Author name: CBCL

Supreme Court on Seat vs Venue: albeit Malaysia’s Arbitral Award, Indian Court’s Jurisdiction

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[Mreganka Kukreja]   The author is a 4th year student of SLS, Pune.   Introduction The seat versus venue debate, owing to the simultaneous convergence and polarity of the two theories, has been a matter of long-standing deliberation before the courts. The Indian Judiciary in the case of Union of India v. Hardy Exploration and Production (India) Inc., [1] was once again required to substantiate the relationship between the two concepts. The author discusses the background of the case; the decision of the court and the implications of the pronouncement on the arbitration regime in India. Background The dispute between Hardy Exploration and Production (India) Inc. (hereinafter “Hardy”) and Union of India (hereinafter “India”) arose under the Production Sharing Contract concerning oil and gas exploration rights in India’s territorial waters. In 2006, Hardy claimed that it had discovered natural gas in India’s Southeastern coasts, which, under the contract, entitled it to a five-year appraisal period to ascertain the commercial viability of the extraction. India disagreed on the proposition, claiming that the discovery was of crude oil, which entitled Hardy to an appraisal period of two years. On expiry of the two-year time period, India relinquished Hardy’s rights to the block on the ground that Hardy has failed to submit the commercial viability in a timely manner. This prompted Hardy to initiate arbitration proceedings against India. On February 2, 2013, the arbitrators, sitting in Kuala Lumpur, issued an arbitral award in favour of Hardy. India knocked the doors of Delhi High Court to set aside the said award under S.34 of the Indian Arbitration and Conciliation Act 1996 (hereinafter “the Act”). The Delhi High Court upheld Hardy’s preliminary objection that the court had no jurisdiction over the matter and Part I of the Act is inapplicable, thereby rejecting India’s argument that Kuala Lumpur was merely a physical venue where the arbitration between the parties was concluded. [2] India appealed this decision to the Supreme Court. A two-judge bench of the Supreme Court referred the matter to a larger bench to determine the seat of arbitration and consequently, Indian Court’s jurisdiction in the present case. [3] Therefore, the present case came before a three-judge bench of the Supreme Court. Earlier in the month of June, the United States District Court for Columbia had not considered India’s request to stay the order for enforcement of arbitral award owing to pending proceedings in the Indian Court, however, the court ultimately refused to enforce the arbitral award. [4] Hence, the US District Court did not make any observations on the seat of arbitration or the competency of the Indian courts to hear the matter. Issue When the arbitration agreement specifies the ‘venue’ of arbitration, but does not specify the ‘seat’ of arbitration, then on what basis and principle is the ‘seat’ of arbitration proceedings determined? Judgment [A.] A reflection on the existing jurisprudence and non-application of Sumitomo case  The appellant had relied on the case of Sumitomo Heavy Industries Limited v. ONGC Limited & Ors [5] to argue that in the absence of an expressed seat of arbitration, the proper law of the contract (lex contractus), which in the present case was that of India, must govern the arbitration proceedings. The court observed that discussion in the Sumitomo case pertained to the Arbitration Act, 1940 and Foreign Awards (Recognition and Enforcement) Act, 1961. Further, the developments subsequent to the Bharat Aluminum Company v Kaiser Aluminum Technical Services Inc.[6] has rendered the Sumitomo case irrelevant and therefore, non-applicable in the present case. The court discussed a plethora of judicial pronouncements that had already discussed the relationship between the seat of and venue of arbitration [7] and explained the difference between the terms, pointing that while the former is concerned with the law of arbitration, the latter is merely restricted to a geographical location of the award. Thereafter, the Court reiterated that the arbitration clause of a contract has to be read in a holistic manner, and if there is a mention of venue and additional information pertaining to the venue, then depending upon the information appended, the court could conclude that there is an implied exclusion of Part I of the Act. The applications of these principles in the light of facts of the case were discussed as elaborated below. [B.] Approaches when the parties have not agreed to the juridical seat  The court discussed the course of action when the arbitration agreement does not provide for a seat of arbitration. First, the court said that the seat of arbitration could be inferred on the basis of the venue of the arbitration in conjunction with concomitant factors pointing towards the venue. [8] Second, on reading Art. 20 and Art. 31 of the UNCITRAL Model Law, the court said that in the absence of an expressed seat of arbitration, the arbitral tribunal is competent to ‘determine’ the seat of arbitration. The court discussed the case of Imax Corporation v. E-City Entertainment (India) Pvt. Limited, wherein the arbitration agreement provided that as per the ICC Rules, the arbitral tribunal would decide the place of arbitration, and therefore, Arbitral tribunal’s decision to hold the seat as London was upheld, as opposed to party’s plea for Paris to be the seat. [9] [C.] The constructs of arbitral tribunal’s ‘determination’   The court held that determination by the arbitral tribunal requires a ‘positive act to be done’ and the same must be considered contextually. Reliance was placed on Ashok Leyland Limited and State of T.N. and anr. as per which, the test of determination was laid down as an expressive opinion. [10.] In the present case, there was no adjudication and expression of opinion of the arbitral tribunal and the only act that was done was that the award was given in Kuala Lumpur. The Court held that Indian Courts have jurisdiction and the order passed by the Delhi High Court must therefore be side aside. The court’s position could be summarized in the following words: “The word ‘place’ cannot

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Corporate Governance crisis in the Banking Sector: Role of the RBI

