Author name: CBCL

Free Download – A CBCL Primer on Writing Research Papers and Blogs

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CLICK HERE TO DOWNLOAD – The CBCL Primer on Writing Research Papers and Blogs In this lockdown, many of us are picking up the pen (or opening new word documents, if you will) to write our hearts out, be it our critique of legal developments or even suggestions. We have all found ourselves staring at our laptop screens with hundreds of Google Chrome tabs open, wondering how to synthesize all that information accurately into concise sentences. We have realised that in drafting, following the Issue-Reasoning-Argument-Conclusion (or the IRAC method) is not always the solution! The team at CBCL recognizes how important yet tricky legal research and writing can be. So, we’ve decided to compile our experiences and knowledge to aid those who are yet to truly experience the joy of writing or those who wonder why they see frequent rejections for their papers. We present to you, our Primer on Writing Research Papers and Blogs. With this, we seek to build on our experiences of what to do and what not to do, picked up from The CBCL Blog, the commemorative NLIU Trilegal Summit Book and the newly launched NLIU Journal of Business Laws. All published by CBCL. The Primer contains much-needed step-by-step guidance on legal research and writing. It primarily deals with four aspects. First, it begins with how to choose a topic. The topic of your article is crucial in determining whether readers or reviewers will be inquisitive enough to read it. It is the foremost step in legal research and writing. The Primer guides you in choosing an appropriate topic which will attract readers and ensure a hassle-free process for you in researching and writing on the topic later. Second, the Primer explains the difference in research papers, blogs, legislative comments and case comments.  Each of these forms of publication warrants a distinct strategy in your research and writing. We, at CBCL have been publishing all four of these forms of publications, through the NLIU-Trilegal Summit commemorative book, The CBCL Blog and the NLIU Journal of Business Laws. As reviewers, we are aware of the distinct styles in structure and flow in them. The Primer guides you in understanding these differences to help you accordingly to decide your strategy. Third, the Primer helps you to understand how to develop an academic writing style. It breaks down the various parts of an article, such as the abstract, introduction, main body, suggestions, conclusion among others and explains what is expected in each of them. It helps you consolidate your research into an organized structure and give your article the much-required flow. Lastly, the Primer gives you a sneak-peek into how publishers evaluate your article. We not only tell you the criteria that decides whether or not your article will pass the review, but also give you a more in-depth understanding of them. The team at CBCL has curated this much-needed Primer, in recognizing the significance of the skills of legal research and writing. We realised that there is a gap in guidance to develop these essential skills. Therefore, our team has objectively analysed all our past publications, articles which have been rejected, our scoring criteria and what our editors look at while confirming a publication, to bring to you this comprehensive Primer. At CBCL, we have consistently taken steps to foster interest in research and writing among law students and practitioners. We hope that the Primer serves the purpose which was intended. P.S – Look out for the specific “CBCL Tips” across the document. Happy Writing!

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Mandating the Filing of Default Record from Information Utility – Unwarranted and Unjustified

Insolvency Law /

[By Ujjwal Agrawal] The author is a student at Maharasthra National Law University, Nagpur Introduction Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC” or “the Code”) provides for the initiation of the Corporate Insolvency Initiation Process (“CIRP”) by the financial creditors of a corporate debtor. Furthermore, Section 7(3)(a) of the IBC mandates the filing of either ‘record of the default recorded with the information utility’ or ‘such other record or evidence of default as may be specified’. However, recently the National Company Law Tribunal (“NCLT”) passed a notification dated 12 May, 2020 which mandates the filing of default record from Information Utility (“IU”) thus, changing the directory condition as mentioned in Section 7(3) of the Code to a mandatory one. An IU is defined under Section 3(21) of the IBC as a ‘person who is registered with the Insolvency and Bankruptcy Board of India (“IBBI”) Board as an information utility under Section 210 of the Code’. It is a network wherein the information relating to the financial data is stored. Its main objective is to provide a platform for submission and storage of financial information by entities, its authentication as well as access to this information as and when required. As of now, the National E-Governance Services Limited (“NeSL”) is the first and the only registered Information Utility with the IBBI owned by the State Bank of India and the Life Insurance Corporation among others. Section 7(3) IBC – Mandatory or Directory? Section 7(3) of the IBC uses the word ‘shall’ while mandating the requirement of record of default to be submitted along with the application to initiate the CIRP by the financial creditor, but the provision does not mention that it is mandatory to submit such record of default only after procuring it from the IU. The Apex court in the case of Union of India v. A.K Pandey had interpreted the word ‘shall’ as – “it will always be presumed by the court that the legislature intended to use the words in their usual and natural meaning. If such a meaning, however, leads to absurdity, or great inconvenience, or for some other reason is clearly contrary to the obvious intention of the legislature, then words which ordinarily are mandatory in their nature will be construed as directory, or vice versa”. Furthermore, the Supreme Court in 2005 had made a significant observation in the case of Kailash v. Nankhu with regards to the applicability of the procedural rules –   “All the rules of procedure are the handmaid of justice………….Unless compelled by express and specific language of the Statute, the provisions of the CPC or any other procedural enactment ought not to be construed in a manner which would leave the court helpless to meet extraordinary situations in the ends of justice”. In the case of Shreenath v. Rajesh, the Apex court had made a relevant finding – “In interpreting any procedural law, where more than one interpretation is possible, the one which curtails the procedure without eluding the justice is to be adopted. The procedural law is always subservient to and is in aid to justice. Any interpretation which eludes or frustrates the recipient of justice is not to be followed”. Thus, it is implied that the procedural requirements are not strictly mandatory in nature and could take a back seat in order to meet the ends of justice. They should not become an obstruction to justice, rather should aid to justice. Furthermore, the word ‘shall’ will not be construed as mandatory in nature in every circumstance but would depend on the intention of the legislature. The intention of the legislature is quite clear over here that the application for CIRP must be furnished along with any record of default and that could be either procured from the IU or any other means so as the default is proved. In 2017, the Apex court in the case of Surendra Trading Company v. Juggilal Kamlapat Jute Mills Co. Ltd. & Ors was faced with an issue that whether the requirement of 7 days to cure the defect in application to initiate CIRP as mentioned in the proviso to Section 9(5) IBC is mandatory or directory in nature, to which the court held that it is a mere procedural requirement and cannot be held as mandatory in nature. Furthermore, in the case of Pioneer Urban Land & Infrastructure Ltd. v. Union of India, the Apex court observed that – “the absence of any consequences for infraction of a procedural provision implies that such a provision must be interpreted as being directory and not mandatory”. Thus it is quite evident that such procedural requirement of filing of default record from IU is directory and should not have been made mandatory as even if furnishing the evidence of default from any other source would not lead to any prejudice to the other party. NCLT’s Authority to issue such notification– Contrary to Parent Provision Section 196(1) (t) of IBC authorizes IBBI to make regulations and guidelines on matters relating to insolvency and bankruptcy but nowhere mentions any such power to be with NCLT or its appellate body. Interestingly, the notification does not even mention the enabling provision through which the NCLT is issuing such an order but it can be presumed that NCLT invoked its inherent power mentioned in Rule 11 of the NCLT Rules, 2016 which authorizes the NCLT to issue such order to meet the ends of justice or to prevent abuse of the process of the Tribunal. However, it is a well settled position of law that any rule making power cannot restrict the provision of the enabling act. The Apex court in the case of State of Karnataka v. H. Ganesh Kamath[i] held that “it is a well settled principle of interpretation of statutes that the conferment of rule-making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant

