Author name: CBCL

Addressing Gaps in Indian Shareholder Litigation: The Imperative for Double Derivative Suits

Leave a Comment / Company Law /

[By Dhiren Gupta] The author is a student of Rajiv Gandhi National University of Law.   Introduction Evolution of the Indian corporate structure has gone through several stages. From the Companies Act of 1956 to the economic reforms of 1991, which underscored the need for greater corporate transparency and accountability, which was addressed by bringing in the Companies Act, 2013. A plethora of changes were bought in by the new legislation which imposed additional compliances on the companies, but the issue of shareholder litigation persists due to the sophisticated growth of corporate malpractices for which the current legal system seems increasingly ill-equipped. There has been a large number of cases pertaining to corporate mismanagement and fraud, where the shareholders, especially the minority, have suffered due to Sections 241, 242 and 245 being riddled with procedural flaws leading to an excessive burden of proof on the shareholders. In this piece, the author will discuss the shortcomings of shareholder litigation in India and how improvements can be made while analysing different jurisdictions and how they deal with derivative and double derivative suits. Shortcomings of the Indian Shareholder Litigation System The inclusion of Sections 241, 242 and 245 was a step forward for corporate litigation in India which theoretically aligning them with other jurisdictions. However, the practical approach reveals the actual issues. Section 245, which deals with class action suits, empowers the shareholders to move against companies, directors, auditors and other associated persons against their deleterious effects on the company or shareholders. This section was formulated to provide support to the minority shareholders. But it soon became an underutilized legal tool as most of the shareholders were unaware that they possessed such an entitlement within the Act. Additionally, structural complexities, like the minimum number of applicants required to institute a suit is difficult to attain – especially in companies where the shareholding is diffused with minority shareholdersbeing present. Lastly, it only covers harm caused by direct actions of a company and excludes any indirect harm that may be caused by the actions of a subsidiary or the parent company. Section 241 lets shareholders approach the National Company Law Tribunal (NCLT) if they feel the company is being run poorly or in a way that harms the company or its members. Section 242 gives the NCLT the power to take corrective action, which can include serious steps like removing directors or even shutting down the company in severe situations. However, the success of either of these sections has been limited because of the disproportionate burden of proof on the shareholders. The essential of providing substantial evidence to prove oppression against the minority shareholders is complicated, as the management may act elusive and take decisions which might not seem wrong on paper. Additionally, the implementation of these sections extends to the company where the shares of the person lie and not when the harm is done to a subsidiary, leaving a significant gap in corporate governance remedies. Therefore, these provisions of the Companies Act, 2013, reflect a sincere effort to strengthen shareholder protection. A large number of procedural impediments, coupled with ineffective judicial operations and labyrinthine of corporate structures, will frustrate the aforementioned  provisions in law that protect shareholders’ rights and prevent oppression, which is worse in case of minority shareholders. In India, a multitude of companies operate through highly complex holding structures, often involving a large number of minority shareholders. When such multilayered parent-subsidiary frameworks exist, the key concern becomes identifying those minority shareholders who are unable to establish their locus standi at the subsidiary level. This point therefore highlights the urgent need for a complete overhaul that shall transform litigation processes and offer relaxation in evidentiary requirements, along with policy changes to truly ascertain that these laws protect shareholder rights and enforce corporate responsibility. The Absence of Double Derivative Suits in Indian Law The exclusion of double derivative suits from the Companies Act creates a significant legislative gap, especially given India’s complex corporate structures. Such provisions would empower shareholders of the parent company to sue the holding company on behalf of the subsidiary. Governance and ownership structures often become opaque because subsidiaries can have other subsidiaries beneath them. Minority shareholders of the parent company find themselves unable to do anything when a wrong occurs at the subsidiary level and the parent company chooses not to act. This creates an accountability vacuum, which allows for misconduct in the subsidiaries to run amok. The absence of double derivative suits thus aggravates the plight of minority shareholders, practically leaving them bare to any kind of corporate malpractice, whilst reiterating the inherent weaknesses within the corporate governance system of India. The Case for Introducing Double Derivative Suits While layered corporate structures in India allow conglomerates to administer operational flexibility and incorporate risk management benefits, they also pose significant challenges to shareholder oversight and accountability. By allowing deals that may amount to fraud or mismanagement to take place at the subsidiary level, shareholders of the parent company, with no direct holding in the shares of that particular subsidiary, become deprived of any meaningful remedy regarding the wrongdoing. In order to redress such imbalance, it is pertinent that India include provisions for double derivative suits, i.e. suits wherein the shareholders of the parent firm are entitled to sue a subsidiary on whose behalf they have a substantial interest. Such provisions shall not only be useful for providing remedy but would also act as a deterrent against such corporate malpractices. Wrongdoers exploit the separation of parent and subsidiary companies to shield themselves from liability, knowing that normally only the direct shareholders of a subsidiary can avail this right. However, in the light of modern corporate governance, particularly in India’s rapidly changing economy, it is increasingly clear that double derivative suits are more a matter of necessity than some legal novelty. While layered corporate structures grant large conglomerates increased operational flexibility and help in managing risks, they also create significant hurdles for shareholder oversight and accountability. When mismanagement or fraud

Addressing Gaps in Indian Shareholder Litigation: The Imperative for Double Derivative Suits Read More »

Correcting the Anomaly Created by Amit Metaliks in Section 30(2) of the IBC Through the Cathedral Model

