be along the same lines. The Delaware Chancery Court in In re IXC Communications, Inc. Shareholders Litigation held that a break fee arrangement must be judged by evaluation of the entire agreement and the terms of negotiation that brought it about. Regulation in Asia Importing de minimis limits to Asia would be contrary to the purpose for which they were introduced in the UK.  The de minimis limit is part of the larger

Break Fee Agreements in M&A: Regulatory Challenges Read More »

Diminishing Material Utility of IBC Towards One Primary Stakeholder

Insolvency Law /

[By Kirti Gupta] The author is a student a Hidayatullah National Law University, Raipur. Introduction The Insolvency and Bankruptcy Code, 2016 (the Code) promises to deal with the mammoth task of stabilising the Indian economy in this era of peculiarly volatile market conditions. The Preamble of the Code, enumerates the objective which strives to reform the insolvency framework and aid the transition from debtor to creditor centric regime. While the Code attempts at stabilising the economy in the times of COVID-19, the author reasonably assumes that there remains a lacuna in the law, which could be detrimental to the stakeholders in the near future. The author has objectively circumscribed the scope of this article to probable disorientation expected to follow the  Gazette Notification dated 24-03-2020 [MCA Notification S.O. 1205 E] (notification). The notification by the virtue of the power vested with the Central Government, vide proviso to Section 4 of the Code, increased the threshold of the default amount to INR 1 crore from INR 1 lakh. The author opines that considering the crooked power dynamics that hovers around the company and its employee’s relationship, the increased threshold shall predominantly deny workmen/employees, a measure of recourse under the Code, thereby defeating the objective of the Code. Legislative Intent Behind the Position of Workmen/Employees Under the Code The Code attempts at reorganisation and insolvency resolution in a time-bound manner without digressing from defined rights of all stakeholders, which reasons the paramount intention behind the position of employee and workman in the resolution framework. It was understood, that in the event of a business failure leading to bankruptcy, the worst affected loft is the workman and employee. This proposition was highlighted in the Joint Committee on the Insolvency and Bankruptcy Code, 2015, where it was significantly observed that the workers are the nerve centre of the company and are affected adversely in the time of insolvency. Therefore, their outstanding dues are entitled to priority. It’s mandatory for the resolution plan to necessarily provide for protections to Operational Creditors (OC), which includes workmen and employees, for the speedy recovery of the due payments, significantly reflected in the Bankruptcy Law Reforms Committee report (the “BLRC Report”). It was highlighted in the BLRC Report, that the provisions for providing protection to the workmen and employees is with an intent to; ‘… empower the workmen and employees to initiate insolvency proceedings, settle their dues fast and move on to some other job instead of waiting for their dues for years together…’ Moreover, The UNCITRAL Legislative Guide on Insolvency Law, elucidates that vulnerable groups such as workmen and employee shall be afforded special protection as a measure against business failure by acknowledging primacy of their rights, while discharging the debt under the insolvency laws. Legitimate Recourse for the Workman/Employee Under the Code Section 8 of the Code allows OC to deliver a demand notice to the corporate debtor (CD) on the occurrence of default, and further, on expiry of 10 days, where CD fails to satisfy the dues or notify of any dispute, OC can file an application to initiate Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Code. The application is made w.r.t Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the Regulation), where the application is filed according to prescribed Form 5. It is imperative to note here, that Note to Form 5 provides, ‘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.’ This implies that workmen and employees can file an application in their joint capacity. Diminishing Utility of the Code for Workman/Employee The predicament of the government in devising measures that secure economy and cater to the needs of instrumental stakeholders is understandable, however, it is equally imperative to not decide hastily, which could cause irreversible damage Au contraire. The author opines that an increase in threshold neglects one of the primary stakeholders, i.e. workmen/employees. Increasing the quantum to the maximum permitted limit by the Code, without any consideration for the influenced stakeholders is an inconsiderate and a rushed decision. This is evident by the quantum of average wage earned in this country, which is INR 7410 per month, according to the ILO Report. Thus, it makes it immensely challenging for an employee to initiate CIRP for the payment of his past dues after the increased threshold considering the average wage. Therefore, it is essential to address the question of filing an application conjointly under the regulation, otherwise it becomes nearly impossible to meet the prescribed threshold. In Uttam Galva Steels Limited v. DF Deutsche Forfait AG and Ors.[i] (Uttam Galva), NCLAT decided that application by OC cannot be filed jointly, because unlike Section 7, Section 8 and 9 do not provide for such provision. Moreover, it was held in Para 20, that it is impractical for more than one OC to file a joint petition due to the varied amount of default at different dates for each individual. Ascended by another NCLT judgment, Suresh Narayan Singh v. Tayo Rolls Limited[ii] (Tayo Rolls), provides that the Note in Form 5 is not in consonance with provision  Section 9 of the Code as it does not authorise a joint application or joint demand notice by the OC, and therefore, it was requested to be reconsidered by the appropriate authorities. However, this judgment was overruled by NCLAT[iii], where the application was allowed, nevertheless, it was stated in Para 6, that where an individual claim of OC is less than 1 lakh, it cannot be maintainable. Later, Supreme Court (SC) in J.K Jute Mills Mazdoor Morcha v. J.K Jute Mills Co. Ltd.[iv] (Jute Mills) took a slightly different stance w.r.t representational applications. The Bench decided, that a trade union represents its members who are workers and are owed debts by the employer. Thus, it is the authority which has been transferred from all the workmen to one,

