Author name: CBCL

Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited: A Critique

Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited: A Critique. [Shaalini Agrawal] is a third-year student of Gujarat National Law University. The seat of arbitration has various internal and external implications for the arbitral proceedings. One such implication is that the administration and control over the arbitration is done by the courts of the country where the seat is located. Such courts have the power to regulate the conduct of arbitration and hear application challenging the arbitral award.[1] Where the seat of arbitration is designated, expressly or by implication, by the parties as India, the courts in India will have supervisory jurisdiction over the arbitral proceedings and Part 1 of the Arbitration and Conciliation Act, 1996 (“Act”) will apply. In case of domestic arbitration where parties have chosen a neutral city as the seat of arbitration, the question that arises for consideration is which courts in India will have the jurisdiction- courts of seat of arbitration or court which has the subject matter jurisdiction under sections 16-20 of the Civil Procedure Code, 1908 (“Code”). There have been conflicting judgements of various High Courts and the Supreme Court on this issue. Most recently, the Supreme Court in Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited[2] (“Indus Mobile”) has held that the designation of seat in the arbitration agreement is akin to an exclusive jurisdiction clause. It means that when the parties have chosen a particular place as the seat of arbitration, the courts of that place will have exclusive jurisdiction to regulate the arbitral proceedings. This is irrespective of where the cause of action arose or where the parties or the subject matter of dispute is located. This case comment argues that the judgement in Indus Mobile was erroneous because firstly, it completely ignored the wording of section 2(1)(e) of the Act and secondly, it ignored the judicial precedents of over 70 years that interpreted section 2(1)(e) to confer jurisdiction only on the courts that have territorial jurisdiction over the subject matter of the arbitration according to sections 16-20 of the Code and misplaced reliance on Bharat Aluminium Co v. Kaiser Aluminium Technical Services[3] (“BALCO”). Facts of the Case In this case, Respondent no. 1 was engaged in the manufacture, marketing and distribution of mobile phones and tablets with its registered office at Amritsar. An agreement was entered into between the Appellant and the Respondent no. 1 where the latter would be the former’s retail chain partner. Respondent no. 1 was supplying goods to the Appellant from New Delhi to Chennai. Dispute arose between the two parties. Respondent no. 1 sent a notice to the Appellant stating the default of outstanding dues of Rs.5 crores with interest on the part of the latter and called upon it to pay the outstanding dues within 7 days. Appellant failed to pay and the arbitration clause in the agreement was invoked by the Respondent No. 1. Clause 18 of the agreement provided that the “…dispute shall be finally settled by arbitration conducted under the provisions of the Arbitration & Conciliation Act 1996 by reference to a sole Arbitrator which shall be mutually agreed by the parties. Such arbitration shall be conducted at Mumbai, in English language.” Clause 19 of the agreement further provided that “all disputes & differences of any kind whatever arising out of or in connection with this Agreement shall be subject to the exclusive jurisdiction of courts of Mumbai only.” Respondent no. 1 then filed two petitions under sections 9 and 11 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court. The Delhi High Court disposed of both the petitions holding that since no part of the cause of action arose in Mumbai, only the courts of Delhi and Chennai (from and to where goods were supplied), and Amritsar (which is the registered office of the appellant company)  could have jurisdiction over the matter. This is so irrespective of the exclusive jurisdiction clause as the courts in Mumbai would have no jurisdiction in the first place. Since the court in Delhi was the first court that was approached, it would have exclusive jurisdiction over the matter. Appellants approached the Supreme Court where they argued that even if no part of the cause of action arose at Mumbai, yet courts in Mumbai would have exclusive jurisdiction over all the proceedings as the seat of the arbitration is at Mumbai. Respondents supported the Delhi High Court judgement by stating that one of the tests prescribed by section 16-20, Civil Procedure Code, 1908, to give a court jurisdiction over the matter must at least be fulfilled and merely the designation of seat as Mumbai would not give exclusive jurisdiction over the proceedings to the Mumbai courts. Decision of the Supreme Court and its Analysis The Supreme Court set aside the order of the Delhi High Court in the following words: “..the moment the seat is designated, it is akin to an exclusive jurisdiction clause. On the facts of the present case, it is clear that the seat of arbitration is Mumbai and Clause 19 further makes it clear that jurisdiction exclusively vests in the Mumbai courts. Under the Law of Arbitration, unlike the Code of Civil Procedure which applies to suits filed in courts, a reference to ‘seat’ is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue may not in the classical sense have jurisdiction – that is, no part of the cause of action may have arisen at the neutral venue and neither would any of the provisions of Section 16 to 21 of the CPC be attracted. In arbitration law however, as has been held above, the moment ‘seat’ is determined, the fact that the seat is at Mumbai would vest Mumbai courts with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.” However, the Supreme Court in the above paragraph upheld two conflicting propositions. Firstly, it held that “On the facts of the

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Minimum Public Float Under the Securities Contracts (Regulations) Act, 1956