Leave a Comment / Insolvency Law /

[By Aakriti Rikhi] The author is a student of National Law School of India University, Bengaluru.   Introduction Section 30(2) of the IBC provides that the resolution plan must provide for a certain minimum amount to the operational creditors and dissenting financial creditors (‘FCs’). For the latter, it states that they must be paid at least the amount that they would have received, had the corporate debtor been undergoing liquidation under section 53. However, the interpretation of minimum liquidation value has been a contentious issue when it comes to payment to dissenting secured FCs. There are two positions as of now. First is that dissenting secured FCs are entitled to receive a payout as per the resolution plan and it is not necessary to pay them the value of their security interest. This position was laid down in India Resurgence Pvt. Ltd. v. M/s Amit Metaliks Ltd. & Anr. The Court here held that the amount to be paid to such creditors is to be decided by the commercial wisdom of the Committee of Creditors (‘CoC’) and a dissenting secured FC cannot claim a higher amount based on the value of their security interest.  The second position is that dissenting secured FCs must be paid the value of their specific security interest as minimum value. This position was laid down in DBS Bank Ltd. v. Ruchi Soya Industries Ltd. & Anr. The Court here held that section 30(2) ensures that dissenting creditors receive the payment of the value of their security interests as that was the legislative intent behind introducing this minimum value through the 2019 amendment. Both the decisions are conflicting and have been referred to a larger bench for consideration. To that end, this paper analyses the issue of minimum payout to dissenting secured FCs from a law and economics perspective. It uses the Cathedral Model to argue that dissenting secured FCs have an entitlement that is protected by a liability-rule where their consent is not necessary for the relinquishment of their security interest when a plan is approved under section 30(4). Since the liability-rule mandates the payment of an objective fair value as compensation, by paying the dissenting secured FCs below this value (i.e., their security interest), Amit Metaliks has created an anomaly within the IBC framework. If not paid this value, there will be high social costs and a failure of the distributive goal envisaged by the introduction of section 30(2). Approaching section 30(2) through the Cathedral Lens To put forth this argument, this paper has been divided into two parts. It first lays down the framework proposed by Calabresi and Melamed and then, applies this framework to section 30(2) in a way that is consistent with the overall objective of the IBC i.e., balancing the interests of all stakeholders. I. Laying down the basics: The type of entitlements and their general application The Cathedral Model was developed to help decide that in a dispute between parties having conflicting interests, which interest should be entitled to prevail. It has divided entitlements into three categories: entitlements protected by property rules, entitlements protected by liability rules and inalienable entitlements. For the purposes of this paper, the first two entitlements are relevant. A property-type entitlement is one where someone who wishes to remove the entitlement from its owner must buy it by bargaining with the holder of the entitlement. It requires the consent of both the parties on the value of the entitlement. An entitlement protected by the liability rule, on the other hand, is one where someone may take away the entitlement if she is willing to pay an objectively determined value for it. This objectively determined value is determined not by the parties but by one of the organs of the state. The application of each type of entitlement depends on economic efficiency, distributional goals and “other justice reasons”. Economic efficiency entails an outcome consistent with Pareto optimality. Pareto optimality asks that the rule that we follow should lead to such an allocation of resources that a further change could not improve the condition of those who have gained by such an allocation, that they could compensate those who have lost from it and still be better off than before. In other words, it is the most optimal situation, assuming that it is not possible to make someone better off, without making the other worse off. So, Pareto optimality’s goal is to minimize the aggregate social costs, which is the sum of damages incurred as a consequence of harm and the costs incurred in preventing this harm. The Cathedral Model does so by putting the costs on the party which can most cheaply avoid them. However, since markets do not function ideally, we do have transaction costs. In light of these transaction costs, the Model presents us with two options: market transactions or collective fiat. Either of these have to be chosen keeping in mind the economically efficient outcome. The second factor is distributional goals. These are grounds which decide the distribution of entitlements. These grounds vary with the purposes that a society seeks to achieve. Lastly, “other justice reasons” includes those reasons which cannot be described in efficiency or distributional terms but are linked with both. Using these factors, the authors contend that when the cost of establishing the value of an entitlement by negotiation is high, then a voluntary transaction will not be able to occur due to high transaction costs. In such a scenario, it is better that collective fiat should prevail, instead of a mutually beneficial transfer. While this provides us with the economic justification for preferring a liability rule over a property rule, there are distributional reasons for doing so as well. As per the authors, the choice of a liability rule is often made because “it facilitates a combination of efficiency and distributive results”[iv]. Distributional reasons play an integral role in deciding the compensation value in a liability-rule as we shall see in the next section. Keeping the above framework

Correcting the Anomaly Created by Amit Metaliks in Section 30(2) of the IBC Through the Cathedral Model Read More »

Balancing the Scales: Rethinking Shareholder Primacy in Hostile Takeover Defences