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[By Ambarin Munir Khambati ] This Blog is part of a series of posts as a collaboration titled “KAIZEN” between the Centre for Business and Commercial Laws (CBCL), NLIU Bhopal and Law School Policy Review (LSPR). To view this blog on LSPR, please click here. Ambarin Munir Khambati is a 3rd-year student of NLSIU, Bangalore and an Editor at LSPR. The RBI crackdown on the top management of several banks, and most recently on YES Bank MD and CEO, Rana Kapoor, has opened a Pandora’s box in the banking industry. In this post I shall look at the corporate governance failures at major banks that have come to light in the recent months, and how the RBI must play an active role as a watchdog to ensure compliance. The starkest failure of most banks has been that of Loan Divergence. Banks have been under-reporting their Non-Performing Assets (“NPA”s) or failing to classify them as bad loans post-default. To tackle this, in April 2017, the RBI published a notification requiring banks to disclose their divergence in asset classification, if there was over 15% difference in the assessment made by the RBI and that of the Bank itself. As a result, banks revealed whopping figures of under-reported NPAs which forced the RBI to interfere with appointments and removal of top management in order to ensure compliance. YES Bank, for instance, reported a divergence of Rs.4176.70 crores in 2016, which was 558% higher than the figures they reported themselves. Consequently, the RBI refused to approve an extension of CEO and MD Rana Kapoor’s tenure at the Bank. The massive scale of loan divergence is problematic for several reasons. Primarily, it misleads shareholders and investors about the credit risk of the bank. It also raises suspicion about related party transactions, and corruption with loans being granted to individuals or companies without adequate collateral security, or background checks. This also puts under the lens auditing firms which allow companies to fudge figures on their annual reports, and fail to caution shareholders and the public. Unchecked loan divergence, on the part of huge banks like YES Bank, ICICI, and Axis Bank puts at risk the entire banking system. To enforce corporate governance norms, such as adequate disclosures by banks, the RBI must play a punctilious role, and make full use of its wide-ranging powers under the Banking Regulation Act, 1949 (“Act”). First, the RBI must require mandatory disclosures by banks; second, failures to comply must be made public, third, more reliance must be placed on the Insolvency and Bankruptcy Code (“IBC”), and fourth, there must be increased control over top management. Mandatory Disclosures Under Sec. 35 of the Act, the RBI has the power to inspect the affairs, and books of accounts of any banking company. Directors, officers, and employees of the company are also obligated to produce any document or statement as required. Moreover, it can also exercise its power to issue directions, and guidelines for disclosure, such as the Revised Framework on Resolution of Stressed Assets which requires lenders to classify loans as stressed, immediately on default. They are also mandatorily required to provide weekly credit information to a special body created for the purpose, the Central Repository of Information on Large Credits. Resolution of bad loans needs to be carried out by the banks under a specified timeline, failing which they must file an application under the Insolvency and Bankruptcy Code. Mandatory and periodical disclosures to the RBI, shareholders, investors, and general public will ensure much needed transparency. These would have a direct bearing on stock prices, and credit ratings which would incentivize banking companies to comply with governance norms. For example, the developments at YES Bank affected the ability of the bank to raise capital, and so credit ratings agencies such as Moody’s and ICRA have lowered their ratings, forcing the company to begin finding replacements for Kapoor. Publishing corporate governance failures The RBI, in a series of letter to YES Bank pointed out, “serious lapses in the functioning and governance of the bank”, and “highly irregular credit management practices, serious deficiencies in governance and a poor compliance culture”. Yet, the full text of these letters remains confidential. The only information available to potential investors comes from cryptic press statements made by the regulator and the Bank, and the inference drawn from the curtailment of Rana Kapoor’s term. In the interest of accountability, the RBI must invoke its power under Sec. 28 which gives it the power to publish, in public interest, any information obtained under the Act, and any credit information disclosed under the Credit Information Companies (Regulation) Act, 2005. Increased reliance on the IBC The next step after disclosure of NPAs would be to recover the bad debts, and reliance must be placed on the newly amended Insolvency and Bankruptcy Code which is designed to tackle NPAs in the speediest manner possible. In just 2 years since it came into force, creditors have recovered close to 56% of admitted claims from stressed companies under the IBC. While the jurisprudence on the area is still emerging, the government has shown a keen interest in updating the Act to comply with decisions of the NCLAT, with an aim to promote resolution, as opposed to liquidation. Control over top management The massive amounts of divergence that has been reported would have been impossible without the knowledge of the top management. A means of enforcing corporate governance norms is to keep tenures of high-level officials such the CEO, Chairman and Board in check. The problem with having high-profile CEOs with exceedingly long tenures is concentration of power over time, and consequent paralysis of the Board. For example, at ICICI Bank, the Board overlooked deals concluded in conflict of interest by Chanda Kochhar, eventually leading to an RBI crackdown. Further, any misstep on a CEOs’ part, or a removal, in the worst case, would trigger a panic sale of stock, such as at YES Bank where the stock price halved as soon as Kapoor’s term was reduced. The “cult of the CEO”

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Exemption to Vessel Sharing Agreements From The Competition Act in India: Another Indian Provision Full of Ambiguities?

