Author name: CBCL

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

Insolvency Law /

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

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IBC Amendment, 2020: A Delusional Relief for Homebuyers

Insolvency Law /

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

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

Competition Law, Uncategorized /

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

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

Competition Law /

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

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Arbitrability of Disputes Involving Commercial Fraud: What Does the Modern Arbitration Regime Hold?

Arbitration Law /

[By Arjun Sahni and Moksh Roy] The authors are third year students of Symbiosis Law School, Noida. Introduction The regime and system of international arbitration, including the procedure, applicable laws, inter alia, are ever changing. One such issue pertains to the element of arbitrability, that is, whether a particular subject matter is capable of being referred to arbitration or not. This problem arises even when there is an arbitration clause/agreement that specifically governs the dispute or the subject matter in question. Historically, disputes involving the elements and claims of bribery/corruption, antitrust/competition, intellectual property rights, employment and labour disputes et al. were considered to be non-arbitrable.[i] The idea behind this has been that such claims run contrary to the aspects of international as well as national public policy, and party-appointed private individuals do not have the power, competence, and right to render decisions with respect to such claims.[ii] However, exponential development in international and domestic arbitration jurisprudence has led to a drastic change in the fora of arbitrability as many jurisdictions have become pro-arbitration and consider that almost all disputes are capable of being referred to arbitration,[iii] including the ones which are tainted with the aspects of commercial fraud, corruption & bribery.[iv] To date, the law, in international and domestic legislation, is not entirely clear on even if claims involving expansive elements of corruption and bribery can be referred to arbitration and how such claims are to be arbitrated. What do we mean by commercial fraud? The UNCITRAL Guide on Recognizing and Preventing Commercial Fraud, 2013 defines it as an element of deceit having a serious economic dimension as a result of which there is a loss of value. Consequently, elements of corruption and bribery become integral to the aspect of commercial fraud. Corruption relates to the abuse of some entrusted power for private gain whereas bribery is the act of receiving preferential treatment, be it in the form of money, goods and/or services, in exchange for doing or abstaining from doing something which runs contrary to the settled law.[v] The position of these elements in law is that they attract penal provisions and are termed as criminal actions, be it in the international or domestic front. Arbitrators are individuals appointed by private parties for resolving disputes between themselves, whereas criminal acts are the actions against the state and public peace.[vi] States have in the past, been reluctant to let arbitrators decide such matters; however, that trend has undergone a change. Position of the New York Convention, 1958 and the UNCITRAL Model Law on International Commercial Arbitration, 1985 (the Model Law) Drawing on the Geneva Protocol, 1923, New York Convention’s Article II(1) provides that an international arbitration agreement shall only be valid if it “concerns a subject matter capable of settlement by arbitration”. On the same lines, Article V(2)(a) of the New York Convention puts forth that an arbitration award may not be recognized if “the subject matter of the difference is not capable of settlement by arbitration”. On a bare reading of these provisions, it is not entirely clear what makes a dispute not capable of being settled by arbitration. If the parties agree on referring their differences to arbitration, virtually nothing can hold them back.[vii] The UNCITRAL Secretarial Guide on the New York Convention, 2016 puts forth that the definition and scope of the term “subject matter” is dependent upon its interpretation rendered by courts of different countries. The same goes for the wordings of Article V(2)(a) of the New York Convention. The Supreme Court of the United States of America in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 1985 was faced with a similar problem and the bench was of the opinion that in the absence of a clear list of disputes that are non-arbitrable, the domestic laws which are applicable to the arbitration agreement or laws as determined by the conflict/choice of law rule will have to be taken into consideration and the issue of arbitrability will depend on those domestic laws. The Model Law does not contain a single provision that specifically relates to the aspect of arbitrability, thereby signifying that all the disputes are arbitrable and capable of being referred to arbitration.[viii] The arbitrability issue in the context of the Model Law is, similar to the position of the New York Convention, dependent on the domestic laws of a country. What do the national jurisdictions hold? In many arbitration friendly regimes, such as the United Kingdom and Singapore, the questions of arbitrability of disputes tainted with corruption & bribery rarely find a place.[ix] Similar to India’s position, the domestic legislation of these countries do not explicitly mention what kind of disputes can and cannot be submitted to arbitration. In the absence of the same, such a determination is on a case to case basis, subjectively, based on precedents and national court’s rulings. As far as the United Kingdom’s position goes, the infamous decision rendered by the House of Lords in the Fiona Trust & Holding Corporation v. Privalov in 2007 made it crystal clear that even the disputes that are tainted with the elements of fraud are arbitrable. The Bench based its decision on the principle of separability, that an arbitration clause/agreement is separate and distinct from the contract in question, and in light of the same, even if the contract is tainted with the elements of fraud, the arbitration agreement will retain its full vigour and the constituted arbitral tribunal will have the requisite jurisdiction. The Court was of the opinion that such disputes can be subjected to arbitration unless and until the law clearly prescribes the contrary. India’s position on the subject still remains unclear. The Supreme Court decision rendered in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. in 2011 laid down the first test to determine arbitrability of disputes. The bench opined that disputes involving the aspects of public policy, fraud and corruption give rise to the aspects of in rem rights (something that affects the world at large)