Leave a Comment / Mergers & Acquisitions /

[By Chaitanya Vohra] The author is a student of Rajiv Gandhi National University of Law, Punjab.   Introduction In the corporate realm, one of the pertinent factors that affect the Ease of Doing Business is an investor-friendly environment. Hostile takeovers are successful acquisitions of a target without the green signal from the management of the target, thereby being viewed as pro-investor and anti-management of the target. Investors have a potential to benefit from hostile takeovers by virtue of receiving premium for their shares in cases of sell-out or a natural boost to their dividends in cases of threats of hostile takeover, thereby positively contributing to that investor-friendly environment, which will causally improve the Ease of Doing Business. Nevertheless, the route of hostile takeover is very rarely taken and is considered uncommon in India.  Although hostile takeovers are not expressly recognized and classified in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Code’), there are no statutory hurdles to the same under the Takeover Code. Upon scrutiny, the answer to the obvious question of the non-prevalence of hostile takeovers can be accredited to the combination of strong promoter influence, mandatory disclosure requirements, and strict regulatory controls over takeover offers. It is important to note that hostile takeover attempts will rise in future with increasing corporate restructuring and foreign investment, and such a change is considered inherently beneficial as it would facilitate corporate competence and foster capital market development.  The advent of hostile takeovers in India means the emergence of defence strategies adopted by the management of the target to deter the potential acquirer from a successful acquisition. This article highlights the prevalence of promoter-driven companies, which immensely help in the effectuation of the defence strategies.  However, the promoter-driven companies appear to have been reduced in numbers as per the latest trends. This calls for the need for a robust and effective regulatory framework and, subsequently, the much-needed changes are effectively proposed. Thereupon, a reasonable argument is built which supports the need to expressly accommodate the proposed amendments in its existing regulatory framework. Moreover, these proposed changes will better equip the corporate entities for a shift towards a liberal environment with the surge of global interest in the M&A landscape in India.  The Shift from Promoter-Driven Shareholdings: Implications for Hostile Takeover Defences The shareholders are ultimate arbiters in scenarios which require the adoption of defence strategies to hostile takeover, given the shareholder-centric nature of Indian law. In this regard, one of the effective ways to defend against a hostile takeover can be having a shareholding structure such that substantial control is in the hands of promoters. It is pertinent to note that such was the case in the recent past, as concentrated promoter shareholdings were a norm in this sense. However, these promoter-driven companies are no longer seen to be in trend due to the advent of investments by virtue of private equity funds and institutional investors. Acknowledging these changes, SEBI released a consultation paper seeking comments with respect to shifting from the concept of ‘promoter’ to ‘person in control’. In support of such changes, it has been prudently observed by SEBI that there has been a substantial reduction of companies having major promoter shareholding in the top-500 listed companies, from 58% in 2009 to 50% in 2018. These statistics heavily indicate the shift, which is the elephant in the room as the regulatory framework does not allow the nascent companies without the traditional shareholding structure to fully avail the defences in cases of a hostile takeover. It is pertinent to note that these defences to hostile takeover are numerous, ranging from poison pill to golden parachutes. However, these defences are toothless in the present regulatory structure. For instance, Regulation 26(c) of Takeover Code prohibits the practical application of poison pill defence mechanism and Regulation 26(d) of Takeover Code prohibits the employment of leveraged recapitalization defence. Thus, it can be implied in the present circumstances that the companies are encouraged to vest a major shareholding with promoters to ensure stability in the company. This is not ideal due to the fact that it emboldens the ongoing norm of promoter-driven companies, thereby punishing those who choose not to follow such a norm with the persistent threat of a hostile takeover. This threat persists due to the lack of a robust regulatory framework that provides for the feasibility of availing defences against hostile takeovers.  Therefore, based on the latest trends, the upcoming companies going away from the concept of promoter-driven shareholdings are put at a significant disadvantage as they cannot avail the appropriate defence strategies of hostile takeovers.  Pinpointing Hiccups in Effective Adoption of Hostile Takeover Defences Upon a deeper dive, the Indian law appears to rely heavily on the concept of shareholder democracy, which was introduced in the Indian framework by the J.J Irani Committee. While the introduction of such a governance model can be attributed to past events such as the Satyam scandal case, and it presently acts as a safeguard for protecting the interests of shareholders, its application in certain circumstances can be deemed skeptical. One such specific circumstance can be taking the crucial decision of employing a certain defence strategy to avert a hostile takeover.   The shareholders acting as sole arbiters in this regard can amount to gross injustice to the future of the company due to the indifferent attitude of Indian shareholders towards understanding the policies and future objectives of the company. Hence, Indian shareholders appear to be gullible when their interests lie in reaping monetary benefits, as opposed to corporate successand preservation, thereby implying the slow death of the practicality of availing defences. It can be said that the shareholders who are not personally invested and associated with the company, as opposed to promoters, tend not to represent the class of long-term investors, which means that they are much more likely to bend to the will of potential acquirers in a hostile takeover by virtue of selling their shares at a premium, as opposed to

Balancing the Scales: Rethinking Shareholder Primacy in Hostile Takeover Defences Read More »