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Abolition of DDT- Tale of its Impact on Corporate Governance

Taxation Law /

[By Rohit Maheshwary and Shrutika Lakhotia] The authors are students at School of Law, Christ (Deemed to be University), Bengaluru. Introduction The Finance Act, 2020 has brought in some relief for the companies by swapping the Dividend Distribution Tax (“DDT”) with the classical system of dividend taxation and thus functioning as a raindrop in the drought. The Finance Minister, Ms. Nirmala Sitharaman, has closed the doors of the DDT while paving a way out for tax liability on the shareholders, thus following the relics of 1997. This means that the company distributing dividends will be exempted from paying tax on it and the burden to discharge the liability has been shifted in the hands of shareholders receiving the dividend. Before the enactment of the Finance Act, 2020, the DDT was provided under section 115-O of the Income Tax Act, 1961 (“Act”). It states that the amount declared, distributed, or paid by the company by way of dividends will be subjected to additional income-tax at the rate of fifteen percent. The government’s approach to tax a non-income based transaction has attracted a lot of criticism by various stakeholders in the past.[i]The DDT caused an excessive tax burden on the companies distributing the dividend since the effective tax rate amounted to 48.5% (inclusive of the corporate tax rate at 25%). The DDT has been referred to as the epitome of “double taxation” as well as “surrogate tax”. To clear the air, the Apex Court in the case of Union of India & Ors. v. M/s. Tata Tea Co. Ltd. has upheld the constitutionality of section 115-O of Act. Raison D’être to Abolish DDT The rationale purported by the government to bring this change in the dividend tax policy is worth mentioning. The government decided to abolish the DDT for the benefit of the small retail investor who had to face the brunt of high tax in the form of DDT levied at the rate of 20.56% in comparison to the tax levied at the rate of 5% or 10% on the income of the shareholders falling in the lower tax bracket. Further, the move to abolish the DDT is intended to welcome investments from the foreign shareholders since, the denial of the tax credit paid in the form of the DDT caused excessive tax burden on the foreign investors. This decision to abolish the DDT impacts, various stakeholders, in different ways. However, the present article analyses the impact of DDT abolishment on one of the most crucial aspects of company law jurisprudence- “Corporate Governance.” In 1994, the King Commission portrayed Corporate Governance minimally as “the system by which companies are directed and controlled.” Impact on Indian Corporate Governance Any corporate structure possesses a unique characteristic of separation between ownership and management. This structure efficiently functions on the well-established premise that the management works for the best interest of the company and the shareholders. However, this is not always true because sometimes the managers may prove to act otherwise and prioritize their self-interest. Having said this, it is pertinent to refer to the “Free Cash Flow Theory” as suggested by Jensen in 1986.[ii] The study conducted by Jensen in 1986 reveals that the companies having excess cash under the opportunistic management’s hand will invest in unprofitable projects. This tends to burden the shareholders with the cost and reduces the firm’s value.[iii] The presence of the “corporate insiders” in a company deepens the hole and aggravates this problem. Corporate insiders are the persons who tend to dominate the affairs of the company because they hold detailed knowledge of the working of the company.[iv] In practical terms, a corporate insider uses the excess cash for satisfying their personal needs and political agendas instead of investing in profitable projects.[v] One such instance can be drawing huge remuneration from the company. This also undermines the duty of the managers to act faithfully towards the owners of the company. Therefore, when the management or the corporate insiders do not offer to distribute the profits of the company in the form of dividends or otherwise amongst the shareholders, it results in the reduction of the rate of return on equity capital and decreasing the value of the firm. In the erstwhile DDT regime, the managers could escape from their actions of not distributing surplus cash to the investors by shifting the blame on the excessive tax burden on the company when a dividend is paid to its shareholders. This practice gives the managers an “excuse” to use the retained earnings for their benefits and thereby sabotaged the shareholders’ interest. With the abolition of the DDT, the seesaw of conflicting interests between the managers and the shareholders would balance out. One may examine the standards of corporate governance through the lens of dividends distributed by the company. The Jobs And Growth Tax Relief Reconciliation Act, 2003 This link between the dividend distributed and the corporate governance standards can also be witnessed by looking at America’s dividend tax policy of 2003. Unlike India, America always followed the classical system of dividend tax. However, the corporate behaviour in America changed with the enactment of The Jobs and Growth Tax Relief Reconciliation Act (“Tax Reform”), 2003. Before the enactment of the Tax Reforms, the dividend tax in the hands of the shareholders receiving dividends was levied at the rate of 35 percent whereas the Tax Reform provided huge relief for the shareholders by levying tax at the rate of 15 percent. One of the main considerations for the enactment of the Tax Reform was to enhance the corporate governance practice in the company.[vi] The Joint Economic Committee (2003) also supported the outlook that the reduced tax rate would result in good corporate governance since the distribution of dividends would attract a healthy appetite for investment in the company. Moreover, this would provide shareholders with a greater degree of control over the company’s resources. Another key aspect of the enactment of the Tax Reform was the increased dividend payouts by the company.[vii] Hence, the

