Author name: CBCL

The NPA Conundrum: Evaluating the Bad Bank Approach

Leave a Comment / 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

Leave a Comment / 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

1 Comment / 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?

Leave a Comment / 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

1 Comment / 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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Extension of Liability in Group Insolvency Proceedings

Leave a Comment / Insolvency Law /

[By Ananya HS] The author is a third year student of the National Law School of India University, Bangalore. Background A significant proportion of Indian businesses are fundamentally structured as group enterprises operating as a single economic unit. These enterprises commonly engage in related party transactions in the nature of cross-collateralization, inter-corporate loans, and so on. These enterprises largely adhere to the concept of separate legal personality of group entities, but precedent suggests that the close linkage between different units of an enterprise in the areas of operation, business and management go on to raise unique challenges especially, when individual group entities become insolvent. Additionally, there are concerns of directors of the parent company in an enterprise exercising control over the subsidiaries, leading to further complications in the ascertainment of liability if a single entity approach is adopted. In certain enterprise groups, the parent company may also be deemed to be the director of the subsidiary.[i] The Insolvency and Bankruptcy Board of India (“IBBI”), in 2019, constituted a Working Group (“WG”) to prepare a report (“WG Report”),[ii] seeking recommendations for the introduction of a group insolvency framework. This step was taken in light of the various recent cases[iii] involving collective defaults and collapse of entire groups. The importance of considering unrecognised factors such as the position of a subsidiary in the group or the degree of integration between the companies, among other things, during insolvency resolution has also been acknowledged in this stead. The WG Report consists of a number of recommendations for amending the Insolvency and Bankruptcy Code, 2016 (“IBC”) in order to equip it to deal with the insolvency of conglomerates and groups. Among various suggestions, the WG categorically recommended that the IBC need not be amended to extend liability to parent companies or its directors in case of group insolvency proceedings. This piece argues that the recommendation of the Working Group against the extension of liability to directors of the parent company in case of group insolvency proceedings must not be a blanket one, and stresses the importance of lifting the corporate veil in this regard in certain situations involving group insolvencies. Observations of the Working Group – Problems and Inconsistencies The WG, in its report, has discussed the aspect of extension of liability at length, and several stakeholders seem to have indicated to the WG that there may be multiple cases where a need to hold the parent company and its directors liable may arise. This could be in the case of fraud, fund diversion, mismanagement of debtor, wrongful trading, or upon finding that the directors of the parent company were a shadow or de facto directors of the subsidiary company. The WG stated that the underlying purpose behind extending liability in such a manner is to pre-emptively deter perverse behaviour, and came to the conclusion that currently, the IBC is sufficiently equipped to deal with such behaviour by companies. This questionable conclusion was arrived at by examining the definition of “officer” of a company under the IBC, borrowed from Section 2(60) of the Companies Act, 2013, which encompasses a wide definition of who an officer in default is, and includes within its purview, shadow and de facto directors. The applicability of this definition to Chapter VII of Part II of the IBC, to hold such officers liable for the specified activities was deemed to be a sufficient ex-ante deterrent, leading to the abovementioned conclusion of the WG.[iv] The WG Report also fails to acknowledge another problem that exists in determining the liability of an individual appointed as a director in more than one of the subsidiary companies. If one director is slated to oversee the management of one or more subsidiaries, and of the group as a whole, conflicts of interest are bound to arise eventually, and such conflict may relate to incidence of control and ownership as well.[v] The WG has failed to supply substantial justification as to why it has provided a recommendation contrary to the opinions of stakeholders as well as established law in other jurisdictions. The UNCITRAL Guide on Insolvency Law (“Guide”) contains a list of circumstances where liability may, in fact, extend to directors of the holding company. The Guide also states that a mere incidence of control or domination of one member by another member will not serve as a ground for extension, and the WG Report uses it in order to support its recommendation. However, it is to be noted that the same is perfectly aligned with the argument of extending liability only in cases where there is a direct correlation between the working of the parent company and the insolvency of its subsidiary. The Guide provides for some indicative factors on which extension of liability can be based, including grievous negligence in the management of the subsidiary, breach of duty of care or diligence in management by the parent company, abuse of managerial power, or any direct causal link between the manner of management of the subsidiary and its subsequent insolvency.[vi] These grounds are beyond the purview of the provisions of the IBC, and cannot be classified as extraordinary circumstances, which would be dealt with by courts as and when they arise. Lifting the Corporate Veil – The Single Economic Unit Argument One of the key issues faced by group insolvency is the dichotomy that exists between effectuating the economic reality of an integrated business functioning through the establishment of subsidiaries, thus referring to the corporate group as a unit, or adhering strictly to the corporate form and treating each subsidiary as a separate legal entity. In situations like this, concerning subsidiary companies working within a single corporate group, an argument of a single economic unit can be made for the lifting of the corporate veil. This argument is based on the fact that subsidiary companies generally constitute a single unit for economic purposes, regardless of their separate legal personalities within the group, and must, therefore, be seen as a single legal unit.[vii]  Since all the