Diminishing Material Utility of IBC Towards One Primary Stakeholder Read More »

Electrosteel Steels Ltd. v State of Jharkhand: The Unsettling Doctrine of Clean Slate

Insolvency Law /

[By Akshita Totla and Nikunj Maheshwari] The authors are students at Institute of Law, Nirma University. Introduction The Insolvency and Bankruptcy Code (IB Code) was enacted for the resolution of the corporate debtor so that it continues as a ‘going concern’[i]. The doctrine of clean slate is one of the means to achieve this objective of the revival of the corporate debtor. This doctrine states that post the approval of the resolution plan by the adjudicating authority, the resolution will be binding on all the stakeholders. Thereby, the acquirer will be protected from any undischarged claim against the corporate debtor prior to the completion of the resolution process and would begin the operation with a clean slate. The intent behind this doctrine is to incentivize the acquirer of the stressed company, and to provide scope for the revival of the corporate debtor. This doctrine in Indian laws finds its place under section 31and 32A of the IBC and has been further expanded and interpreted by the Supreme Court in the case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta[ii] (2019) (Essar Steel). Recently, in Ultra Tech Nathwada Cement v. Union of India[iii](2020) (Ultra Tech) the Rajasthan HC held that tax authorities cannot raise demands of pending tax dues from the resolution applicant subsequent to the approval of the resolution plan. However, the Jharkhand HC in the case of Electrosteel Steels Ltd. v. The State of Jharkhand[iv](2020) (Electrosteel) has overturned the decision of Rajasthan HC with respect to the application of the doctrine of fresh slate in the case of pending tax dues. The juxtaposition of contrasting opinions of adjudicating authorities has created an anomaly as to the scope of the doctrine of clean-slate theory. This article seeks to analyze the decision of the Jharkhand HC vis-a-vis the treatment of disputed amounts post the culmination of CIRP in the light of settled precedents and legislation. Background In the case of Electrosteel, M/s Vedanta Ltd. emerged as a successful resolution applicant, and its application to take over the petitioner company was approved by the adjudicating authority. Albeit, the sums of money owed by the company to its creditors were paid in the required proportions, the dues outstanding with the VAT authorities (tax department) were not considered. As a sequitur, the tax department started sending garnishee orders to the banker of the petitioner company, to transfer a sum of money to the department, in lieu of the outstanding dues of the petitioner. The petitioner thus filed the writ petition to challenge these garnishee orders. The issue raised before the court was whether the approved resolution plan will be binding on the tax authorities. The Court noted that the petitioner tried to frivolously enrich itself, by not paying indirect tax amount to the department which it collected from its customers. The petitioner as required under section 13 of the Code didn’t make a public announcement for inviting the claims of creditors at the location of its registered office i.e. in the state of Jharkhand. For this reason, the Tax authority was unable to submit its claims and thus, it never became the party to the resolution plan. The Court further observed that since the 2019 amendment[v]was promulgated after the resolution plan was finalized, it will not have retrospective effect and thus the tax department will have a claim to get its dues recovered. [Note: The 2019 amendment Act amended section 31 to clarify that position that the approved resolution plan would be binding on all stakeholders including government and local authorities] Analysis of the Judgment Whether resolution plan will be binding on a party who was not involved in the resolution plan? The court interpreted Section 31(1) of the IB Code which states that approved resolution will be binding on “all stakeholders involved in the resolution process”[vi]and concluded that the resolution plan would be only binding on parties that participated in the resolution process.[vii] On the other hand, the Rajasthan High Court in Ultratech while deciding on the same question held that irrespective of the fact that the creditor or the government participated in the resolution process, once approved the plan would be binding on all stakeholders.[viii] The Supreme Court in the case of Swiss Ribbons v Union of India[ix](2019) was also of the same view that insolvency proceedings are proceedings in rem i.e. would be binding on the public at large.[x]The court in this case misinterpreted section 31 while imposing liability to pay on the petitioner as the resolution plan would have been binding on the tax authority irrespective of its involvement in the resolution process. Furthermore, the SC in the case of Essar Steel observed that “A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping”.[xi]This observation was made in the light of the fact that the acquirer would intend to have a fresh slate without any liabilities of the erstwhile management.[xii]Thus, the ratio of Electrosteel runs counter to the very objective of clean slate doctrine which is to prevent government or any other creditor to intrude in the resolution process. If this position of law is not settled by the SC in appeal, this judgment will have an adverse impact on the prospective applicant who would no longer be willing to acquire any financially distressed company. Whether indirect tax is operational debt? The Jharkhand HC while holding the state government as an operational creditor made a distinction between indirect and direct taxes. The court stated that indirect tax may not be considered as operational debt as the VAT in dispute has already been realized from the customers. Hence, it is not a direct debt of the petitioner company towards the state government so as to make it operational debt under section 5(21). The relevant part of Section 5(21) states that “debt in respect of the payment of dues arising under any law for the