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Pandemic Pandemonium: Suspension of Fresh Insolvency Cases

Insolvency Law /

[By Ritik Khatri and Aanand Sanctis] The authors are students at National Law University Odisha. Prefatory The Insolvency system in India has made considerable progress since its inception; it has been continually tried and has grown altogether over due course of time. Due to this pandemic, the Indian Economy has endured a severe effect and will eventually prompt its phenomenal breakdown. As indicated by IMF, this worldwide pandemic recession will be ‘way worse’ than the 2008 financial crisis, the pandemic will monetarily overburden the companies and send them to the brink causing the businesses, little or enormous go bankrupt. The Finance minister while announcing the fifth tranche of the relief packages to mitigate the consequences of COVID-19 on the Indian Economy, also announced that there would be no fresh Insolvency filings under the Insolvency and Bankruptcy Code, 2016 (Code). Further, the President on 5th June exercising its power under article 123(1) of the Constitution promulgated an Ordinance which suspended Sections 7, 9 and 10 of the Code. The Ordinance suspends initiation of CIRP for any default arising on or after 25th March for a period of six months but not exceeding one year. The Ordinance inserts sub-section 3 to Section 66 which bars the Resolution Professional from filing application for the default which have stipulated under Section 10A. The amendment gives a buffer period of at least six months which will act as a breather to both creditors and debtors. This is a welcomed legislation when the Indian Inc. is hit by a plummeting economy in the Pan-India lockdown and saves them from the Insolvency proceedings. Tracing the need for imminent succour With the flow of revenue taking a significant hit throughout the last two months, the survival of MSMEs today is very much at stake. The shelving of Insolvency proceedings would be helpful especially for Micro, Small and Medium Enterprises (MSMEs). MSMEs will in general face expanded weights of Insolvency in the future and finding new financiers/purchasers and so on may end up being troublesome in a focused economy. The delayed time frame would permit the administration of these organisations to stay in charge of the assets and administration of the organisation. Without such suspension in the Code, these grieved endeavours will confront liquidation. These MSMEs are majorly the operational creditors who do not have a claim in significant volumes. Their operations are mainly based on services and amidst lockdown they are experiencing an inflexible slowdown. MSMEs are not able to get their debts resolved due to the absence of the Code and further they will delay their payments bringing about log jam in the Economy. The Government’s helping hand The government had given ease when it came with the first notification which excluded the period of lockdown from the Corporate Insolvency Resolution Process (CIRP) and the second notification which excluded the period of lockdown in relation to any liquidation process. On the same day, the Government in the exercise of its power under Section 4 of the Code increased the threshold of default from ₹ 1,00,000 to ₹ 1,00,00,000. It was observed that a single financial creditor was able to bring a healthy company down to its knees due to such low threshold and this was also the reason that NCLT was struck with frivolous litigation. Section 7 of the Code provides for financial creditors to initiate the CIRP proceedings against the corporate debtor, they are major entities like banks and financial institutions. The RBI declared an augmentation of the moratorium on loan EMIs by a quarter of a year, i.e. August 31,2020 hereby taking the EMI holiday to a time of a half year which was started on March 1st , 2020. The Hon’ble Supreme has also upheld the validity of the RBI circular dated 27.03.20 in the recent writ petition filed and directed the implementation of circular in letter and spirit. With a rationale to build Aatma Nirbhar Bharat Abhiyaan, Finance Minister announced measures for alleviation and credit bolster related to businesses, especially MSMEs to support Indian Economy’s fight against COVID-19. As per the new definition of MSME any firms turnover upto ₹ 5 crore will be classified as “Micro” and upto ₹ 100 crore as “Medium”. Covid-19 related debts shall be excluded from ‘default’ under IBC. Severe Consequences of the Suspension The data as of December 31st 2019 reflects that, of the total number of cases filed for CIRP, 49.21% have been filed by an operational creditor which implicates the dominance of Section 9 cases amongst Section 7, 9 and 10 applications. Denying MSMEs (almost all are operational creditors) the right to invoke the Code will curb their recourse to the most suitable and efficient debt resolution mechanism present today. This seems to be against the purpose and the objective of the code to promote entrepreneurship, availability of credit and balance the interest of all stakeholders, which was validated in the Swiss Ribbons Case. The suspension of fresh Insolvency may prove the major setback amid liquidity crunch in the financial sector. MSMEs are not able to get their debts resolved due to the absence of the Code and further they will delay their payments resulting in a slowdown in the Economy. The embargo on the initiation of fresh Insolvency proceedings tends to uncertainty in the Insolvency regime. The definition of Covid-19 debt for the default and the time period it will cover is still unknown. The World Bank Ease of Doing Business Index 2018 recognised India’s effort as in the year 2018, India became one of the top 10 improvers amongst the World. The ban on fresh Insolvency will reduce the reforms taken by the government in regards to Insolvency laws in India. The banks and financial institutions would bear the biggest brunt as it would subordinate them while re-negotiating loans with the corporate debtor.  The objective behind the enactment of the Code was to shift the focus from debtor-in-control to the creditor-in-control regime. This was the primary reason behind the success of the

