Author name: CBCL

CCI’s Precedented Consumer Favouritism Approach Wanes in the Multiplex Antitrust Order

Competition Law /

[By Prerna Kapur] The author is a fifth year student of National Law University, Orrisa. Background The Competition Commission of India (“CCI”) vide order dated 28.02.2019 dismissed the allegations against one of India’s largest multiplex chains, Inox Leisure Ltd­. and its beverage partner, Hindustan Coca-Cola Beverages Private Limited (“parties”). The allegations concerned contravention of provisions prohibiting tie-in arrangement, exclusive supply and distribution agreements under Section 3(4)(a), 3(4)(b), and 3(4)(c)of the Competition Act 2002 (“the Act”) respectively. These allegations were two fold- First, that the agreement between the parties of selling Cola-Cola’s products with the exclusion of any of its direct competitors amounted to an exclusive supply agreement which crafted ‘Appreciable Adverse Effect on Competition’ under Section 19(3) & Section 3(4) of the Act. An informant revealed that difference between the price of Diet Coke and Minute Maid Pulpy Orange Can sold at multiplexes versus that sold other local retail stores in Hyderabad is approximately Rs. 22.00/- and Rs. 34.00/- respectively. Emphasis was also placed on the legislative intent of the Legal Metrology (Packaged Commodities) Rules 2011 which was recently amended to prohibit the mischief of dual pricing of identical products of the same brand and quality in India. The collusion between the two parties had resulted in vertical restraint since Inox (as a retailer) and Coca-Cola (as the sole supplier of beverages) fell into different levels of the supply chain. And second, despite the absence of a tie-in agreement in the literal sense, viewers were compelled to purchase essential commodities like packaged water bottles and other beverages of only one brand provided to them by the multiplex, thereby limiting their right to choose. Consequently, the informant sought relief before the CCI against the malpractice of execution of such anti-competitive agreements. CCI, however, decided to exculpate the opposing parties based on the flexibility of the agreement entered between them which was earlier characterised as an “exclusive supply agreement” by the informant. Not only was the term “Exclusive Partner of Beverages” omitted from the initially drafted agreement of the parties entered in 2008, but clauses like, “the agreement entered by the parties can be terminated by giving a 60 days’ notice” was also incorporated alongside. These adjustments were seen to decimate entry and exit barriers to eliminate any competition concerns. Hence the CCI observed that market power does not rest with the manufacturer simply because the distributor can switch to sell the brands of competitors, if it were offered a better commercial deal. However, it is worth mentioning here that the supply agreement between the parties has been lingering for over eleven (11) years now. Statistics further sided with Inox as it claimed to own only one hundred and twenty eight (128) multiplex properties with over five hundred and twenty (520) screens across India limiting the possibility of executing similar agreements. That said, its competitors like PepsiCo. by 2011 alone had entered into such agreements with a large number of multiplexes having about six hundred (600) screens (namely that of Big Cinemas, Cinemax and Waves Cinema) thereby distributing its market share to avoid a dominant status. CCI’s after thought that there is no explicit condition that consumers have to necessarily buy these goods to watch a movie were seen as attempts to justify its decision and to further that there is no tie in agreement within the realms of Section 3(4)(a) of the Act. Lock-In and Lock-Out Arrangement This decision could possibly stir into a catalyst of agreements between manufacturers and sellers encompassing lock-in of consumers and lock out of competitors. While CCI maintained its position that purchasing beverages is not indispensable to the “movie theatre experience”, let’s face it – how often do we really enjoy a movie without enjoying a beverage at hand? The agreement between Inox and Coca-Cola is moulded to portray fluidity but, Inox’s beverage partner has remained unchanged since 2008. The retailer’s ability to charge above-competitive prices for its aftermarket service product depends largely on the availability of substitutes provided to the customer. But in the present scenario there are none available. Competition law compels market players to search for better permutations and combinations for providing greater efficiency and fluidity in the market structure. Shuffling and re-shuffling of product resources results in output maximization paving way for the finest consumer valuation. In fact, in 2011, the CCI had expressed its concern on the issue that Inox and such other multiplexes enjoy complete economic power, in the sense that its consumers are completely dependent on the food and beverages they provide [i]. The US Supreme Court in the case of Eastman Kodak Co. v. Image Technical Services, Inc. defined market power as, “the power to force a purchaser to do something that he would not do in a competitive market.” It further held that in some instances one single brand product can constitute a separate market in itself. The narrative that CCI poses sits well only because the relevant market here has been extended to all multiplexes at large. Based on this, let’s assume that the relevant market in the CCI’s impugned order is not extended to all multiplexes at large but to those of a single multiplex brand like the aforementioned Supreme Court order permitted. Would that not resultantly increase the market share of Coco-Cola at any given Inox multiplex to a 100%? By broadening the horizons of Inox’s relevant market, CCI resultantly ignores the test of substitutability which has been the tombstone for numerous standards set by the CCI in its earlier decisions. When the question came before CCI in the Snapdeal case as to whether ecommerce websites shall exist as a distinct relevant market as that compared to the offline market, CCI embraced a neoclassical reasoning. CCI clarified that offline and online markets differ because they provide a different shopping experience in terms of discounts and customer service. Similarly, buyers weigh the options available to them in both the markets and decide accordingly. Therefore, if the price in the online market increases that would