7 Comments / Competition Law /

[Akash Anurag & Aman Gupta]   The authors are 4th and 3rd year students respectively of NLU, Jodhpur Introduction The Ministry of Corporate Affairs (hereinafter referred to as the MCA) through a notification dated July 4, 2018 has granted a 3 year extension to the already existing exemption to Vessel Sharing Agreements[i] (hereinafter referred to as VSA) from the purview of Section 3 of the Competition Act,2002[ii], which deals with anti-competitive agreements. Section 3 (2) of the Competition Act, 2002 declares any form of anti-competitive agreement to be void in law[iii]. The granting of the exemption to VSAs in India means that such agreements are not anti-competitive within the meaning of the Competition Act, 2002 and thus not void in law in India. However, the grant of the exemption to VSAs in India comes with shortcomings of its own, especially when compared to the exemption granted to Vessel Sharing Agreements or agreements of the same nature in different parts of the world. Meaning of a Vessel Sharing Agreement Before going into details of the exemptions granted to Vessel Sharing Agreements in India and in different jurisdictions of the world it is important to know as to what a Vessel Sharing agreement means. Vessel Sharing Agreements are not defined under the provisions of any law applicable in India. Vessel Sharing Agreements also known as Liner Shipping Agreements in certain jurisdictions can be defined as”an agreement between 2 or more vessel-operating carriers which provide liner shipping services pursuant to which the parties agree to co-operate in the provision of liner shipping services in respect of one or more of the following- technical, operational or commercial arrangements prices remuneration terms[iv]“. Exemption to Vessel Sharing Agreements From The Competition Act in India It was in the year 2013 that the Ministry of Corporate Affairs for the first time using the powers conferred upon it by Section 54 (a) of the Competition Act[v] exempted Vessel Sharing Agreements from the purview of Section 3 of the Competition Act, 2002 for the period of an year[vi]. The MCA notification exempted all Vessel Sharing Agreements in Liner Shipping with respect to carriers of all nationalities operating ships of any nationality from any Indian port. The exemption subsequently was thereafter given on a yearly extension at the end of every previous extension. However, the practice changed in 2018 when the extension so granted by the MCA was for the next 3 years[vii]. The 2018 notification for the extension of the exemption from Section 3 differs from the original notification for the exemption in an important sense (the basic difference between the two notifications being the time period of the exemption from the purview of Section 3) as the same provides for reasons due to which the Government may decide to rescind the exemption so granted under the notification. The Government may choose to rescind the exemption if any complaint for fixing of prices, limitation of capacity or sales and allocation of markets or customers comes into notice[viii]. The European Theatre with Respect to Competition Law Exemptions to Vessel Sharing Agreements. It is at this juncture that it becomes very important to analyze the European state of affairs with respect to the exemption of Vessel Sharing Agreements from Competition Law in the European Union. Under the legal regime in the European Union, all agreements that restrict competition in the market are banned under the provisions of Article 101 (1)[ix] and Article 101 (2)[x]of the Treaty on the Functioning of the European Union ( hereinafter referred to as the TFEU). However, the Consortia Block Exemption Regulation[xi] (hereinafter referred to as the CBER) allows shipping lines with a combined market share of below 30%[xii] to enter into cooperation agreements to provide joint cargo transport service (known as the consortia or the consortium), hence saving such agreements from the purview of anticompetitive agreements as contemplated under Article 101 (1) of the TFEU. Such an exemption to Article 101 (1) is provided under the CBER on the ground that the agreement between such shipping lines should contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits without the elimination of competition[xiii]. The Consortia Block Exemption Regulation (under which the exemption period is 5 years) will expire on 25 April 2020. Thus, it was in June, 2018 that the European Union launched a review of the five year container shipping block exemption that is due to expire in the year 2020. It is on the basis of this review by the European that it will decide in the year 2020 with respect to the extension of the exemption. Arguments in the Favour of Competition Law Exemptions to Vessel Sharing Agreements One of the most contemplated advantages of giving block exemption to the consortium shipping companies/ Vessel Sharing Agreements under the various legal regime is that the same would help in improving the productivity and quality of the available liner shipping services[xiv]. It is often contemplated that the Consortium of Liner Shipping Companies and Vessel Sharing Agreements will also bring about Economies of Scale and Economies of Scope in the operation of vessels and port utilization[xv]. They also help to promote technical and economic progress by facilitating and encouraging greater utilisation of containers and more efficient use of vessel capacity[xvi].Thus, its often argued vehemently by liner shipping companies operating in various jurisdictions of the world that Vessel Sharing Agreements. in the greater good of the economy and towards the furtherance of the objective of Public Welfare should be exempted from the purview of the respective competition acts operating in different countries. Arguments against Extension of Competition Law Exemptions to Vessel Sharing Agreements However, in a sharp contrast with the arguments of the Shipping Councils in defence of the extension of the Vessel Sharing Agreements, a number of groups of Shippers Association have raised very serious concerns with respect to the further extension of the exemption. For instance, in Europe.

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Competition Law Concerns of Big Data