Minimum Public Float Under the Securities Contracts (Regulations) Act, 1956 [Ashlesha Mittal] The author is a student of National Law University, Jodhpur. The Securities Contracts (Regulation) Act, 1956 (SCRA) was enacted to prevent undesirable transactions in securities by regulating the business of dealings therein, and by providing for certain other matters connected therewith. Section 21 of the SCRA mandates all listed companies to comply with the conditions of the listing agreement with the stock exchange. The provisions of the Securities Contracts (Regulation) Rules, 1957 (SCRR) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) provide a framework to maintain this balance. The blog article examines the framework, the rationale therefor and the implications of the same on the market in general and the shareholders in particular. Regulatory Framework and its Evolution The SEBI regulates financial markets, and minimum public shareholding ensures that listed companies offer their shares to the public in order to increase liquidity and ensure maximum protection of interest. The SEBI regulations have been centered around the protection of individual shareholders, and hence strict compliance of all the laws is mandatory. Any deviation leads to imposition of penalty, and even delisting of securities in some instances. The framework relating to minimum public shareholders has evolved through the years. From a regime of extensive restrictions, it has moved towards a liberated market, and recently the trend has again been to increase restrictions. Prior to 1993, listed companies were required to issue 60% of their shares to the public. This was eventually relaxed to 25% and then to 10% to ease listing requirements as companies with large amount of share capital did not require such amount of outside funds.[1] However, to maintain liquidity of shares and prevent price manipulations, the SCRR was amended vide the Securities Contracts (Regulation) (Amendment) Rules, 2010 to amend rule 19(2)(b) and insert rule 19A, and increase the public shareholding threshold from 10% to 25%. Companies with capital above Rs. 1600 crore were given a period of 3 years to achieve the threshold, by using methods prescribed by SEBI. Rule 19A of the SCRR provides that maintaining public shareholding of at least 25% is a requirement for continued listing. Where the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of twelve months from the date of such fall. The increased threshold of 25% was made applicable on listed public sector companies in 2014 by the Securities Contracts (Regulation) (Second Amendment) Rules, 2014 and had to be met within three years from the commencement of the amendment. The amendment not only increased opportunities for investors to invest in PSUs, but also assisted Government’s disinvestment programme. To avoid undervalued transfer of shares of the public-sector companies and distress sale of government stocks, the period for compliance was increased to four years by the Securities Contracts (Regulation) (Third Amendment) Rules, 2017. Further, regulation 38 of the LODR provides that the listed entity shall comply with minimum public shareholding requirements in the manner as specified by the SEBI from time to time. This was earlier provided in clause 40A of the Listing Agreement. SEBI via its circular has also prescribed methods by which the minimum level of public shareholding specified in rule 19(2)(b) and/or rule 19A of the SCRR can be achieved.[2] These methods are: issuance of shares to public through prospectus; offer for sale of shares held by promoters to public through prospectus; sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012; institutional placement programme in terms of Chapter VIIIA of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009; rights issue to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, that may arise from such issue; bonus issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, that may arise from such issue; any other method as may be approved by SEBI on a case to case basis. Implementation of the Regulations Shareholders of a public company have an advantage that the shares are freely transferable and that there is quick liquidity of investment. The liquidity arises due to ready availability of buyers and sellers in the market, and an established procedure for the transfers. However, if the promoter group refrains from trading in their shares, the number of buyer and sellers reduces in the market, thus affecting the liquidity factor. In June 2013, when the deadline for complying with the requirement of 25% public shareholding ended, SEBI issued an order against 108 companies which failed to do so. The rights of the promoters with respect to shares exceeding the maximum promoter shareholding were frozen. Restrictions were imposed on trading of shares of these companies by promoters except for the purpose of complying with the minimum public shareholding, and also on the promoters holding any new position of director in any listed company. All the restrictions were to apply till the minimum public shareholding threshold was finally met by the company.[3] In the Bombay Rayon’s case,[4] the delay in compliance with minimum public shareholding requirement occurred on account of the CDR process pursued by Bombay Rayon with its lenders. Sufficient period of non-compliance had lapsed in ensuring implementation of the CDR package, which inter alia was also subject to necessary approvals from SEBI. As noted in the confirmatory order dated December 11, 2015, the restructuring of Bombay Rayon’s debt by CDR–EG was for the company’s “sound growth, which in effect will benefit its shareholders also.” Since the non-compliance was beyond the control of the company and was only due to the conversion of GDRs into equity, the SEBI reversed the penalty imposed on the company. Rationale and Implications Minimum public participation in listed companies has always been advocated by the regulators as this ensures liquidity in the market and discovery of fair price.[5] Further, the availability of requisite floating stock ensures reasonable market depth. This enables an investor

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Restricting the Scope of “Suit or Other Proceedings” under Section 446 of the Companies Act, 1956 vis-`a-vis Section 138 of the Negotiable Instruments Act, 1881