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The NPA Conundrum: Evaluating the Bad Bank Approach

Banking Law /

[By Shubham Nahata]   The author is a student at Hidayatullah National Law University, Raipur Introduction One of the most drastic and disastrous impacts of the economic slowdown induced on account of COVID-19 will be seen on the balance sheets(“B/S”) of banking and financial institutions. As the availability of easy credit will become the norm in the post COVID-19 society, banking institutions will need to deal with the herculean task of resolving stressed assets on their B/S. According to the Financial Stability Report, published by the Reserve Bank of India, scheduled commercial banks (“SCBs”) account for almost 9.3% of Gross Non-Performing Assets (“NPAs”) in the economy. Almost 85% of these stressed assets can be traced to the B/S of Public Sector Banking institutions (“PSBs”). One of the prospective solutions on cards for resolving the banking crisis is the creation of a ‘Bad Bank’ that would take over NPAs from banking and financial institutions. Unlike traditional banking institutions, it does not engage in credit lending functions, however, it assists in the recovery of stressed assets in the financial sector. The soundness of the credit infrastructure of an economy is largely dependent on the recovery and resolutions mechanism in place for dealing with stressed assets. This blog post maps the growth of different regulatory practices adopted overtime to deal with NPAs and analyses the viability of a Bad Bank structure based on the experiences of different jurisdictions. Mapping the Trajectory Different strategies have been adopted over time in order to deal with stressed assets in the banking infrastructure. It includes measures like corporate debt restructuring, recapitalisation of banks etc. in order to improve the capital adequacy and keep NPAs in control. However, the overtime rise of NPAs in an economy is a signal for the need for a robust and effective resolution and recovery infrastructure. Neo-liberal banking reforms introduced in the first decade of the 21st century although increased the credit flow in the economy but it also led to a steep rise in bad loans as well. In order to portray the sound health of the banking industry, drastic measures like Corporate Debt Restructuring (“CDR”) were taken. It involved complete overhaul strategies like conversion of debt into equity, reducing interest, or extending the maturity to maintain the soundness of B/S.  One of the benefits that restructuring offered was that it exempted banks from creating provisioning for stressed assets. However, the Reserve Bank of India (“RBI”) prescribed stricter norms for classifying and recognition of stressed assets in the economy after the Asset Quality Review of 2015. This led to a steep increase in the ratio of NPAs in the banking sector. In order to deal with the ‘twin balance sheet problem’, the Insolvency & Bankruptcy Code (“IBC”) was enacted in the year 2016 which provided an effective avenue for financial lenders to undertake the resolution of stressed assets. The Banking Regulation (Amendment) Act, 2017 also empowered the RBI to issue directions to the banks to undertake resolution process against defaulters under the IBC. Similarly, under the framework of Joint Lenders Forum, the Reserve Bank empowered the banks to undertake measures like Corporate Debt Restructuring, Strategic Debt Restructuring and, the Scheme for Sustainable Restructuring of Stressed Assets (“S4A”). S4A offered an opportunity to the lenders to identify the sustainable level of debt for the borrowers and convert the unsustainable part of debt into equity instruments. However, these policies were discontinued after the RBI notified Prior Framework in March 2018. The prior framework was struck down by the Supreme Court in Dharani Sugars and Chemicals Limited v. Union of India, for being violative of Section 35AA of the Banking Regulation Act, 1949. Hence, on June 7, 2019, the RBI notified Prudential Framework for Resolution of Stressed Assets (Prudential Framework) which prescribes an incentive-based approach for resolution of stressed assets to improve the resilience of the credit infrastructure of the economy. Bad Bank Economics Asset quality, capital adequacy, liquidity and, responsiveness to the market are considered to be the key indicators of the financial health of a banking enterprise. Overtime rise in the ratio of NPAs not only affects the asset quality of banking institutions but also affects its capital to asset ratio, in turn, fracturing its ability to lend swiftly in the market. Bad Bank is a special purpose vehicle constituted as an Asset Reconstruction Company (“ARC”) tasked with the objective of acquiring and managing stressed assets of banking and financial institutions. It acquires discounted stressed assets from banks by upfront payment of a certain proportion in cash and issuing security receipts for the rest of the amount. Bad Banks are tasked with the responsibility to uniformly carry out resolution and recovery steps in respect of stressed assets and increase the return on such assets. Generally, such a form of entity is funded by the government and banking institutions in order to carry out its activities. Bad Bank structure for resolution of NPA can be effective as compared to the recapitalisation of banks, as the latter increases the burden on the taxpayers to provide for weak recovery infrastructure for banking institutions.  Global Experience Different jurisdictions around the globe have found recourse in a Bad Bank framework in order to deal with the problem of mounting stressed assets in the banking industry. Sweden during the financial crisis of 1992, formed a state-owned company (‘Securum’) tasked with the objective of acquiring stressed assets from its banking institutions. Securum was successful in resolving banking crisis in the economy and was able to return a substantial amount of government funding. Similarly, the Korean Asset Management Corporation of South Korea was formed in order to deal with stressed assets lying with banking and financial institutions. It was successful in reducing the ratio of NPAs in the economy from 17% in 1998 to 2.2% in 2002. It also introduced and developed the market for asset-based securities which attracted investments from both domestic and foreign investors. After the global financial crisis of 2008, the United States of America also formulated

