Author name: CBCL

Building a Case for Digital Financing in India

Leave a Comment / Contemporary Issues /

[By Shivam Tripathi] The author is a fourth year student of Maharashtra National Law University, Nagpur. The global payments landscape is under fundamental transformation and India is no exception to this. The Reserve Bank of India (“RBI”) notified the 2020 guidelines[i] governing Payment Aggregators (“PA”) and Payment Gateways (“PG”) (“Guidelines”). PA is a service provider through which merchants can process their payment transactions, and PG provides the technical support for securely transferring money from the customer bank account to the merchants’ payment portal. In the process, both PA and PG act as intermediaries facilitating online payment methods. Under the existing regime governed by Directions for Opening and Operation of Accounts and Settlement of Payments for Electronic Payment Transactions involving Intermediaries, 2009[ii] (“2009 Direction”) the intermediaries have to maintain a nodal account, in the form of an internal account, thus both PA and PG were not being directly governed by the RBI. The Guidelines recently issued by the RBI provide structure to regulate every activity of the PA, along with recommendations regarding the maintenance of online data security of the customers. Key Takeaways from the Guidelines The Guidelines adopt a licensing method, under which no PA will be allowed to operate without prior authorization by the RBI. The key takeaway of these Guidelines is that firstly it define PA[iii] and PG[iv] as the 2009 Directions only recognised the intermediary as a whole. Secondly any e-commerce marketplace providing services that are covered under the definition of PA are to be separated from the marketplace. Thirdly every PA seeking authorization under the Guidelines must be a registered company under the Companies Act 1956/2013. Fourthly banks providing PA services as a part of the normal banking services need not acquire separate authorization and lastly all the entities governed under the Guidelines are to be managed professionally and are required to maintain an escrow account with one of the scheduled commercial banks. Additionally, all the entities must maintain a customer grievance redressal and dispute management framework. The Guidelines do not regulate the functioning of PG, however, they do provide for the protection of consumer information. The Guidelines are a welcome step as they bring intermediary payment platforms under the direct control of RBI.[v] However certain steps taken under the Guidelines might act as roadblocks rather than furthering effective implementation. Regulating the Payment Gateway The Guidelines distinguish between PA and PG, which leaves a chunk of entities outside the ambit of the Guidelines. Instead, the Guidelines should incorporate a method under which payment services[vi] are regulated. A similar method is adopted by Singapore[vii] and the European Union.[viii] FAQ[ix] of the Payment Service Act, 2019 (Singapore) states that the scope of the Act also includes payment gateways. The European Union under the Payment Service Directive (“the EU Directives”) also adopts a similar approach[x]. Such an approach enables the government to adopt a more comprehensive regulatory mechanism. However, in both these cases, an exception is carved out for entities providing purely technical support, for instance, privacy protection services, data processing services, communication network services, etc. Whether registration under the Companies Act, 1956/2013 is necessary? The Guidelines require any entity applying for a license/authorization to operate as PA, to be a registered company under the Companies Act 1956/2013,[xi], and the MOA of such a company should specify the proposed activity of operating as a PA. Such an approach acts as an impediment in attracting international payment services providers in India. Looking at foreign jurisdictions, Singapore has a similar requirement under the Payment Services Act. However the FAQ’s released under the Payment Service Act, 2019 state that both local and foreign companies are permitted to apply for a licence under the legislative framework.[xii] On the other hand, the European Union Payment Services Directives do not contain any such requirement at all. Third-Party Payment Service providers The Guidelines leave a gap as to the regulations imposed on the third party payment service providers which included payment initiation and account information services. These services providers access the customer’s security details through online banking, but as there is no legal framework governing third-party service providers, issues like breach of privacy may arise. Under the EU Directives, third party payment services are also included. The Directives state that these providers will be governed by the same rules as the other online payment service provider, i.e. registration, licensing, and supervision by the competent authorities.[xiii] Furthermore the EU Directives also state that the banks have the duty to establish a safe and secure communication channel for transmission of data.[xiv] The Banks will also be liable for maintaining the accounts and ensuring that there is no delay or incorrect payments. Additionally, to prevent leakage of any sensitive data, the EU Directive mandates that the third-party service provider, should ensure that the information regarding the payment shall only be conveyed to the recipient and to no other party, furthermore no sensitive data can be stored. Approach for revised regulations With the ever-evolving technology, the traditional approach of “one size fits all” fails. Instead, the regulators should come up with a new innovative approach to regulate the payment service sector. For instance, the current regime focuses on the design of the entity, i.e. whether the entity is a payment aggregator or a payment gateway. To determine the applicability of the Guidelines, instead the regulators should focus on the performance standards. Performance standards specify an outcome, but leave the specific measures to achieve the outcome to the discretion of the regulated entity. Performance standards can better account for changes in the practices of regulated entities, empower innovation in compliance methods, and incentivize the developments that are occurring in the industry while ensuring that the regulatory goal is achieved. Traditionally, policymakers used to face certain issues while implementing performance standards, because earlier it was very difficult to test how the goal is met, owing to the information gap between the regulators and the industry. Additionally, regulators attempting to implement classical performance standards lacked the technical knowledge to be able to measure, monitor,

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Practical Issues in Conducting Virtual Meetings of Shareholders: A Case for Co-operation versus Activism