Restricting the Scope of “Suit or Other Proceedings” under Section 446 of the Companies Act, 1956 vis-`a-vis Section 138 of the Negotiable Instruments Act, 1881. [Jasvinder Singh] Jasvinder Singh is a third-year student of National Law Institute University, Bhopal. Introduction It is manifest from a bare reading of section 446(1) of the Companies Act, 1956 [“Companies Act”], that when a winding-up order has been passed against a company or where a provisional liquidator has been appointed, then, except by the leave of the tribunal, neither a suit can be initiated against such company nor any other legal proceedings be commenced or proceeded therewith.[1] The purpose behind this provision is to safeguard the company, which is wound-up, against wasteful and expensive litigation by bringing all the matters against that company before a single adjudicating authority. Moreover, in cases of winding-up, as the assets of the company get distributed to all of its creditors and contributories, the proceedings are stayed in order to avoid situations of chaos among the creditors regarding the distribution of the assets. Similar provisions exist under the Insolvency and Bankruptcy Code, 2016 [“IB Code”], which states that after the admission of the application of insolvency, the adjudicating authority can by order, declare moratorium, prohibiting the institution of suits or the continuation of pending suits or legal proceedings against the corporate debtor.[2] However, presently, we are only concerned with the application, the scope as well as the ambit of section 446 of the Companies Act. The aim of this post is to discuss the effect of section 446 of the Companies Act on the proceedings under Section 138 of the Negotiable Instruments Act, 1881 [“N.I Act”], which provision creates a statutory offence in case of dishonour of a cheque on account of insufficiency of funds, among other things. The Problem There have been certain disagreements with respect to the scope of the expression “suit or other legal proceedings” under section 446(1) of the Companies Act. Various high courts in several of their judgments have time and again delved into the provisions of the Companies Act so as clarify and demarcate the ambit of the said section. The High Court of Bombay took divergent views on the application of section 446(1) of the Companies Act to the proceedings under section 138 of the N.I Act. In the case of Firth (India) v. Steel Co. Ltd. (In Liqn.),[3] the issue before the court was whether the expression ‘suit or other legal proceedings’ in section 446(1) of the Companies Act includes criminal complaints filed under section 138 of the N.I Act?  It was held by the Single Judge Bench that section 446(1) has no application to the proceedings under section 138 and hence leave of the Court is not necessary for continuing proceedings under the N.I Act. Further in an unreported decision of Suresh K. Jasani v. Mrinal Dyeing and Manufacturing Company Limited & Ors.,[4] in order to decide on the relevance of section 446 of the Companies Act to the proceedings under section 138 of the N.I Act, the Single Judge Bench has taken diametrically opposite view altogether, and held that by virtue of the former provision, the matter under the latter could not be proceeded any further after the passing of the winding-up order as the proceeding under section 138 of the N.I Act arose out of civil liability of the company, which brings it under the purview of section 446(1). It was further held by the Court that the words “other legal proceedings” have a wider connotation and meaning and thus they include even the criminal proceedings which have some relevance with the functioning of the company. Because of such disagreements in relation to the issue, the Single Judge Bench of the Bombay High Court decided to refer the matter to a larger bench. Decision of the Division Bench of the Bombay High Court The Division Bench of the Bombay High Court on May 06, 2016, in the case of M/S Indorama Synthetics (India) Limited v. State of Maharashtra and Ors.,[5] tried to reconcile and resolve the conflicting views taken in the above-mentioned judgments. The Division Bench discussed the scheme and object of section 446 of the Companies Act. The court held that when the proceedings of winding-up against a company have been filed, the tribunal has to see that the assets of the company are not imprudently given away or frittered. It is the fundamental duty of the tribunal to oversee the affairs of the company and to meet the debts of its creditors as well as contributories. With regard to section 138 of the N.I Act, the court stated that the main object of the provision is to assure the credibility of commercial transactions by making the drawer of the cheque personally liable in case of dishonour of cheques. The Bench cited the case of S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (In Liquidation) v. V.M. Deshpande, Income Tax Officer, Companies Circle I (8), Bombay & Anr.,[6] wherein the Hon’ble Supreme Court considered the provisions of  section 446 of the Companies Act vis-à-vis those of section 147 of the Income Tax Act, 1961 dealing with the initiation of the reassessment proceedings against a company which is undergoing liquidation process, and held that “[t]he Liquidation Court cannot perform the functions of the Income Tax Officials while assessing the amount of tax payable, even if the assessee be the company which is undergoing a winding up process. The language of section 446 of the Companies Act must be so interpreted so as to eliminate any startling consequences.” The Court observed that the expression “other legal proceedings” under section 446 of the Companies Act, should be read ejusdem generis with the expression “suit” and could only mean civil proceedings. Further, the expression “legal proceedings” under section 446 does not mean each and every civil or criminal proceeding; rather, it signifies only “those proceedings which have a direct bearing on the assets of a company in winding-up or have some relation to

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Section 29A: A Target On Party Autonomy