Electrosteel Steels Ltd. v State of Jharkhand: The Unsettling Doctrine of Clean Slate Read More »

Apeejay Trust v. Aviva Life Insurance – FSPs and the IBC

Insolvency Law /

[By Aman Sadiwala] The author is a student at National Law School of India University, Bengaluru Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) provides the insolvency resolution process for corporate persons in Part II. Section 3(7) of the IBC defines “corporate person” and specifically excludes any financial service provider (“FSP”) from its ambit. Section 3(8) defining “corporate debtor” qualifies this ‘corporate person’ as one who owes a debt to any person. Thus, it is evident that a ‘corporate debtor’ as envisaged under the IBC does not include an FSP. Section 4 of the IBC limits the applicability of Part II to corporate debtors, thereby excluding FSPs from its purview. Despite this apparent clarity in the position of law, the judgment of the National Company Law Tribunal (“NCLT”) in Apeejay Trust v. Aviva Life Insurance Co. India Ltd. (2019) has raised questions regarding the relation between the IBC and FSPs. Aviva Life Insurance (“Aviva”), the Corporate Debtor had debt arising from non-payment of license fees, car parking, maintenance charges and service tax. Apeejay Trust (“Apeejay”), the Operational Creditor filed the petition before the NCLT praying for initiation of the Corporate Insolvency Resolution Process (“CIRP”) of Aviva. Aviva argued that being an insurance company, it qualified as an FSP and did not fall within the scope of the IBC. The NCLT noted that the transaction between Apeejay and Aviva was not in the nature of financial services and concluded that Aviva did not qualify as an FSP in this transaction. The NCLT ruled in favour of Apeejay and initiated CIRP of Aviva. Section 3(17) of the IBC defines FSP as “a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator”. Section 3(16) which defines “financial service” covers ‘contracts of insurance’ in sub-section (c). Section 3(18) which defines “financial sector regulator” includes the Insurance Regulatory and Development Authority of India. While Aviva meets the definitional requirements relating to Sections 3(16) and 3(18), the question that arises is whether an FSP as defined in Section 3(17) looks at the nature of debt or the nature of the corporate person. In this piece, I argue that the NCLT erred in its consideration of the nature of debt when instead, it should have looked at the nature of the corporate person. I present a two-pronged argument to support my thesis: first, based on statutory interpretation of relevant provisions; and second, that the judgment is per incuriam and inconsistent with previous National Company Law Appellate Tribunal (“NCLAT”) judgments. Statutory Interpretation of Relevant Provisions First, the definition in Section 3(17) uses the phrase “person engaged in the business of”. To understand the scope of this definition, I rely on rules on statutory interpretation. The Literal Rule requires that words be given their natural and ordinary meaning unless it results in vagueness and ambiguity. Oxford Dictionary defines “business” as “a person’s regular occupation”. There is no indication in Section 3(17) that one needs to look specifically at the transaction in question and identify the nature of debt. The natural meaning of the definition looks at the recurring activity a corporate person is engaged in, thus being concerned with its general nature and not the specific nature of debt in that transaction. The Golden Rule is applied if the literal interpretation leads to absurdity or an injustice. It permits certain alterations to the original words after ascertaining the legislature’s intention. The Mischief Rule also carries out a purposive interpretation and requires a construction which suppresses mischief, while advancing the remedy in accordance with the true intent of the legislation drafters. While I argue that the Golden Rule and the Mischief Rule need not be looked at as the Literal Rule squarely applies, even if one was to rely on either of these rules, it would still follow that the nature of the corporate person needs to be looked at. FSPs were specifically excluded due to the adverse impact that an insolvency process of an FSP under the IBC would have on the economy as well as its numerous consumers. This was also recognized in the Report of the Financial Sector Legislative Reforms Commission. Given that the rationale to exclude FSPs is based on their nature in general and their impact on the economy and its consumers, it is evident that the nature of the corporate person determines whether an entity is an FSP. Moreover, Section 227 of the IBC allows the Central Government to notify FSPs of their insolvency and liquidation proceedings and prescribe its manner. In light of this, the Central Government notified the  Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. These Rules provide a different insolvency resolution process for FSPs compared to those for corporate debtors under the IBC. For instance, any creditor with a claim of at least INR 1,00,000 can institute CIRP against the corporate debtor under Section 4 of the IBC while only the appropriate regulator can initiate CIRP against the FSP under Rule 5(a)(i) of the aforementioned Rules. This stringent requirement under the Rules aligns with the legislative intent and is based on the nature of the corporate person. There exists no rationale for this different standard based on the nature of debt in the transaction. Inconsistency with Precedents Secondly, the NCLT failed to consider judgments of the NCLAT in Randhiraj Thakur v. M/s Jindal Saxena Financial Services Private Ltd. and anr. (2018) and HDFC Ltd. v. RHC Holding Private Ltd. (2019). Admittedly, in both these cases, the debts in the transactions were in the nature of ‘financial services’ and thus, the facts of those cases are not completely analogous to those in the Apeejay Trust case which has an operational debt. However, the analysis and ratio of the NCLAT in both these cases can be relied upon to show that the NCLAT looked at the nature of the corporate person and not the nature of debt. In