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[Venkata Sai Aditya Santosh Badana]   The author is a 4th year student of ICFAI Law School, Dehradun. Introduction: Several years ago, “The Economist Magazine” noted that data, particularly consumer data, had become “the new raw material of business: an economic input almost on a par with capital and labors.” The choice of buzzwords in the instant interplay between antitrust and the digital economy, however, is not merely “data”, but “big data”. Traits of “big data” that are frequently cited are large amounts of different types of data, produced at high speed from multiple sources, whose handling and analysis require new and more powerful processors and algorithms.[i] To simplify, “big data” is often defined by the three characteristics or “3 V”s – Variety, Velocity, Volume.[ii] This brings us to the question whether big data or data allied activities in general can be examined by the sector specific competition watchdog when inter alia Data protection Authorities are in place? To answer this intriguing question at its simplest, data is simply a product and a competition law analysis can be applied to it as is applied to any other product. Services founded on data can be analyzed in the same way under competition law as any other service.[iii] This article casts light on the debate of Antitrust concerns of Big data by examining some of the key issues and parameters that may need to be considered when assessing the nexus between market power, competition law and data. For this purpose it is necessary to first delineate what is by meant “big data”.The theories of anti-competitive harm usually associated with data collection and exploitation in digital markets are presented in section II, while theories to regulate Data driven combinations are dealt with in Section III. Anti-Competitive Arrangements and Big Data: Data collection may facilitate collusion when this data is employed to fix prices in tandem with the use of algorithmic technology.Factual examples of aforementioned scenario cases include United States v. Airline Tariff Publ’g Co.[iv] as well as the David Topkins case[v]. The ruling in that latter case stated that “in order to implement this agreement, David Topkins and his co-conspirators concurred to employ specific pricing algorithms for the agreed-upon posters with the object of corresponding changes to their assigned prices”. In furtherance of the conspiracy, David Topkins created a computer code that instructed Company A’s algorithm to set prices of the posters analogous to price fixing agreement, and the same algorithm was entrusted to ensure compliance. In pursuance with the agreements reached, The Northern District of California in San Francisco held that, “David Topkins and his co-conspirators sold, distributed, and accepted payment for the agreed upon posters at collusive, non-competitive prices on Amazon marketplace[vi].” Topkins also has agreed to pay a $20,000 criminal fine and cooperate with the department’s ongoing investigation. It is exigent here to outline that there that CCI as of date is yet to bring a successful prosecution or levelling of charges of employing big data for collusion. But there is glimmer of hope by drawing inferences from the recent development of CCI[vii] imposing a fine of Rs.258 crore on three leading airlines – Jet Airways, Indigo and Spice Jet after finding them guilty of tacit collusion and cartel like behavior in overcharging cargo freight in the garb of fuel surcharge. It essentially found that the three airlines had fixed a fuel surcharges at a uniform rate through algorithms on the very same day and they all increased the surcharges at the same time without any analogous rise in the fuel prices. Such conduct was found to have resulted in indirectly determining the rates of air cargo transport in contravention of section 3 of the Competition Act, 2002. Data-Driven Merger Control and Big Data: Mergers in technology sector beg the ever important question of whether an entity obtaining access to exclusive troves of big data can significantly foreclose or leverage competition? Access to data sets in a competitive markets can be of great value, for example when a data set facilitates more targeted advertising (behavioral targeting or micro targeting). While testifying before United States Congress, Mark Zuckerberg attested to the fact that, big data can potentially predict the outcome of elections.[viii] Few cases which have been subjected to merger scrutiny by the European Commission (the “Commission”) illustrate:  Google/Double Click[ix]: takeover price 3.1 billion dollar; Facebook/WhatsApp: takeover price 19 billion dollar and Microsoft/LinkedIn[x]: takeover price 26 billion dollar). All the above amalgamations have been unconditionally cleared with a few contingent directions, placing reliance upon the traditional litmus test of “significant impediment to effective competition” disregarding data analytics and third party data sharing. The European Commission’s Horizontal Mergers Guidelines, 2004 and Non-Horizontal Mergers Guidelines 2008 respectively do not outline the element of big data in merger control. Competition Commission of India (CCI) did not raise concern about Facebook/WhatsApp, while concerns about competitiveness associated with net neutrality are still fresh from the Telecom Regulatory Authority’s decision against discriminatory access to data services.[xi] While the CCI is yet to examine Big Data and its effects on competition, it is pertinent to visit opinion/Exposition 83/2015 issued by the CCI, wherein dominant position of WhatsApp and Google was averred by the Informant under Section 19.[xii] The Commission noted that the informant had failed to satisfy the ingredients of section 4 of the Competition Act 2002, under which, imposition of unfair or discriminatory terms has to be shown in sale of goods or service or price in purchase or sale of goods or services.The Google/Double Click merger decision includes nevertheless a significant disclaimer at paragraph 360: “it is not excluded that (…) the merged entity would be able to combine DoubleClick’s and Google’s data collections, e.g., users’ IP addresses, cookies IDs, connection times to correctly match records from both databases. Such combination could result in individual users’ search histories being linked to the same users’ past surfing behaviour on the internet (…) the merged entity may know that the same user has searched for terms A, B and C and visited pages X, Y and

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Promoter over-reach in Corporate Governance – Murthy v. The Board