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Rights Issue of Fully Convertible Debentures: The Canning Industries Case

Company Law /

[Guest Post by Gaurav Pingle] The author is a practicing Company Secretary and runs his own CS firm, Gaurav Pingle & Associates, Pune. Background Section 23 of the Companies Act, 2013 (“the Act”) relates to ‘public offer and private placement’. According to the said provision, a public company may issue securities to public through prospectus (i.e. Initial Public Offer/Further Public Offer) or through private placement[i] or through rights issue[ii] or bonus issue[iii]. In addition to this, a public company can also issue ESOPs or debentures[iv]. However, the question for interpretation arises when a public company issues securities and such issue falls under two or more provisions of the Act. The requirement of valuation is different for rights issue, private placement or public offer of securities. In addition to this, the Act read with the Companies (Share Capital and Debenture) Rules, 2014 has significantly enhanced the compliances, disclosures, documentation and reporting for such issue of securities. Section 42 of the Act, which relates to issue of shares on private placement basis was entirely substituted by the Companies (Amendment) Act, 2017[v]. However, irrespective of substitution, the underlying theme has not changed i.e. offer and issue of securities to certain investor(s) only i.e. ‘select group of persons’. In the recent case of Canning Industries Cochin Ltd. v. SEBI[vi], decided on 28 January 2020, Securities Appellate Tribunal (“SAT”) has interpreted the provisions relating to private placement of securities. This article analyses Section 42 of the Act along with the said SAT judgment. Facts of the case Canning Industries Cochin Ltd. (“Company”), an unlisted public company (having 1,929 shareholders) passed a special resolution[vii] for issuing 1,92,900 unsecured Fully Convertible Debentures (“FCDs”) of Rs. 250/- each to its 1,929 shareholders at the rate of 100 FCDs, with no right to renounce the offer to any other person. The debentures were issued for a period of 5 years i.e. every FCD would be compulsorily converted into equity shares on maturity or earlier if the call option is exercised by the Company itself. However, the Company was able to raise funds only from 335 members. One disgruntled shareholder filed complaints before SEBI and NCLT alleging that the Company has made public issue of securities without complying with the provisions of the Act. The Company contended that the same was neither rights issue as issue was not made on a proportionate basis, nor was it private placement as no ‘select group of individuals’ were identified for the issue in question. It however claimed the issue to be made on preferential basis under Section 62(1)(c) of the Act. Issue for consideration Whether the said issue of FCDs would be deemed public issue under Section 42 of the Act? Observations of SEBI SEBI in its Order dated 18 March 2019[viii], observed that an offer to 335 persons is a ‘deemed public issue’ as it violates the provisions of Section 42(1) of the Act. SEBI also observed that the Company was required to comply with the relevant IPO related provisions and was required to make an application to one or more of the stock exchanges for listing, which the Company failed to comply. Observations of SAT On appeal, SAT observed that Section 42 of the Act is not applicable to the offer of FCDs as it is not ‘private placement’ of securities. SAT observed that ‘private placement’ means an offer to subscribe securities to a ‘select group of persons’ by a company. The term ‘select group of persons’ though not defined in the Act, indicates a specified number of persons limited to aggregate 200 in a financial year. It was observed that since the offer was made to 1929 shareholders, the offer of said FCDs cannot be termed as an offer to a ‘select group of persons’. SAT observed that “the expression ‘select group of persons’ is not a technical expression but has to be understood in its ordinary popular sense, namely, an offer made privately such as to friends and relatives or a selected set of customers distinguished from approaching the general public or to a section of the public by advertisement, circular or prospectus addressed to the public.” SAT further observed that restriction of subscription of shares to 200 persons or more is not applicable in the instant case as it is not a ‘private placement’. SAT also observed that section 62(1)(c) of the Act is not applicable as it is not a case of issuance of shares/securities on preferential basis. Analysis of SC Order in the Sahara case Before we analyse the said SAT order, let us refer to some important and relevant observations of Supreme Court (“SC”) in Sahara India Real Estate Corporation v. SEBI[ix]. In this case, an offer was made to public under the garb of private placement of securities[x]. SC observed that Section 73(1) of the Companies Act, 1956[xi] casts an obligation on every company intending to offer shares or debentures to the public to apply to recognised stock exchange for listing its securities. SC further observed that if an unlisted company expresses its intention, by conduct or otherwise, to offer its securities to the public by the issue of a prospectus, there arises a legal obligation on the company to make an application on a recognized stock exchange for listing. Even though the overall principle was laid down by SC under the Companies Act, 1956, it is still noted and referred by SEBI in many cases dealing with public issue of shares or securities, and stands valid under the provisions of Companies Act, 2013. Interestingly, provisions relating to private placement of securities have been introduced with an objective to avoid Sahara-like events in future i.e. offer to public under the garb of private placement of securities. Analysis of SAT Order FCDs were offered to 1,929 persons, however all the offerees were existing shareholders. Also, the right of renunciation was not part of the offer. Issue is whether such offer is rights offer or public offer or an offer that violates the provisions of