Section 29A: A Target On Party Autonomy. [Shashank Chaddha] The author is a fourth-year student of National Law Institute University, Bhopal. The Arbitration and Conciliation Act, 1996 (“Act”), amended by the Arbitration and Conciliation (Amendment) Act, 2015 (“Amending Act”), introduced a host of changes, one of them being the insertion of two new sections– Section 29A and Section 29B- to the Act. The two sections, essentially, place an obligation on the parties, in addition to placing an obligation on the arbitral tribunal, to conclude the arbitration proceedings within a time period of 12 months, or if an extension is granted, within 18 months.[i] Section 29B talks about a new mode of procedure that may be adopted by an arbitral tribunal towards completing arbitration proceedings within 6 months’ time period. While this insertion may cure the evil of delays that used to considerably hamper the arbitration proceedings, section 29A, which forms the focus of this post, compromises with the grund-norm or the backbone on which arbitration lies– party autonomy. The present article attempts to highlight this scenario. Demystifying the Provision Section 29A uses the word ‘shall’,[ii] which implies a mandate on the part of the arbitral tribunal to deliver a final award within 12+6 months; else, there will be a penalty imposed by the High Court on the arbitrator’s fee,[iii] or the arbitrator’s mandate may be terminated.[iv] However, the section overlooks the possibility of cases where the parties themselves are responsible for delay in cases, or where due to reasons attributable to complex nature, the proceedings cannot be completed within the 12+6 months’ time, without any fault of the arbitrator or the parties. The section does not provide any mechanism to deal with such situation. Where the parties enter into an arbitration agreement, in case of ad-hoc arbitration, they lay down the procedure to deal with various aspects, such as evidence, submission of claims, etc., which might take some time when seen from a practical point of view. Therefore, when the agreement itself has provided for detailed steps to be undertaken during a proceeding, which cannot be practically completed within the statutory limited time frame, the provisions of the agreement come in direct conflict with section 29A. This means, on the one hand, that we have the arbitration agreement reflecting parties’ intention based on party autonomy, and, on the other hand, that we have the legislature’s will to complete the arbitration proceedings within a certain period, even if that has the power of overriding the express procedure laid down by the parties. When we deal with this section, it is also important to understand the intention behind the insertion of this section. The Law Commission of India, in its 176th Report[v] (2001), had suggested inserting a statutory limit to be imposed for completion of arbitration proceedings. However, in that Report, the Commission had suggested introduction of a 24-month time limit (inclusive of an extension of 12 months). The Commission observed in this regard: “We are not inclined to suggest a cap on the power of extension as recommended by the Law Commission earlier. There may be cases where the court feels that more than 24 months is necessary. It can be left to the court to fix an upper limit. It must be provided that beyond 24 months, neither the parties by consent, nor the arbitral tribunal could extend the period. The court’s order will be necessary in this regard.”[vi] However, after this Report was released, the Central Government released a Consultation Paper,[vii] based on the said Report, and the Committee was of the opinion that: “…neither any time limit should be fixed as contemplated by the proposed section 29A nor should the court be required to supervise and monitor arbitrations with a view to expediting the completion thereof. None of these steps is conducive to the expeditious completion of the arbitral proceedings. Moreover, court control and supervision over arbitration is neither in the interest of growth of arbitration in India nor in tune with the best international practices in the field of arbitration. The Committee is of the opinion that with the proposed amendment the arbitral tribunal will become an organ of the court rather than a party-structured dispute resolution mechanism. The Committee, therefore, recommends the deletion of the proposed section 29A from the Amendment Bill.”[viii] However, taking source from the 176th Report, the Parliament inserted section 29A to the Act, ignoring the Consultation Paper. Comment Observing that section 29A has the potential to comprise the basic tenets of arbitration, it would have been a pro-arbitration approach had there been a provision regarding allowing parties to give their own thought as to how long, and in what manner, do they wish to carry the proceedings forward through according primacy to the arbitration agreement, by beginning the section with “Unless otherwise agreed by the parties…”. The express intention of the parties must be respected, in entirety. Anything to the contrary might result in further litigation, rather than minimizing it, where a party can allege that the arbitration proceedings were carried out hastily and that proper opportunity was not given to such party. The sanctity of the principle of party autonomy must be restored, and the parties should be free to contract the methods for carrying out the private mode of dispute resolution mechanism. [i] The Act, section 29A(3). [ii] Ibid, section 29A(1). [iii] Ibid, section 29A(4), [iv]  Ibid, section 29A(6). [v]  Law Commission of India, 176th Report, available at http://lawcommissionofindia.nic.in/arb.pdf, pages 126-127. [vi]  Ibid, page 125, ¶ 2.21.4. [vii]  Ministry of Law & Justice, Government of India, Proposed Amendments to the Arbitration & Conciliation Act, 1996, available at http://lawmin.nic.in/la/consultationpaper.pdf (Annexure-IV of the Paper). [viii]  Ibid, ¶127.

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Ascertaining The Meaning Of “Dispute” And “Existence of Dispute” Under The Insolvency And Bankruptcy Code, 2016