Unpacking the Dormancy of India’s Patent Box Taxation Regime

Leave a Comment / Taxation Law /

[By Megha Bhartiya & Sneha Bharti] The authors are students of Rajiv Gandhi National University of Law, Punjab and Symbiosis Law School, Noida respectively. Introduction India introduced the patent box taxation regime through Section 54 of the Finance Act, 2016. It presents itself as a unique tool to promote and foster innovation by emerging from the conflux of taxation law and intellectual property (“IP”) rights law. The patent box regime is a tax incentive mechanism and offers reduced tax rates on certain qualified incomes which are generated from patented innovations.  This blog pivots around the Organization for Economic Cooperation and Development (“OECD”)’s Action 5: Agreement on Modified Nexus Approach for IP Regimes and its resultant implications for India. With the recent buzz around a potential new law for direct income tax in India, this is a crucial time for the legislature to consider reworking the patent box provision i.e., Section 115BBF of the Income Tax Act, 1961, in order to better utilize it. The blog will thus focus on determining the reasons behind the dormancy of the regime in India. This will be done through a critical appraisal of Section 115BBF which would lead us to two fatal flaws in the provision that have long been overlooked. What is the Patent Box Regime? The separate and patent specific taxation provision in India is referred to as the patent box regime. It allows the companies that qualify its requirements to avail a decreased tax rate for the profits they have generated from their patented inventions. The rationale behind allowing a different reduced tax rate for profits on patents is rooted in the objectives of the IP Rights regime, i.e., it acts as a strong incentive for the companies to invest into innovation, and research and development (“R&D”) activities.  ​Why do we need a Patent Box Taxation Regime? At present, the dominating school of thought is that reducing subsidies and substituting them for a lower corporate tax is a more effective approach as opposed to offering outright subsidies as it interferes less with the market mechanism and is hence termed as a market-friendly instrument.   It is accepted by economists that if industrial R&D is primarily conducted by private sectors, then it comes with the risk that they will under invest in the area, resulting in lesser research than what is socially and scientifically desirable. This tendency to underinvest stems from the issue of appropriability where the private sectors are unable to fully appropriate the returns of their investments. In addressing this, governments worldwide have incorporated patent box regimes as one method to encourage businesses to continue investing in R&D.  OECD’s Modified Nexus Approach In 2015, the OECD released its Action 5 report as part of the Base Erosion and Profit Shifting (“BEPS”) project, which aimed to combat tax avoidance strategies used by multinational enterprises. The OECD guidelines on the patent box regime emphasise the importance of aligning tax benefits with substantial economic activities. According to the guidelines, countries should ensure that their patent box regimes are compliant with the “nexus approach,” which requires a direct link between the R&D activities that generate the income and the income that benefits from the reduced tax rate. ​According to the nexus approach, only the income generated through qualifying R&D activities should be eligible for the subsidized tax rate.-​     ​​​​​​. This means that countries implementing a patent box regime must establish a clear criteria for determining which R&D activities qualify for tax benefits, hence ensuring a level and fair playing field.   The Nominal and Ineffective Patent Box Regime in India Recent years have witnessed India grow as a centre for innovation globally in light of the increasing number of firms investing in the R&D activities. In India, the potential benefits of the patent box regime were recognized and introduced via the Finance Act, 2016, which inserted Section 115BBF in the Income Tax Act, 1961. The section provides a 10% tax rate on income by way of a royalty for the patent developed and registered in India. The provision provides for certain qualifying requirements – firstly, the Company must have the patent granted under the Indian Patents Act, 1970, and secondly, the patentee must be a resident of India. Additionally, the aspect of the patent being “developed” in India alludes to the mandatory condition of R&D also being conducted in India. These conditions together align India’s patent box regime with OECD’s 2015 modified nexus approach which posits that the income arising from the exploitation of a certain IP should be taxed in the jurisdiction where substantial R&D activities were undertaken, not simply where the legal ownership lies. This has also been attributed as one of the rationales behind the introduction of the regime in India.  The Fatal Flaws: Challenges to the Use of the Patent Box Taxation Provision in India While the patent box regime offers significant tax benefits to companies engaged in R&D activities, it also poses challenges in terms of implementation and compliance. There are several reasons for the current dormancy of the patent box provision in India, one of them being its restricted scope of application. The complete lack of use of the provision in the past several years directs us to the first flaw –   FLAW 1: Missing Links in Definitions of Key Terms ​​Section 115BBF of the Income Tax Act, 1961, provides for tax on income from patents and refers to the assessee as an “eligible assessee.” ​Subsequently, the definition of “eligible assessee” can be referred to in Explanation (b) of the section, which defines it as a person who is an Indian resident and who is a patentee. ​​​​​The use of “and” indicating that both conditions must be fulfilled. ​     ​​T​he definition of “patentee” which is provided in explanation (f) indicates, in explicit phrasing, that patentee means the person who is the true and first inventor. According to the principles of patent law, a true and first inventor can only be a natural person. The same has also been upheld

Unpacking the Dormancy of India’s Patent Box Taxation Regime Read More »

Revamping Space Exploration in India with SPACs: A New Epoch 

Leave a Comment / Mergers & Acquisitions /

[By Shaurya Jha] The author is a student of Hidayatullah National Law University, Raipur.   Introduction With the Indian Space Industry’s expected target to reach $40 billion by 2040, funding roadblocks stand as the major hurdle. Conventional financial mechanisms are misaligned with the commercial requirements of space ventures. Bank loans require collateral and predictable income, constraining early-stage space startups. Venture capital, on the other hand, demands short-term to medium-term exit (5–7 years). This has necessitated the industry to react with the accelerated usage of Special Purpose Acquisition Companies, or SPACs – a mechanism that facilitates the company to go for a public listing and fundraising even before the acquisition target is recognized. The end goal of a SPAC is to capitalize on shareholders and PIPE funding to purchase an operating company, which has marked a watershed phase in modern corporate capital acquisition, breaking outside conventional methods like IPOs.   SPACs, informally known as “blank-check companies,” are publicly listed entities created entirely to converge with or take over a pre-existing corporation, thereby aiding its swift transition to public trade venues. Space technology has surfaced as an alluring industry for cooperatives focusing on developing satellite constellations, reusable rockets, and space travel industry services that conventional funding avenues falter to provide. Notable space technology SPAC transactions include Virgin Galactic, the first publicly traded commercial spaceflight company, which went public via a $1.5 billion SPAC merger in 2019. Similarly, Rocket Lab’s SPAC merger underscored the sector’s promise, enabling the company to expand its small satellite launch capabilities. However, India lacks regulations dedicated to SPACs, resulting in uncertainties for the investors of space-tech markets, and the current legislation makes the process of capitalizing on the financing model difficult due to the imposition of compliance barriers.  Through the means of this article, the author analyses the convergence of SPACs and Space technology. Subsequently, the author deliberates on the legal regulatory dimensions of space technology SPACs in the Indian context and the challenges and risks of space technology SPACs in India, and the author concludes the article by discussing the future of SPACs in India’s space industry.  The Intersection of SPACs and Space Technology The concept remains to be evolving in India, despite gaining global traction, India is yet to develop a definitive legislation for SPACs within concrete guidelines. The vacuum further limits the Indian startups, specifically the capitally intensive ones, from exploring this alternative route to markets.   Unlike traditional IPOs, SPACs enable privately listed companies—particularly those in fledging industries—to circumvent lengthy supervisory scrutiny and facilitate significant funding within months. In 2020 and 2021, SPACs collectively raised over $160 billion globally, with several transactions targeting innovative industries such as the space sector. The SPACs are now venturing into innovative sectors, with space technology being a key area of focus. For instance, Lynk Global, a company specializing in satellite communications, announced its merger with Slam Corp, a SPAC. The convergence, valuing Lynk at $800 million, aims to finance the low earth orbit satellite constellation. The space sector has its unique impediments, like substantial capital requirements coupled with long development deadlines, thus making SPACs an ideal financial mechanism to close the divide between pioneering cooperatives and funding ecosystems in India. These deals reflect the rising investor confidence in private space companies and highlight SPACs’ role in democratizing access to the space economy. The promising convergence of SPAC and the Space technology of India provides a humongous opportunity for technological advancement and growth. SPACs, which provide an efficient process for private cooperatives to be open to the public or civic and access capital, have been and will be pivotal in developing the global space industry. Companies such as SpaceX have demonstrated the commercial viability of reusable rockets, while satellite ventures promise to bridge the global digital divide. SPACs enable these firms to secure the necessary capital to scale operations and innovate rapidly. As projected, the space economy is estimated to reach $ 1 trillion by 2040, facilitated by space-based internet systems, satellite technology, and even lunar exploration.   The Indian space economy targets a fivefold expansion in the next two decades; harnessing the prowess of SPACs could accelerate the transition to a full-scale commercial enterprise, strengthening global competitiveness. SPACs allow the private Indian space-tech corporations to step into the humongous market, making sure that the Indian space-based industry is suitably financed so that India remains at the place of prominence in space exploration. As the aspirations mature, the regulation of SPACs should not be assessed economically but legally as the determinant of their success.    Legal and Regulatory Dimensions of Space Technology SPACs in India In defiance of the global acceptance, the regulatory environment of India persists to be limited. In contrast to major countries like the United States of America, where SPACs have been accepted as a major tool of financial transactions.   Despite the readiness around investments driven by SPAC in the space sector, the Indian  Investor continues to face intimidating difficulties due to the lack of a formalized and dedicated framework which engender legal roadblocks for the space-tech corporations willing to go public via SPAC.   Assessing Section 26 of SEBI ICDR Regulations, 2018, which places a requisite of exhaustive financial disclosures as well as past earnings, presents an overwhelming challenge for space-based startups as unlike the conventional commercial corporation, these startup make take years to make the transition from prototype to product due to the long term R&D investment with limited immediate funds, making the adherence to the IPO eligibility, counterproductive. \  While Regulation 2(s) of the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 defines a SPAC and allows SPACs to be listed on IFSCs, it lacks the sectoral guidance for the capital-intensive sectors. In defiance of a consultation paper issued by SEBI, no formal rules have yet been notified. Absence of such provisions prevents the alignment with the upfront R&D investment and extensive development cycles of commercial space in India. By contrast, in major jurisdictions such as the United States of America, the Securities

