Author name: CBCL

Extension of Liability in Group Insolvency Proceedings

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

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?

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?

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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Building a Case for Digital Financing in India

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

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

Competition Law /

[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

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?

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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