Leave a Comment / Company Law /

[By Gaurav Pingle] The author is a practicing Company Secretary. Corporate governance has always emphasized on building an environment of trust, transparency, and accountability necessary for fostering long-term investment, financial stability, and business integrity. This in turn contributes to supporting stronger growth and more inclusive participation of stakeholders, required especially when the global economy is badly hit due to the COVID-19 pandemic. From the perspective of accountability and transparency, it is desirable that there is regular communication between a company’s management and its shareholders. MCA unveils framework for virtual general meeting An integral aspect of corporate governance is to ensure that owners (i.e. shareholders, in case of companies) should have a right to participate in, and to be sufficiently informed of, decisions concerning fundamental corporate changes. The owners should also have an opportunity to participate effectively and vote in the general meetings. Taking into consideration the critical situation of COVID-19 and nation-wide lockdown where gathering of shareholders physically looks impossible, the Ministry of Corporate Affairs (“MCA”) has unveiled a framework for companies to conduct shareholders’ meeting through video-conferencing (VC) or other audio-visual means taking into consideration the aforementioned important aspects of corporate governance. MCA, through its several circulars and clarifications[i], has prescribed a procedure for conducting shareholders meetings and thereby obtaining their approval. Sending of Financial Statements to shareholders In case of an Annual General Meeting (“AGM”), companies are required to send the financial statements, Auditor’s Report, Directors’ Report to its members. Until now, the companies were sending it by registered post or courier. Owing to the difficulties due to COVID-19 pandemic, where courier services have been suspended owing to the nationwide lockdown, MCA has allowed companies to send the said documents by e-mail to the registered e-mail addresses of the shareholders. One of the major challenges for listed companies is communicating with its shareholders and getting their e-mail addresses registered. In most of the cases, the members are either not traceable or contact details are not updated. Taking into consideration such practical difficulties but at the same time ensuring effective participation, the depositories and registrars are also assisting listed companies in co-ordinating with the shareholders. Listed companies are ensuring that all the shareholders are served with the notice of general meeting. However, it is important to note that under Section 101 of the Companies Act, 2013 (“the Act”) any accidental omission to give notice to, or the non-receipt of such notice by any member shall not invalidate the proceedings of the meeting. MCA has also directed listed companies to publish notice by way of advertisement in two newspapers (preferably having electronic editions) and are also required to disclose necessary information of the AGM through video conference. Voting at general meeting conducted via video-conferencing According to the Securities and Exchange Board of India’s (“SEBI”) principles governing disclosures and obligations of listed entity, shareholders shall be informed of the rules, including voting procedures that govern general shareholder meetings. The shareholders have an opportunity to ask questions to the board of directors, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations. With this objective, the MCA has directed companies to ensure that such meetings of shareholders are conducted by two-way teleconferencing or Webex with a minimum capacity of at least 1,000 members to participate on a first-come-first-served basis. It would be a herculean task for listed companies in conducting such meetings of shareholders, especially, for the companies whose operations are largely affected by COVID-19. Presently, companies and market intermediaries are developing an online system or platform to ensure that such proceedings of the AGMs are in the proper flow and at the same time shareholders are able to propose resolution(s) and ask questions. A secured system needs to be developed wherein the shareholder can ask questions/counter-questions in the general meeting for a limited time and company management provides their response to the same. The Chairman of the company would also need technical assistance in conducting the AGM through VC. The Chairman would also need the assistance of directors, company secretary, chief financial officer, chief executive officer, etc. in replying to the queries raised by the members. Taking into consideration the overall uncertainty due to COVID-19 and genuine curiosity of investors, it is expected that there would be active participation of investors in the AGM through VC than the regular AGMs convened years before. Passing of resolution by postal ballot and e-voting for approving scheme of amalgamation In one of the cases[ii] before the Bombay High Court, the issue was, “whether the resolution for approval of Scheme of Amalgamation can be passed by a majority of the equity shareholders casting their votes by postal ballot, which includes electronic voting, in complete substitution of an actual meeting.” The High Court observed that at the heart of corporate governance lies transparency and a well-established principle of indoor democracy that gives shareholders qualified, yet definite and vital rights in matters relating to the functioning of the company in which they hold equity. Principal among these is not merely a right to vote on any particular item of business, so much as the right to use the vote as an expression of an informed decision. That necessarily means that the shareholder has an inalienable right to ask questions, seek clarifications, and receive responses before he decides which way he will vote. It may often happen that a shareholder is undecided on any particular item of business. At a meeting of shareholders, he may, on hearing a fellow shareholder who raises a question, or on hearing an explanation from a director, finally make up his mind. Interestingly, the High Court also observed that greater inclusiveness demands the provision of greater facilities, not less, and certainly not the apparent giving of one ‘facility’ while taking away a right. Taking into consideration the observations of Bombay High Court, it will be difficult for corporate restructuring activities of listed companies during this period of COVID-19 and lockdown. Passing of resolution by shareholders’

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Inclusion of the Hub-and-Spoke Agreement in the Draft Competition Bill, 2020