Revamping Space Exploration in India with SPACs: A New Epoch  Read More »

Section 17 of SARFAESI and Breach of OTS Agreements: A Legal Conundrum

Leave a Comment / Banking Law /

[By Upanshu Shetty] The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.   Introduction The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), was enacted to empower financial institutions with a framework to recover non-performing assets without resorting to time-consuming litigation. A key feature of the SARFAESI Act is Section 17, which grants borrowers the right to challenge enforcement actions taken by secured creditors under Section 13(4). Over the years, judicial interpretations of Section 17 have evolved, particularly in the context of One-Time Settlement (OTS) agreements, where borrowers often seek relief when banks revoke settlement offers or enforce security interests after an alleged breach.  While OTS schemes are designed to facilitate amicable resolution between lenders and borrowers, disputes often arise when borrowers fail to comply with the settlement terms, leading banks to cancel OTS agreements and proceed with asset recovery. In such cases, borrowers have sought to invoke Section 17 before the Debts Recovery Tribunal (DRT) to challenge the enforcement of security interests. However, the judiciary has taken a nuanced approach to these cases, weighing the contractual nature of OTS agreements against the statutory framework of SARFAESI. The evolving jurisprudence suggests that while borrowers can approach the DRT to challenge wrongful enforcement, they cannot use Section 17 to seek enforcement of an OTS agreement itself.  The Role and Scope of Section 17 under SARFAESI Section 17 of SARFAESI provides an appellate remedy to any person aggrieved by measures taken under Section 13(4), which empowers secured creditors to take possession of secured assets or manage them in a manner they deem fit. The provision is intended as a safeguard against arbitrary or unlawful enforcement, ensuring that creditors act within the bounds of the law while exercising their rights. In Hindon Forge Private Limited v. State of Uttar Pradesh, the Supreme Court reaffirmed that a borrower can approach the DRT at the stage of the possession notice itself, thereby ensuring a fair opportunity to challenge enforcement proceedings.  However, a fundamental question remains: does Section 17 apply to disputes concerning OTS agreements? Courts have generally held that DRT jurisdiction is limited to reviewing measures taken under Section 13(4) and does not extend to general contractual disputes between banks and borrowers. In Bijnor Urban Co-operative Bank Ltd. v. Meenal Agarwal, the Supreme Court categorically ruled that a borrower cannot claim OTS as a matter of right and that no writ of mandamus can be issued directing a bank to grant such a settlement. This principle suggests that an aggrieved borrower cannot invoke Section 17 solely to enforce an OTS agreement but may do so if the revocation of an OTS results in wrongful enforcement under SARFAESI.  The Enforceability of OTS Agreements and Borrower Rights OTS agreements are contractual arrangements governed by the policies of individual banks and subject to the regulatory framework set by the Reserve Bank of India (RBI). While they provide borrowers an opportunity to settle dues at a reduced amount, they do not confer an absolute right to settlement. Courts have consistently upheld the discretionary nature of OTS schemes, emphasizing that banks must be allowed commercial autonomy in deciding whether to accept or reject a settlement proposal.  In Amrik Singh v. DCB Bank Ltd., the High Court held that once a bank frames an OTS policy in compliance with RBI guidelines, it must act in good faith while considering applications. Arbitrary rejection or revocation of an OTS offer, particularly if the borrower has demonstrated bona fide intent to comply, may invite judicial scrutiny. However, this does not imply that a borrower can force the bank to accept an OTS or claim an automatic extension of time to make payments. In State Bank of India v. Arvindra Electronics Pvt. Ltd., the Supreme Court ruled that borrowers cannot demand an extension of OTS terms as a matter of right, reaffirming the principle that OTS agreements remain subject to mutual agreement rather than legal compulsion.  OTS Breach and the Availability of Remedies Under Section 17 A key legal question arises when a borrower defaults on an OTS agreement, and the bank, consequently, proceeds with SARFAESI enforcement. In such instances, the borrower may attempt to challenge the action under Section 17, arguing that the bank’s revocation of the OTS was unjustified. However, the judiciary has generally restricted the scope of Section 17 to reviewing enforcement measures rather than adjudicating contractual disputes.  The Supertech Realtors Pvt. Ltd. v. Bank of Maharashtra, decision underscores this principle by holding that OTS agreements are purely contractual in nature and that disputes concerning their breach should be adjudicated through civil proceedings rather than writ petitions or SARFAESI appeals. However, there have been exceptions. In Anu Bhalla v. District Magistrate, Pathankot, the High Court exercised its writ jurisdiction to extend the OTS period based on the borrower’s bona fide intent to pay. This ruling highlights the judicial balancing act between upholding contractual obligations and ensuring fairness in lender-borrower relationships.  While the courts have largely maintained that Section 17 does not provide recourse for enforcing OTS agreements, they have recognized limited exceptions where the borrower can demonstrate that the bank acted in bad faith or violated due process. If the revocation of an OTS is arbitrary and is immediately followed by disproportionate enforcement under SARFAESI, the borrower may have grounds to challenge the action before the DRT. However, such challenges must be rooted in procedural violations rather than the mere expectation that an OTS should have been granted.  The Interplay Between Section 17 and Writ Jurisdiction Under Article 226 A significant aspect of this debate is whether borrowers can bypass the limitations of Section 17 by invoking Article 226 of the Constitution. The Supreme Court has consistently discouraged the use of writ jurisdiction in SARFAESI matters, emphasizing that statutory remedies under the Act must be exhausted before approaching the High Courts. In G. Vikram Kumar v. State Bank of Hyderabad, the Court ruled that challenges to e-auction notices must

