Author name: CBCL

Trade Union As “Operational Creditor”: Critical Analysis of the Judgment

Leave a Comment / Insolvency Law /

[By Suprabh Garg] The author is a third year student of National Law University, Odisha. INTRODUCTION The Insolvency and Bankruptcy Code, 2016 [“IBC”] empowers the Operational Creditors to initiate Corporate Insolvency Resolution Process [“CIRP”] against a Corporate Debtor, if it defaults in payment of ‘operational debt’. However, the ongoing debate whether Trade Union constitute as Operational Creditors, has been finally settled by the Apex Court in the case of JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Company Ltd. [“Jute Mill”] [i]. The Apex Court by clearing one of the grey areas of IBC provided employees an efficacious weapon to recover their hard earned labour from the insolvent Corporate Debtor. However, there are several unresolved issues which have arisen subsequent to this judgement, which have been dealt by the author in the later part. TRADE UNION CONSTITUTE AS OPERATIONAL CREDITORS: JUDGEMENT ANALYSIS The Supreme Court overruled the impugned order of the National Company Law Appellate Tribunal [ii], which had affirmed the order of National Company Law Tribunal Delhi [iii], holding that trade union was not an operational creditor since they did not qualify as ‘persons’ under IBC and further that no service are rendered by the Trade Unions to the Corporate Debtor. The Apex Court in a contrasting opinion held that Trade Unions constitute Operational Creditor on two grounds, firstly that Trade Unions fell within the definition of ‘person’ under IBC and subsequently qualified as Operational Creditor [1] and secondly that filing of individual petitions by employees would be burdensome and costly affair [2]. Trade Union Fell Within the Definition of Person under Section 3(23), IBC Operational Creditor is defined under Section 5(20) of IBC as a ‘person’ to whom an operational debt is owed. Further, the term ‘operational debt’, defined under Section 5 (21), IBC inter-alia, includes claim in respect of services rendered including employment. The term ‘person’ for the purpose of IBC has been defined in Section 3(23), IBC, which in sub-clause (g) inter-alia, includes ‘any other entity established under a statute’. The Court held that the Trade Unions fall under the definition of ‘person’ under Section 3(23)(g) since they are ‘entity established under a statute’ viz. The Trade Union Act, 1926 and therefore, they constitute as Operational Creditor under Section 5(20) read with Section 5(21), IBC. Filing of Individual Petition by Employees – Burdensome and Costly Affair The Court held that instead of filing one petition by Trade Union, if all the employees filed an individual petition, it would not only be burdensome but also a costly affair. Each employee would have to thereafter pay various costs, inter-alia, insolvency resolution process cost, the cost of interim resolution professional, the cost of appointing valuers etc. [iv], which were mandatory requirement. In such scenario, the processual law of IBC would become tyrant and deprive the employees of justice, thus increasing the burden of the courts. The Apex Court then, to support its contentions, reiterated its judgements in Kailash v. Nanhku [v], Sushil Kumar Sen v. State of Bihar [vi], State of Punjab v. Shamlal Murari [vii] wherein it was held that processual law should not be a tyrant, but an aid to justice. The Court thus, held that such a stringent approach of processual law that would deny the employees opportunity of justice, should be rejected. Therefore, the Court held that a registered trade union which is formed for the purpose of regulating the relations between workman and their employees [viii] could maintain a petition as an Operational Creditor. UNRESOLVED/DISPUTED ISSUES: A CRITICAL ANALYSIS The Court in Jute Mill on the other hand also raised plethora of unresolved issues listed below. Whether or Not a Trade Union Can File an Application Under Section 9, IBC Conjointly? One of the issues that arose is whether or not a trade union can file an application under Section 9, IBC conjointly on behalf of its employees? [ix] According to the procedure established by IBC, an Operational Creditor to initiate CIRP has to file an application under Section 9, IBC in compliance of Rule 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (hereinafter “Rules”) [x], which mandates the filing of application in the format prescribed by Form 5 [xi]. Now, Section 8 and Section 9, IBC do not expressly talk about class action suits or joint petitions. However, ‘Note’ to Form 5 under Rule 6 allows for workmen/employees who are operational creditors to file in his/her individual or joint capacity. The ‘Note’ states: “Note: Where workmen/employees are operational creditors, the application may be made either in an individual capacity or in a joint capacity by one of them who is duly authorized for the purpose.” [xii] There renowned rule of interpretation, sententia legis which was discussed by the Apex Court in Vishnu Pratap Sugar Works v. Chief Inspector of Stamps [xiii], held that a statute is to be construed according to the intent with which it was made and the duty of judicature is to act upon the true intention of the legislature –the mens or sententia legis. In the view of the aforementioned ‘Note’ it appears that the legislature intended to allow joint suits by employees under Section 9, IBC and subsequently, it can be inferred that registered Trade Unions can file an application under Section 9, IBC co-jointly on behalf of one or more employees. However, more clarification is needed on this issue, which would continue to be a grey area until there is a judicial interpretation or a subsequent amendment to that effect, Whether the Minimum Threshold of Rs. 1 Lakh would apply Individually or Collectively to Employees in Cases where the Application is Filed Conjointly? A Trade Union as per Section 9 read with Section 4, IBC can file a CIRP application only when there is a default of minimum of rupees one lakh. However, one question which remains unresolved is whether the minimum criteria of rupees one lakh apply to the debt of an individual employee or will it apply collectively to the debt of more than

Trade Union As “Operational Creditor”: Critical Analysis of the Judgment Read More »

RBI’S Prudential Framework for Resolution of Stressed Assets – Modus Operandi, Analysis and Implications