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Applicability of Arbitration (Amendment) Act, 2015 to Section 34 of the Arbitration Act, 1996

Arbitration Law /

[By Rahul Kanoujia and Venkata Supreeth Kesapragada] The authors are third year students of Gujarat National Law University, Gandhinagar. Introduction In the present case [i], the appellants, Ssangyong Construction Co. a construction company registered under the laws of the Republic of Korea, entered into a contract with the respondent National Highways Authority of India (“NHAI”) a government undertaking overseeing the construction of highways across the territory of India. Under the contract, the parties had agreed to payments for base materials such as cement, bitumen, petrol, chemicals and tar based on a formula decided mutually, involving the Wholesale Price Index (“WPI”) as published by the Ministry of Industries. At the time of entering into the contract, the parties had agreed to the old WPI series of 1994, however, the contract permitted for change in the formula, subject to the contractor’s approval. The NHAI had issued a subsequent circular in 2013 making a unilateral change in the WPI series from the 1994 version to 2007 version and raised invoices of pending dues under the new series starting from 2007. Aggrieved, the appellants referred the matter to arbitration for a three-member tribunal where the majority decided the matter in favor of the respondents, while the dissenting arbitrator awarded in the favor of the appellants, basing his reasoning on the ground that the new WPI series was de hors to the contract. Upon reaching arbitration, the appellant moved to the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter “Act”) to set aside the award on the ground of “patent illegality”. The learned judge did not find a reason to interfere with the award as the view of the majority was drawn on a plausible interpretation lying within the contract. The court opined that unless patent illegality has been established the court shall not interfere with the substantive decision of the tribunal. Hence the application was dismissed, leading to an appeal before the Supreme Court. Examination of the grounds of judicial interference as laid down under section 34 of the Arbitration Act, 1996 The Supreme Court took upon to examine the applicability of section 34 of the Act and to decide if in the present case, such a unilateral novation is permissible. In the case of Associate Builders v. Delhi Development Authority [ii], relying upon the case of Renusagar Power Co. Ltd. v. General Electric Co. [iii], interpreted the term “public policy “as comprising three elements: Fundamental Policy of Indian Law Interests of India Justice or Morality Though reliance was placed on Renusagar judgment, the interpretation was made in the context of the term “public policy” as provided in Section 48 of the Act for the enforcement of foreign judgments. A fourth element, “patent illegality” had been constructed by the court for the application of Section 34 of the Act in the case of ONGC v. Saw Pipes Ltd. [iv]. The Court further elaborated its position in the case of Associate Builders v. Delhi Development Authority wherein it was held that a quasi-judicial authority must adhere to the most basic tenets of justice such as principles of natural justice and fairness. Infraction of these principles attracts the court’s attention to the defects apparent on the face of the decision of the arbitral tribunal. However the court has, by policy, not adopted an expansive construction of the permissible grounds of judicial intervention as laid out under Section 34 of the Arbitration Act. In the instant case, the court invoked its plenary powers under Article 142 of the Constitution to set aside the arbitral award and elevate a minority judgment of a sole dissenting arbitrator to the status of the award so as to bind the parties, in order to avoid a fresh set of arbitration proceedings, which would defeat the provisions for speedy resolution as envisioned under the Arbitration and Conciliation (Amendment) Act, of 2015 (“2015 Amendment Act”). In the instant case, the court opined that the decision to implement the new WPI series had been taken unilaterally by the NHAI. The respondents placed reliance on documents and material, which were not accessible to the appellant company. In doing so the court felt that the principle of Audi Alteram Partem was violated. Further the court did not place the said infraction as a violation of the basic notion of justice. The award delivered was within the competence of the arbitral tribunal. The Court gave an extreme caution in the handling of applications under Section 34 of the Act wherein if the appellant alleges a violation of the basic notion of justice, the violation should be such that the conscience of the court must be shaken at the infraction of any of the basic tenets of justice or fairness, in line with the Supreme Court’s holdings in the Associate Builders’ case. The court also relied on the 246th Law Commission report [v] which highlighted the necessity for independent, faster dispute resolution mechanism free from excessive judicial intervention to ensure the protection of money claims. Hence, in providing for applications under Section 34 of the Act, the courts must bear in mind the delay factor that is likely to cause irreparable losses to the parties. The 2015 Amendment has effectively overruled the widened scope of intervention as provided by the Saw Pipes & Western Geco [vi] judgment, where ‘Interests of India’ is no longer recognized as a possible sub-category of a public policy violation. Further an erroneous application of law by the arbitral tribunal is not recognized as a valid ground for setting aside the arbitral award, so long as such an application is within the tribunal’s competence. Analysis In the light of the court’s judgment in BCCI v. Kochi Cricket Pvt. Ltd. and Ors.[vii], the application of the provisions of the 2015 Amendment Act was held to be prospective. However in the instant case, the Supreme Court has provided that the application of the provisions of the amendment shall be made only in those cases where the arbitration proceedings have