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[By Lavanya Jha and Shreya Jha] The authors are students of WBNUJS, Kolkata and Amity Law School, Delhi respectively. Introduction The growth in anti-competitive concerns due to the rapidly evolving business landscape in India, has led to amendments being proposed in the Competition Act, 2002 (“Act”) by the Ministry of Corporate Affairs. One of such proposed amendments includes the expansion of the scope of cartels. Earlier, under the Act, only market players on a horizontal level were included in the definition of cartels. The (Draft) Competition (Amendment) Bill, 2020 (“Bill”) now seeks to include those enterprises which facilitate the operation of cartels, thereby extending the scope of cartels to hub-and-spoke agreements. This article focuses on an analysis of hub and spoke agreements and its inclusion in the Bill. What is a Hub-and-Spoke agreement? Hub and Spoke refers to a type of collusion wherein ‘spokes’ are the colluding competitors and, ‘hub’ refers to the facilitator of this collusion by the spokes. This horizontal agreement amongst the spokes is referred to as the rim – as it connects the spokes. An example of collusion can be seen in the case of United States v. Masonite decided by the U.S. Supreme Court. A patent-holder for hardboard entered into an agency agreement with nine competitors to sell the Masonite hardboards. In the agency agreement, each agent knew that the others were entering into an identical agreement with Masonite, thus inferring the existence of a horizontal agreement amongst the agents. Types of Hub-and-Spoke arrangement Hub-and-Spoke arrangements are primarily of two types: Downstream Hub-and-Spoke Cartel– This form of cartel can be illustrated with the help of US case Interstate Circuit, Inc. v. United States. In this downstream hub-and-spoke arrangement – Interstate Circuit, the exhibitor of motion picture movies and theatres acted as a ‘hub’ and entered into anti-competitive agreements with various movie distributors (spokes) by making them agree to raise prices of second-run theatre, where the prices were generally low. Thus, collusion was achieved between the downstream firm Interstate (Hub) and the movie distributors as spokes. Upstream Hub-and-Spoke Cartel– This form of a cartel can be illustrated with the help of Toys’ case. In 2003, three firms Hasbro, Argos, and Littlewood were fined by the then UK Competition Law Enforcer, Office of Fair Trading for entering into an anti-competitive agreement. Hasbro, a toy manufacturer had acted as a ‘hub’ and entered into anti-competitive agreements with catalogue retailers Argos and Littlewood by independently identifying the common products in their catalogue and persuading them to charge a recommended retail price. Thus, the manufacturer acting as a hub and retailers acting as spokes represents an upstream hub-and-spoke cartel. The Hub-and-Spoke arrangement in the digital landscape The digital economy is often characterized as an algorithm-driven economy. Algorithms play various roles in furthering an anti-competitive arrangement. In most cases, they strengthen an already existing cartel. It was in the Eturas case where the Hub and Spoke arrangement was first recognized in the online world. According to the facts of this case, an administrator of a Lithuanian online travel booking system sent an electronic notice to its travel agents, declaring a new technical restriction that put a cap on discount rates. The Court of Justice of the European Union (“CJEU”) observed that the travel agents who knew of the message presumed to have participated in the cartel, unless they publicly distanced themselves from the message. In this case, the knowledge was presumed to exist among the travel agents. Thus, the Court inferred the existence of a horizontal agreement among the travel agents. In recent times, taxi aggregators like Uber have often been quoted as examples of a hub-and-spoke conspiracy because of their business model which does not allow individual taxi operators to charge their own prices, and instead is decided by Uber itself. These prices are based on calculations made by its own algorithms. According to Mark Anderson and Max Huffman the fact that the drivers chose to enter into an agreement in order to determine sale price with Uber knowing that similar pricing arrangement exists with other drivers qualify as a horizontal cartel. However, the Competition Commission of India (“CCI”) held a different view in the case of Samir Agarwal v. ANI Technologies Pvt. Ltd. It was held that the unilateral decision of individual drivers to adopt algorithmic pricing determined by Uber did not raise an anti-competitive concern. This decision is premised on the observation that in cab aggregators, the pricing is based on various personalized information of the riders like time of the day, traffic situation, special conditions, etc. It was further clarified that for a hub-and-spoke cartel to exist it would require an agreement between all drivers to set prices through the platform, or an agreement. Understanding tacit collusion in the Hub-and-Spoke Model In an online marketplace an increasing number of pricing algorithms are being employed by the market players. There is greater market transparency as well as the availability of consumer data in the online forum. Greater availability of data subsequently leads to algorithmic collusion. Algorithmic collusion is of two types – algorithmic express collusion and algorithmic tacit collusion. In express collusion, there is “direct and express” communication about an agreement as demonstrated in the Poster Cartel case. However, in the evolving digital landscape, the issue of tacit collusion is gaining increasing importance. In tacit collusions, a substantive part of the collusive agreement is achieved without express collusion. The large-scale use of similar algorithms by the competitors or the use of available data may lead to a hub-and-spoke conspiracy. In other words, a single provider for algorithmic pricing- hub might lead to tacit collusion among spokes i.e. the competitors. For instance, in 2018, an investigation was led by the CCI pertaining to a hike in the Chandigarh-Delhi flight fares due to “Jat agitation”. The CCI had suspected inflation in price due to collusion among the pricing algorithms of various airlines. Such collusion is made possible after the algorithms gather data related to ticket prices, availability of seats,

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Competition Landscape in the Sports Industry: Unravelling CCI’s Decisions