Section 17 of SARFAESI and Breach of OTS Agreements: A Legal Conundrum Read More »

GST in License Fees: Unresolved Questions

Leave a Comment / Taxation Law /

[By Lovish J Goyal] The author is a student of NALSAR University of Law, Hyderabad.   Introduction Electricity Regulatory Commission(s) (‘ERC’) are instrumental in shaping India’s electricity sector. They are established under various statutes to regulate the electricity sector in their jurisdictions. These statutory bodies are responsible for granting licenses and determining tariffs to ensure an uninterrupted and reliable electricity supply. ERC are also vested with quasi-judicial powers, which enable them to regulate the industry effectively.  However, the license fees collected by ERC on the grant of licenses have recently become a contentious issue due to Goods and Services Tax (‘GST’) authorities seeking to levy GST on such collections. A landmark development occurred when the Delhi High Court quashed the levy of GST on license fees collected by the Central Electricity Regulatory Commission (‘CERC’) and the Delhi Electricity Regulatory Commission (‘DERC’). Similar legal challenges are pending in various other High Courts. The legal questions about the problem become relevant in light of similar activities undertaken by similar statutory bodies. Different industries have various regulatory authorities regulating them, ranging from Pollution Control Boards to Education Boards through issuing licenses and collecting fees. There have been instances wherein GST has been levied on license fees collected by different statutory authorities. Thus, the answer to this question would have broad ramifications across industries. This makes it imperative to have a clear law laid down on this issue. The Delhi High Court judgment becomes vital in light of the significance of the subject matter of the case.   Judicial Development The Delhi High Court, in the case of CERC v. Additional Director DGGI (‘Additional Director’), quashed the demand for GST, which was confirmed by the GST Department. The court based its decision on the finding that the ERC perform quasi-judicial functions. The court relied on the judgment of PTC India v. CERC (‘PTC’) to borrow the principle that the licensing function of CERC is a quasi-judicial function. Schedule III under the CGST Act provides that services by any court or tribunal established under any law for the time being in force shall not be treated as a supply. This makes the activities of any court or tribunal exempt from the levy of GST. It further held that these commissions primarily execute their statutory mandate and, therefore, should not be subjected to GST.   Furthermore, the court went into the contention of whether services rendered by these bodies are in furtherance of any business. An act has to be in furtherance of a business in order to make it exigible to GST. The court held that the power to regulate could not be considered akin to trade, commerce, manufacture, profession, and other activities enumerated in Section 2(17)(a), which defines “business.” Further, it holds that CERC is not akin to local authorities, Central Government, or State Government. Section 2(17)(i) makes any activity or transaction undertaken by the Central Government, a State Government, or any local authority as a public authority also constitute a business. Based on the aforementioned considerations, the High Court held that the licensing activities of CERC cannot be made exigible to GST. However, several questions remained unanswered during the course of this case.  The Unaddressed Questions Whether granting licenses is a quasi-judicial function? The court heavily relied on PTC to conclude that granting licenses is a quasi-judicial function performed by CERC without going into a critical examination of the underlying issues. However, the court failed to appreciate the context in which the decision in PTC was based. The case pertained to whether regulations framed by CERC to regulate the electricity industry can be challenged before the Appellate Tribunal for Electricity. In this context, the Apex Court in PTC held that framing of regulations cannot be challenged as it is a regulatory function;i however, granting a license is not a regulatory function but a quasi-judicial function and thus can be challenged. However, this judgment was in an administrative law context. It was, therefore, on the High Court in the case of Additional Director to determine whether a quasi-judicial authority for the purposes of administrative principles would also automatically become a quasi-judicial authority for taxation purposes. The High Court, rather than delving into this question, uncritically followed the law laid down in PTC.   A similar conundrum exists in the context of arbitration tribunals as well. In the case of Central Organisation for Railway Electrification v. ECI SPIC SMO MCML, the Apex Court considered an arbitration tribunal to be a quasi-judicial tribunal while arriving at the further conclusion of determining the legality of a Unilateral Arbitrator Appointment Clause. The case considered whether such clauses would allow impartial decision making on account of arbitration tribunals being quasi-judicial bodies. However, CBIC, vide Circular No. 193/03/2016 had already clarified that service tax was to be liable for services provided by an arbitral tribunal. Whereas Section 65B(44)(c) of the Finance Act 1994 also provided an exception to fees collected by courts or tribunals, still service tax used to be levied on the fees collected by the arbitration tribunals similar to the exception provided in CGST Act. Moreover, various arbitration centres across the country still charge GST on the arbitration fees collected by them.  The situation becomes similar as much as classification of CERC and arbitration tribunals into quasi-judicial body is concerned. However, both these entities differ in the way they are treated under taxation laws after the decision in the case of Additional Director..This takes us back to the same question: can a quasi-judicial authority for administrative law purposes also be considered one for taxation purposes? Answering it becomes more imperative in light of the broad application of this legal question.  The purpose of quasi-judicial bodies in administrative laws is to extend the principles of natural justice to the decision-making of these bodies. This has been recurrently stated by the Apex Court in landmark cases such as the Province of Bombay v. Khushaldas Advani and AERA v. Delhi International Airport. However, the purpose of determining quasi-judicial bodies for taxation purposes is