Leave a Comment / Banking Law /

[By Suprabh Garg and Arshit Kapoor] The authors are third and second year students of National Law University, Odisha BACKGROUND The Reserve Bank of India (“RBI”) has finally released the much-awaited circular for dealing with stressed assets named Prudential framework for Resolution of Stressed Assets (“Framework”) [[i]]. This circular is a replacement for the earlier circular on Resolution of Stressed Assets dated 12th February 2018 (“Earlier Circular”) [[ii]]. The earlier circular had been struck down by the Hon’ble Supreme Court in Dharani Sugar and Chemical Ltd. v. Union of India [[iii]]. The Framework is released by the RBI with a view for providing early recognition, reporting and time bound resolution of stressed assets. This Framework and Direction is issued by the RBI without prejudice to Section 35 AA of The Banking Regulation Act, 1949 which empowers the RBI to direct banks for initiation of insolvency proceedings against specific borrowers [[iv]]. APPLICABILITY The Framework has expanded the scope of applicability and covers in the definition of “lenders”: Scheduled Commercial Banks All India Term Financial Institutions Small Finance Banks; and Systemically Important Non- Deposit taking Non- Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D). MODUS OPERANDI-FRAMEWORK FOR RESOLTION OF STRESSED ASSETS The modus operandi of the Framework can be fragmented into the following systematic and sequential steps as under: Early Identification and Classification Of Stresses Assets The lenders, upon default have to recognize and classify the emerging-incipient stress in loan accounts and classify them into Special Mention Accounts (“SMA”). The word ‘default’ has been assigned the same meaning as defined under Section 3 (12) of IBC The classification of debts into Special Mention Accounts shall be done as per the following categories: In case of stress other than revolving credit facilities like cash credits, the SMA sub-categories will be as follows: SMA Sub- Categories Basis for Classification- Principal/ Interest Payment/ Any other amount wholly or partly overdue between SMA-0 1-30 Days SMA-1 31-60 Days SMA-2 61-90 Days   Whereas in case of stress revolving credit facilities like cash credits, the SMA sub-categories will be as follows:     SMA Sub- Categories Basis for Classification- Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of: SMA-1 31-60 Days SMA-2 61-90 Days   Reporting Of Stresses Assets The lenders have to then, report to the Central Repository of Information on Large Credits (“CRILC”) regarding the credit information, including the classification into SMA, of all borrowers having an aggregate exposure of ₹ 5 crores or more, with them. The lenders in this regard have to submit CRICL-Main Report on monthly basis and a weekly report of the instances of default by all borrowers having an aggregate exposure of ₹ 5 crores or more, with them. Resolution Plan As per the Framework all the lenders have to place a board RP which would contain the action, plan and reorganization of stressed assets. The RP may also include the reorganization of the accounts by payment of all over dues, sale of exposures to other entities, change in ownership, restructuring etc. All the RPs have to be well-documented by all the lenders concerned [[v]]. Review Period In cases, where any default is reported by any of the Scheduled Commercial Banks, All India Term Financial Institutions or Small Finance Banks, they have to take a prima facie review of the borrower account within thirty days of such default. (“Review Period”). The Framework has given complete discretion to the lenders to decide on the resolution strategy, the nature of the resolution plan and the approach for implementation of resolution plan. Inter-Creditor Agreement The lenders have to then enter into an inter-creditor agreement (“ICA”) during the Review Period to finalize the ground rules and their strategy for implementation of RP.  Furthermore, the ICA has to inter-alia provide for rights and duties of majority lenders, duties and protection of dissenting lenders etc. The Framework provides the threshold of 75% by value of total outstanding credit facilities and 60% of lenders by numbers, for the decision to be binding on all the concerned lenders. Time Period for Implementation The Framework mandates the implementation of RP within 180 days from the end of review period. Further, with respect to existing defaults, the review period shall commence from 7th June, 2019 for all the defaults having an aggregate exposure of ₹ 2,000 crores and 1st January, 2020 for all the defaults having an aggregate exposure between ₹ 1,500 crores to ₹ 2,000 crores. Additional Provision For Delayed Implementation of Resolution Plan The Framework has provided for mandatory making of ‘additional provision’ of 20% by the lenders in cases where a viable RP is not implemented within the stipulated time i.e. 180 days from the end of review period and a further 15% (i.e. total of 35%) if the delay crosses a time limit of 365 days from the end of review period. These additional provisions have to be made above the already held provision or provisions required to be made as per the status of the asset classification of the borrowers account, whichever is higher. Situations Where Additional Provision May Be Reversed The framework provides that when the RP involves restructuring or change in ownership outside IBC, the additional provisions may be reversed upon implementation of the RP. However, the additional provision may also be reversed in cases where RP involves payment of overdues by the borrowers and the same has been cleared. Further, where RP is pursued under IBC, half of the additional provision made may be reversed upon filing of insolvency proceedings under Section 7 [[vi]] and another half may be reversed upon the same being admitted by the respective NCLT. Furthermore, in all cases where assignment of debt or recovery proceedings are completed, the additional provisions may be reversed. ANALYSIS OF THE FRAMEWORK FOR RESOLTION OF STRESSED ASSETS Striking a Balance The Framework not only gives liberty and ample discretion to lenders to strategize and proceed with the

RBI’S Prudential Framework for Resolution of Stressed Assets – Modus Operandi, Analysis and Implications Read More »