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Effect of an improper public announcement on Section 31(1) IBC

Insolvency Law /

[By Preksha Mehndiratta and Anchit Jasuja] The authors are students at the Gujarat National Law University, Gandhinagar. Background The Insolvency and Bankruptcy Code (Amendment Act), 2019 [i] had amended Section 31 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) after many cases had surfaced where governmental authorities had demanded statutory dues from the corporate debtor even after the resolution plan had been approved. Recently, a division bench of the Jharkhand High Court in Electrosteel Steels Limited v. The State Of Jharkhand [ii] has ruled that when the governmental authority had not been afforded an opportunity to file a claim before the Interim Resolution Professional (“IRP”) due to an improper public announcement, then the claim would not be extinguished after the approval of the resolution plan.  This post attempts to question the correctness of the view of the Jharkhand High Court. Facts of the Case The corporate debtor, Electrosteel Steels Limited was undergoing Corporate Insolvency Resolution Process (“CIRP”) at the Kolkata bench of the National Company Law Tribunal (“NCLT”) and the resolution plan had gained final approval under Section 31. Meanwhile the Deputy Commissioner of Commercial Tax, Bokaro, Jharkhand issued an order demanding unpaid Value Added Tax dues from the corporate debtor against which a writ petition was filed. The tax authority argued that it was not aware of the initiation of the CIRP because of the improper public announcement, due to which it was unable to file a claim before the IRP and thus the resolution plan would not be binding on it. Analysis The court held that since the public announcement was not made in Jharkhand, where the corporate debtor had its offices, the tax authority was unaware of the imitation of the CIRP, and thus was not afforded the opportunity to file its claims before the IRP. Consequently, it could not be held to be a stakeholder ‘involved’ in resolution plan within the meaning of Section 31 and thus the resolution plan would not be binding on it. The decision of the court carves out an exception to the binding nature of the resolution plan in cases where the public announcement was not made as per IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 [iii] and this noncompliance caused a tax authority to be unaware of the initiation of the insolvency process. However, in doing so the court has misread Section 31 and created an unnecessary exception to the binding nature of the resolution plan due to three reasons. Firstly, Section 31, after the Insolvency and Bankruptcy Code (Amendment Act), 2019 [iv] makes the resolution plan binding on the corporate debtor, its employees, creditors, members and all central and state government authorities and other stakeholders ‘involved’ in the resolution plan. According to the rule of last antecedent [v], in a series when a qualifying factor such as the word ‘involved’ is used, then that qualifying factor is only applicable on the last antecedent in the list which would be ‘other stakeholders’ in this context. Thus the qualification of being ‘involved’ in the resolution plan would not apply to creditors and governmental authorities. The rule of last antecedent does not operate where a contrary intention appears from the statute [vi]. However, that does not seem to be the case, because scheme of the statute especially after the amendment of Section 31 and the insertion of Section 32A has been to ensure that all debts of the corporate debtor are accounted for in the resolution plan. Secondly, the carving out of the exception to the resolution plan being binding goes against the object of the IBC. The Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [vii] explained that one of the many objectives of the code is to provide the corporate debtor with a ‘fresh slate’ after the insolvency process. For this reason, the court explained that all claims, even disputed ones have to be accounted for within the resolution plan, or otherwise a resolution applicant would be faced with claims being filed against the corporate debtor even after the insolvency process, thus denying the ‘fresh slate’ to the corporate debtor. Further,, the Rajasthan High Court in Binani Cements Ltd. vs. Commissioner, Central Goods And Service Tax and Central Excise Commissionerate [viii] has also held that all claims against the corporate debtor before the initiation of the CIRP would be extinguished after the resolution plan is approved. Thus the Jharkhand High Court’s judgement carves an exception which would deny the corporate debtor a ‘fresh slate’, which militates against the object of the IBC. Thirdly, the NCLT in State Bank of India v. ARGL Ltd. [ix] while allowing for the admission of a claim of a tax authority observed that the tax dues payable by the corporate debtor would be reflected in its books of accounts which has to be handed over to the IRP who has to first prepare the list of the debts of the corporate debtor using the books of accounts and only then invite claims from the creditors. The NCLT noted that if this procedure is not followed, then the dues reflected in the books of accounts would be rendered meaningless. Thus the creation of an exception to the binding nature of the resolution plan for tax authorities is unnecessary since their dues are already present with the IRP and could be collated. Conclusion The judgement of the Jharkhand High Court seems to be attempting to correct the prejudice suffered by the tax authorities due to their claims not being admitted on account of contravention of provisions under the IBC by the IRP. Therefore, the actions of the IRP did lead to prejudice to the tax authority. But by creating an exception to the binding nature of the resolution plan, the judgement sets a dangerous precedent as it might become a tool for tax authorities and creditors to demand their dues even after the resolution plan has been approved because they were not involved in resolution plan on