Leave a Comment / Competition Law /

[By Sumit Jain] The author is a Senior Resident Fellow at the Centre for Competition Law and Economics. Introduction The Competition Act, 2002 (“Act”) was introduced in order to keep pace with economic reforms and pay due focus on sectoral expertise in the country. One such industry which has gained prominence since the Competition Commission of India’s (“the Commission” or “CCI”) inception, is the Indian sports industry.  The Act has changed India’s economic regulatory framework, and it remains important to chart the Commission’s evolution since its inception in the said sector. Background The sports sector has observed a tectonic shift in its development post liberalization. From a nationalized industry, the said sector has attracted large investments from private players, majorly in order to exploit the entertainment aspect of it. With the advent of events like Indian Premier League and Go Kabaddi, the organization of sports leagues have seen complete commercialization, thereby leading to an exponential rise of the sports sector in the share of the Indian economy. This sudden increase has also led to invitation of various economic regulators which ensure the infusion of capital into the industry happens in a sustained manner. The increase in investment is also important from the perspective of majority of the sports being played by multiple countries, and governed by a pyramid structure. The structure is ruled by an international regulator at the top, and member countries like India and/or the UK subscribing to it through their respective sports association. This brings efficiency to the game, but at the same time sees continuous influx of regulations across the border. This sometimes leads to a deflection where the policy goals set by the national government may be different from the objects of the international regulator. CCI’s decisions in the chronological order 1. Surinder Barmi v. Board of Cricket Control of India (BCCI) – 8 February 2013[i] The Commission first looked into the sports sector in September 2010, where one Surinder Barmi alleged that BCCI was abusing its dominant position in the relevant market of private professional leagues to impose unfair conditions on the various business stakeholders. The informant claimed that the said organization had intentionally auctioned media rights for a period of 10 years in order to foreclose competition for other players in the market. The Commission held BCCI in contravention of the law, and said that there is an inherent conflict of interest in positioning of the Board where it acts as a de-facto regulator for the sport in India, and at the same time accrues financial gains on behalf of conduction of events like IPL. CCI made a clear distinction between regulation of national/first class cricket by the Board, where the primary aim of the event was to play for honour of the game, and organization of IPL where the same was done to exploit the popularity aspect of it. It held that the organization of private cricket professional league should be treated as a separate Relevant Product Market (“RPM”) given that the entertainment offered by it is unique, and is incomparable by other TV programmes and/or national and first-class cricket. The CCI took due cognizance of the pyramid structure of the cricket regulating body, where the national body has to abide by the instructions issued by the international organization, and at the same time show compliance with the national legislative framework. 2. Dhanraj Pillai v. Hockey India – 31 May 2013[ii] Dhanraj Pillai, among other players, alleged that Hockey India (“HI”) was abusing its dominant position as de-factor regulator of the sport in the Indian market, and imposed unfair conditions on the players while promoting the said sport. Facts of the matter included one Indian Hockey Federation (“IHF”) which organized the World Series Hockey League (“WSH”) in collaboration with Nimbus Sport, and HI along with International Hockey Federation (“FIH”) which had imposed restrictions on Indian players as the said league was an ‘unsanctioned’ event. The CCI held, that HI is not acting in contravention of the law, and certain restrictions imposed by the said body are justifiable in the light of efficiency brought by them. The Commission paid due emphasis on pyramid structure of the sport, and paid heavy reliance on by-laws framed by FIH before concluding the said case. 3. DLF City Club Members Welfare Association v. DLF Limited – 1 July 2013[iii] The third case was initiated by DLF City Club Members Welfare Association against DLF Ltd. for violation of Section 4 of the Act, alleging appreciable adverse effects on competition. The informant in the said case alleged that the opposite party promised club facility along with the apartment through various advertisements and promotions in the newspapers, however post allotment, DLF started operating the same on a purely commercial basis where it charges exorbitant membership fee from the club users. The Commission closed the matter and held that DLF does not enjoy position of dominance in the delineated RPM, and therefore the question of abuse does not arise. 4. Pan India Infra Projects Private Limited v. BCCI – 16 January 2014[iv] The fourth case, the relief sought by the informant was quite similar to the one claimed in Surinder Barmi case. The Commission while closing the matter paid due reliance on the said case law. 5. Om Datt Sharma v. Adidas A.G. – 13 May 2014[v] The informant in the instant case alleged that Adidas, through various acquisitions occupied a dominant position in the delineated relevant market, and was abusing the same by granting less commission rate to the informant, as compared to other dealers in the market. The Commission held that no case for violation of the Act could be brought out by the informant. It recognized the right of the opposite party to enter into an agreement best favorable to its business requirements. It also questioned the inconsistency of allegations on informant’s part where it waited for five years to point out the alleged abuse, and used the same reasoning to rule in favour of Adidas. 6. Ministry of Youth Affairs &

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FDI Policy Revision, 2020: A Dagger in the Arm of China or a Shot in the Dark?