Position of Cryptocurrencies under the Indian Taxation Regime

Leave a Comment / Taxation Law /

[By Prakhar Khandelwal and Rachita Shah] The authors are third year students of National Law Institute University, Bhopal Introduction Almost twenty-five years ago, the world was introduced to the internet, which poised us towards a new era of technological excellency. Today, with cryptocurrencies and its related technology at rise, we are at the starting point of yet another such revolution. The cryptocurrency industry is still in its premature stage, with skewed knowledge available regarding its working which complicates its classification and therefore its categorization under India’s taxation system. Now, while there is no legal definition for “cryptocurrency”, it can be described as: “a digital representation of value that (i) is intended to constitute a peer-to-peer (“P2P”) alternative to government-issued legal tender, (ii) is used as a general-purpose medium of exchange (independent of any central bank), (iii) is secured by a mechanism known as cryptography and (iv) can be converted into legal tender and vice versa”[i] In the recent years, cryptocurrencies are gradually becoming an acceptable digital currency around the world and countries like Russia and Japan are working towards its regulation. As a result, it becomes pertinent to acknowledge the requirement to define the legality and taxability of cryptocurrency in India. The authors shall attempt to lay out the Indian Government’s present position on cryptocurrency as well as provide a brief overview of its treatment under the current taxation regime. The Government of India’s position The Reserve Bank of India, (hereinafter “RBI”) on December 24, 2013[ii], February 1, 2017[iii] and December 05, 2017[iv] had cautioned persons dealing in virtual currency about the potential risks that they are exposing themselves to as well as clarified its non-authorization to any entity dealing with such transactions. These notifications gave rise to a petition filed on October 31, 2017 which demands emergent steps for restraining the sale and purchase of cryptocurrency in India.[v] The case is tentatively listed to be heard on July 23, 2019. On April 6, 2018, entities regulated by the RBI were prohibited from dealing with cryptocurrencies and those which already provided such services were compelled to exit the relationship within three months.[vi] It was against this notification that the Internet And Mobile Association of India (hereinafter “IAMAI”) filed a writ petition on May 15, 2018 in the Supreme Court of India under Article 32 of the Constitution of India.[vii] However, a stay order was not approved for the above notification. Therefore, the April 6, 2018 position subsists today. The case is likely to be listed on July 23, 2019. In November 2017, a panel headed by Economic Affairs Secretary, Subhash Garg had been constituted to oversee India’s policy on cryptocurrency. According to a report released on June 07, 2019,[viii] the bill concerning cryptocurrency which is being looked into by the panel contains a provision for punishment of imprisonment up to 10 years to anyone who deals in cryptocurrency. Therefore, the events between 2013 and June, 2019 strengthen the government’s disapproval to regularising the use of cryptocurrency in India. Treatment under Direct Taxation System: At the outset, it is important to note that the illegal nature of income does not bar its taxability. Therefore, although the Government has consistently disapproved the use of cryptocurrency, it is crucial to have a regulatory framework for its taxation. The Income Tax Department sent notices to individuals for non-declaration of investments in cryptocurrency in early 2018 and emphasized that such investments shall be taxable.[ix] As per the notices, the Income Tax Department levies tax on cryptocurrency under two heads.[x] Firstly, under the head “profits or gains from business or profession” under Section 28 of the Income Tax Act, 1961 (hereinafter “IT Act”) and secondly, under the head “capital gains” under Section 45 of the IT Act. Therefore, since cryptocurrency is not declared as legal tender and “money” by itself is not taxable under the IT Act, the Income Tax Department treats cryptocurrency as “goods” or “property”. i. As profits and gains of business or profession under Section 28 of the Income Tax Act, 1961 The IT Act gives an expansive definition for “business” under Section 2(13) of the IT Act, encompassing any concern in the nature of trade, commerce or manufacture. As a result, profits earned by way of trade in cryptocurrencies falls within the ambit of taxable income under Section 28(i) of the IT Act. Cryptocurrency earned by way of consideration for sale of goods and services as well as when they are held as stock-in-trade comes within the ambit of profits and gains from business or trade. ii. As Capital gains under Section 45 of the Income Tax Act, 1961 One of the modes of acquiring cryptocurrency is through mining. Mining is a method wherein computer algorithms are solved to produce a cryptocurrency. As a result, this cryptocurrency is a self-acquired capital asset[xi] and is taxable under “capital gains” as given under Section 45 of the IT Act. The capital gains tax is either long term or short term, based on the duration for which the cryptocurrency is held.[xii] While the above methods may prima facie seem to solve the confusion among cryptocurrency dealers, one of the primary problems faced by the Income Tax Department and tax payers is the very valuation of cryptocurrency. Since the transactions of cryptocurrency are peer to peer, there is no regulatory authority to control the volatile prices. Moreover, the market for cryptocurrency, although fast expanding, is small and therefore, results in fluctuations in supply and demand.[xiii] The IT Department has not stepped in to explain the computation of its prices. With countries ascertaining their stance on the use of cryptocurrency, the volatility of cryptocurrency may reduce due to growth in the market. Treatment Under Indirect Taxation System Goods and Services Tax, (hereinafter “GST”) which was implemented with effect from July 1, 2017, across India, subsumes most of the indirect taxes, barring few.[xiv] The implications of GST on cryptocurrencies and the Government’s rumoured decision to allow the state to tax it at a maximum rate of 20%[xv]

Position of Cryptocurrencies under the Indian Taxation Regime Read More »