Apeejay Trust v. Aviva Life Insurance – FSPs and the IBC Read More »

Expanding the Umbrella of IPR Exemptions: A Critical Comment on Draft Competition Amendment Bill, 2020

Competition Law /

[By Ashna Chhabra and Anuja Chaudhury] The authors are students at ILS Law College, Pune Introduction The Ministry of Corporate Affairs published the Draft Competition Amendment Bill, 2020[i] on 12th February 2020 based on the recommendations of the Competition Law Review Committee (CLRC). One of the proposed changes is the insertion of S.4A which extends the Intellectual Property Rights (‘IPR’) exemption to abusive practices by dominant enterprises under Section 4 of the Competition Act, 2002 (‘The Act’). Earlier, this exemption was restricted only to the anti-competitive agreements under Section 3(5) of the Act. The earlier provision granted a protection from Section 3 to agreements entered into by any person for restraining any infringement or imposing any reasonable conditions, imperative for the protection of IPRs. This provision conferred a protection to IP holders, specifically in licensing agreements; acting as a shield to uphold the proprietary rights of the holders and simultaneously promote inventions. It further provides that Section 3 will not act as a bar to the right of a person to undertake export of goods from India to a certain extent.   The newly inserted S.4A aims to extend the same exemption to abusive conduct by dominant entities done to protect their IPR. This article aims to analyse the proposed amendment extending the IPR exemption to dominant entities and to identify the prospective enforcement concerns arising from the same. Balancing ‘Rights’ under IP & ‘Abuse’ under Competition Law The regimes of IPR and competition law have always been considered antithetical to one another. While the former confers exclusive monopoly rights, the latter checks upon the unreasonable exercise and abuse of those rights. At the same time, their complementary objectives cannot be overlooked, since competition law and IP, in synergy, promote efficient competition and innovation. The extension of the IPR exemption to abuse of dominance (‘AOD’) cases will tip the equibalance between the two laws in the favour of the IPR regime. This will eventually induce an exponential rise in cases where dominant enterprises (such as patent or copyright holding entities) will attempt to objectively justify their abusive behaviour (such as imposing restrictive licensing or franchise clauses) under the guise of protecting their IPRs. As early as 1988, the European Union (‘EU’) Commission, in the case of AB Volvo v. Erik Veng (UK) Ltd.[ii] decided that even an exercise of an IPR right by an enterprise will be considered abusive in the following circumstances: Existence of no other substitute for the product which has a specific, constant, and regular potential demand on the part of the consumers; Refusal to supply the information leading to the prevention of the creation of a new product for which there is potential consumer demand; No objective justification for such refusal; Reservation of the secondary/downstream market to themselves by excluding all the competition in the market. Although the proposed provision contemplates the above scenarios by not providing a blanket exemption, it runs the risk of becoming a template defence used by the entities to escape liability under Section 4 of the Act.