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[By Vartika Tiwari] This Blog is part of a series of posts as a collaboration titled “KAIZEN” between the Centre for Business and Commercial Laws (CBCL), NLIU Bhopal and Law School Policy Review (LSPR). To view this blog on LSPR, please click here. Vartika Tiwari is a 3rd-year student of NLIU, Bhopal and a member of the Centre for Business and Commercial Laws. Earlier this year, Infosys Ltd. (“Infosys” or “the Company”) completed 25 years of stock market listing.[1] Through all these years, the Company has been one of the best in terms of stock returns, revenue growth and other financial parameters.[2]  Infosys and its iconic co-founder, N.R. Narayana Murthy, have long been admired and respected for delivering excellence while conducting business in a legal, transparent, and ethical manner.[3] However, even before the Company had attained the status of a bellwether for the IT industry, the Company had successfully managed to set a benchmark for corporate governance in India – from employee stock options to detailed financial disclosures.[4] In such a scenario, the past few months have been surprisingly marked with controversies and concerns over Infosys’ almost flawless corporate governance record. From the acquisition of Panaya to Ex-Chief Finance Officer (“CFO”) Rajiv Bansal’s 17.38 crore severance package, lately, it seems like Infosys is slowly losing its reputation in the market. This blog post will discuss these and other corporate governance issues that the tech-giant has faced over the past one year or so. In August 2017 the Company’s first non-promoter CEO, Vishal Sikka, resigned and the Board of Directors blamed co-founder Narayan Murthy for his exit.[5] The differences between Murthy and Sikka are said to have cropped up after a $200-million deal was struck between Infosys and Israeli cloud company Panaya.[6]As per reports, in February 2017 an anonymous whistleblower filed a complaint before SEBI, claiming that the deal was overvalued.[7] The whistleblower, in another letter, asked the market regulators in India and the United States to take action against the Infosys board for inconsistency.[8] In late 2015, the Company’s former CFO, Rajiv Bansal was sacked over differences with Sikka. The Company agreed to pay Bansal a severance package of Rs. 17.38 crore or 24-month salary but had failed to take approval of the nomination and remuneration committee and the audit committee of the Infosys board in arriving at a settlement regarding the severance money.[9] Consequently, Murthy raised concerns over this failure to disclose norms and claimed that the severance package was “hush money.”[10] However, an internal investigation committee gave a clean chit to the deal but the findings were not made public.[11]This was again contested by Murthy, who believed that the findings should be made public.[12] In April 2017, the Company has suspended payments after handing out Rs. 5 crore of the promised amount, after Murthy contested that the amount in total was “hush money” for hiding corporate governance issues under the former board of directors of the Company.[13] Later that month, Bansal invoked arbitration proceedings to contest the halting of the promised payment.[14]It was only recently that the issue finally got settled when Infosys lost the arbitral proceedings due to lack of evidence and was asked to pay Bansal the outstanding amount.[15] Amidst all this, Vishal Sikka resigned as the CEO and MD of Infosys, citing “personal attacks” on him as one of the reasons for his resignation.[16]Apart from this, newspaper reports claim that things such as Sikka’s salary, the appointment of Punita Sinha as an independent director and Sikka’s push for acquisitions have considerably strained Sikka’s relationship with co-founder Narayan Murthy.[17] It is worth noting that in a span of few months, apart from Sikka, Sangita Singh, Executive VP, Healthcare and Life Sciences and Nitesh Banga, Senior VP and Global Head of Manufacturing and Edge products, and CFO, M D Ranganath, have also stepped down from their roles.[18] In addition to this, a couple of other senior executives have stepped down too and former employees have been filing complaints of unpaid dues, thereby clearly showing that there is something seriously wrong with the way the Company has been conducting business lately. A similar situation was witnessed earlier when Tata Sons accused Cyrus Mistry, the CEO of Tata Consultancy Services (“TCS”), of lack of performance and corporate governance lapses.[19] This led to a very humiliating ouster of Mistry eventually.[20] Thus, the resignation of Sikka must not be viewed in isolation since it raises a bigger concern of over-involvement, or rather, interference of the founders of the company with the management of the company. It must be understood that independence of management is the very foundation of good corporate governance. In such a scenario, the behaviour of Indian promoters is also not in the direction to promote business practices that may be considered healthy. It is important for family-run businesses and for the promoters of a company to recognize this fact of independence of the management. Needless to say, the kind of behaviour that is exhibited by founders like Narayan Murthy and Tata Sons is only adding to the deteriorating state of corporate governance in India and discouraging potential investors internationally. Such conflicts and confrontations among reputed companies like Infosys and TCS would inevitably adversely affect the trust amongst global investors since these companies enjoy goodwill internationally. Another issue with such interference is that most companies look at IT giants like Infosys and TCS as benchmarks and are likely to follow the trend that has been set by them. Thus, ordinarily, it is advisable for the promoters to avoid unnecessary interference and to ensure that the management board is completely independent. However, the devil’s argument that both Tata and Infosys founders hold considerable shares in their companies and thus, as stakeholders, they have every right to nominate the directors and to keep a close watch on the way the company is being managed; holds equally true. Considering the clash of the interests of the company with those of the promoters, a middle path must be sought wherein not only the promoters should

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Disqualification of Directors under Section 164(2)(a) of The Companies Act, 2013: Madras High Court clears the Air

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[Devina Srivasatava]   Devina is a 4th year BBA LL.B. (Hons.) student at Symbiosis Law School, Pune. Introduction In the recent case of Bhagavan Das Dhananjaya Das v. Union of India[1], decided on 3rd August, 2018, the Madras High Court has set a significant precedent for matters concerning disqualification of directors under Section 164(2) of the Companies Act, 2013 (“2013 Act”). Various petitions were clubbed by the Madras High Court in this matter and the facts in all pertained to disqualification of directors on the ground of failure of the company to file annual returns or financial statements for 3 consecutive financial years. For instance, in the petition filed by Mr. Bhagavan Das Dhananjaya Das, the director of a private company called Birdies and Eagles Sports Technology, the company had been unable to commence business activities and had not filed annual returns since 2011-12. Accordingly, the Registrar of Companies, Chennai (“ROC”), struck off the company’s name from the Register of Companies under Section 248 of the 2013 Act after giving due notice. Various other companies were also struck off as part of the nationwide crackdown of over 2 lakh shell companies and their directors disqualified from being appointed or re-appointed as directors for the next 5 years.[2] Grounds for Challenge The writ petitions challenged the disqualification on two major grounds: Firstly, the 3 year period for disqualification under Section 164(2)(a) can only commence for private companies post the enactment of the 2013 Act. Hence, the year 2013-14 cannot be included in the 3 year period of default. Secondly, the principles of natural justice were violated as no opportunity to be heard was provided to directors before their disqualification. Analysis of Issues Involved Since there was no alternative remedy for challenging the disqualification and a statutory body like the ROC had allegedly misconstrued provisions of law, infringing on the fundamental rights of the petitioners, the writ petition was held to be maintainable. In deliberating upon the first issue of scope of the period of 3 financial years under Section 164, the court considered that the 2013 Act came into force only on 1st April, 2014 and as per the definition of ‘Financial Year’ contained in Section 2(41) of the Act, the first financial year under the Act commences on 1st April, 2014. Hence, if the three year period is considered to commence from 1st April, 2013, as done by the ROC, it would be inconsistent with the 2013 Act. In addition to this, no provision for disqualification of directors for failing to file annual returns existed under the Companies Act, 1956 (“1956 Act”) for private companies. Section 274(1)(g) of the 1956 Act, which provided for such disqualification applied only to public companies. Hence, to consider the year 2013-14 for disqualification of a director would be in contravention of law as the then applicable law did not attach any liability for default in filing annual returns or financial statements in case of a private company. This is also supported by the General Circular No. 08/14 by the Ministry of Corporate Affairs[3] which clearly states that financial statements in respect of periods prior to 1 April 2014 will be governed by the 1956 Act and that the provisions of the 2013 Act shall apply only thereafter. Moreover, the provisions of the Companies Act, 2013 ought to be read prospectively and cannot relate to occasions prior to its coming into force, failing which the said provision would become unconstitutional under Article 20(3) of the Constitution of India. Thus, the court held the disqualification of directors to be invalid and bad in law. As far as the second issue was concerned, the court noted that though the ROC had called upon the companies to explain as to why they should not be struck off, no notice was given for disqualification of their directors. The Court opined that these were two distinct and independent actions and a fair opportunity to be heard should have been provided to the disqualified directors. Thus, the Court thus read down Section 164(2) of the Act to the extent that a fair opportunity to be heard must be given to directors of a company before disqualification. Resultantly, the challenged orders of disqualification were set aside. Conclusion Scholars are of the opinion that the principles laid down by the Court have somewhat narrow as well as broad application.[4] Narrow because the decision as to the 3 year period will apply only to the current batch of disqualified directors and broad because the decision on reading down of Section 164 will have sustained implications. This aptly demonstrates the impact of the judgment. However, a question that arises is that even if the ROC gives a notice of disqualification and an opportunity to be heard to a director, what will be the grounds which will be considered as sufficient justifications for non-compliance with the statutory mandate of filing annual returns or financial statements? Section 164 provides no proviso to disqualification of a director for such a default and hence, it will be worthwhile to see if a notice of disqualification will only prove to be a mere legal requirement or actually serve a useful purpose. In August this year, the Supreme Court stayed another order of the Bombay High Court granting relief to disqualified directors[5] on different grounds. If the present matter is appealed against, whether the Supreme Court will adopt a pro-director stance or support the government in its endeavours– time will only tell. In any case, the decision is a landmark one as it not only provides clarity about the calculation of period of default by directors, but also upholds the principles of natural justice.       [1] 1967 SCC OnLine Mad 307. [2] https://www.livemint.com/Companies/1Y2Eru7mxnNgHoKkqXicHP/Over-2-lakh-shell-companies-to-be-struck-off-from-records-in.html. [3] General Circular No. 08/ 2014 dated 4th April, 2014, Ministry of Corporate Affairs, Government of India. Available at: http://www.mca.gov.in/Ministry/pdf/General_Circular_8_2014.pdf. [4] Umakanth Varottil, Madras High Court Grants Reprieve to Disqualified Directors, IndiaCorpLaw. Available at: https://indiacorplaw.in/2018/08/madras-high-court-grants-reprieve-disqualified-directors.html. [5] https://www.moneycontrol.com/news/business/supreme-court-stays-bombay-hc-order-granting-relief-to-disqualified-directors-2815121.html.  