1 Comment / Contemporary Issues /

[By Kartikey Sahai] The author is a fifth year student of Institute of Law, Nirma University. Introduction India and China, two of the top 10 economic superpowers of the world have, in a way, put to terms, their political debacle with India blowing a major cog in the wheel of China’s upper handedness, by putting restrictions on Chinese investment in India. On April 17, 2020, the Department for promotion of Industry and Internal Trade (“DIPP”) brought in an amendment to the extant Consolidated FDI Policy, 2017 (“Press Note 3”).[i] Consequent to this revision, an amendment was also brought about to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 on April 22, 2020. Prior to the introduction of this amendment, investments by non-resident entities were allowed in those sectors which are not prohibited as per the extant FDI Policy, with the exceptions of entities based out of Bangladesh and Pakistan. Post the inception of this amendment, the Government of India has revised this policy to include the provision for investment by entities based out of countries sharing land borders with India (read: China) or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can now invest only after obtaining prior approval from the Government of India. The objective of the revised policy, as stated in the Press Note 3, is to curb opportunistic takeovers/acquisitions of Indian based companies during the subsistence of the Covid-19 pandemic, in lieu of the People’s Bank of China buying out 1.01% stake in HDFC bank, worth approximately 1.75 crores shares of the bank.[ii] However, this revision brings about a crucial question relating to the financial sector into beckoning. Is the Indian industrial contingent ready to exclude Chinese investment into Indian companies, at the behest of government approval? Increased reliance of Indian industries on Chinese investments As per the quarterly fact sheet on FDI released by the DIPP up to March 2019, China ranks 18th out of the 164 countries that have FDI equity inflows in India, amounting to a total of INR 13,954.82 crores.[iii] Sectors such as the automobile industry (60%), the metallurgical industry (14%) and the electric equipment industry (4%), amongst others, attract the maximum FDI equity inflows.[iv] Another startling fact that needs to be taken account while evaluating the recent policy revision is that before the current NDA government came into power in 2014, the FDI equity inflows from China never crossed the 1000 crore mark, but as soon as the new government came into power, for two years consecutively, the figures reached the staggering mark of INR 3066.24 crores in 2014 and INR 2196.11 crores respectively.[v] Furthermore, as per the Secretary-General of India-China Economic and Cultural (“ICEC”) Council, China invested an estimate of about INR 2000 crores in 2017, in comparison to INR 700 crores invested by China in Indian companies in 2016.[vi] Moreover, despite issues such as Doklam which are clouding the bilateral ties between the two countries, India-China bilateral trade have amassed a whooping USD 71.18 billion in 2016 and USD 84.44 billion in 2017.[vii] Additionally, with the changes in the extant FDI policy of India, investments through indirect route have to be taken into account as well, such as that of INR 3500 crores invested by the Singapore subsidiary of the techno-giant Xiaomi.[viii] Interpreting ‘Beneficial Ownership’ under the revised FDI Policy The revised FDI policy, as amended by the press note of April 2020 seeks to hinder non-approved foreign investments into India from countries where the beneficial owner of an investment into India is situated or resides. However, the term beneficial ownership has not been defined anywhere, neither in the extant FDI policy, nor the FEMA rules. To analyze the problem in an in-depth manner, a glance may be had at Section 90 of the Companies Act read with Companies (Significant Beneficial Owners) Rules, 2018 which define the term ‘significant beneficial owner’, which is analogous to beneficial ownership. The relevant rules have laid down certain criterion for determining beneficial owners, such as individuals, who either directly or indirectly, hold 10% of the shares or 10% of the voting shares or have a right to receive a minimum of 10% of the total distributable dividend or have a right of significant control in such company. These Rules provide further clarifications as to how to ascertain the significant beneficial owner. However, as per these rules, only an individual may be deemed to be a significant beneficial owner. On the other hand, the revised FDI policy merely refers to the term ‘beneficial owner’, without clarifying whether it applies to individuals or body corporates as well. The Prevention of Money Laundering Rules, 2005 prescribe that a beneficial owner is a natural person, who alone or jointly in conjunction with a natural or artificial person, holds above 15% or 25% control over capitals or profits of the relevant company.[ix] Moreover, SEBI has also reiterated that a similar definition be adopted for the determination of beneficial ownership for the purpose of KYC as well.[x] However, such definition cannot be used for the purpose of ascertaining the meaning of beneficial ownership under the revised FDI policy, as these legislations were brought about mainly to nab the accused alleged to have been involved in laundering money and thus hold an altogether different connotation. International investment obligations envisioning the debacle The revised FDI policy has not put forth an enforceability date from which this revised policy will be brought into force. If India is intending to go big this time, it might as well grant retrospective effect to the tune of 5 to 10 years to strike a dagger in the heart of China’s involvement in the Indian market. This revision in the extant FDI policy of India has not brought about happy reactions with China terming this move as ‘discriminatory and against the general trend of liberalization of trade’.[xi] Even when it comes down to the bilateral obligations of India, it is not at the right side

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The Covid-19 Mahabharata: Impact on Insolvency Professionals in India

Leave a Comment / Insolvency Law /

[By Animesh Khandelwal and Surbhi Kapur] Both the authors are lawyers based in New Delhi. Introduction  Pandemics have a potential to be very disruptive, entail a catastrophic effect with a staggering cost on one and all. With Covid-19 being declared as a pandemic, the global community is left helplessly supine with irreparable loss to the lives of the people. All the sectors of the Indian economy have suffered the downturn triggered by this virulent outbreak. The relationship between the deterioration of human health capital and its effect on economic growth and development is shaping both the regulatory design, response, and implementation thereof. Understanding the severity of this relationship, the Government of India in coordination with the state governments has notified several mitigation policies and emergency declarations. Starting with the enforcement of a nationwide lockdown, making social distancing a norm, several key regulatory reforms have been instituted to alleviate the catastrophic effect of the turmoil caused by this virulent pandemic. With companies across the world and in India working from home through online resources, manufacturing has been hampered and economies have been hit badly with early signs of a slowdown and possible recession. This may lead to a high rate of default on loans by corporates pushing them closer to a higher possibility of initiation of insolvency proceedings against them. Both the firms as well as the individuals have been reviewing the contractual clauses for performance of their obligations. The importance of force majeure as a legal doctrine to cover the present outbreak of Covid-19 has become contentious. In this vein, the role as well as responsibilities of an Insolvency Professional (“IP”) in India assumes prominence. In light of the current extraordinary economic situation, it is difficult for the IPs to conduct the corporate insolvency resolution process (“CIRP”) and manage the stressed corporate debtors(defaulting companies) as going concerns. It would be onerous for an IP to ensure the attendance of the members in the meetings of the committee of creditors (“CoC”). The preparation and submission of the resolution plans by the prospective resolution applicants (“PRA”) also seems unviable. The interested resolution applicants may want to pull back or defer their decision on submission of a viable resolution plan. Therefore, the timely completion of various tasks during a CIRP within the timelines specified under the Code seems impractical. Being a creation of the Insolvency and Bankruptcy Code, 2016 (“the Code”) and a manager of the financial distress as such, and currently attributable to the pandemic, an IP is expected to offer workable solutions to steer the corporate debtor (“CD”) through the legal uncertainties into resolution. Measures initiated by the Government The government recently announced two important facilitative steps to be undertaken regarding the insolvency landscape in India. At first the Ministry of Corporate Affairs (“MCA”) increased the threshold for the determination of the default in insolvency matters from one lakh rupees to one crore rupees as the minimum amount of default under Section 4 of the Code. This step was taken to, inter alia, assist and aid the functioning of micro, small and medium enterprises (“MSMEs”), who may be operational creditors, which might face defaults owing to the economic slowdown and unprecedented lockdown. Next in line, the suspension of Sections 7, 9 and 10 (provisions for initiating CIRP) of the Code for a period of six months was announced. Regarding the suspension of initiation of CIRP, the MCA has prepared a proposal for the consideration of the Union Cabinet. Along with this, the Reserve Bank of India (RBI) has also provided for a debt moratorium.[i] Tribulations being faced by IPs in India Some of the issues faced by the IPs are outlined as follows: Human Resource: While most of the employees of the IPs have travelled to their respective homes in adherence to the lockdown, some IPs are finding it difficult to provide a steady income to their team and thus, losing precious team members. This has led the IPs themselves toiling and burning the midnight oil and multi-tasking, thereby increasing their workload and productivity. Commercial Decisions: The prime tasks of an IP is to run the stressed CD as a going concern and also to ensure that viable resolution plans are presented to the CoC. The IPs are finding it difficult to perform both these tasks due to the state of the economy during the ongoing pandemic. The availability of interim finance too seems a distant remedial measure. On the one hand, the already stressed companies are facing further difficulties in day to day operations, on the other, the PRAs are either not coming forward or withdrawing from the already submitted resolution plans. Communication and IT: Since members of the CoC are themselves ‘working from home’, the IPs are constrained to organise the CoC meetings via video conferencing. This is raising not just bandwidth issues but also concerns with respect to cyber intrusion, privacy and data breach, espionage and pilferage.[ii] Indian Computer Emergency Response Team (“CERT-In”) has cautioned of the perils of unguarded use of digital platforms, given its vulnerability to phishing and cyberattacks. Work Allocation: After completion of the pending work in CIRPs, the IPs are not finding much more to be done since new assignments cannot be undertaken. Timelines under the Code: Regulation 40A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides a model timeline for the conduct of CIRP as per the provisions of the Code. One of the biggest issues faced by the IPs could be with respect to adherence to the timelines specified under the Code. Since time and speed are of essence under the Code, disciplinary action may be initiated against the IPs for not following those timelines. Efforts by the Insolvency and Bankruptcy Board of India (IBBI) IBBI has been pro-active and taken due consideration of the concerns of the IPs and other stakeholders. It has suspended the enrollment for the limited insolvency examinations till 3rd May, 2020 and has also allowed the Insolvency Professional Agencies (“IPAs”) to conduct