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Shares with Differential Voting Rights: A New Life?

Company Law /

[By Deeksha Gabra and Shivam Gupta] Deeksha is a Chartered Accountant and Shivam is a fifth year student of RGNUL, Punjab  1. Background Shares with Differential Voting Rights (hereinafter “DVR Shares”), also known as Dual Class Shares internationally, are shares with rights disproportionate to their economic ownership. The concept of DVR is not new to India. It can be traced back to 2000 when the then Companies Act, 1956 was amended by Companies (Amendment) Act, 2000 to inculcate Section 86, which allowed the Indian companies to issue DVR Shares. The Consultation Paper on DVR Shares released by SEBI categorized DVR into two types: Shares with Superior Voting Rights (hereinafter “SR Shares”) which carry superior voting or dividend rights in comparison to ordinary shares. The minimum votes to share ratio in SR Shares should be 2:1 which can reach up to maximum of 10:1, implying a shareholder holding one share will have 10 votes. Shares with Fractional Voting Rights (hereinafter “FR Shares”) which carry inferior voting rights in comparison to ordinary shares. The minimum votes to share ratio in FR should be 1:2 which can reach up to maximum of 1:10, implying a shareholder holding 10 shares will have one vote. Till 2009, there were only few listed companies that issued shares with differential rights. For instance, in 2008, Tata Motors issued DVR Shares carrying 1/10th voting right and 5% higher dividend on these shares as compared to ordinary shares; and in 2009 Pantaloons Retails (now, Future Enterprises Ltd.) issued DVRs with 1/10th voting rights to the existing ordinary shares and offered 5% additional dividend. Later in 2009, SEBI amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to bar listed companies from issuing DVR Shares with superior voting or dividend rights, meaning that only FR Shares could be issued by listed entities. Since then, the use of DVR Shares in the Indian corporate sector is almost negligible, which can be attributed to various reasons including low awareness about the concept of DVR shares, inadequate corporate governance measures which may lead to minority oppression and lack of legal framework for regulating the DVR Share market. The release of Consultation Paper on DVR Shares by SEBI followed by the hostile takeover of Mindtree by the L&T, being the first hostile takeover in the Indian IT sector ignited a debate in the corporate arena regarding the importance of DVR Shares to avoid such hostile takeovers. Thereafter, SEBI in its Board Meeting on 27th June, 2019 approved the Framework for issue of DVR Shares. This article briefly discusses how DVR Shares would have helped to prevent the hostile takeover of Mindtree and makes an attempt to analyze the new approved framework for DVR Shares and the provisions inculcated therein. 