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Raising the IBC Threshold: Addressing the Needs of MSMEs and Home Buyers

Insolvency Law /

[By Urmil Shah] The author is a third year student of Auro University, Surat. Introduction The Ministry of Corporate Affairs on 24 March, 2020 raised the minimum threshold requirement for initiating a Corporate Insolvency Resolution Process (“CIRP”) under Section 4 of the Insolvency Bankruptcy Code (“IBC” or “the Code”) from existing Rs. 1 lakh to Rs. 1 crore by way of Notification S.O. 1205(E) as measure for combating the Covid-19 pandemic. Among other relations and exemptions to companies from routine disclosures and compliances announced by the Government in wake of the recent pandemic, the increase in threshold comes as controversial as the measure has the effect of spurring a conflict between Corporate Debtors (“CD”) and Financial Creditors (“FC”). A similar debate arose when the Central Government reduced the pecuniary jurisdiction of the commercial courts under the Commercial Courts Act, 2015 from Rs. 1 crore to Rs. 3 lakhs in wake of making it more accessible to common people.[i] The effect was that it led to multifold increase in litigation in these courts which was earlier being settled or resolved through alternate modes of resolution. Similarly, the change of threshold requirement for determination of default and triggering insolvency for corporates in the IBC follows both affirmation and depression in itself. The Finance Minister mentioned that such a step is taken due to limited functioning of the MSME sector on account of pan-India lockdown and to avoid large-scale insolvencies as a result of financial distress to such small companies and MSMEs. Such a legislative reform is a welcome relief due to the virtual shutdown of the economy and suspension of business is bound to have domino-effect across contracts entered into between parties and trigger the force majeure clauses in the contracts resulting in either frustration or non-performance of such a contract. Resultantly, the Ministry of Finance announced that the pandemic can be treated as a natural calamity and the force majeure clauses maybe invoked as consequence when required. The critical question to be addressed is whether the change is temporary in nature on account of the pandemic or permanent as it may well be counter-productive to the interest of certain class of small yet significant creditors like MSMEs and home buyers and may defeat the purpose of safeguarding the interest of MSMEs. MSME Sector – A Bouncing Bouncer? The Micro Small and Medium Enterprises Development  Act, 2005 (“MSMED Act”), although does not  provide for a specific mode for recovery on account of insolvency for the MSMEs but addresses the issue by alternative mode of resolution to delayed payments and offers a handsome rate of interest at 18% for such delay. The present notification in no way benefits the MSME sector as 97% of the sector operates as either proprietorship or partnership, the insolvency provisions for which have not been notified yet.