Individual Insolvency: A New Regime

1 Comment / Insolvency Law /

[By Akash Mukherjee] The author is a third-year undergraduate student at National Law University, Jodhpur Introduction The Insolvency and Bankruptcy Code, 2016 (hereinafter “the Code”) was enacted on 28th May, 2016. It has been in force for over three years, successfully operationalizing a mechanism for corporate insolvency resolution. The objective of the enactment was to provide an effective legal framework for the development of the credit market and entrepreneurship. The Code has been able to fulfill these objectives, so far, with respect to the corporate sector. However, corporate insolvency resolution is not the only means to attain the aforementioned objectives. Individual Insolvency, enshrined in Part III of the Code, aims to reach the same destination. Although, it has not been notified yet and is still in its nascent stages, the regime for individual insolvency portends major impact on the Indian credit market. This article would focus upon the need for the introduction of individual insolvency in the Code, the inadequacy of the current laws for recovery of individual debts, the mechanisms put in place for facilitating individual insolvency resolution and the issues with the proposed mechanisms. The need for Individual Insolvency Resolution Proprietorship and Partnership firms account for a substantial share in the income and employment sector in India. The Government initiatives like Start-Up India, under the aegis of Make in India programme, have identified their significance in the Indian economy and are aimed at providing a much-needed boost to them. Individual Insolvency Resolution framework, enshrined in the Code, must be pursuant to this goal. It should protect the interests of the debtor by preventing the creditors from causing detriment to him by putting in place a resolution process and isolating minimum assets for his subsistence. It must shield the individual against honest business failure and, thereby, promote entrepreneurship.[i] Meanwhile, it should also ensure increased returns to the creditors which would promote credit availability. Furthermore, the proposed framework would provide a resolution process for personal guarantors which is not in place currently. This would bridge the gap between corporate guarantors, for whom the resolution process is already in place, and personal guarantors. The Current Legal Framework is fragile The laws with respect to personal insolvency, currently in force, were enacted during the British Raj. The Presidency Towns Insolvency Act, 1909 for Madras, Bombay and Calcutta and the Provincial Insolvency Act, 1920 for the rest of India provide for the existing legal framework in India for individual insolvency. However, these laws have been a rare recourse for resolution of individual insolvency. Instead the Negotiable Instruments Act, 1881 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 (hereinafter “SARFAESI Act”) have been used to initiate the process of formal recovery. Section 138 of the Negotiable Instruments Act has been a vital device for credit recovery since its introduction in 1988. It criminalized dishonor of a cheque which served as a deterrent for the borrower against default. This provision was used increasingly by the lenders in the home mortgage market since its introduction due to lack of any other viable alternative.[ii] Non-Banking Financial Corporations giving loans to individuals still actively resort to this section for recovery. The SARFAESI Act, 2002 provided the banks and financial institutions with the power to take possession of collateral security without any intervention from the Court. It was a tool of recovery against non-performing loans. The increased use of Section 138 has over-burdened the Courts which has led to inefficient and delayed disposal of matters regarding property and mortgages.[iii] Also, SARFAESI Act is available only to banks and financial institutions. Its effectiveness has diminished since its inception. The recovery rate under SARFAESI Act was 61% in 2008 which fell to 22% in 2013.[iv] Thus, both these alternatives have become obsolete in the present scenario. The resolution process under Part III of the Code Part III of the Code stipulates three procedures for resolution of personal insolvency on default of a threshold amount: Fresh Start Process[v]: The Code provides for a complete waiver of debt for a debtor with the annual income of less than Rs.60,000, assets less than Rs.20,000, debts not amounting to Rs.35,000 and no dwelling unit.[vi] The process can be initiated only by the debtor. The debtor must not be an undischarged bankrupt and must not own a dwelling unit.[vii] There should not be a fresh start process subsisting against the debtor or a fresh start order issued in relation to him twelve months prior to the date of application.[viii] The application is examined by a Resolution Professional (hereinafter “RP”). The RP submits a report to the Adjudicating Authority (hereinafter “AA”) recommending acceptance or rejection of the application by the debtor.[ix] The AA, after due consideration, either admits or rejects the application.[x] On admission, a moratorium period becomes applicable for six months on all creditors.[xi] The creditors can object to the process only on limited grounds.[xii] By the end of the moratorium period the AA shall pass a discharge order writing off all debts of the applicant subject to an entry in the credit history. Insolvency Resolution Process[xiii]: This provides for a mechanism for negotiation of a repayment plan between the debtor and the creditors under the guidance of the RP. This process can be initiated by either the debtor or the creditor.[xiv] On admission of the application by the AA, a public notice is issued inviting all the claims.[xv] Then, a repayment plan is formulated by the debtor under the supervision of the RP. If the plan is approved by 75% of the creditors,[xvi] and thereafter by the AA, it is implemented by the RP. On the successful execution of the plan, the AA passes an order discharging the debtor from his liability under the plan. The debtor, therefore, gets an ‘earned start’.[xvii] Bankruptcy Process[xviii]: On failure of the resolution process or non-implementation of the repayment plan, the debtor or creditor could initiate bankruptcy proceedings.[xix] If the application is approved the AA issues a bankruptcy order and appoints a

Individual Insolvency: A New Regime Read More »

Deposition and rights of Promoter-Director in a Quasi Partnership: The Vikram Bakshi Case