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IBC Amendment, 2020: A Delusional Relief for Homebuyers

1 Comment / Insolvency Law /

[By Ishita Soni and Sanjana Karnavat] The authors are third year students of Symbiosis Law School, Pune. Introduction The Insolvency and Bankruptcy Code, 2016 (“the Code”) consolidates India’s insolvency laws under one comprehensive scheme to ensure value maximization of an insolvent debtors’ assets for the benefit of all stakeholders.[i] The Code classifies all creditors as either financial creditors or operational creditors based on the kind of debt Corporate Debtor owes them. Whereas, the former give consideration in the form of cash (in return for an interest), the latter extends debt in the form of goods or services. This distinction is of essence because the Code extends certain exclusive rights to the financial creditors, namely, the right to initiate the corporate insolvency resolution process (“CIRP”) without sending any demand notice, the right to be a member of the committee of creditors (“CoC”), and the guarantee of receiving at least the liquidation value under the resolution plan.[ii] This creates an unequal balance of powers between the two types of creditors, solely on the basis of the type of debt that is owed to them. The status quo of homebuyers under the Code is a vehemently debated issue since their role as financial creditors has been claimed and subsequently challenged innumerable times. Real estate allottees are persons to whom an apartment or plot in a real estate project has been allotted or sold.[iii] Consequently, certain ‘homebuyers’ give an advance to the developers and fund the cost of the project in return for a house.[iv] Since this advance is a means of raising finance, it is deemed to have “commercial effect of borrowing” under Section 5(8)(f) of the Code.[v] Therefore, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 included homebuyers under the category of financial creditors for all intents and purposes of the Code. The IBC Amendment, 2020 The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“the 2020 Amendment”)[vi] was introduced as a Bill on 12th December 2019 in the 17th Lok Sabha Session, post which it was referred to the Standing Committee on Finance for recommendations and suggestions. The Committee discussed several issues surrounding homebuyers, however, after perilously disregarding the same, the 2020 Amendment made the following modifications in the implementation of the Code, by adding a proviso in form of Section 7(1) before the Explanation in the Code.[vii] The same reads as under: Financial creditors under Section 21(6A)(a) & (b), whose debt was in the form of securities or deposit, are allowed to file an application for initiating CIRP jointly with not less than 100 such creditors or 10% of their number, whichever is less. Financial creditors, who are real-estate allottees are allowed to file an application for initiating the CIRP jointly with not less than 100 such allottees or 10% of such allottees under the same real estate project, whichever is less. The pending applications for CIRP that were filed by the aforesaid two categories of creditors must be altered to comply with the minimum threshold requirements within 30 days of the commencement of the 2020 Amendment Act. A failure to do so would deem the application to be withdrawn before its admission.[viii] Loopholes and Patent Irregularities in the IBC Amendment, 2020 I. Undue restriction in initiating the CIRP Section 7 of the Code prescribes three distinct modus operandi through which a financial creditor is permitted to file an application for initiating a CIRP against a defaulting Corporate Debtor. Accordingly, the financial creditor is allowed to apply: By itself, Jointly with other financial creditors, or With any other person on behalf of the financial creditor, as may be notified by the Central Government. Since homebuyers are equivalent to all the other financial creditors whose debt falls under the classification of Section 5(8)(a)-(e), they must be treated identically in every aspect of the insolvency proceeding under the Code. Albeit all financial creditors have the discretion to approach the NCLT via any of the aforesaid means. However, by virtue of the 2020 Amendment, a homebuyer is deprived of the right to file an application himself/herself i.e. ‘by itself’. Insertion of the 2nd proviso explicitly contradicts and violates the beneficial construction of Section 7 of the Code that is extended to every financial creditor, since it mandates solely a homebuyer to take refuge with at least 99 other homebuyers or satisfy the minimum 10% requirement before he/she can apply for the recovery of his/her debt. II. Complete disregard to the amount of debt The Code allows all the financial creditors to initiate the CIRP if the debtor makes a default of Rs. 1 Lakh or more. However, the 2020 Amendment mandates the homebuyers to satisfy the minimum members’ requirement, even if the debt that is individually owed to them exceeds 10 times the amount of Rs. 1 Lakh. Thus, this sinister provision hinders them from reaping the benefits that are available to all other financial creditors. III. Impractical and Unenforceable Provision Every legislation is made keeping in view its practical considerations and hazards involved in implementation. The 2020 Amendment, however, is uncalled for and highly impractical because it is not feasible for a single homebuyer to obtain information, consolidate data, contact other homebuyers and then persuade them to file an application for initiating the CIRP against a Corporate Debtor. This is all the more bizarre when a homebuyer, with a pending application, is obliged to fulfill this requirement within 30 days of enactment of the 2020 Amendment, as per the 3rd proviso of the newly inserted provision. There is only a bleak possibility that one can gather 99 other homebuyers or 10% of their number, given that in most cases, it is the defaulting party i.e. the real-estate developer/builder or the project head that possesses all the details about the homebuyers. Thus, it is extremely unlikely that they would willingly assist the aggrieved homebuyers and handover these details so that they can initiate the CIRP against the defaulter. Since non-adherence to the mandatory provision will result in quashing of the homebuyer’s application, the 2020 Amendment may prevent