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Companies (Significant Beneficial Ownership) Rules, 2018: An Overview

Leave a Comment / Company Law /

[Ishita Vyas and Akash Srivastava]   Ishita & Akash are 5th year students at HNLU, Raipur. Introduction The ‘White Paper on Black Money’ prepared by the Ministry of Finance in May 2012 categorically stated that black money has a “debilitating effect on the institutions of governance and conduct of public policy in the country”[1]. The Govt. of India has been persistently fighting against the menace of black money and corruption. In pursuance of that it had demonetized higher value currency in December 2016. The parliament also amended the Benami Transactions (Prohibition) Act, 1988 in November 2016. Moreover the Securities and Exchange Board of India, via its circular no. CIR/IMD/FPIC/CIR/P/2018/64 dated 10th April 2018, came out with new KYC requirements for ‘foreign portfolio investments’ that ultimately seek to reveal the names of the actual beneficiaries behind a particular investment or security. This step has been taken to check prevention of money laundering and round-tripping[2] of unaccounted income. Misuse of corporate vehicles for the purpose of evading tax or laundering money for corrupt or illegal purposes, including for terrorist activities has been a concern worldwide[3]. Complex structures and chains of corporate vehicles are used to hide the real owner behind the transactions made using these structures.[4] On the same lines, the Ministry of Corporate Affairs (“MCA”) sought to amend the Companies Act in 2017. The Companies (Amendment) Act, 2017 has brought about some major changes to the law governing companies in India. It has introduced the concept of beneficial ownership along with an exhaustive compliance requirement with respect to reporting of the same. Section 89 and 90 deal with declaration of beneficial ownership and registration of significant beneficial owners in a company. In order to supplement the statutory provisions, the MCA has also notified the Companies (Significant Beneficial Ownership) Rules, 2018 on June 13, 2018. Important Definitions Firstly, beneficial interest (“BI”) refers to the right or entitlement of a person alone or together with any person, directly or indirectly, through contract, arrangement or otherwise, to exercise or cause to be exercised any or all of the rights attached to the share; or to receive or participate in any dividend or other distribution in respect of such share[5]. A significant beneficial owner (“SBO”)[6] is an individual who holds not less that 10%[7] of shares in a company or the actual exercising of significant influence or control, over the company, but whose name is not entered into the register of members of the company[8]. It has been further explained that depending on the form of business the method of identification of the Significant Beneficial Owner will vary[9]. In case of a the member being a company, the significant beneficial owner shall be the natural person, who holds not less than ten percent of the share capital of the company or who exercises significant influence or control in the company through other means. In case of the member being a partnership firm, the significant beneficial owner is the natural person who holds not less than ten percent of capital or has entitlement of not less than ten percent of profits of the partnership. Moreover, where there is no natural person identifiable then the person who holds the position of senior managing official will be the SBO.[10] In case of the member being a trust, the SBO would be the author, trustee and the beneficiaries with not less than ten percent interest in the trust and any other natural person exercising ultimate effective control over the trust through a certain chain of control or ownership. Whereas a ‘registered owner’ means a person whose name is entered in the register of members of a company as the holder of shares in that company but who does not hold beneficial interest in such shares[11]. Compliances The compliances can be categorized into three divisions on the basis of applicability. For a registered owner: A registered owner is supposed to make a declaration to the Company specifying the name and other particulars of the person who holds the beneficial interest in such shares, as specified[12]. The rules do not specify any particulars or any particular form which needs to be referred to for this declaration. For a person holding beneficial interest: Holder of beneficial interest must submit a declaration to the company specifying the nature of his interest and particulars of the corresponding registered owner in whose name the shares are held. However, a declaration form has been prescribed only for the declaration of significant beneficial ownership. Such a declaration needs to be made within 90 days[13] of the commencement of the SBO Rules and within 30 days[14] in case of any change is Significant Beneficial Ownership. Such declaration must be made in the prescribed format i.e. Form BEN- 1 For the Company: Whenever a declaration has been made under Section 89 to a company, the company is supposed to make note of those declarations in a separate register.[15] It is also supposed to file a return to the Registrar of Companies (“ROC”) regarding such declarations within 30 days of receiving these declarations. The return needs to be filed the format of Form BEN-2. The register of declarations needs to be prepared in the prescribed format i.e. Form BEN- 3. This register shall be open for inspection during business on every working day as decided by the Board of Directors of the Company. The inspection can only be open for members and for not less than two hours each day. The company can charge fees subject to a maximum of Rs 50.[16] A company shall also have to give notice to any person whom the company knows or has reason to believe to be a significant beneficial owner of the company, or to be having the knowledge of the identity of an SBO or another person likely to have such knowledge or to have been an SBO of the company at any time during the preceding three years from the date of issue of notice and who is not