[ii] Even the remaining 3% of the MSME sector which are companies, a majority of them are Operational Creditors (“OC”) [iii] themselves[iv] and have utilized the mechanism as a means to find resolution of their dues and not that of the defaulter, thereby going against the legislative intent behind enactment of the Code to have a resolution mechanism in place for insolvent businesses. MSME as creditors: Since the companies within the sector operate at a miniscule level with limited capital requirements, their offerings are not as huge as FCs of other sectors and accordingly the debt rendered by them will be classified as operational debt. The notification of increased threshold will have the effect of nullifying the benefit that these creditors earlier obtained as actionable claim against the default which would have previously been qualified to initiate CIRP as it is impractical to expect a single OC to have a claim as high as Rupees 1  crore,[v] considering the fact that OCs triggered almost 53% of the CIRPs for the quarter Oct-Dec, 2019.[vi] Such a reform goes against the spirit and letter of law as decided in the Swiss Robbins case[vii] to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. MSME as debtors: The amendment comes as knight in shining armor for the limited MSMEs who are CDs as it has been discoursed that the Code does not offer the most effective regime for the insolvency resolution of smaller CDs.[viii] It is in concurrence with the spirit envisaged by the Insolvency Law Reforms Committee that the sector is key driver of economic growth, entrepreneurship and financial inclusion in the country.[ix] The selected CDs of this sector will be benefitted for the time being from unnecessary and excessive insolvencies due to the increased threshold limit. Homebuyers – The Active Creditor Class? An important consideration for homebuyers is that the Real Estate (Regulation and Development) Act, 2016 (“RERA Act”), provides for refund of amount received for carrying out the project including compensation in case of withdrawal by the allottee and monthly interest for delay in possession by the promoter in case of non- withdrawal from the project. Considering this remedy for homebuyers, approaching the insolvency court is only a mode of forum shopping and liquidating happy-going businesses for a meagre sum of default, considering the quantum of claims received by NCLTs and NCLAT, the adjudicating authority and appellate mechanism envisaged under the Code. Since the formation of Code in 2016, homebuyers have been the most active creditor class and have triggered several amendments, including the Second Amendment Act, 2018 which declared them as FCs.[x] However the controversial IBC Amendment, 2019  which introduced a minimum threshold limit of 100 or 10% of allottees in a project or class of investors to approach the Adjudicating Authority for initiating CIRP, is challenged before the Supreme Court. The interest of homebuyers from standpoint of both legislature and judiciary is clear to place their benefit over and above the other creditor class. The present notification however is not likely to have a major implication considering their status under the Code, as the claim of 100 or 10% of the allottees can easily amount to 1 crore. The critical consideration however is that

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Covid-19 and Stock Market Crash: Should SEBI Ban Short-selling?