Leave a Comment / Company Law /

[By Saket Agarwal] The author is a student of National Law University, Jodhpur Abstract Oppression and mismanagement has been provided under Section 241 of the Companies Act, 2013.[1] Oppression is an act which lacks probity and fair dealing to a member and is burdensome, harsh and wrongful.[2] Mismanagement comes into play when there is a mismanagement or apprehension of mismanagement of the affairs of the company.[3] The section itself makes it clear that only the members are entitle to file a petition for oppression and mismanagement. But when it comes to the directors of a quasi-partnership company the situation somewhat changes. Throughout the study, we will see as to how this actually works. Case: Vikram Bakshi & Ors. v. Connaught Plaza Restaurants Ltd. & Ors.[4] Facts: The petitioner; Vikram Bakshi along with the ‘Bakshi Holding’ were the holders of 50% of total shares in the Connaught Plaza Restaurants Ltd.; the respondent company. The rest 50% of the shares were held by the McDonald’s India Pvt. Ltd. The arrangement was entered into through a joint venture agreement between the parties. The petitioner was initially appointed as the managing director of the partnership. He had the right to get appointed for successive years unless there being some exception like incompetency etc. It was agreed that there shall be four directors in the board, two from each side. Further, in case of his exit from the joint venture, he was obliged to sell all his shareholding to the respondent at a fair price. During the course of business, some disputes arose between the parties. Ultimately, the petitioner was removed from his post of managing director and was asked to sell his shares in the partnership. Hence, the petitioner approached the NCLT for his re-appointment as the managing director. Judgment: The NCLT pronounced the order in favour of the petitioner. The NCLT ordered for the re-instatement of the petitioner as the managing director. Reasoning applied by the NCLT: The NCLT opined that the petitioner had the right to remain as the managing director of the joint venture. It was also observed that the joint venture, in essence was a partnership between the parties. This is corroborated by the fact that they were holding equal number of equity shares in the joint venture. Additionally, both the parties had the right to appoint equal number of directors. Moreover, in case of ousting of the petitioner, he was under an obligation to sell his shares. These facts show that the like a partnership firm this arrangement was being operated where the partners had the equality in shareholding, participation in the management etc. Hence, the removal of the petitioner from the post of managing director was unjustified. Analysis: It is generally understood that company and partnership are two different concepts having their own peculiar advantages and disadvantages. But there is also something like a ‘quasi-partnership’, which although is a partnership but not in the true sense. It has the features of both a company and a partnership firm. A quasi-partnership may have its articles of association, board of directors, shares etc. like that of a company. But it differs from a company when it comes to the rights of its promoter-director. Generally, in a company a person cannot claim that he has a right to remain as the director of the company. Therefore, he can be easily removed from his position. But in a quasi-partnership company, the promoter-director has a legitimate expectation to continue as the director of the company.[5] This legitimate expectation can validly raise his rights under oppression. The reason being that partners in a partnership firm; have equal rights in terms of profit sharing, participation in the management etc. On the similar lines, partners in a quasi-partnership exercise equal rights. Under oppression and mismanagement, directorial complaints are not entertained as the section is specifically for the protection of the members of the company. Filing a petition in any other capacity such as a lessee of the company is not maintainable.[6] But when it comes to the family companies and companies functioning as quasi-partnership companies, a petition filed by a director is justified.[7] The reason being that in case of such companies it is very difficult to distinguish between the rights of the person as a member and a director due to the complex structure involved in such kind of companies. Qualifications for a Quasi-Partnership Whether there is an existence of quasi-partnership or not, depends upon several factors. This includes: (1) approximate equality in shareholding, (2) approximate equality in participation in the management and (3) restriction on the transferability of shares.[8] As mentioned above, the partners in a quasi-partnership company have equal shares and involvement in the operation of the management. With respect to the third criteria i.e. restriction on the transferability of the shares; it has a much wider implication. This condition is inserted in order to dissuade the parties from leaving the company. Even if that person wants to leave the company, he is bound to liquidate his shareholding in the company in favour of other partners. Further, this third condition is so inherently linked with the employment that in case the founder-director has not made an exit from the organization but merely has changed his position within the company, then also this condition becomes operative. In the Vikram Bakshi case, Vikram Bakshi was not elected as the managing director by the respondents themselves but still he was asked to sell his stakes in the company as per the articles of the company. Tussle of Contract Law and Company Law A quasi-partnership company arises just like any other form of partnership through a contract. A quasi-partnership company usually arises through a joint venture agreement. If the terms of the joint venture agreement have been validly entered into the articles of the company, then they are enforceable under section 241. But problem arises when this joint venture has not been incorporated in the articles. In the Vikram Bakshi case also, the respondent raised this

Deposition and rights of Promoter-Director in a Quasi Partnership: The Vikram Bakshi Case Read More »

NBFCs – Unravelling the Indian Shadow Banks

Leave a Comment / Banking Law /

[By Himani Singh] The author is an Advocate enrolled at Bar Council of Maharashtra and Goa Introduction ‘Non-banking Financial Companies’ (NBFCs) are financial institutions registered under the Companies Act, 1956(now Companies Act, 2013) and may engage in businesses such as loans and advances, acquisition of marketable securities, leasing, hire-purchase, insurance etc. To operate as an NBFC, the company must also have a valid registration under Section 45-IA of the Reserve Bank of India Act, 1934. Based on the type of business carried out, NBFCs can be classified into: deposit taking, non-deposit taking, non-deposit taking but with acquired securities in their group/holding/subsidiary company(ies). On the basis of their asset size, NBFCs can be classified into: systemically important (asset size above Rs. 500 Crore) and non-systemically important NBFCs. NBFCs or the Shadow Banks in India The gamut of NBFCs in India is exquisitely flavored – from housing finance and corporate lending to the more exotic infrastructure finance, promoter finance and core investment companies; and several distinct shades in between. The most attractive fragment of NBFCs that distinguishes them from traditional banks and attracts borrowers from around the world is the peer-to-peer lending segment. Just as NBFCs differ on their business, risk and leverage profiles, there are also multiple regulations and regulators governing them. But essentially, NBFCs are institutions that occupy the interstices in financial intermediation unfulfilled by banks; much like the shadow banks in United States and United Kingdom. The shadow banking system is made up of a multitude of banking and financial operators linked to each other by financial intermediation chains of varying lengths and degrees of complexity – from hedge funds, asset managers and pension funds to insurers, money market funds, real estate funds and many others.[i] The shadow banks perform the financial intermediation function in the same way as the traditional banking system. The main distinguishing characteristics of the shadow banking system are looser supervision and greater fragmentation between operators at each link in the intermediation chain.[ii] NBFCs were tagged as ‘shadow banks’ in India by Paul McCulley, the famous American economist, given their easy money lending nature and a separate regulatory framework governing them, distinct from the laws and regulations that govern banks. The shadow banking sector contributed significantly to the economic downturn and eventual financial crisis of the global economy in 2007-08. The crisis occurred since the shadow banks were largely unregulated. The minimal regulation resulted in negligible notice and left everyone blindsided even when shadow banks progressed towards a crisis. In India, the IL&FS fiasco and DSP offloading on DHFL[iii] sparked a similar fear like that of 2007-08 crisis and stressed on the fact that NBFCs were subject to lighter regulation in comparison to their traditional counterparts i.e. Banks. Regulation of NBFCs – Progress so Far For past few years, the Indian banking sector is facing multiplying systemic risks and there is a lack of supervision in the functioning of financial institutions especially the NBFCs. The disruptive challenges arising from technological advances and overarching impact of globalization add to the trouble. The Reserve Bank of India (RBI) has brought multiple reforms to regulate the NBFCs since the 1990s and the process is still underway. Between 1995 – 1998, the Reserve Bank of India (RBI) came up with several regulations such as exposure limits for lending by NBFCs, prudential regulations for their governance and also restricted raising deposits from public to an extent. Further, NBFCs were categorized based on their business model into deposit taking, non-deposit taking and core investment companies; along with specific directions regulating each category. In 2000, audit requirements for NBFCs were introduced and certain exemptions were also granted to NBFCs for charitable purposes (companies registered under Section 8 of the Companies Act, 2013 ( Section 25 of 1956 )), potential Nidhi Companies as well as government companies, from applicability of core RBI Act provisions. In 2001, the concept of asset management was brought in. In 2004, several associations formed a self-regulatory group called ‘Finance Industry Development Council’. In 2006, RBI devised a method to regulate NBFCs functioning on a large scale and identified systemically important and non-systemically important NBFCs wherein NBFCs with asset size above Rs. 100 crore were recognized as systemically important. Nearly 10 years later, in 2016, RBI increased the threshold of systemically important NBFCs to asset size of Rs. 500 Crores and also released master directions to govern each class of NBFC. In the interim, in 2008, the government had also set up a ‘Stressed Asset Stabilisation Fund Trust’ to address the liquidity freeze caused by global financial crisis. The Trust Fund was set up to purchase short term loans from eligible NBFCs, thereby increasing the liquidity. Next Steps As of 2018, there are approximately 12,000 NBFCs registered with RBI and they continue to operate on uneven grounds. The government has brought in several reforms in the financial framework governing NBFCs in the past. However, in comparison to traditional banks, the issue of regulation of NBFCs is only obliquely addressed and therefore, there is a need for further reforms in the array of NBFCs in India. It is important to re-visit the already registered NBFCs and check for qualification requirements. The license for any NBFC that does not meet the minimum eligibility criteria should be cancelled immediately. Further, it is pertinent to increase the threshold for minimum capital, especially for micro-finance institutions and asset reconstruction companies. The regulations should not be limited to asset size but also be inclusive of streamlining the liabilities of NBFCs. NBFCs with large assets sizes, especially the systemically important NBFCs should be exposed to standard statutory liquidity ratio and liquidity coverage ratios, set for NBFCs, amongst other things. The prudential norms concerning income recognition, asset classification and provisioning must be applicable to and tightened for all NBFCs to address the systemic risk plaguing the sector for long. The fair practices code and corporate governance norms of NBFCs should also be strengthened. Additionally, a uniform mode of risk management and settlement process should also be