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CCI’s E-Commerce Investigation: A New Era in Indian E-Commerce Landscape

Leave a Comment / Competition Law, Uncategorized /

[By Prasad Hegde] The author is a fourth year student of Gujarat National Law University. Background On 13 January 2020, the Competition Commission of India (“CCI”) passed directions to carry out investigations into alleged violation of Section 3 and 4 of the Competition Act, 2002 (“the Act”) by ‘Flipkart Internet Pvt. Ltd.’ and ‘Amazon Seller Services Pvt. Ltd.’ (“Opposite Parties” or “OPs”). The information was filed by Delhi Vyapar Mahasangh (“Informant”). The Informant used the OPs’ platform to list their products for sale on online marketplace. The Informant alleged that there were several instances of anti-competitive acts by the OPs or between the OPs and their preferred sellers/private labels. The Informant alleged the following acts of the OP to be violative of the Act: OPs provide “deep discounts” to its preferred sellers which adversely impact other sellers as they lack resources to compete on price with such preferred sellers; OPs gather “data on consumer preferences” and use them to their advantage; OPs provide “preferential listing” to certain sellers thereby creating a bias. Due to this the products of the preferred sellers dominate the first few pages of the search results; OPs have “exclusive tie-ups” with producers, which are violative of Section 3 of the Act. The Informant alleged that by virtue of these anti-competitive acts, they were denied a chance of optimally using the online market space. Such acts forced the non-preferred sellers to operate through the brick and mortar set up which involved high fixed cost and lacked pan-India reach. The Informant provided evidence in the form of communications to further the same. However, in an unusual move, the aforementioned order by CCI has been temporarily stalled by the Karnataka High Court. It is rather surprising to see a CCI Investigation being stayed even before it has been completed. However, since it is a temporary stay, the HC might also uphold the CCI order which found a prima facie case against the OPs. Therefore, the CCI has a clear-cut task to prove that the practices of the OP warrant an investigation due to their anti-competitive impacts. Deep Discounting Such practices of deep discounting can be analysed under Section 4 of the Act i.e., predatory pricing. In order to establish violation of Section 4, the concerned enterprise must be dominant in the relevant market. The CCI has previously held that none of the e-commerce players enjoy a dominant position. However, the Indian Supreme Court (“SC”) recently upheld a COMPAT order which allowed for investigations into the predatory pricing practices of Uber. The SC in its order opined that an enterprise having a “position of strength” can be brought under the ambit of Section 4 of the Act. An enterprise holds a position of strength when it (i) operates independently of market forces and (ii) affects the competitors in its favour. Therefore, applying this rationale, both the OPs enjoy a “position of strength” because if the OPs incur any loss due to the discount they offer, it will attract more customers and will negatively impact its competitors. Further, they collectively hold a market share of 89% as declared in the first quarter of 2019 which confers a position of strength on them. Hence, their actions can be analysed under the ambit of predatory pricing. Discounts can also be analysed under the rule of reason framework as per Section 3(4) of the Act. Section 3(4) of the Act will kick in if the intention behind the disparity in discounts offered is to induce exclusivity, which consequently amounts to an appreciable adverse effect on competition. It is to be noted that though discounting creates benefits to consumers in the form of lower prices albeit in the short run. Nor, is discounting a reflection of efficiency gains or cost savings. It further creates distortionary effects on the supply side of the market. Discount is an incentive in the demand side of the market but consumer welfare does not only frown upon such discounts. To elaborate, discounts offered to preferred sellers today, will drive away other sellers in the online market tomorrow. This phenomenon will allow e-commerce players to increase prices, thereby creating no consumer benefits in the long run. Lastly, Regulation 5.2.15.2.4(ix) of the 2019 FDI Regulations also prescribes that “market-place entity cannot directly or indirectly influence the sale price of goods or services”. Use of Data The Informant has also alleged that OPs gathered consumer data and used it to their benefit. It is interesting to note that on 17 July, 2019, the EU had commenced investigation into Amazon’s use of sensitive data from independent retailers who sell on its marketplace. Amazon is alleged to come up with their own offering, using the data it collects from the retailers. In India, such use of data could be analysed under Section 4 of the Competition Act, since both the OPs are in a positions of strength. India could take inspiration from EU’s investigation and the subsequent penalization of Google. The EU found that Google favoured its own shopping services over those of third parties in its search rankings due to misuse of data. The EC found that Google had committed an anti-competitive act that allowed Google to benefit from investments made by other firms.[i] However, the fact that CCI has to look into is whether, Amazon by collecting data from the retailers using its marketplace, has launched similar products to compete against them. The most effective way (as evidenced by EU) to get to know about this, could be by asking retailers using the Amazon Marketplace. Further, it is to be seen, if principles of Section 3 and 4 of the Act suffice to address this issue. Lastly, the EU has the General Data Protection Regulations (“GDPR”) to protect personal and non-personal data, however, India lacks any data privacy law currently. Therefore, this investigation and the subsequent court battles might bring back the debate regarding the need for a robust data protection law. Preferential Listing The Informant further alleged that products of a