Capital Markets and Securities Law /

[By Tanuj Agarwal] The author is a third year student of Institute of Law, Nirma University, Ahmedabad.  Introduction Covid-19 pandemic has raised serious apprehensions surrounding health and safety causing a lockdown in India.  The pandemic has caused a worldwide recession and has spooked investors’ sentiment. Prior to the coronavirus outbreak, Indian stock market was in full positive swing as Sensex and Nifty had reached their all-time intraday peak of 42,273.87 and 12,430.50 respectively in the month of January, 2020. Even after attaining such progress, Indian stock market is witnessing the most difficult period for the past few weeks. The stock market has observed lower circuit levels after 12 years on March 13, 2020. Afterwards, the equity index discerning a continuous downfall. On March 19, 2020, Sensex crashed below 27,000 and Nifty breached the level of 7,900, thereby attained their five-year closing low levels. Consequently, an approximate downfall of 37% is evident in both the equity indices within a period of just 2 months. The stock market has seen a considerable collapse due to high market volatility. This downfall has degraded the financial market and faded interest of investors and corporates. Thereby, the concern is whether such market downturn can be controlled by restricting short-selling. Short-Selling and its Impact on the Stock Market Short-selling means selling a stock which the seller does not own at the time of trade. It is a practice in which financial traders hold bets on specific shares that they expect a fall in price. A modest fee is paid to borrow some stock in the company to sell them. Further in case the market obliges, the financial trader will buy the shares at the lower price and book the profit. All classes of investors including retail and institutional investors are permitted to do short-selling. The mechanics of short-selling are such that it inflows supply of specific shares in the stock market. These are the shares which are not even owned by the supplier. Consequently, such a scenario creates an excessive supply in the stock market. Thereby, this excess supply leads to a decrement in the price of these shares to settle for an equilibrium with the demand in the market. The mechanism is at times also useful for real price discovery of overpriced share. However at the same time, excessive short selling may decrease the price more than the actual worth of the company, as apart from the business competence, the prices in stock market are highly determined by market forces.  Covid-19 and Short-Selling With the advent of Covid-19, there is shutdown of almost all cities in India. This raises serious business concerns and results in depression of various industries. Thereby, there is an apparent market expectation of fall in stock market too. In pursuance of such expectation, the market speculators are expected to do massive short-selling with a view to pocket profit in case of fall in price of shares. Consequently, the huge amount of shorting by big market players leads to decrease in price of shares in excess of what it naturally (through market forces) might have observed because of business downturn. The fall in price of shares because of business disgrace due to coronavirus is very much conceived, however the question is regarding the excessive decrease in price due to excessive short-selling. In view of corona-pandemic, market players would be very much tempted to capitalise the downfall of share price caused by business loss. Indian stock market has observed a huge short-selling in future segments of index such as Sensex, Nifty and Bank Nifty. During the last week, the net shorting in equity index reached 173,000 contracts. Moreover, foreign portfolio investors have also piloted enormous shorting in India. These investors have perceived Rs. 26.32 lakh crore of speculative volume in derivatives. Such a scenario of extreme shorting resulted in incessant fall in stock market. Ban on short-selling: A temporary yet effective solution The permanent solution to improve the market condition is to get rid of coronavirus which seems to be difficult considering the present set-up. However, effective steps are required to be taken to control the ongoing menace in the capital markets. As demonstrated that short-selling plays a vital role in downturn of equity index and leads to abnormal fall in share prices in such panic business conditions, ban on short-selling practice for the time being can be an effective solution to control the continuous drop in stock market. Short-selling market speculators worsen the general market scenario. Amid excessive panic triggered short-selling, the capitalisation on the reduction of a share value intensifies market fluctuations. Such stock market instability impersonated a serious threat to confidence of retail market players in India as shorting can surge price swings which lead to deterioration of financial markets. The ban on short-selling will help to restore steadiness in the distressed financial market. Notably, the ban can diminish the speculative hammering of the shares and consequently, to some extent, would aid in alleviating the market. Many countries such as Italy, Spain, France, and Belgium banned short-selling with a view to control the fall in their equity index. On the other hand, the U.S. has not suspended the practice of short-selling, even after observing huge market crash. The U.S. short-sellers have made a profit of $343.67 billion in a month, at the cost of public investment in such an ongoing darkened stock market. India should not adopt the U.S. approach which permits short-sellers to make profit by using excessive market volatility due to coronavirus pandemic. Increase in short-selling doesn’t indicate improvement in bearish market. This would be detrimental to public shareholders and may expose Indian stock market at risk, likewise of 2008 financial crisis. China has also wisely handled the corona-outbreak with respect to its volatility of stock exchange. China is miserably shaken by the colossal flood of cases of coronavirus, yet Shanghai Composite Index (SCE) has observed a deterioration of mere 2.53% since the first case was reported in the country. To stabilise the effect of such panic

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Privacy and Data Protection – Implications on Fintech in India