[iii] It would result in enterprises in monopolistic markets indulging in practices such as the creation of a market-standard based on IPR licensing, excessive pricing, refusal to deal, refusal to license, or dominating the downstream market by refusing necessary information for entry, under the garb of ‘protection of IPR’. This necessitates the striking a fine balance between private proprietary rights and promotion of economic growth and competition. Peeking into the future: Prospective enforcement issues in AOD cases The extension of the IP defence to AOD cases is sure to raise several pertinent concerns and enforcement issues. Firstly, there remains ambiguity regarding the determination of the ‘relevant market’ which forms the very foundation of Section 4. In 2014, CCI in the Super Cassettes case,[iv] concluded the relevant product market by considering the SSNIP test instead of holding the entire IPR as the relevant market. However, for the purpose of Section 4A, in determining the establishment of a dominant position, there is a requirement of due consideration of whether the ‘relevant geographic market’ would be commensurate to the extent of the territorial protection granted to the IPR or the extent of usage of that IPR in the market. The clarification of the same will warrant an addition to the factors required to be satisfied for determining the ‘relevant market’ under Section 19(5) and (6), for example, if the relevant market will include products made from license or technology transfer of the IPR. Secondly, The threshold for proving AAEC is more flexible and has a broader scope under the relative ‘rule of reason’ approach adopted by CCI in AOD cases due to the presence of various objective justifications for the abusive practices. The extension of the exemption to Section 4 will provide an additional scope, broader to satisfy the ‘objective justifications’ for the abusive conduct by a dominant enterprise. Thirdly, the CCI has failed to provide an appropriate and succinct definition of what constitutes ‘reasonable conditions’ under Section 3(5). In 2017, CCI in the K Sera Sera case,[vi] concluded that exclusive agreements with distributors to prevent agreements with repeated IPR infringers constitute a ‘reasonable condition’. In 2015, CCI in the Shamsher Kataria case,[vii] provided two requirements to be satisfied for any entity to claim exemption under Section 3(5) namely: Whether the right which is put forward is correctly characterized as protecting an intellectual property; and Whether the requirements of the law granting the IPRs are being satisfied. While clarifying the first criteria, the CCI stated that the concept of protection of an IPR is qualified to be ‘necessary’ where, in the absence of the restrictive conditions; the IPR holder is unable to protect his IPR. However, the extension of the same to AOD cases will require a more variable and clear definition of what constitutes ‘reasonable conditions’ as the possibility of misuse of the provision is higher. The Bill also lacks an adequate mechanism to address the issues which can arise from the non-compulsion of provision Fair, Reasonable & Non-Discriminatory (FRAND)terms to

Expanding the Umbrella of IPR Exemptions: A Critical Comment on Draft Competition Amendment Bill, 2020 Read More »

Covid-19 Crisis and the Failing-firm Defense: Greater Responsibility on the CCI?