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Validity of Horizontal Agreements and Cartels in the FMCG Sector- The Covid-19 Exigencies

Leave a Comment / Competition Law /

[By Srishti Suresh] The author is a third year student of NALSAR, Hyderabad. Introduction The outbreak of COVID-19 has disrupted markets and economies over the world. India too, is facing its fair share of disruption and apprehension, owing to the uncertainty that surrounds the pandemic. Businesses and large scale enterprises facing significant losses due to reduced revenues, might seek to palliate the commercial damage caused, by resorting to collaboration and cooperation with their competitors. But the question that ensues, is whether, Horizontal agreements and cartels by manufacturers and enterprises in the FMCG sector are restricted by Section 3(3) of the Competition Act? Such an agreement to collaborate has the potential to cause an Appreciable Adverse Effect on the Competition (“AAEC”) regime? Section 54(a) of the Competition Act gets attracted owing to the unanticipated circumstances? For the sake of clarity, the difficulty is deposed in the given factual scenario. The difficulties faced by enterprises engaged in the FMCG sector, relates to the decrease in the procurement and supply of essential goods to the markets, owing to various relevant factors such as significantly reduced work force, shutting down of factories due to inaccessible transportation and logistical support, and the difficulty in obtaining approvals and permissions to allow workers to oversee plants, in creating buffer stocks of inventory.[i] Consequently, in the non-essential sector, both demand and supply have plummeted, as opposed to the essential sector, where the demand for FMCG is steadily increasing, with the supply decreasing exponentially. Under the Competition Act 2002 (“the Act”), a general prohibition is imposed under Section 3(1) of the Act, when an agreement creates a direct AAEC, as envisaged by Section 19 of the Act. Accordingly, while determining the appreciable adverse effects on competition, any or all of the factors enumerated from clause 19(3)(a)-(f) can be considered by the Competition Commission of India (“CCI”) while adjudging its impact on the market. This includes an agreement to improve production or distribution of goods or provision of services. It also specifies certain important criteria to be met such as creation of barriers for new entrants, driving out existing and operating competitors within the same field etc.[ii] The conception of ‘Appreciable Adverse Effect’ is not an objective stand-alone yardstick, which can effectively oust players in the market for anti-competitive practices. It necessarily involves a case by case analysis, within a given economic and social contexture. CCI, in the case of Builders Association of India v. Cement Manufacturers’ Association had categorically held that the presumption of anti-competitive agreements can be inferred from the intention or conduct of parties, by virtue of any circumstantial evidence.[iii] This would include evidence of parallel changes in price fixing and information sharing with other similar enterprises, without an explicit agreement, thereby creating an anti-competitive cartel. The AAEC test is coded within the Act and is relied on judiciously as a robust test to discern any anti-competitive behaviour, as most cartels or price fixing correspondences are meticulously hidden or destroyed, to escape the plausible consequences of legal infringement. But in the present case, the uncertainty and gravity of the spread of the pandemic has led to a further extension of the national lockdown. Consequently, a few classes of citizens are able to procure and cache the earlier stock inventory stored in the warehouses. Most essential goods are getting exhausted at an unprecedented rate, making accessibility almost impossible for the larger part of the community. With workers reasonably fearing their safety, manufacturing and distribution of FMCG has almost come to a standstill. Enterprises, having already run into deep losses, are facing an arduous situation in distributing essential goods to the markets, for the common benefit. As a result, prices of various essential goods have increased manifold, even up to 30% in the local markets. This has further increased the burden on the end consumer in procuring essential goods, just as a consequence of the play of forces of demand and supply.[iv] As of March 31st 2020, the notification issued by CCI requires all filings related to anti-competitive agreements and abuse of dominant position to be suspended until further notice. Moreover, any submission or proceeding under the Act, is to remain in abeyance until notified.[v] The main concern is whether in light of the exigent situations, and with the operations of the CCI remaining in suspension, can the FMCG sector enterprises enter into bona fide Horizontal Agreements for the purposes of sharing markets and sources of production and effective utilization of resources, in order to effectively percolate into the market in providing essential goods? Section 4 of the Act prohibits companies from abusing their dominant position in the market, which might adversely affect its competitors and end consumers. In essence, enterprises that possess the resources can exercise an overarching power on smaller and less equipped competitors without the competitive force restraint, in driving their rivals out of the market- this is envisioned as the abuse of the dominant position. But under Section 54(a) of the Act, such a dominant position, if utilized by enterprises for the purposes of public interest, in the form of horizontal agreements and cartels, cannot be deemed anti-competitive under the Act. A Tie-Up and Distribution Agreement within a group of competent companies, for ensuring the disbursal of essential goods at a reasonable price, accessible to citizens at large cannot be construed as an unethical price-fixing correspondence or deal. Moreover the scale of competition and the number of competitors has reduced owing to the dearth of demand and supply for goods and services. Therefore, the ‘driving out of rivals’ is a result of natural economic forces in light of the pandemic, as opposed to an active participation by dominant players in ousting the rivals. As the CCI has abstained from issuing any notice or statement with respect to such tie up agreements with private dominant enterprises in the FMCG sector, in the growing disarray of the market, the only recourse would be for the Central Govt to issue an exemption notice to such acts, provided

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