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Assessing the Competition Law Impact of Platform Price Parity Agreements

1 Comment / Competition Law /

[Deepti Pandey and Sushant Singh] The authors are fourth year students of WBNUJS, Kolkata. Introduction The global increase in the foothold of the online platforms has considerably accelerated leading to a significant share in the relevant market.[i] The areas where these businesses have flourished in India include food delivery services, hotel and travel bookings, cab services and delivery of products through e-retail inter alia.[ii] On one hand, it has contributed to convenience and market efficiencies.[iii] On the other hand, it has raised eyebrows of the regulatory authorities across jurisdictions specifically in relation to the Price Parity agreements.[iv] In particular, these have tremendously impacted the competition which is why several cases have emerged in Germany, the European Union and India among others challenging the cartelization, abuse of dominance and anti-competition.[v] A commonly accepted definition of price parity agreement (also known as ‘Across Platform Parity Agreement’[vi] or ‘Most Favoured Nation Agreement’) is an agreement between a service provider and an intermediary where the service provider guarantees to abide by a minimum price threshold while selling its own product or service to any other intermediary.[vii] It essentially provides an assurance to the intermediary who is a party to the agreement that he/she is offered the terms at least as favourable as other intermediaries.[viii] Depending upon the intensity of the containment/restraint, such agreements can be classified as ‘wide’ (here, restraint applies to other channels – both online and offline) or ‘narrow’ (here, the restriction applies to the extent of service provider’s own website).[ix] There is a difference in approaches as regards the two forms of price parity agreements across jurisdictions. While there is some degree of unanimity regarding invalidating wide price parity clauses, certain jurisdictions do confer validity to narrow price parity agreement.[x] The controversy regarding their validity has become crucial particularly from India’s standpoint especially after the release of the 2020 Report on E-Commerce (“Report”) where the Competition Commission of India (“CCI”) has vaguely referred to the competition crisis by the price parity agreements while refraining from their categorical invalidation. The concerns are intensively hiked in light of the increased cases filed particularly against online hotel booking sectors wherein the CCI has to step in and conduct the analysis on abuse of dominance.[xi] In this backdrop, this article seeks to analyze the validity of the price parity agreements and their effect on competition. Price parity agreements and their relevance in online intermediation  The primary motive for adopting these clauses as identified by the CCI is to preclude free-riding (a practice that allows the sellers/service providers to freely exploit the labour of online platform operators for gravitating customers otherwise available at cheaper alternative prices). In certain way, it may foster innovation in the online services catering greater to the demand side and thereby expands the consumer base.[xii] In marketing terms, it should be viewed as an incentive provided for the marketing services of online channels. These channels in various instances help drive the prices for the goods/services.[xiii] The market and promotion advantage furthers the objective of the sellers/service providers to give in to the price parity agreements.[xiv] Various sectors (especially the hotel industry) have realized that there is a great potential in online platforms to integrate the consumer demands into a framework for tailorized services as well as to cater appropriately to the consumer perception regarding a steady and stable pricing.[xv] The enhanced information symmetry coupled with more innovative means to cater to the consumers helps the demand side which in turn creates returns for the supply side leading to the growth of the concerned sector.[xvi] India’s contribution to the jurisprudence on price parity in e-commerce  An attempt to provide an understanding on how the Competition Act, 2002 (“the Act”) regulates price parity agreements is made by the CCI. Based on the given Report, it appears that there is no clear cut response given to the status of price parity agreement and they are subject to a fact-specific inquiry which is grounded upon the factors under Section 3 and 4 of the Act. The rationale for according this uncertainty is evident from paragraph 93-95 of the Report where the CCI discusses both the pros and cons of price parity and seeks to arrive at a balancing approach. So far so good: The MakeMyTrip case and a Vigilant CCI Not all the cases involving the online intermediaries are impugnable. A dominant market is required to be proven and a case shall lie under Section 3 or Section 4 of the Act. A detailed analysis is required to ascertain whether the agreement has the effect of causing appreciable adverse effect on competition or is creating a dominant market. However, the subject-matter has recently come into the foray due to which there is not enough jurisprudence and judicial precedence. The two cases cumulatively discussed hereunder are the CCI’s analysis of the price parity agreement between hotel chains and online booking platform with reference to Section 3(4) and 4 of the Act. The first case is the In Re: Rubtub Solutions Pvt. Ltd. and MakeMyTrip case (“MMT”). In the given case, MMT entered into a chain agreement containing price parity clause with Treebo Hotels. This agreement is challenged by Treebo as an infringement of Section 3(4) and Section 4(2)(a)(ii) of the Act. In its analysis, CCI relied on the previous case – In Re: FHRAI and OYO (“OYO”). The OYO case involves allegation against the MMT for abuse of dominance on various factors – one such is the wide price parity clause it entered into with hotel companies. While ascertaining the abuse of dominance,  the CCI closely peruses the following factors:- 100% acquisition of Ibibo Group Holdings by the MMT, annual growth of the MMT in past three years, the MMT’s market share post the acquisition (around 63%). Based on these factors, it infers a prima facie abuse of dominance. It further reaffirms that the price parity agreement is wide in nature. This, in the opinion of the CCI, causes a repulsive effect by acting as a