GST in License Fees: Unresolved Questions Read More »

Beyond The Exit: Status Of The Global Tax Deal and India’s Strategy

Leave a Comment / Taxation Law /

[By Khushbu Mathuria] The author is a student of Rajiv Gandhi National University of Law, Patiala.   Introduction With the incoming of the Trump administration, the US has withdrawn from the Global Tax Deal via a presidential memorandum issued on January 20, 2025. The memorandum states that the Global Tax deal (“The Deal”) signed in 2021 under the Biden administration has no force or effect in the US. It further stated that the US shall take “protective measures” against countries who are in non-compliance with any tax treaty with the US or in compliance with any extraterritorial tax rules that disproportionately affect American companies. As nations are adjusting to the sudden political shift, the future of the tax deal necessitates navigation of both domestic and international interest amidst the rising tensions and trade conflicts. The article delves into how this withdrawal not only disrupts the progress made so far but also prompts various countries to reconsider their commitment to the deal and to reinstate unilateral measures, in response to the perceived inequalities..   OECD’s Two-Pillar Approach to Global Tax The Global Tax Deal is a multilateral agreement, signed by over 137 countries on October 8, 2021,to bring a global shift in the traditional approach of the taxation system and to further the aim of Base Erosion and Profit Shifting (“BEPS”) via a two-pillar approach. This two-pronged solution aimed to prevent a race to the bottom in corporate tax rates. However, despite this concerted attempt, after almost three years, the deal is thrown off course in the midst of a political maelstrom. The Deal has two Pillars:  The Pillar One undertakes reallocation of taxing rights for market jurisdiction over the excess profits underscored by Multinational Enterprises (“MNEs”) and large companies. The implementation of Pillar One involves the application of Amount A and Amount B. Amount A compliance involves a set of rules applicable to MNEs with a global revenue over USD 20 billion and total profits exceeding 10% of their global revenue subject to certain exclusions, reallocating 25% of the excess profit to market jurisdictions. Amount B on the other hand is a three-step analysis to price baseline marketing and distribution activities to further simplify the application of arm’s length principle via delivering a pricing matrix.   Pillar Two of the framework, introduces a framework for a global minimum tax of 15% for MNEs groups with the annual revenue higher than € 750 million. The underlying intent is to ensure that all streams of income within such MNE groups, regardless of the jurisdiction, either source or resident are taxed at the minimum rate of 15%. In this respect, OECD through the course of 2022 released draft provisions for the Pillar Two Global Base Erosion Rules (“GloBE Rules”), a commentary, and a set of illustrative examples to clarify the working of the rules.   The GloBE rules include the Income Inclusion Rule (“IIR”), which imposes a Qualified Domestic Minimum Top-up Tax on a main enterprise or the parent entity of an MNE group for income earned by its subsidiaries and Permanent Establishments (“PE”), that are taxed below a 15% minimum effective tax rate (“ETR”) in source jurisdictions. The taxing right under the IIR is offered first to the jurisdiction of the ultimate parent entity and, if unexercised by it, shifts to the jurisdiction of the next downstream entity. The Under-taxed profit rule complements the IIR by denying deductions or requiring adjustments if the top-up tax is not applied to low-taxed constituent entities. A de minimis threshold excludes jurisdictions with turnover below €10 million and profits below €1 million, and investment funds and Real Estate Investment Trusts are outside the scope of GloBE. These rules require integration into domestic tax systems for effective implementation.  The third rule, i.e., the Subject to Tax Rule (“STTR”) is a treaty-based provision that applies to related-party payments, such as interest and royalties, when they are not subject to a combined 9% ETR across both the resident and source jurisdictions. Unlike the GloBE rules, the STTR prioritizes the taxation rights of the market jurisdiction. Additionally, the IIR functions as a complimentary measure under Pillar Two enabling market jurisdictions to tax payments that might otherwise go untaxed in both the source and recipient jurisdictions.  Unilateral Measures, Trade Tensions and Global Hurdles in Implementation The two-pillar framework was introduced as a multilateral solution for taxation of MNEs who derived profits in countries without having a PE. While the OECD was attempting to formulate a global solution, prior to 2021, when the global consensus was not in sight, countries had already started taking independent measures by implementing what we refer to as a Digital Service Tax (“DST”).  Indian for Instance, implemented a 2% Equalization levy (“EL”) in 2020, on companies who had a significant economic presence. As a result of the DST and EL, which the US claimed, disproportionately targeted US based companies, the USTR initiated investigations under Section 301 of the Trade Act of 1974 and started imposing retaliatory tariffs on imports from Austria, France, Italy, Spain, Turkey, United Kingdom, and India.   However, in 2021 pursuant to the ongoing discussions of the OECD framework, the US under the Biden Administration suspended such proceedings for 180 days. Subsequently, in October 2021, 136 IF members reached an agreement on the two-pillar approach and issued a joint statement under which Austria, France, Italy, Spain, the United Kingdom and the US compromised to take back DSTs and other relevant unilateral measures. Pursuant to the Joint statement, Ministry of Finance, India issued a Statement (“MoF Statement”) that excess EL paid by MNEs will be available as a credit for set off against their corporate liability determined under Pillar One. This transitional approach came in the backdrop of dropping off of retaliatory measures by the US. Following this, in 2024, India completely did away with the 2% EL. As a consensus, most countries with DSTs agreed to a moratorium pursuant to the negotiations of Pillar One.   Despite their efforts, the OECD’s Pillar One framework faces criticism from experts