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Saving Stressed Companies From The Cusp Of Insolvency: Examining The SEBI Consultation Paper On Pricing Of Preferential Issues And Exemption From Open Offers

Capital Markets and Securities Law /

[By Srishti Suresh] The author is a third-year student at NALSAR University of Law, Hyderabad. Background In light of the COVID-19 outbreak and its resultant economic lockdown, several companies are cash starved and are facing immense financial crunch. There exists an incumbent need to infuse funds into such stressed entities, to enable them to avoid insolvency and bankruptcy proceedings. Consequently, the securities market regulator SEBI, issued a Consultation Paper on April 22nd 2020, titled Pricing of Preferential Issues and Exemption from Open Offer for Acquisitions on Companies having Stressed Assets.[i] The same seeks to tweak certain provisions under the current SEBI Issue of Capital and Disclosure Requirements (“ICDR”) Regulations, 2018, and the SEBI Substantial Acquisition of Shares and Takeover (“SAST”) Regulations, 2011. The Changes Proposed by SEBI in Consultation with the Primary Market Advisory Committee (PMAC) in Contrast to the Present ICDR and SAST Regulations Three aspects of the original Preferential Allotment route are sought to be tweaked, in order to encourage more private investors to infuse funds into stressed companies. First, an objective-criteria for what constitutes a ‘stressed company’ is to be made clear. This is to ensure that companies and investors alike, are made aware of those companies that are in urgent need of funding. At present, neither of the two Regulations enunciate on the criteria for determining what a stressed company is. As a consequence, if a company satisfies two out of the three criteria specified hereinunder, the same would be considered a ‘stressed company’. They are – A listed company which has previously disclosed its defaults in payments of interest and repayment of the principal amount on loans taken from any bank or financial institution, as well as listed/ unlisted debt securities for two consequent quarters, in consonance with the SEBI Circular.[ii] If there exists an inter-creditor agreement with the company, in terms of the RBI Circular[iii], and/or Downgrading of credit rating of the listed instruments of such stressed company to “D”. Further, the securities regulator has acknowledged the burdensome nature of the existing norms of raising capital, which has proven itself to be more of an impediment, and has proposed the following changes to be introduced to the ICDR and SAST Regulations. Exemption from Pricing Norms Currently, Regulation 164 of the ICDR requires the pricing of equity shares of a listed company (allotted through the preferential route), to not be less than the average of the weekly high and low of the weighted average price of the said shares on the recognized stock exchange during the twenty-six weeks preceding the relevant date (for frequently trading entities), OR The average of weekly high and low of the volume weighted average prices of the quoted shares during the two weeks preceding the relevant date.[iv] The exemption proposes to narrow down the price determination to Regulation 164(b), basing it on the weighted average price of the preceding two weeks, applicable even to frequently trading companies. Ordinarily, the twenty-six-week period is said to determine the demand surge for an entity’s shares, and the pricing is therefore based on the said period. But owing to crashing markets and deterioration of performance of industries, the latency period would create a wide gap in the pricing of such shares. The price at the beginning of the twenty-six-week period, before its decline in the forthcoming weeks, is significantly higher than what an investor would have to pay on the basis of the preceding two-week period. If the earlier requirements are imposed as a hard-handed rule, investors investing in frequently trading stressed entities would have to pay more to acquire shares and voting rights, and the financial burden imposed on an investor would increase manifold. Therefore, restricting the price determination to the two-week weighted average would allow companies and investors to factor in economic changes caused due to the unforeseen circumstances and the gap would be reasonably constricted. This is a reasonable measure to attract investments. Exemption from Open Offer Requirements Regulation 3 read with Regulation 7(1) of the SAST requires an investor, who has acquired 25% or more of such shares or voting rights in a company, to make a public announcement of an open offer. The open offer made to the existing shareholders should aggregate to a minimum of 26% of the total shares of the target company. The open offer is sought to be waived off in the new proposal. It seeks to serve two purposes; First, the entity is restricted in allocating such shares to promoters and promoter groups. This is to ensure that newer more efficient management is roped into a cascading entity, without further entrenching the position of promoters. Resuscitation requires dynamism and innovation, and this is furthered by attracting investors motivated to hold substantial interest in a stressed entity. Second, imposing burdens of an open offer would prove counterproductive in attracting potential investors in saving the entity. This is primarily because the earlier requirement of open offer creates a substantial financial obligation on the investor, in addition to his fund infusion. This would discourage plenty of investors and defeat the purpose of saving stressed entities from the cusp of insolvency. The Discounted Factor The Consultation Paper is open to public comments, while being inclusive of present and potential investors. A point that SEBI and PMAC seem to have overlooked, is that a slew of companies that have begun to have Non-Performing Assets (“NPA”), are slowly treading into the trajectory of insolvency owing to the economic shutdown caused by COVID-19. Many do not fall under the ambit of ‘frequently trading’ entities. But the trend observed in the economy has indicated that several small/medium companies (listed) are heading towards severe capital starvation and a plausible bankruptcy. Therefore, it would be prudent in extending the proposed exemptions in the ICDR and SAST Regulations to companies that have not yet fallen under the banner of stressed entities. But this expansion across the board would prove to be a double-edged sword, and thereby requires precaution. On one hand, the waiver of the

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Supreme Court on the enforcement of foreign award: A move against the pro-enforcement trend?