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Decriminalization of Corporate Offences: An Unjust Amendment?

Leave a Comment / Company Law /

[Shagun Singhal] The author is a second year student of National Law Institute University, Bhopal and a member of CBCL. Background Recently in March 2020, the Union Cabinet approved certain amendments (“Companies Act Amendment, 2020” or “the Amendment”) put forth by the Injeti Srinivas Committee (“the Committee”) in November 2019 (“Srinivas Committee Report, November 2019”). The Srinivas Committee Report built upon another report that had been submitted by the same Committee in August 2018 (“Srinivas Committee Report, August 2018”) which was formed to review offences under the Companies Act, 2013 (“the Act”). Among the other recommendations, the Committee suggested decriminalization of minor offences involving either procedural or technical lapses under the Act.[i] The objective behind the inclusion of these amendments is to unburden the National Company Law Tribunals (“NCLT”) by decreasing the amount of cases concerning minor offences directed towards them; and thereby facilitating ease of doing business in India. For doing so, two main propositions were suggested. First, include an in-house adjudication mechanism with regional directors presiding over them and Second, lay down the plan of compounding minor offences from fines or imprisonments to penalties.[ii] This blog post focuses on the second proposition and analyses the disadvantages of imposing fixed penalties. It further lays down certain suggestions by which the amendment can be implemented without any pit-falls. Difference between ‘Fine’ and ‘Penalty’ Fines and penalties are often used interchangeably; however, the two are altogether different concepts. While the former (i.e. fines) are imposed when a petition is filed in a court of law, the latter can be imposed by any authority, not necessarily a court or tribunal, when any law, rule or regulation is broken.[iii] Penalties are usually fixed, whereas fines have a range. Referring to the current scenario, this can be explained through an example. Under the pre-amended Companies Act, 2013, cases of non-filing of resolutions and agreements by a company would cost them a fine ranging between 5,00,000 to 25,00,000 INR.[iv] However, after the 2020 Amendment, non-violation of the same compliance would directly lead to an imposition of a fixed penalty of 1,00,000 INR by a Regional Director (“RD”) under the Ministry of Corporate Affairs (“MCA”). Moreover, repeated contravention of the same would lead to an additional penalty of 500 INR per day up to the limit of 25,00,000 INR.[v] Drawbacks of the Amendments It is pertinent to refer to the case of Adamji Umar Dalal v. the State of Bombay,[vi] wherein the Hon’ble Supreme Court of India held that circumstances related to an event should be taken into account while deciding a certain penalty for a particular offence. If not, there can be cases with exceptional circumstances, which if not considered would lead to an excessive penalty being imposed, thereby causing irreparable harm to the person. Thus, the author contends that the imposition of ‘fixed’ penalties by regional directors might have certain drawbacks, as elaborated below. 