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P.Radha Bai and Ors. v. P. Ashok Kumar and Anr.: An Interplay of Limitation and Arbitration

3 Comments / Arbitration Law /

[Saara Mehta]   Saara is a 4th year student at NLIU,Bhopal. Introduction A case decided on 26th September, 2018 by a Division Bench of the Supreme Court, P.Radha Bai and Ors. v. P. Ashok Kumar and Anr.[1], is an aid towards understanding how the Limitation Act, 1963 (“Limitation Act”) operates vis-à-vis the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The issue under consideration was whether Section 17 of the Limitation Act could be used to condone the delay in filing an application to set aside the award under Section 34(3) of the Arbitration Act. Under Section 17, the period of limitation begins to run from the time when fraud played against the award debtor is discovered or could have been discovered with reasonable diligence.[2] Factual Matrix and Adjudication prior to the Supreme Court An award was made in February, 2010 by a tribunal adjudicating a dispute between the Appellants no. 1-6 and Respondents no. 1 and 2, all heirs of a common descendent. The award was received within 3 days of its delivery. According to the Respondents, the Appellants entered into a Memorandum of Understanding (“MoU”) with the Respondents in bad faith. They submitted that pursuant to this, the Appellants agreed to give certain properties to Respondent no. 1, which cumulatively were more than what the award stipulated. Further, after entering into the MoU,   the   Appellants   were   required   to   execute   Gift   and Release   Deeds   to   give   effect   to   the   MoU. This execution, allegedly, was delayed intentionally, owing to which the limitation period to apply for execution of the award under Section 34(3) (three months and an extended period of 30 days) expired. On expiry, the Appellants filed an Execution Petition for execution of the award, but the trial court held that this was not maintainable. On appeal, the High Court set aside this order; the trial court was directed to decide the petition on its merits. On realising the intentional delay of the Appellants in executing the gift deed, the Respondents applied under Section 34(3) of the Arbitration Act. They sought to condone the delay in the application on account of fraud by the Appellants. The City Civil Court, Hyderabad, dismissed the application on the ground that it was not empowered to condone delay beyond three months and 30 days, as stipulated in Section 34. Following this, four civil revision petitions were filed by the Respondents before the Andhra Pradesh High Court under Article 227 of the Constitution. The High Court remanded the matter back to the trial court solely for determination of the question of whether Section 17 of the Limitation Act would apply to condone delay in filing an application under Section 34(3) of the Arbitration Act. The Respondents, aggrieved by the High Court’s order, appealed to the Supreme Court in the present case. The Supreme Court’s Decision The Respondents submitted that since application of Section 17 of the Limitation Act had not been specifically excluded under the Arbitration Act, the benefit of Section 17 should not be denied to the Respondents. The Supreme Court, in this regard, took note of Section 29(2) of the Limitation Act, which provides: “Where any special or local law prescribes for   any   suit,   appeal   or   application   a   period   of limitation different from the period prescribed by the   Schedule,   the   provisions   of   Section   3   shall apply   as   if   such   period   were   the   period prescribed by the Schedule and for the purpose of determining any period of limitation prescribed for any suit, appeal or application by any special or local law, the provisions contained in Sections 4 to 24 (inclusive) shall apply only in so far as, and to the extent to which, they are not expressly excluded by such special or local law”.[3] The case of Vidyacharan Shukla v. Khubchand Baghel and Others[4] was relied on to interpret this section. This case provides that Section 29(2) has two limbs. The first limb is that the limitation period prescribed by the special law or local law shall prevail over the limitation period prescribed in the Schedule to the Limitation Act. In the present case, the Supreme Court noted that the Arbitration Act was a special law and thus the period in Section 34(3) would apply to filing objections to the arbitral award. The second limb, identified in Vidyacharan, is that Sections   4   to   24   of   the Limitation   Act   will   apply   for   determining   the   period   of limitation “only in so far as, and to the extent to which, they are   not   expressly   excluded   by   such   special   or   local   law.”[5] Thus, the Court held that Sections 4 to 24 would apply towards limitation period under the Arbitration Act only if these sections were not expressly excluded under the Act. Relying on previous pronouncements, in which Section 12 and 14 of the Limitation Act had been extended to condone delay under Section 34, the Respondents argued that since application of Section 17 had not been expressly excluded by the special law, it could be extended in the same way. Citing Vidyacharan, as well as Hukumdev Narain Yadav v. Lalit Narain Mishra,[6] the Court concluded that “express exclusion can be inferred either from the language of the special law or it can be necessary implied from the scheme and object of the special law”. The Court observed that there existed a contradiction in the language of Section 17 and Section 34(3). The Supreme Court, inter alia, observed as follows. First, Section 17 of the Limitation Act does not extend or break the limitation period. It only postpones commencement of the limitation period till the applicant has discovered the fraud. Besides, Section 34(3) of the Arbitration Act has a limitation provision built in itself. It provides that the limitation period commences from the when a party making an application had received the arbitral award, or from the disposal of a request under Section 33 of the Arbitration Act for correction and interpretation of the Award. Section