Arbitration Law /

[By Shreya Choudhary] The author is a fifth-year student of ILS Law College, Pune. Introduction Section 48(2)(b) of the Arbitration and Conciliation Act, 1997 (“the Act”) provides that the enforcement of a foreign award may be refused if it is against the public policy of India. In the wake of various decisions of the Supreme Court and the High Courts, it is observed that the scope of interference in enforcement of foreign awards i very limited. In Renusagar Power Co. Ltd. v. General Electric Co.[i] (“Renusagar”), the Apex Court narrowed the scope of public policy and held than a foreign award would be against public policy if its enforcement is contrary to “(i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality”[ii]. Though Renusagar interpreted public policy in realm of the erstwhile Foreign Awards (Recognition and Enforcement) Act, 1961 (“Foreign Awards Act”), it holds relevance till date as it finds its place under section 48(2)(b) of the Act. The pro-enforcement approach has been recognised by the Apex Court in Ssangyong Engineering & Construction Co. v. National Highways Authority of India[iii]. While dealing with a domestic award, the Court observed that the ground of “public policy” should not be exploited and widely construed to unduly interfere in both domestic and foreign awards. Following the trend, the Apex Court, recently in Vijay Karia v. Prysmian Cavi E Sistemi SRL[iv] (“Vijay Karia”), upheld the pro-enforcement bias to rule that the grounds provided to challenge enforcement are extremely limited to not include re-interpretation of the arbitration agreement between the parties. Further, it upheld Delhi High Court’s reasoning in Cruz City 1 Mauritius Holdings v Unitech Limited[v] and observed that mere contravention of an enactment would not mean contravention of the fundamental policy of Indian law. This clarified the judicial and the legislative intent in enforcing foreign awards and restricting the grounds on which their enforcement can be challenged. Recently, the Supreme Court in National Agricultural Cooperative Marketing Federation of India (“NAFED”) v Alimenta S.A[vi] seemed to digress from the pro-enforcement trend to allow the challenge to the foreign award in favour of Alimenta on the ground of public policy. Factual Background NAFED entered into a contract with Alimenta for the supply of 5000 metric tonnes of Indian HPS groundnut (“commodity”) to be shipped in August-September 1980. Due to damage caused to crop by cyclone in Saurashtra region, only 1900 metric tonnes of commodity could be shipped. Clause 14 of the contract provided for force majeure and prohibition of export by law or executive order amounting to cancellation of the contract. Two addendums were added to the agreement, one of them stipulating that the shipment period for remaining 3100 metric tonnes of commodity shall be November-December 1980. To effect this change, NAFED sought permission of the Government but was refused on account of price escalation, restricted export policy and quota-ceiling. Hence, NAFED failed in executing the remaining part of the contract. Aggrieved by NAFED’s default, Alimenta invoked arbitration before the Federation of Oil, Seeds and Fats Associations Ltd. (“FOSFA”) and got the award in its favour. Alimenta sought enforcement of the initial and the appellate award under the Foreign Awards Act before the Delhi High Court upon which it was held that it was enforceable. NAFED challenged the enforcement of the award before the Supreme Court. Judgment of the Supreme Court The Supreme Court found the case within section 32 of the Indian Contract Act, 1872 as the contract itself envisaged contingencies, the happening of which would render the contract cancelled. Appreciating Clause 14 of the contract, the Court noted that NAFED’s stance in not supplying the remaining commodity owing to Government’s restrictions and the Export Control Order was justified. Additionally, the Court relied upon the Renusagar test of the fundamental policy of Indian law. It observed that the performance of the contract upon express prohibition by the Government would contravene the public policy relating to export that mandated Government sanction. Therefore, the Court held that the award in favour of Alimenta was unenforceable. Critical Analysis of the Judgment The Apex Court, deflecting from the pro-enforcement trend, prima facie broadened the scope of public policy by allowing challenge to the foreign award and holding it unenforceable. The problem, however, does not rest with the change brought about by the judgment. The primary reservation lies in the way the Court has looked into the matter. It is settled law that the arbitrator looks into the merits of the case, and the Court interferes limitedly only if such interpretation shocks the conscience of the court or if it suffers from procedural irregularities. The interference by Court, however, does not entail a review on the merits of the contested dispute. In the instant case, the Apex Court reviewed the award on merits and delved into the terms of the contract between NAFED and Alimenta to base its decision upon the liabilities of the parties under the contingent contract and against enforcement of the award. Moreover, the Court did not follow the precedent set out in Vijay Karia wherein it was observed that merely breach of an enactment/principle will not amount to contravention of the fundamental policy, unless the law so breached is intrinsic/basic to Indian law. The Court rested its views based on an inarticulate premise that the Government’s permission for export is a fundamental public policy of India. It failed to clarify and reason out whether the permission was core to India’s public policy that could not be compromised or whether the permission amounted to a mere contravention of law. The law in the instant case seems to raise suspicion because the Court’s response seems unclear and flawed with regard to certain facts. The arbitrator was appointed by FOSFA in gross violation of the High Court’s restraint order. Secondly, contrary to procedural rules and standards, the arbitrator of Alimenta defended the first award in its favour as an Advocate before the Board of Appeal. Additionally, the Board of Appeal