Ascertaining The Meaning Of “Dispute” And “Existence of Dispute” Under The Insolvency And Bankruptcy Code, 2016. [Ashish Jain] The author is a third-year student of National Law Institute University, Bhopal. Introduction The Insolvency and Bankruptcy Code, 2016 (“Code“) has been enacted with the objective of bringing efficiency in the insolvency and liquidation process in the country. However, there have arisen disagreements relating to the true meaning and purpose of the various provisions of the Code. One such concern has been raised with respect to interpretation of the terms “dispute” and “dispute in existence” used in the Code. Both the Mumbai and the Delhi benches of the National Company Law Tribunal (“NCLT”) in their various recent judgments have provided different interpretations to the said terms. Relevant Provisions of the Code Section 5(6) of the Code, which provides the meaning of “dispute,” says that the term includes a suit or arbitration proceeding relating to- (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty.[i] Section 8 then provides that the corporate debtor is required to bring notice, within ten days of receipt of demand notice from an operational creditor, of any “existence of dispute” in relation to such debt.[ii] Further, section 9 provides for initiation of corporate insolvency resolution process and states that the adjudicating authority may reject the application for initiation of such process if, before the expiry of the notice period of ten days, the operational creditor has received a notice of dispute from the corporate debtor.[iii] Thus, interpretation of the expression “dispute in existence” becomes significant as it remains the only defence available with the corporate debtor to avoid the insolvency proceedings.[iv] In cases where the debt is not disputed by the corporate debtor (and therefore the tribunal can initiate the insolvency proceedings) or where a suit or arbitration proceeding is already pending (and therefore the tribunal may reject the application), it is easier for the adjudicating authority to take a call. However, problem arises when a dispute regarding such debt has been raised by the corporate debtor within the ten days of delivery of demand notice and no suit or arbitration proceedings are pending in relation to such debt.[v] The question arises whether this would amount to an existing dispute within the meaning of the Code. Conflicting Judicial Interpretations On the one hand, the NCLT Mumbai bench has taken recourse to strict interpretation and held that a debt would be considered disputed only if a suit or an arbitration proceeding exists before the delivery of notice by the operation creditor regarding the debt. It can be argued that this may lead to injustice in matters where there is a genuine dispute in respect of the debt but no suit has been filed. The NCLT Mumbai bench in Essar Projects India Limited v. MCL Global Street Private Limited,[vi] while deciding over an application filed by an operational creditor, held that since the dispute raised by the corporate debtor in its reply to the demand notice was not raised before any court of law or arbitration tribunal, it cannot be said to come within the purview of existing dispute under the Code. Therefore, the Tribunal while allowing the application for initiation of insolvency resolution proceedings held that a simple denial of claims by the corporate debtor without any pending suit or arbitration proceeding would not amount to “existence of dispute” under section 8(2) of the Code. The Tribunal in DF Deutsche Forfait AG & Anr v. Uttam Galva Steel Limited[vii] while further affirming its interpretation observed that the term “dispute” cannot be held to mean mere assertion or denial as it would frustrate the objective of the Code and deny the remedy available to the operational debtor. Further, the Tribunal while deliberating over the meaning of the word “includes” in the definition of dispute under section 5(6), considering the context of the surrounding provisions, observed that the word “includes” must be read as “means”. Therefore, pendency of suit or arbitration proceeding before delivery of demand notice is necessary to take defence of section 9(5)(ii)(d). On the other hand, applying the golden rule of interpretation, the Delhi Principal Bench of NCLT has held that, in order to claim “existence of dispute,” it is enough that the corporate debtor has questioned the default of debt in the reply to notice within the ten-day period. Therefore, an application filed by an operational creditor is liable to be rejected by the tribunal if the corporate debtor claims that a dispute exists regarding such debt and there is no mandatory requirement that a suit or arbitration must be pending. The application in such case will only be allowed if such claim of dispute can be refuted on the basis of evidence provided in the application. The problem with such wide interpretation will be that the corporate debtor may raise a dispute even though no genuine dispute is present and this may lead to rejection of the application filed by the operational creditor. The NCLT Delhi bench while deciding over the application filed for initiation of insolvency resolution process under section 9 in One Coast Plaster v. Ambience Private Limited[viii] and in Philips India Limited v. Goodwill Hospital and Research Centre Limited[ix] interpreted the term “dispute.” In both the cases, the Tribunal observed that since the corporate debtor had disputed the debt in its reply to demand notice, the applications were liable to be rejected. The Tribunal further held that since the word “includes” comes before the word “dispute” in section 5(6), the definition of dispute is inclusive and not exhaustive and, therefore, it must be given a wider interpretation and should not be restricted to mean pending suit or arbitration proceeding alone. The Tribunal also observed that there is “adequate room for the NCLT to ascertain the existence of a dispute” under section 8 of the Code. The NCLAT Decision Recently, the National Company Law Appellate Tribunal (“NCLAT”) had the occasion to deliberate over the true interpretation of the

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Derivative Action Suits in Corporate Litigation in India

Derivative Action Suits in Corporate Litigation in India. [Virali Nagda] The author is a fourth-year student of NALSAR University of Law. A derivative action, also called the shareholder derivative suit, comes from two causes of action, actually: it is an action to compel the corporation to sue and it is also an action brought forth by the shareholder on behalf of the corporation for redressal against harm to the corporation.[1] Such an action allows the shareholders monitoring and redressal of any harm caused to the corporation by the management within, in a case where it is unlikely that the management itself would take measures to redress the harm caused. Thus, the action is ‘derivative’ in nature when it is brought by a shareholder on behalf of the corporation for harm suffered by all the shareholders in common. This happens when the defendant is someone close to the management, like a director or corporate officer or the controller. If the suit is successful, the proceeds are forwarded not to the shareholder who brought the suit but to the corporation on behalf of which the cause of action was established. If the American literature on this subject is to be believed, then the historical foundations of the derivative suit lay in the corporate purpose. This debate over the purpose raged in the first half of the 20th century with the proliferation of major conglomerates as public corporation where investors could buy stock in the corporation on the public stock exchange but had close to no control or active role in the management of the corporation.[2] Even before the early 20th century when most corporations were privately owned by the small groups of shareholders who managed the corporations,[3] there was a judicial struggle to understand the corporate purpose when shareholders sought to challenge the directors running the management of the corporations. This American literature roots different from the Indian base of derivative action, which comes not from a principled provision of the company law rules and legislation in the country but simply from the willingness of the courts here to rely on principles from the English common law. The provision that the law has provided with is redressal against oppression and mismanagement of the company where the Companies Act, 2013, has allowed for a provision of class action suits[4] to be filed by shareholders against directors or other officers of the company in cases of mismanagement. In the event of this section being now notified, this paper is an attempt to look at literature around derivative suits in India and the supplement of class action suits to understand where the interpretation and applicability of derivative suits in India stands at, presently. Historical and Normative Foundation of Derivative Suits Commentators have often claimed that the United States had imported the principle of shareholder derivative action from England.[5] The representative litigation in early cases of the English Court of Chancery showed semblance to the class action suits of today.[6] This was developed gradually from the communal harms within the thriving feudal societies of the 12th-15th century England. The American Revolution gave way from the precedent method of England for matters of corporate litigation to permitted exception to the necessary parties’ rule, a form of representative party law suits quite different from the contours of the actions in England.[7] The classification began when for the first fifty years post-independence the United States permitted shareholders to bring suits on behalf of themselves and all other shareholders,[8] but then near the later part of 1940, courts began to often describe such lawsuits as those being brought on behalf of the corporation itself. The seminal case on shareholder derivative action is the English case of Foss v. Harbottle,[9] where the court had to consider the question of whether it was acceptable to depart from the rule of corporation suing in its own name and character as against that in the name of someone whom law appointed as its representative. Relying on the words of its predecessor Wallworth v. Holt[10] which allowed the consensus of all shareholders of a joint stock company to be represented by its shareholder in a suit against mismanagement, the court in Foss recognized the involvement of a true corporation and consequently recognized the right of its shareholders to bring a lawsuit to court on behalf of all the shareholders in some situations. The US courts in bringing this interpretation, understood homogeneity of interests of persons involved in a corporation or an organisation as with the interest of the corporation or organisation itself and thus allowed the shareholder’s cause of action to be derivative to the corporation’s interest in the cause of action.[11] Clear recognition to the shareholders’ derivative suits came when American courts restricted shareholders to filing suits only in circumstances where corporation was incapable of seeking redressal.[12] Percy v. Millaudon[13] was the first case decided in the Louisiana Supreme Court which appears to have accepted derivative action suit. The English cases that percolated in the following of the class action of the Chancery court slowly allowed the exception rule to allow corporation representation for the interest of the shareholders. Derivative Suit as an Exception to the Principle of Corporate Law  The voting rules in company law ensure that the shareholders who won the largest stake in the corporation are allowed the greatest impact on the venture policy, simply because these shareholders will gain most from the good performance and lost most from the bad performance of the venture giving them the largest incentive to maximize welfare interests of the corporation.[14] The minority share-holders then have no power to act on behalf of the venture or limit the will of the majority. This relative lack of power for the latter does not otherwise disadvantage them since the benefit of this decision-making mechanism is accrued to the minority as well. In this fundamental principle of corporate law, the derivative suit is a striking exception as shareholders with the tiniest of investment in the corporation can also bring the derivative suit on behalf of the corporation.[15] The litigation costs of such suit are then accrued by the corporation itself. This then