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Securities and Exchange Board of India (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018: An Overview

Leave a Comment / Capital Markets and Securities Law /

[Utkarsh Jhingan & Akhil Kumar]   Utkarsh and Akhil are 4th year students of NUALS, Kochi. Introduction Securities Exchange Board of India (hereinafter “SEBI”) vide Notification Number: SEBI/LAD-NRO/GN/2018/39, dated October 3, 2018 notified the Securities and Exchange Board of India (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018, (hereinafter “Regulation”). These Regulations have been made by SEBI in exercise of the powers conferred by Section 30 read with sub-section (1) of Section 11 and Section 28A of the Securities and Exchange Board of India Act, 1992[i] (15 of 1992), Section 23JB of the Securities Contracts (Regulations) Act, 1956[ii] (42 of 1956) and Section 19-IB of the Depositories Act, 1996[iii] (22 of 1996). The Regulation aims to recover investors’ money in cases of felonious collective investment schemes. The provision of this Regulation shall apply mutatis mutandi in respect of the proceedings under the Securities Contracts (Regulation) Act, 1956 or the Depositories Act, 1996. These Regulations are a follow up to an earlier decision by the SEBI to empanel third party workers as receivers for management and sale of assets attached through regulatory orders for recovery of penalties and investors’ money from defaulters who have failed to return monies to the investors. The order in the case of Opee Stock Link[iv] was the first disgorgement order that was passed by the Supreme Court. In this case, shares of Jet Airways Limited and Infrastructure Development Finance Company Ltd. were offered to the public at large. The issue of shares in relation to both the companies had been oversubscribed. However, there were several irregularities that had been committed by certain persons related to both the companies. As a result of these irregularities, the Supreme Court ordered to compensate the retail investors. Further, the passing of these Regulations is a step taken forward by SEBI to seek disgorgement of unlawful gains from the culprits. Applicability The Regulation shall only be applicable in cases where a non-compliant entity of SEBI’s orders is untraceable. In such cases, the Recovery Officer (hereinafter “RO”) can appoint an administrator for the purpose of selling the attached properties and refunding the promoters. According to Provision 5 of the Regulation, only persons registered with Insolvency and Bankruptcy Board of India (hereinafter “IBBI”) as Insolvency Resolution Professionals (hereinafter “IRPs”) are eligible for such appointment. The administrator under Regulation 5(4) has a duty to provide an undertaking to the Board of absence of any conflict of interest with the defaulter, directors, promoters, key managerial personnel and the group entities.[v] Additionally, he should also be a person who is independent/impartial and devoid of any conflict of interest throughout the tenure. It has been provided that any dispute regarding the conflict of interest of the Administrator shall be decided by the RO. Terms of Appointment Regulation 6 provides that both the terms of appointment and remuneration shall be decided on a case to case basis after taking into consideration the amount of work, number of investors and the amount involved. Functions The administrator shall perform his functions as per the directions of the RO. He is empowered to obtain any document regarding ownership and possession of properties, claims of investors, details of amounts raised and the amount of settled debt from the defaulter or any other person. He shall also maintain a record of the properties attached in the process, the bank as well as dematerialized accounts and the value of monies and securities held by the defaulter. Furthermore, he shall also sell the attached properties as per the directions of the RO. The Regulations also empower the Administrator to carry out any act with the prior approval of the RO essential for the purpose of carrying out his duties thereto. In the process of discharging his functions, the Administrator can appoint independent charted accountants to verify the details of amount raised and the quantum of debt already settled. He shall also submit monthly report(s) as and when called by the RO for the purpose of determining the progress made by him.  Sale of properties The process of sale of properties will be undertaken by the Administrator after he conducts an independent valuation of the property. The Administrator also has the option of undertaking the sale of property via e-auction for which he can engage an e-auction agency. The RO after considering the valuation report may put a reserve price on the property. Regulation 9 states that the Administrator shall also issue advertisements in an English and Hindi Newspaper having nationwide circulation for the purpose of inviting claims from the investors. The defaulting company and its officers are also supposed to furnish an undertaking that they shall be liable for payment if any complaint is received in future by the Board from any investor. Cost incurred in Administration and Repayment Process The entire cost that is incurred in relation to the sale of properties, verification, remuneration of the administrator and any other person appointed by him in connection to the repayment process shall be borne by the defaulter. If he fails to pay, then the cost incurred in the administration and repayment process shall be given priority over other liabilities. Furthermore, the cost and expenses incurred should be reasonable, should be directly related to and necessary for the act and purpose mentioned in the Regulations. Priority in Distribution of Sale Proceeds The amount recovered from the sale of properties of the defaulters shall firstly be used for the purpose of adjusting the costs incurred by the Board including the charges to be paid to the administrator and persons appointed under him. Thereafter, the remaining amount shall go to the investors and the penalty/fee due from the defaulter to SEBI in the order of priority. Return of Monies Exceeding the Liability In circumstances where excess monies exist after the completion and payment of all the defaults and the amount due, it shall be paid to the defaulter upon the completion of three years after the completion of the refund process. It is

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