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Revisiting the Competition Regulations for Big Data Based Economy

Competition Law, Contemporary Issues /

[Parth Tyagi and Achyutam S. Bhatnagar] The authors are third year students of the National Law Institute University, Bhopal and National Law University, Odisha respectively. Introduction In the month of April, social media giant Facebook invested over 40,000 crores, for a 9.9% stake in Jio Platforms, a unit of Reliance Industries[i]. The transaction brewed up the concerns for the possible abuse of data at the hand of these behemoths. The transaction stirred up the debate upon the lack of authority of the Competition Commission of India (“CCI”) in tackling big data-driven mergers. The article aims at addressing the inefficiencies in the current Competition act, by first defining what big data is, and how can big data give a competitive edge, following up with a discussion on the lacunas in the current merger standards. The last part of the article will lay out the different ways in which the current regulatory standards can be improved so as to cover big data-driven mergers. Big Data and its competitive advantage Big data is generally defined as ‘high-volume, high-velocity and high-variety information assets that determine cost-effective, innovative forms of information processing for enhanced insight and decision-making’.[ii] The potential misuse of data arises from such algorithmic use of datasets which the competitors in the market would not be able to duplicate. This leads to exclusivity of data, which is used to specifically target customers, who are more likely to use the company’s product/services. A perfect example of the possible abuse of the data obtained post-merger is the Google-Double Click[iii]merger. Regulatory gaps regarding data-driven mergers Section 5 and 6 of the Competition Act 2002 (“the Act”) read together, are the regulating provisions of combinations in the market. While Section 5 of the Act defines combinations, Section 6 of the Act provides for regulations of such combinations. However, Section 6 is applicable only to combinations in Section 5 of the Act, which means that CCI does not have the regulatory powers to review all kinds of combinations. Section 5 prescribes certain thresholds in terms of assets and turnovers to term certain mergers and acquisitions as combinations. The primary disability comes to light when data-driven mergers are on the rise in India. This is because big data is not considered as an asset in India, and digital companies tend not to have high turnover due to the provision of free services[iv]thus the scrutiny by the regulator is bypassed. The turnover based exemption is also a threat to privacy[v]. The acquisition of WhatsApp by Facebook is a good example[vi], wherein despite having a worldwide customer base, the acquisition eluded the CCI, while the acquisition met jurisdictional requirements in other countries and was reviewed.[vii] The traditional tools of analysis while have worked out so far[viii], but the digital economy is dynamic and a company with a huge data backing can effectively prevent the entry of new entrants in the market. Way forward Considering data as an asset Big Data in the present markets is undeniably an asset and one of the main reasons of investments, mergers and acquisitions. The future lies in data valuation programmes that can be performed which provide the framework for businesses to monetize, measure and manage information as an actual asset[ix] or through the application of infonomics.[x]      2. Introduction of alternate parameters The idea of novel parameters such as the value of transaction or deal size, which is also under consideration by CCI.[xi] The same was a key observation in the report[xii] of the Competition Law Review Committee. Additionally, network effects and control over consumers’ data prima facie appear to be sensible parameters.[xiii] The concept of big data also involves deliberations over privacy concerns, and what the authors view as a whole other debate. Competition concerns are related to privacy, but at the same time, the regulation of both cannot be a concern for a single body. Privacy in the competitive assessment muddles the goal of competition enforcement.[xiv] Adopting foreign competition regulations to tackle the Big Data-driven mergers The issue of tackling big data-driven mergers has plagued numerous countries and in response, there have been certain regulatory changes made by some countries. This section discusses the new regulatory norms for curbing big data-driven mergers adopted/proposed in different countries, which can be used to change the current regulatory standards in India. Redefining the relevant market or lowering the notification threshold The German federal cartel office, the national completion regulator of Germany, in taking a step towards combating the data-driven mergers,[xv] redefined the meaning of relevant market under section 18(2a) of the German Competition Act. The new provision tackles the free services offered by the digital platforms wherein it states that “the assumption of a market shall not be invalidated by the fact that a good or service is provided free of charge”.[xvi]  The competition regulator also added a new lower threshold for notification of merger under section 35(1)(a) of the Act. This resulted in the competition regulator being notified about the takeover of small companies by large platforms. Shifting the burden of notifying the Competition Regulator on the parties The competition act of Singapore under Section 55A(3), places the burden of notifying the competition regulator of a merger on the parties. The parties are to assess whether their merger has the potential of disrupting the competition in the future, and on the basis of this, they may or may not notify the competition regulator. If the parties do not notify the competition regulator of their merger, and subsequently the merger hampers the competition, then the competition regulator has the authority to take the appropriate action in order to restore market contestability. The provision invalidated the Grab-Uber[xvii] merger, wherein the merged entity had the potential of controlling 90% app-based taxi market. Applying the Public Interest Test A report by the House of Lords communications select committee[xviii]in 2019, recommended the adoption of a public interest test for determining the validity of the data-driven mergers. The committee suggested that such a test should be included in the

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