NBFCs – Unravelling the Indian Shadow Banks Read More »

Problems With Amicus Curiae Submissions In Investment Arbitration

Leave a Comment / Arbitration Law /

[By Sikander Hyaat Khan and Parina Muchhala] Sikander Hyaat Khan (4th year) and Parina Muchhala (2nd year) are students of Maharashtra National Law University Mumbai Transparency has assumed an important position in the contemporary international arbitration dynamic. A major aspect of transparency in international arbitration regime is that of third party or amicus submissions. This holds true even more in the realm of investment arbitration, where there is likeliness of some degree of public interest being at stake. Unlike commercial arbitrations, investment arbitrations deal with matters concerning various public sector services that implicate “government regulation aimed at the protection of public welfare [such as] human rights, health and safety, labor laws, [or] environmental protection.”[1]Another rationale put forth by scholars emphasizing on the need of transparency in investment arbitration proceedings is that any decision against the respondent will lead to rendering of a monetary award that will be paid out of public’s money.[2] Amicus interventions are therefore, said to bring about transparency and legitimacy to the process of investor-state arbitrations. Many institutional rules and treaty frameworks are now becoming increasingly welcoming towards this trend and coming up with provisions for third party submissions. The ICSID Arbitration Rules under Rule 37(2) and Additional Facility Rules under Rule 41 (3) provide for third party submissions. The amended SCC Rules of 2017 in its Appendix III have also made provision for third party submissions. These vest discretion with tribunal to allow third party submissions. Similarly, UNCITRAL Transparency Rules under Article 5 provides for third party intervention in issues of treaty interpretation. At the same time, it is pertinent to highlight that accepting such applications for submissions pose certain problems for the arbitral process. This post identifies certain problems with amicus submissions and provides alternatives that can help calibrate transparency through amicus submissions into the investor-state arbitration fold while minimizing its adverse implications. Pertinent problems with amicus submissions in today’s context Against confidentiality Confidentiality is one of the many pivotal characteristics of arbitration that make it a preferred mode of dispute settlement over the courtroom process.[3] Arbitrations are characterized by confidentiality at various stages: the stage of filing, the proceedings, documents and evidences filed and the award passed. These may however be made public pursuant to party consent but otherwise remain confidential. A major reason behind why confidentiality is essential is because there is confidential information belonging to investors and/or states that cannot be disclosed to non-disputing parties. Third party submissions are at direct odds with confidentiality. There is a general concern that third-party intervention could lead to ‘re-politicization of disputes, making arbitration a “court of public opinion.”’[4] Against the principles of timeliness and cutting down of costs One of the main advantages of arbitration is to resolve disputes quickly and cheaply. An arbitration adheres to strict temporal requirements that leads to faster settlement of disputes.[5] In the context of huge investor corporations or states, there are major policy decisions and huge sum of money involved at the heart of the dispute which require even greater expediency. Third party submissions would require additional time for deliberation by arbitrators. Moreover, most factual submissions would require cross-examination to check veracity of facts which again, is a tedious and time-consuming process. It has been highlighted that allowing greater third-party intervention in State-investor disputes could potentially lead to rising costs and delays.[6] Emergence of a fractured jurisprudence The current position of law on amicus submissions in investment arbitrations is erratic. Some institutions are devoid of any rules on amicus submissions. In cases where amicus submissions have been accepted, most grounds of acceptance of such applications have been similar. These are still susceptible to dispersion though. This leads to a scope of emergence of different standards of admission of amicus submissions which is somewhat similar to the disparity in standards of disqualification of arbitrators under ICSID as compared to other institutional rules. While the ICSID jurisprudence has developed to call for a strict standard of disqualification, other institutional rules call for a mere appearance of bias. The same is possible with amicus submissions wherein conflicting decisions on the standard of admissibility of such submissions will disturb the jurisprudence constante inadvertently. Forum Shopping Currently, many institutions and treaties do not have provision for third party submissions. While it may be a far-fetched argument to make, it is possible that parties may opt for institutions or draw up procedures that include rules which do not have provisions on third party submissions to deliberately avoid the same. Suitable course of action A friction is therefore created by allowing third party interventions. The Methanex v USA tribunal highlighted that there is a need to ensure that third party participation does not result in imposition of additional burdens on parties and the arbitral process. Most institutional rules and investment treaties provide for a somewhat similar metric for tribunals to administer its discretion in allowing amicus submissions. In cases where both the parties consent to such intervention in the form of submissions and/or access to proceedings, the tribunal by the means of a procedural order can allow the same. In some cases, as discussed above, institutional rules provide for third party interventions. These require the respective tribunals to solicit their discretion based on the metrics provided by the rules. Presumption against admission of third-party submissions Owing to the principles of timeliness and confidentiality being the core values of arbitration, the presumption should lie against admission of third-party submissions. The burden of proof should lie on the applicant to show why their submissions should be allowed. Developing a standard metric and introducing metric where absent It is imperative that a standard metric be developed for tribunals to practice their discretion. The criteria given under Rule 37 (2) of the ICSID Arbitration Rules suffice for appropriate grounds that should warrant amicus submissions. Institutional rules should therefore be amended in line with the ICSID rules to incorporate provision for amicus submissions. Such process of amendment varies over different institutions and instruments in the investor-state arbitration regime, but they