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Jio: An Illusion in the Telecom Industry

Jio: An Illusion in the Telecom Industry. [Rajat Sharma and Harsh Salgia] The authors are third-year students of National Law University, Jodhpur. Competition and Antitrust laws in various jurisdictions aim at safeguarding long-term consumer interests from overt and disguised predatory tactics of market actors. These laws regulate, monitor and assess competitive practices between and among firms. They affect major industries and business houses in India among others and every firm tries to be on its toes to not indulge in practices deemed to be anti-competitive. Predatory pricing is one such practice, and this article is an attempt to unfold the concept in the context of the latest Jio turmoil in the telecom market. Predatory pricing is the practice of pricing the goods or services at such a low level that other firms cannot compete and are forced to leave the market.[1] The explanation (b) to Section 4 of The Competition Act, 2002 defines it as follows: …’predatory price’ means the sale of good or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reducing competition or eliminate the competitors. Sunil Mittal-owned Airtel had alleged at the CCI that Jio’s pricing strategy amounts to “zero pricing” and Jio is indulging in predatory pricing in contravention to S.4(2)(a)(ii.) and S.4(e) of the Competition Act, 2002. Competitors are forced to lower their prices as a result of actions of one particular firm which acts in a disruptive way and sells its products below average cost level or indulges in zero pricing strategies. It is a prudent business strategy on behalf of a dominant undertaking (who tend to have deep pockets) to engage in loss making activities for a short period of time which will ensure the exit of the competitors.[2] The prerequisite to establishing practice of predatory pricing is to affirm use or misuse of dominant position. Ambani’s Gift to the Nation: Jio RCom  Jio launched its services in September, 2016 as a fresh entrant in the market which already had several established players. Its USP since the beginning was the extremely attractive feature of zero price for 4G data services and free calling services. Such sustained discounting practices are bound to raise warning signals to various telecom service providers due to the tendency of a single player to dominate the telecom market. Although Jio was a new entrant not too long ago, but due to its pricing strategies and customer plans, it has acquired significant share in what could be called, a surprisingly short amount of time. In terms of broadband subscriber base and data traffic, it holds 85% of the market share. Although, on the contrary, it is also true that in the broader telecom services market, Jio’s share is lesser than that of Airtel’s currently. Jio has also acquired significant amount of electromagnetic spectrum in the 1,800 megahertz (MHz) and 800 MHz bands during the last two rounds of spectrum auctions. But the company is essentially competing with the incumbent firms only within the market of 4G products and services. Eventually, all of this analysis boiled down to one question, namely, whether the relevant market in Jio’s case is market for 4G data and broadband services or is a broader cellular services market. Analysis of the Relevant Market: Whether 4G is a Relevant Product Market in Itself? When the behaviour of an undertaking in dominant position is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market.[3] Before establishing the fact that any establishment has undertaken the practice of predatory pricing, it has to be established that such a firm was in a dominant position and abused the same. Jio holds the largest share of spectrum in the 2300 MHz category and the 800 MHz category and further its subscriber base of 72.4 million as on 31st December, 2016 is the highest in the mobile-broadband user base.[4] In fact, the market for 4G services is quite different from the traditional market for 2G or even 3G services. This can be said due to the presence of features like high-speed downloads, elevated voice excellence, advanced infrastructure requirement and the specific need for subscribers to have 4G compatible mobile instruments. There are cases decided by the CCI itself which suggest that services for 4G can be taken as a separate relevant product market itself other than the broad spectrum of services which include 2G, 3G and voice-calling services.[5] The CCI, however, noted, considering Airtel’s Annual Report, that it would be inappropriate to distinguish wireless telecommunication services on the basis of technologies used to provide such services. It is not sure whether the Annual Report of Airtel is a very strong basis for the determination of differences between 3G and 4G LTE services. Also, the CCI did not dwell upon the fact that Jio is offering their calling services through the 4G-enabled LTE technology and is not providing services in the 3G sector. Therefore, it is not understood how Jio’s services fall in the broad relevant market of wireless telecommunication services and not only within the 4G LTE services product market. Jio: Market Disruptor or Dominant Entity? A dominant position exists where the undertaking concerned is in a position of economic strength which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, its customers and, ultimately, consumers; in order to establish that a dominant position exists, the Commission does not need to demonstrate that an undertaking’s competitors will be foreclosed from the market, even in the longer term.[6] Jio started