2. Mindtree’s Hostile Takeover The whole mishap can be attributed to the bizarre shareholding pattern of Mindtree. The four promoters of the company held only 13.32% of the shares collectively. The first step taken by L&T was to acquire 20.32% stake held by coffee tycoon, V.G. Siddhartha, in Mindtree. Then L&T further purchased 15% from open market before making an open offer of 31% under the Takeover Code. In the end, L&T gained a control of 60% after it further purchased 10.61% stake from Nalanda Capital. Mindtree tried to prevent the hostile takeover by using various defense mechanisms. The main tactics included proposal to announce increased dividends, raising of a contention that both the companies have dissimilar work culture, proposal for buyback of shares. The last effort made by Mindtree was to facilitate an intervention by its largest institutional investor, Nalanda Capital. However, Nalanda Capital also recoiled by selling its stake after SEBI issued a show-cause notice for acting in concert with the promoters of Mindtree and spurring Mindtree’s public shareholders to abstain from selling their shares at L&T’s offered price. Had there been DVR Shares in place, it could have helped the promoters to defend against the hostile takeover as a large percentage of voting rights would vest in the hands of promoter group. 3. Need for a New Framework The Indian start-up market is witnessing a boom. These start-up companies depend majorly on the promoters/founders for their growth, vision and sustenance. Also, these companies are in requirement of funds/capital frequently which is fulfilled by equity capital. This results in erosion of promoter’s stake, thereby weakening their control. This is particularly significant for new technology firms with asset light models. DVR Shares as a paradigm for procuring capital can tackle this concern meritoriously, consequently operating as a defence mechanism to fight hostile takeovers. 4. New Framework The SEBI Consultation Paper proposed a detailed framework for issue of both SR shares and FR shares. According to the framework, a company with SR shares is permitted to list its ordinary shares by an initial public offer subject to certain conditions prescribed under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009: The company should necessarily be a tech company, i.e. companies that intensively use technology such as information technology, intellectual property, data analytics, bio-technology or nano-technology. The Promoter Group (excluding corporate & non-executive promoters) is only eligible to hold SR shares. The collective net worth of the promoter group should not exceed Rs 500 Cr. (notwithstanding the investment of SR shareholders in the shares of issuer company). A Special Resolution is passed for issuance of SR shares. The SR shares are held by the promoter group for at least last 6 months prior to filing of Red Herring Prospectus (“RHP“). After the listing of the ordinary shares, the SR shares shall also be listed on the stock exchanges. However, SR shares shall subject to sunset clause according to which the SR shares will be converted to ordinary shares. Furthermore, provision relating to lock-in will prohibit the trading/ transfer and creation of encumbrances on the SR shares. The coat tail provision is one of the main highlights of the new framework along with the sunset clause. The coat tail provision provides for the circumstances where the SR

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Ishaan Chopra of NLIU Bhopal on his experience at the 4th NLIU Trilegal Summit, 2018