Contemporary Issues /

[By Shubham Jain] The author is a fourth year student of National Law University, Jodhpur. Introduction The issue of privacy and data protection was thrown into the limelight after the Justice K.S. Puttaswamy Judgement which recognized the right to privacy as a fundamental right enshrined under Article 21 of the Indian Constitution.[i] Instances like the AADHAR data leak,[ii] Cambridge Analytica and Facebook data breach;[iii] etc. raised concerns about data protection, existing infrastructure, and the current state of affairs pertaining to cross-broader trading of data. While the concerns regarding privacy were grabbing headlines, FinTech industry in the country was booming because of demonetization, and government’s push towards boosting e-payments in the country. The term FinTech is often defined as the “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services”.[iv] The FinTech industry is aimed at bringing technological innovations to the banking and financial sector.[v] According to estimates, the digital payments industry in India is projected to reach USD 700 billion by 2022 in terms of the value of transactions.[vi] FICCI projects the global FinTech sector’s value at $45 billion by 2020, growing at a compound annual growth rate of 7.1%.[vii] Needless to say, the concerns regarding data protection affect the FinTech industry as well. Therefore it is important to ensure that the data of the consumers provided to the FinTech entities protected, while ensuring the industries growth. Data Protection and Privacy The Srikrishna Committee noted that the conception of privacy is based on society and culture which determines what may be construed as violation of privacy.[viii] It further noted that the data protection principles are founded in the trust of citizens over the entities governing it.[ix] The entities could be either the regulatory authorities; or the private corporations. In the US, these relations are dictated by the capitalistic principle of lassiez-faire; however, the courts have recognized the Right to Privacy, as indicated in their constitution.[x] The US has sector specific laws with regards to privacy and use of data by private entities.[xi] The citizen and corporate relations are based on free markets and merely regulating the data handling process;[xii] whereas the state has to follow stricter laws stemming from the principles of liberty.[xiii] The EU is leading the world in terms of regulations regarding data protection; especially with EU-General Data Protection Regulation, 2018 (“GDPR”).[xiv] The EU Approach to data protection is based on upholding human dignity and protecting privacy.[xv] It was further noted that the Srikrishna Committee noted that the Indian citizen-state relationship does not coincide with either US or EU. The Indian Constitution envisions state as a (i) facilitator of human progress as indicated through the DPSPs, and (ii) checks and balances to prevent misuse of power by the state as enshrined in the federal structure and three organs of the government.[xvi] Therefore, the Indian conception of privacy as a right seems to be exercise of autonomy within a limited sphere as prescribed by the regulators. The decisions of the regulators can checked through the judicial review in case of excessive measures or encroachment on rights of citizens. Fintech – Regulatory Regime In India, the arena of FinTech is regulated by several regulators like the RBI and SEBI for intermediaries in securities market, IRDA for insurance related regulations and TRAI for regulatory mechanisms related to telecom.[xvii] The FinTech companies often find themselves being governed by overlapping jurisdictions. The Working Committee Report remarks that FinTech entities are regulated within the framework of ‘payment systems’[xviii] and need the authorization by the RBI.[xix] The RBI has the power to issue directions to payment systems and systems participants;[xx] which may be invoked by the RBI to issue directions. The RBI regulates payment space under the Payment and Settlement Systems Act, 2007 and the Payment and Settlement System Regulations, 2008. Further, RBI Also governs the functioning of peer-to-peer lending through the P2P Master Directions (published in Oct., 2017) which requires P2P NBFCs to register with RBI. Further, RBI recently recognized the need to strengthen the consumer confidence in digital payments and thus launched Ombudsman Scheme for Digital Transactions (OSDT) as a complaint redressal mechanism.[xxi] Regulating Privacy and Data Protection in Fintech Industry Transfer of personal data categorized as sensitive personal data is currently governed by the SPD Rules issues under Section 43A of the IT Act. In case of any negligence in implementing, and maintaining reasonable security practices to ensure protection of the sensitive personal data, the body corporate are held responsible, and are required to compensate for leak/loss of data.[xxii] Furthermore, the disclosure of information, knowingly and intentionally, without the consent of the person concerned and in breach of the lawful contract is punishable with up to 3 years of imprisonment and fine.[xxiii] The data protection, as of now, is merely governed by a contractual relationship between the parties.[xxiv] Terms of the contract are dictated by the service provider, and the users have very little or no say in the same. The provisions of the IT Act are not sufficient to ensure protection of the sensitive information and data of the consumers. Concerned the sector’s recent boom, RBI issued notifications mandating data protection and localization. It has also showed concerns about the security standards/measures, and has assumed unfettered access to the data.[xxv] RBI also recommended the need for exhaustive stand-alone legislation on data protection in order to ensure customer faith in the FinTech Industry and protect the citizens from exploitation of personal information.[xxvi] The Sectoral Regulators are already taking initiative to protect the data of the consumers.[xxvii] The Working Committee has recommended that the data must be classified based on extent of their sensitivity and risk of exposure associated with the same.[xxviii] The FinTech entities were to ensure that the data does not suffer from any “loss of confidentiality, loss of integrity, and loss of availability”, by implementing the safe transaction principles.[xxix] The RBI also suggested requirement of establishing a Network

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