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Time To Revisit Legislations? An Analysis Of The Tata Docomo Case

Time To Revisit Legislations? An Analysis Of The Tata Docomo Case. [Priya Gupta] The author is a third year student of Gujarat National Law University. On the 28th of April, 2017, an important arbitration dispute was settled by the Delhi High Court in the case of NTT Docomo Inc. v. Tata Sons Limited,[1] wherein the court upheld the sanctity of a private contract in a foreign-seated arbitration by denying the Reserve Bank of India the right to intervene. A currently unsettled concern was raised by RBI in the enforcement of an arbitral award between NTT Docomo Inc. (‘Docomo’) and Tata Sons Ltd. (‘Tata’) whereby it contended that the award was against public policy of India as foreigners in matters of equity investments cannot add clauses that assure them a return below the sovereign yield. Facts of the Case Docomo and Tata entered into a Shareholder Agreement on the 25th of March, 2009, clause 5.7 of which stated that if Tata failed to satisfy certain ‘Second Key Performance Indicators’ stipulated in the agreement, it would be obligated to find a buyer or buyers for Docomo’s shares at the Sale Price i.e., the higher of (a) the fair value of those shares as of 31st March 2014, or (b) 50% of the price at which Docomo purchased its shares. Tata breached the agreement and so was called upon by Docomo to find a buyer or buyers for acquisition of sale shares. Another option later deemed unacceptable to Docomo was that Tata would acquire shares at the fair market price of INR 23.44 (USD 0.36). Finally, the dispute between the two parties was referred for arbitration when Tata failed to honor its obligations due to RBI’s objection before the London Court of International Arbitration. Arbitral Award and its Enforcement The tribunal rejected the contentions of Tata including which was the claim that an award of damages would result in contravention of the laws of India, especially the FEMA regulations. It stated that as Tata was under a strict obligation to perform, a special permission from RBI was not required. The methods of performance were deemed to be covered by other general permissions. It noted that- “Tata is liable for its failure to perform obligations which were the subject of general permissions under FEMA 20. The FEMA Regulations do not therefore excuse Tata from liability. The Tribunal expresses no view, however, on the question whether or not special permission of RBI is required before Tata can perform its obligation to pay Docomo damages in satisfaction of this Award.” On the other issue of non-acceptance of Tata’s offer to buy the shares at fair market price, the tribunal said that Docomo acted in good faith by insisting on performance as it had the reasonableness to not accept the amount on the offer. Therefore, the tribunal ruled out in favor of Docomo by making Tata liable for an amount of US$ 1,172,137,717 payable within 21 days. The real problem arose when Docomo sought to enforce the award in India. RBI filed an intervening petition where its counsel contended that the agreement was in violation of regulation 9 of the FEMA 20 which provided that the transfer should be at a price determined on internationally accepted pricing methodology. Further, the settlement was also in violation of section 6(3) of FEMA as valuation, transfer and issue of shares had to be conducted on the basis of the RBI guidelines which were not followed in the present case and hence the award was contrary to the public policy of India. Judgment of the Delhi High Court The Court first took up the question as to whether an intervention petition by the RBI could be entertained and, if yes, on what grounds. To answer this, it referred to section 2(h) of the Arbitration and Conciliation Act, 1996, which defines ‘party’ to mean a party to an arbitration agreement. Sections 48 and 34 work on the same lines by making sure that only a party to an arbitration agreement could file an application for setting aside the arbitral award. Since RBI was not a party to the agreement under section 48(1), its application was liable to be set aside. On the issue of violation of provisions of FEMA, it was stated that the agreement between Docomo and Tata was based on contractual promise which could always have been performed using general permissions of RBI under FEMA 20. It was held that the promise was valid and enforceable because sub-regulation 9(2) (i) of FEMA 20 permitted a transfer of shares from one non-resident to another non-resident at any price. Moreover, the issue at hand dealt with damages for breach and not for purchase or sale of shares overseas which is why a special permission would not be required. Therefore, the contentions of RBI were set aside and the court ordered for the enforcement of the arbitral award. Analysis It has generally been a recurring tendency of Indian courts to intervene in enforcement of awards by drawing approaches contradictory to the intent of the Act. This has been one of the major reasons for India for not being able to place itself on the global map of arbitration. The Delhi High Court has shown a pro arbitration approach in the current case by appreciating the negative impact on the goodwill of the country if a foreign award is not recognized. The award is said to be positive step as it reduces the ability of Indian companies to violate agreements with foreign entities and provides a wider interpretation to what can and can’t be opposite to public policy. However appreciable the approach of the court may be, the one issue that cannot be ignored here relates to the pending rules on capital account transactions with respect to debt instruments. Traditionally, the government does not have any prescribed limits as to equity investments from foreigners but have capped debt investments since over-indebted countries often see a run on their currency.[2] Since then, an investor putting a percentage on his investments when