Promotion /

(Ishaan Chopra is fourth year student at NLIU, Bhopal and can be reached at ishaanchopra66@yahoo.in) Last year, in July 2018, the Centre for Business and Commercial Laws (CBCL) announced the prizes for the 4th NLIU-Trilegal Summit on Corporate and Commercial Laws. My mind processed and captured three pieces of information from the poster put up by CBCL – a paid foreign trip, an internship at Trilegal and an Eastern Book Company (EBC) publication.  The above mentioned prizes definitely motivated me to write for the Summit but I had little idea about the intellectually enlightening journey I was about to depart on. To start with, I gauged the scope of legal issues and the themes that the Summit sought to cover. The theme for the Summit was “commercial laws” which effectively covered everything that was trending in the corporate law sector. After some preliminary readings, I delved deeper into these issues to zero down on something in my interest area. The indicative themes were insightful and guided my research into different topics.  The Summit’s wide range of themes provided by the summit gave it an edge over other similar summits and conferences which are organized in the law school circuit. One simply cannot jump into preparation for the Summit. Given the variety of themes and stiff competition for publication, brainstorming over prospective topics is a must. If one is in the Second or Third-year of law school, these readings will probably be their first exposure to a web of corporate laws that actually have widespread implications on various areas of our lives. Reading through various topics and researching on them actually helps us understand the complexities of these laws and even gauge our interest in the field. After choosing a theme, one must strategize on the structure of the paper and then begin the process of putting it into words.  None of the above is possible without setting out the objective and scope of your research. It is a sine qua non. And while you are at it, it is always a great idea to take research and drafting advice from seniors who are relatively more well versed with the developments in the field of corporate law. The Summit ensures that all the effort put into research and drafting is appreciated, and sufficiently awarded. Each research paper undergoes two stages of technical review and is further reviewed by experienced lawyers working at Trilegal. After a rigorous assessment of the papers a total of 15 papers are shortlisted for the presentation at the NLIU Bhopal campus.  The lucrative prizes bring with them intense competition among the participants. It is this level of competition and the satisfaction attached to it, that has made law students (including me) across the country strive for the opportunity to present their paper at the Summit.  I was fortunate enough to write for the Summit and get shortlisted in the top 15. The next challenge was the paper presentation. The panel for the Summit consisted of Trilegal partners, academicians and reputed in-house counsels. This is because Trilegal truly ensures the presence of excellent panelists. The very idea of speaking in front of such experienced professionals for eleven minutes, on an issue they have a practical insight into, was daunting. I started my preparation by getting the basics in place. Subsequently, I developed a structure for the presentation and read up on the current issues pertaining to the presentation. This process helped me comfortably put forth my views on an issue of commercial laws and approach it with a commercial perspective. The preparation for the presentation involved focus on advocacy skills as well. Cohesion and eloquence are key to systematically presenting a corporate law issue, which should be a prime focus for all presenters. Last year, Mr Sumeet Malik (Director, EBC) visited the NLIU Bhopal campus and inaugurated the Summit with his session on legal research for junior law students. The students were elated to be learning the basics of the simple yet crucial concept of research. His mantra to teach students not the law – but to think like a lawyer and to know where to find the law, has been extremely impactful on a personal level. This session was immensely beneficial for participants, the students of NLIU Bhopal and anyone else aiming to understand the art of research.  On the next day of the Summit, CBCL warmly welcomed the participants with hampers. I distinctly remember the first presentation that took place. The instant the presentation ended, there were series of questions that followed. Interestingly, the panelists were heavily inclined towards engaging in commercial realities of the issues raised other than the position of law itself. The audience and the participants were also keen on asking questions and the panel engaged in an interactive session with the students. This unique opportunity of interacting with reputed practitioners is another factor which makes this Summit one-of-a-kind. While the questions asked were intriguing, what grabbed my attention most was that the participants were thorough with their respective topics. The competition was tough and the panelists were all praises for the effort put in by the students. Additionally, CBCL arranged for scrumptious meals and additionally it was a great environment to network with peers from across India.  Even though my presentation was post lunch, I felt intimidated by the panel and my peers who had given excellent presentations prior to that of mine. During my presentation, the panel patiently heard my views and asked questions, which I answered on the basis of my preparation. The interaction was extremely insightful and my analysis and perspective were appreciated. The panelists relied on simplified examples to explain their practical experience to all presenters, including me. Post my presentation, I witnessed the remaining presentations of the Summit and asked questions, which were appreciated by the members of the panel and this resulted in me securing an internship with Trilegal. Having developed a keen interest in commercial laws by the end of the Summit, the internship

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

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

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

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

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Position of Cryptocurrencies under the Indian Taxation Regime

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]

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Individual Insolvency: A New Regime

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

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

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

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