Problems With Amicus Curiae Submissions In Investment Arbitration Read More »

The Constitutional Validity of SEBI’s Search and Seizure in the ‘Whatsapp Leak Case’

2 Comments / Capital Markets and Securities Law, Contemporary Issues /

[By Aditya Anand] The author is a Third Year student at NLU, Delhi. He can be reached at [email protected]   Towards the end of 2017, Reuters published a news report[i] in which it claimed that three days before Dr Reddy’s Laboratories Ltd announced quarterly results, a message was circulated on the popular social media platform, ‘WhatsApp’, stating that the company would be reporting a loss which in time proved to be true. In furtherance to the above-made claim, it named at least 12 more companies in which prescient numbers related to their financial results, and due for announcement were shared by the users on some of the WhatsApp groups. These 12 companies involved names like – HDFC Bank, Axis Bank, Tata Steel, Mahindra Holidays, to name a few[ii]. This lead to Securities and Exchange Board of India (“SEBI”) conducting an investigation which led to a search being conducted on 31 brokers and analysts in Mumbai, Delhi and Bangalore, by a team of 70 SEBI officials and they ended up seizing devices such as mobiles, laptops, computers and other documents with the intention of accessing the WhatsApp and other social media accounts, as well as the data that was stored in these devices.[iii] This was done because the leakage of the figures which were not yet declared by the Company, fell under the category of ‘unpublished price sensitive information’ and was in contravention of Regulation 3 of the Prohibition of Insider Trading Regulations, 2015 which states that no insider shall communicate, provide or allow access to any unpublished price sensitive information, relating to a company or its securities unless it is in furtherance of legitimate purposes, performance of duties or for discharging of legal obligations.[iv] Further Section 12A (d) and (e) of the SEBI Act[v] bars any person from indulging in insider trading and dealing with securities while being in possession of material or non-public information and also bars the person from communicating such information. Thereby, SEBI conducted an inquiry in this matter and even asked WhatsApp to share the specific data[vi], which was required in order to trace the origin of such messages that allegedly contained the Unpublished Price Sensitive Information and was crucial for the market regulator, in order to further its investigation. To SEBI’s disappointment, WhatsApp declined the same, citing its privacy policy[vii]. This entire incident was labelled as the ‘WhatsApp Leak Case’, but the real question that arises is whether this seizure of smart-phones can be justified or not, especially with the emerging jurisprudence of data security and privacy. The seizure of smartphones can be termed as a violation of the Fundamental Rights granted under Part III of the Constitution. Many experts argue that there is an urgent need to ensure that the privacy of the citizens is accorded and respected especially in this new and ever-growing era of cyberspace. The same has been opined by the Supreme Court in the case of Justice K.S. Puttaswamy (retd) and Anr v Union of India[viii] where the court opined that, ‘The existence of zones of privacy is felt instinctively by all civilized people, without exception. The best evidence for this proposition lies in the panoply of activities through which we all express claims to privacy in our daily lives. We lock our doors, clothe our bodies and set passwords to our computers and phones to signal that we intend for our places, persons and virtual lives to be private.[ix]’ In the same case, the Supreme Court held that the right to privacy is protected as an intrinsic part of the right to life and personal liberty under Article 21[x] and is guaranteed by the Part III of the Indian Constitution. Various legal systems around the world have prevented the attempt to extract such passwords or to gain access to the personal devices as an invasion of privacy and the United States Supreme Court in the case of Riley v California[xi] held that ‘a cell phone is unlike a physical lock box and is in a sense the extension of the person to whom it belongs as it is a vast repository of information pertaining to its owner.[xii]’ Therefore in the light of emerging jurisprudence relating to privacy, SEBI’s power to seize smart-phones and other electronic devices can be questioned. In addition to that, in the case of Indian Council of Investors v Union of India[xiii], SEBI had asked for the Call Data Records and the details related to the location of the towers from the telecom service providers in order to investigate a matter. The same was challenged but however, allowed by the Bombay High Court with a caveat that such a power should be used ‘carefully’[xiv] as it can lead to a situation wherein the privacy of a citizen can be compromised and stated that certain safeguards should be there in order to ensure the same. Talking about another Constitutional Law facet, Article 20 (3)[xv] guarantees protection against self-incrimination which basically means that no man, not even the accused can be compelled to answer any question, which may tend to prove him guilty of any crime, he is accused of. The concept of ‘personal knowledge’ was introduced in the case of State of Bombay v Kathi Kalu Oghad[xvi] and applying the same concept, it can be asserted that passwords, pass-codes etc. required in order to unlock such devices can be said to be a part of the personal knowledge of any given person, which he or she is not required to divulge during the course of investigation. But the real issue that exists is the absence of proper statutory framework, for the purpose of regulating the conduct of the social media platforms as observed by the Delhi High Court in the case of Karmanya Singh Sareen and Ors v Union of India[xvii]. Later the Supreme Court also constituted a committee of experts in the same case, under the leadership of Justice B.N. Srikrishna, to identify key data protection issues in India and to recommend methods for addressing the