Beyond The Exit: Status Of The Global Tax Deal and India’s Strategy Read More »

Unveiling the Truth – The Tussle Between Google and CCI

Leave a Comment / Competition Law /

[By Sakshi Tiwari & Liesha Mishra] The authors are students of Dr. Ram Manohar Lohiya National Law University, Lucknow.   Introduction The Competition Commission of India has initiated an investigation into Google over alleged anti-competitive practices in India’s burgeoning gaming sector stemming from complaints over its monopolistic behaviour. The investigation stems from the complaint filed by the real money gaming app WinZO, which alleges that Google is abusing its dominant position by favouring Daily Fantasy Sports (“DFS”) and Rummy applications with a competitive edge while excluding other Real Money Gaming Platforms (“RMG”).   Despite all these applications belonging to the same category of skill based real money games, where there are monetary stakes and a degree of player skill determines outcomes, Google’s policy selectively permits only DFS and Rummy on its Play Store while restricting other RMG applications. This selective classification creates an artificial divide within the same category, granting DFS and Rummy a direct market advantage over other RMG apps that also involve real money transactions and rely on skill rather than luck.    Google’s policy lacks transparency in defining why only DFS and Rummy qualify for inclusion while excluding other skill-based games. This arbitrary distinction distorts fair competition, limits consumer choice, and is now under scrutiny by the Competition Commission of India.  In recent years, India’s online gaming industry has witnessed a surge in users driven by the increasing affordability of smartphones and a growing youth population. In 2023, India had 568 million gamers which accounts for the second largest gamer use base trailing only China. By amending the IT Rules 2021, the government seeks to regulate all online games and provide compliance regulations for online gaming intermediaries offering RMGs. The Supreme Court of India has clarified that when success hinges more on skill than it does on chance in a game, such a game will not be constituted as gambling.   The relevance of this distinction lies in its legal validation that establishes a basis for differentiating skill-based games from gambling. Games like DFS and Rummy are legally recognised as skill based and yet Google’s policy does not reflect the same. By restricting other apps, it creates an inconsistency between legal recognition and market access, raising concerns about fairness and transparency. Google’s Play Store Policies: A Double-Edged Sword Google’s policies, which are enforced through its ecosystem of platforms such as Play Store, Google Pay, and Google Ads, have been criticised for restricting market access and favouring specific online games, thereby distorting the competitive landscape. These concerns have been highlighted in Google’s pilot program which granted exclusive Play Store hosting rights to DFS and Rummy applications.   In this scenario, other RMGs, including WinZO users have to opt for sideloading which is a download method directly from the internet, for apps outside of the Google Play Store, reducing exposure and coverage. Given that Google Play Store holds a hegemonic position in downloading and using apps, it deeply impairs the capabilities of other competing apps to gain higher exposure. Thereby, apps like DFS and Rummy push other RMGapplications to the periphery by leveraging their access to a vast user base.    While the reasoning behind introducing this pilot program has been framed as an exploratory measure to foster a secure platform for RMGs, its execution has revealed a glaring imbalance. The selective inclusion of only two games while leaving out the rest from the pilot program raises serious questions about the objectivity of Google’s gatekeeping practices.    Adding to this complexity is Google’s ad policy since 2019, which allows advertisement policy for DFS and Rummy applications, while simultaneously citing regulatory uncertainty to justify excluding other RMGs. This contradiction brings to light a policy that is both supportive and restrictive by giving certain apps the means to grow while restricting others.   Google’s Alleged Abuse Of Dominance The complaints against Google highlight concerns about its conduct in markets where it already holds a dominant position. The CCI in Google Android case has found Google to be dominant in both the licensable Operating System (OS) market for smart mobile devices in India and the licensable OS market on the device with app stores.   Building on this precedent, WinZO has alleged that Google’s conduct is discriminatory and imposes unfair conditions by creating a two-tier market grating selected apps superior visibility while marginalising the others thereby violating Sections 4(2)(a)(i), 4(2)(b)(i), and 4(2)(c) of the Competition Act, 2002.    Google’s previous penalties for anti-competitive practices in the Android case, further strengthen concerns that it is leveraging its dominance in the gaming industry by selectively favouring certain apps while restricting others without clear justification. This issue raises broader questions about platform neutrality, fair competition, and consumer choice in India’s growing digital economy.  Payment Systems: Restrictive Practices And Monetization Control To download WinZO, sideloading may work as an alternative to Play Store but this creates additional burden on users. Google warnings during sideloading, ostensibly designed as a security measure, often discourages users by emphasising risks such as malware infections. This situation is further worsened by Google’s approach to transaction-related warnings. While payment warnings by Google Pay have been installed under regulatory compliances, such warnings are absent in the case of DFS or Rummy applications.    There has been a strong dependency created by Google on its ecosystem making it nearly impossible for app developers to compete outside the realm of its platforms. All of this necessitated the investigation by CCI to unveil the potential effects of the combination of practices that Google has undertaken in this case.    How Does Advertising Affect Markets? In the order released by the CCI, WinZO has claimed that Google’s Pilot Program to allow downloads for only DFS and Rummy could cause market distortions and has also contended the unfairness of Google’s Ad Policy which currently permits only these two applications to run ads. Google’s Play Store policies were in news in the year 2022 after CCI’s imposition of monetary penalty in light of its anti-competitive practices. Thus, while there is enough possibility for Google Play Store to make the headlines again, the ad

Unveiling the Truth – The Tussle Between Google and CCI Read More »

Scroll to Top