1. Fixed monetary penalties are biased towards companies with large turnovers It is well established that different companies have different turnovers, from anywhere between 50 thousand to 50 thousand crores.  Hence, the imposition of fixed penalties for all companies can have varied consequences on them, as for some, it may cost them their entire annual earnings and for the others, it shall only serve as a “fee” to earn their desired profits. A penalty can only be effective if it carries the repercussions of “punishment” for committing a particular offence. This can be understood by the following example; if a company has an annual turnover of 1 crore INR, a penalty of 50,000 INR would have no value to them, in fact, if the particular offence leads to a profit of 20 lakhs, it shall only act as a ‘fee’ to earn the desired profit. However, the same penalty shall lead to overspilling for companies with lesser turnovers who shall face chronic cash shortages and hence leave them with no incentives to save the firm. Moreover, the penalties for repeated offenders also remain fixed, thereby incentivizing the large firms to plan their ‘fines’ beforehand for their desired profits. Furthermore, as held in the Adamji case, there can be exceptional situations influenced by external circumstances which lead to the causation of an offence. In such cases, small companies shall suffer huge financial losses for no fault of their own. Hence, it is of paramount importance to take into consideration the turnovers of companies while deciding the penalties rather than fixing one for all regardless of their size. 2. Penalties directed towards a ‘company’ fails to distinguish between the lawbreaker and the innocent victim The principle of a company being a distinct legal entity from its shareholders, promoters and directors was originated by the English Court in the case of Saloman v. Saloman and it has been followed by the Indian courts ever since.[vii] This principle reinstates that a company is an artificial ‘person’ and can hold its own assets, make deals etc. In spite of the incorporation of this principle, the fact that it is run by an association of persons who are its real beneficiaries cannot be disregarded.[viii] In several instances, these beneficiaries driven out of their own underlying motive commit offences to gain a larger profit. In order to ensure that they do not hide behind a company’s envelope and face appropriate punishments, the doctrine of “lifting of corporate veil” was introduced which affirmed holding the corporate personalities liable instead of the companies itself. The current amendment riddles with this concept as it imposes liabilities on companies along with the officers. For example, if a company defaults in filing the return of allotment within a prescribed period the ‘company’ along with its promoters and directors are liable to pay a penalty of 10,000 INR. Moreover, disregard of this doctrine by the imposition of a fixed penalty towards a ‘company’ directly targets the value of shares, the economic brunt of which has to be borne by the innocent shareholders. It might be argued that the shareholders, while buying stocks

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Sensing Fears, Shifting Gears: Did the RBI Steer in the Wrong Way?