The Constitutional Validity of SEBI’s Search and Seizure in the ‘Whatsapp Leak Case’ Read More »

The curious cases of L&T, Jet and Renuka Sugars & Indian regulators’ overbearing interference

1 Comment / Capital Markets and Securities Law, Contemporary Issues /

[By Rohan Kohli] The author is a 5th year student of NLIU Bhopal and the Co-convenor of CBCL. The Indian corporate story that took off in the 1991 liberalisation reforms to its success today has had a great part to thank the paradigm shift in the Indian regulatory behaviour. From the License-Raj era protectionist and red-tape bureaucracy to today’s times where the regulators actively engage in consultations with stakeholders, the Indian regulator has morphed into a modern beast that has by and large kept in-tune with the changing times, even if a little belatedly. However, a slew of recent examples in the past few months has threatened to undo these years of liberal outlook that the regulators have developed at great pains. I will analyse three such recent examples playing the devil’s advocate to the regulators. Larsen & Toubro (L&T), which is currently in news for a hostile takeover bid by one of its subsidiary L&T Infotech in IT company Mindtree, was earlier also in news for a stunning derailment of its ambitious buyback attempt. L&T Board on 23 August 2018 approved a buyback proposal of 4.29% of its shares amounting to INR 9000 crore, the first in the company history. [1] The draft letter of offer was submitted to SEBI, which inexplicably took 102 days to reject this buyback proposal with the reason that the post-buyback debt-equity ratio would exceed 2:1. [2] This decision has taken the corporate world by surprise and been widely criticized by foreign and Indian media alike, the unanimous opinion being that the regulator erred in its opinion. The reason why this is being questioned is because neither section 68, Companies Act, 2013 nor SEBI Buyback Regulations make any mention of whether the consolidated group financials or the standalone financials of the entity be taken to calculate the ratio of secured and unsecured debts vis-à-vis paid-up capital and free reserves (which both mandate it to be maximum 2:1). SEBI took the former approach – where L&T Financials (one of the group companies), which has a debt-equity ratio of 6:1, brings the group’s debt-equity ratio to above 2:1 both pre and post-buyback – which is a very strict and literal interpretation and contrary and singularly opposite to its past practice. L&T has accordingly filed for a review of the decision instead of approaching SAT. If this does not fall through, L&T may have to go ahead with a special dividend to return money to its shareholders, which attracts significantly higher tax implications. The troubled aviation giant Jet Airways recently saw a resolution plan under the 12 February RBI Circular [3] with equity infusion for the lenders and exit of its promoters and other management (nominee of Etihad Airways) from the Board. [4] While it promises to be a close-knit fight now for the company once the bidding deadline are invited on 9 April as banks exit the company, [5] this entire process could have been pre-empted if not for the regulators’ hawkish and unyielding stance. When the first reports of Jet’s troubles began to emerge, it was Etihad who was expected to step in and assume the majority of the equity in Jet by increasing its 24% (at that time) stake. But SEBI’s move to deny open offer exemptions changed the story and finally pulled the plug on Etihad’s plans. SEBI declared that any exemptions from applicability of conditions for preferential issue and making a mandatory open offer under Takeover Code for corporate debt restructuring made other than under IBC, will only be given to banks and financial institutions. [6] This effectively removed Etihad’s option of seeking an open offer exemption by referring to SEBI under Regulation 11 of the Takeover Code. Further, SEBI also removed any exemptions pursuant to scheme of arrangement pursuant to order of competent authorityunder any law, removing Etihad’s option of seeking open offer exemption under Regulation 10 (1) (d) (iii). The latter seems to be a belated admission of SEBI’s earlier mistake to SpiceJet’s open offer exemption done under similar circumstances in 2015 that brought Ajay Singh in majority of the company. [7] SEBI’s present move makes it difficult for Etihad to even make a future bid for Jet Airways, since the FDI Policy allows for a maximum of 49% FDI under automatic route [8]. This would mean that Etihad cannot make an open offer for singlehandedly replacing the lenders (since 26% offer beyond the threshold of 24% would breach the 49% mark), and thus Etihad would have to make a joint bid with another Indian entity to keep them with in the 49% mark. If Etihad would still want to make an individual bid without attracting open offer obligations, they would have to structure the transaction as an internal corporate restructuring under Section 230, Companies Act which would mean seeking approval of NCLT and fulfilling the condition of a scheme of arrangement pursuant to order of Tribunal under Regulation 10 (1) (d) (iii). [9] All this process could have been pre-empted if not for SEBI’s outdated approach in this regard. This entire process of lenders’ having to take up equity, then opening up bids would not have been needed to be done in the first place if Etihad would have been allowed to increase its stake, saving substantial amount of time and legal and economic costs. However, we will see in the example below that another regulator may make it even more difficult for Etihad to do this. Renuka Sugars is another classic ongoing case that continues in the same vein of regulatory overreach as above. Shree Renuka Sugars was a company undergoing debt restructuring in 2018, in Wilmar Sugar Holdings increased its stake from 27.24% to 38.57% as part of the restructuring process and finally to 58.34% through an open offer. [10] Interestingly, this restructuring was done after the 12 February 2018 RBI Circular came into force, which mandates all accounts above INR 2000 crore (the present case falls under this bracket) and where restructuring may have been initiated under

The curious cases of L&T, Jet and Renuka Sugars & Indian regulators’ overbearing interference Read More »

Scroll to Top