Competition Law /

[By Shreya Chandhok] The author is a student at National Law Institute University, Bhopal Introduction The Covid-19 pandemic has pushed the global economy into a slump, leading to a shrinking economy with weakened growth. The increased uncertainty caused by the disruption in demand and supply chains is discouraging transactions, leading to companies filing for bankruptcy worldwide. Even though the government and the competition authorities are working towards providing relaxations to such undertakings, there remains a possibility of an increase in the number of Mergers & Acquisitions (M&A) transactions, particularly rescue deals in the market. The better-positioned companies with sufficient financial resources will be tempted to seize a unique opportunity to acquire a struggling competitor. Even the Organisation for Economic Cooperation and Development (‘OECD’) acknowledges that in times of financial crisis, it is natural for distressed companies to improve their condition by merging with a healthier competitor. In India, such acquisitions must comply with the requirements under the Insolvency and Bankruptcy Code, 2016 (IBC) which eventually depends on the resolution plan chalked out by the insolvency resolution professional. According to the proviso under Section 31(4) of the IBC, an applicant is supposed to take prior approval from the Competition Commission of India (CCI), before the approval of the Committee of Creditors (CoC) is obtained if the resolution plan has a provision for ‘combination’. Essentially, this acquisition becomes a part of combination under Section 5 of the Competition Act, 2002. To relax this long procedure of approvals, the CCI in 2019 amended its  ‘Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011’ (Combination Regulations)to legitimise a self-assessment channel, known as the ‘Green Channel Clearance’ for M&A filings. Under the green channel, mergers or acquisitions between unrelated parties that are not involved in similar businesses, horizontally or vertically will be deemed to be approved by an automatic system for speedy approval of combinations. Recently, the government promulgated an ordinance to suspend sections 7, 9, and 10 of IBC for a period of 6 months, which can be extended for a period of one year. This would imply that the merger requests reaching the CCI will not go through the severity of the IBC, to determine if the firm was actually under a financial distress. In pursuance of this, the CCI will likely be asked to assess M&A which might be anti-competitive but may nonetheless fall under the ‘failing firm defence’, permitting a failing firm to merge with a healthy competitor. Therefore, the question is, how will the CCI examine the ‘failing firms’ in the current scenario? This post attempts to find an answer to this question, firstly, by examining the application of ‘failing firm defence’ in India vis a vis other jurisdictions and secondly, by analysing CCI’s role in the upcoming merger requests. Failing-firm defence The failing firm defence provides a way to clear mergers in cases that would otherwise be characterised by significant anti-competitive effects. Before starting with the substantial discussion, it is important to distinguish between two concepts, the ‘failing firm’ and the ‘flailing firm’. ‘The failing firm’ is a firm that has exhausted all its options for survival and is on the brink of exiting the market, whereas the latter has simply become a weaker competitor. Therefore, there is a higher burden on the parties to prove that they are close to bankruptcy, rather than just weakened by the current economic situations, pertaining to the proposed merger. The European Union (‘EU’) for that matter, in the case of Kali und Salz, gave a three-fold test to determine the applicability of the failing-firm defence- (i) the failing firm would be forced out of the market if not taken over by another entity; (ii) this was the least anti-competitive measure; and (iii) the assets of the failing firm would leave the market in the absence of the said merger. Accordingly, to satisfy the first condition, the firms must establish their financial difficulties by showing denied access to requisite funds or failed attempts of restructuring. The second condition can be satisfied by showing that there are no alternative buyers available in the market, or that the acquisition by another company does not lead to a less-competitive result. Therefore, from a buyer’s perspective, between exploring alternative options and allowing a merger, the latter is the least anti-competitive resort available to the undertaking. To establish the third condition, it requires the notifying party to demonstrate that if the target company fails, its entire share would inevitably exit the market and/or its market share will go the competitor. The Aegean/Olympic II case in the EU deliberated on all these conditions and satisfied that if the merger was not allowed, Olympics’ market share would retire from the market, leading to a reduction in competition, and therefore allowing the merger was the least anti-competitive alternative available with the authorities. Following the same, recently, the Competition and Markets Authorities (CMA) in the United Kingdom, approved Amazon’s investment in Deliveroo, a British restaurant and grocery delivery platform that attained a significant share in the market, was likely to lose its share due to the Covid-19 pandemic if Amazon did not invest, eventually leading to a loss of competition in the market. In the United States, the US Department of Justice (‘department’) has been disinclined to compromise the standards of this defence, and is only helping the undertakings by expediting the review process. Nevertheless, the authorities are honouring the requests on a case to case basis, by giving due regard to the nature of the industry and their position in the society, when evaluating a merger request. Recently, the department allowed for an acquisition in the milk industry, following the unprecedented challenges they were facing. Therefore, in a nutshell, the authorities across the borders are trying to accommodate the requests of such undertakings, by evaluating their requests based on the current crisis. Even though India has not dealt with the failing firm directly, it is noteworthy to mention that the S.V.S. Raghavan

Covid-19 Crisis and the Failing-firm Defense: Greater Responsibility on the CCI? Read More »

Scroll to Top