Leave a Comment / Banking Law /

[By Ujjwal Jain] The author is a third year student of Tamil Nadu National Law University. One of the most important functions of any central bank is to formulate and execute monetary policy. In our case, the Reserve Bank of India (“RBI/Bank”), the banking regulator and India’s central bank, is statutorily entrusted with this responsibility.[i] Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to primarily achieve the goals of price stability, which is a precondition for sustainable growth. Some of the monetary instruments include repo rate and reverse repo rate[ii] and they influence the cost and availability of money in the economy.[iii] The RBI had recently (in April 2020) reduced the reverse Repo Rate without convening and consulting the Monetary Policy Committee. The author analyses the statutory prescriptions which the RBI has violated in doing so and contemplates for a possible solution. Legal Background The preamble of the RBI Act, 1934 (“RBI Act”) enunciates that the rationale for constituting the central bank is to secure monetary stability in India, secured by way of monetary policy.  As macroeconomic conditions change, a central bank may change the rates of the instruments in its monetary policy. Until 2016, a Technical Advisory Committee consisting of the Governor, Deputy Governor, and advised by external advisors would decide on the rates of various instruments. Notably, the decision(s) of the advisors were not binding on the RBI and the Governor’s decision was final. In 2016, Chapter III-F was inserted[iv] in the RBI Act by way of an amendment and a Monetary Policy Committee (“MPC”) was constituted (“2016 Amendment”).[v] The 6-member Committee was entrusted with the responsibility to determine the policy rate[vi] and its decision(s) were made binding upon the RBI.[vii] The reason for coming up with MPC can be traced to the Report of an Expert Committee[viii] which took cognizance of the ‘monopoly power’ in deciding the monetary policy and batted for communication and transparency in the monetary policy framework. It is believed that democratic societies require public institutions to be accountable.[ix] The Financial Sector Legislative Reform Commission in its Report submitted to the Ministry of Finance in March, 2013, had also echoed the same tone. It had flagged concerns of autonomy and independence and posited that achieving independence of a central bank requires appropriate institutional design and thus, recommended constituting MPC.[x] Notably, in the time before the constitution of the MPC, the Governor of the RBI was vested with enormous powers and the 2016 Amendment strived to overcome this shortcoming; thus, ensuring no abuse of power. It is noteworthy that the MPC framework is structured in such a manner that autonomy and independence of the Committee are vouchsafed. For instance, though the Central Government can “convey its views” to the MPC[xi], but the same has not been made binding upon the MPC’s or the RBI’s decision. The modus operandi of management of the RBI is enshrined in Section 7(2) of the RBI Act, which states that: “..the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.” Clearly, only with the exception to the monetary policy, the Central Board of the RBI is entrusted with over-arching powers. Do lofty ideals justify faux measures? The RBI (as prescribed[xii] in Chapter III-F, 1934 Act) convenes MPC meeting and decides upon the rates of various monetary policy instruments. The Secretary of the MPC releases the policy resolution & statement and the minutes of the MPC meeting in the manner prescribed. The RBI is then, under Section 45 –ZJ of the RBI Act, mandated to take steps to implement the decision of the MPC. Surprisingly, in April 2020, the RBI had suo moto reduced the reverse repo rate under the Liquidity Adjustment Facility (LAF) without convening & consulting the MPC. Due to the Covid-19 pandemic, which is having a cascading effect on liquidity in the market, though the above move seems to be a much-needed one, it raises eyebrows as the RBI has patently transgressed the statutory prescription by not consulting MPC. Furthermore, Regulation 5(b) of the MPC Regulations, 2016 prescribe ‘ordinarily’, 15 days’ notice should be given to the members of the MPC to convene a meeting, the Regulations also allow flexibility to convene an “emergency meeting” by giving “a 24 hours’ notice” to every member “to enable him/her to attend, with technology-enabled arrangements.”[xiii] Despite a framework which gives such great latitude that it can convene an ‘emergency meeting’, if the exigency of a situation so demands, the RBI has gone ahead and tinkered with the rates without taking MPC into confidence, thus disregarding the mandate of the RBI Act. The April 17th Notification declares the reduction of reverse repo rate in the following words:  “it has been decided to reduce the fixed-rate reverse repo rate under the LAF by 25 basis points from 4.0% to 3.75% with immediate effect. It is unclear from the statement of the RBI Governor on how the decision was reached. Ironically, the Governor concludes his statement with the following words: “…without infringing in any way on the mandate of the MPC”, but by what it has done it has committed a “regulatory overreach” and the same is ex facie contra legem, therefore, takes us back to the pre-MPC times. Can the RBI’s move be justified? At this juncture one might argue that the RBI, by virtue of the Banking Regulation Act, 1949, has been vested with the powers to issue directions to banking companies “in the public interest and in the interest of banking policy” and is also empowered to “control advances by banking companies” and every banking company shall be bound to comply with such direction(s).[xiv] This read with Section 17(15-A)[xv] of the RBI Act [which provides for the RBI to perform its duties enshrined under the RBI Act

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