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The Competitive Dynamics: Analysing The CCI Decision In The Reliance Jio Case

The Competitive Dynamics: Analysing The CCI Decision In The Reliance Jio Case. [Praharsh Johorey] The author is a fifth year student of National Law Institute University, Bhopal. On the 16th of June 2017, the Competition Commission of India in C. Shanmugam v. Reliance Jio Infocomm Limited  held in response to information filed by Bharti Airtel (“Airtel”) that Reliance Jio Infocomm Limited (“Jio”) was not in abuse of its dominant position in the telecom sector, dealt with under section 4 of the Competition Act, 2002 (“the Act”). It was argued by Airtel that Jio’s extra-ordinary investments in the sector were indicative of the dominant position that it enjoyed, which it abused through predatory pricing – offering its data and telephony services at a minimum discount of 90% relative to its competitors. However, the Commission’s analysis did not extend beyond declaring that Jio could not be considered as being in a dominant position in the market – in that the ‘presence of entrenched players with sustained business presence and financial strength’ did not raise competition concerns. In this essay, my primary aim is to assess the concept of ‘dominant position’ under Indian Competition Law through a critique of the Commission’s decision in respect of Jio – and what it could come to mean for an increasingly disrupted telecom sector in India. A Dominant Position Under section 4 of the Act, the term ‘dominant position’ has been defined to mean ‘a position of strength, enjoyed by an enterprise, in the relevant market, in India, which would enable it to: operate independently of competitive forces prevailing in the market; or affect its competitors or consumers in the relevant market in its favour. The Competition Commission notes that while dominant position is traditionally defined in terms of market share of the enterprise in question, section 19(4) of the Act lists a number of factors are mandatorily required to be considered, such as the size and resources of the enterprise, the economic power of the enterprise, the source of dominant position and the dependence of consumers upon the enterprise. Thus, to effectively gauge whether Jio does in fact enjoy a dominant position in the Telecom sector, the market share it enjoys need only form part of the Commission’s overall consideration. To support its assertion that Jio does in fact enjoy dominance, Airtel pointed to two key factors – the unprecedented investment (nearly ₹1,50,000 crore) made by Jio’s parent company reflecting its lasting economic power, and the ‘welcome offers’ (free unlimited services for specific durations) which through ‘predatory pricing’ served as the source of its increasingly dominant position in the market. The resultant impact, Airtel argues, disproportionately affected Jio’s competitors, forcing them to reduce their tariffs to remain competitive – causing them to enter a negative spiral of loss-making and dwindling business feasibility. Let us examine the Commission’s response to both these contentions individually. First, in respect of Jio’s economic power, it noted: “As may be seen, the market is characterised by the presence of several players ranging from established foreign telecom operators to prominent domestic business houses like TATA. Many of these players are comparable in terms of economic resources, technical capabilities and access to capital.” This does not sufficiently counter the contention that Jio’s parent company, Reliance Industries has, and will continue to, inject significant sums of money at an unprecedented rate into a sector that has resulted in vast and rapid movements away from established market entities into Jio. The very presence of established industries such as the Tatas, for example, does not necessarily exclude the possibility of new entrants in the market exercising lasting and disruptive economic power. More pertinent however, is the argument concerning Jio’s ‘predatory pricing’. The term predatory pricing is defined under section 4 of the Act, being the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors. Jio’s introductory offer – free and unlimited data, voice calling and roaming amongst other telecommunication services – was and continues to be unprecedented in the Indian telecom sector. The Commission’s answer to this contention is particularly crucial: “The Commission notes that providing free services cannot by itself raise competition concerns unless the same is offered by a dominant enterprise and shown to be tainted with an anti-competitive objective of excluding competition/ competitors, which does not seem to be the case in the instant matter as the relevant market is characterised by the presence of entrenched players with sustained business presence and financial strength.” For those following this line of argument closely, its circular nature is made quickly apparent.  For any pricing to be considered predatory, it must be tainted with an ‘anti-competitive objective’. However, the Commission rejects the notion that Jio is guilty of such objective, on the ground that the Telecom sector is characterised by the presence of ‘entrenched players’ – implying therefore that only in a market that is underdeveloped or lacking participation can anti-competitive objectives be manifested. It is also established that providing a bundle of telecommunication services free of cost for a period of nine months clearly falls within the literal meaning of selling ‘below the cost’. Even after such welcome offers ended, it is estimated that Jio offered its high-quality services at nearly 90% discount, to which the Commission responded: “In a competitive market scenario…it would not be anti- competitive for an entrant to incentivise customers towards its own services by giving attractive offers and schemes. Such short-term business strategy of an entrant to penetrate the market and establish its identity cannot be considered to be anti-competitive in nature and as such cannot be a subject matter of investigation under the Act.” It is important here to note that all participants in the telecom sector operate through offering various incentives to customers – the legality of such offers is not in question. Instead, the question is whether the telecom sector could

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