Author name: CBCL

Analysing Supreme Court’s Ruling in Macquarie Bank v. Shilpi Cable

Insolvency Law /

[Vishakha Srivastava and Ashutosh Kashyap] The authors are fourth-year students at Chanakya National Law University, Patna. In the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., the Supreme Court was confronted with two pertinent questions in relation to the Insolvency and Bankruptcy Code, 2016 (“Code“): firstly, whether, in relation to an operational debt, the provision contained in Section 9(3)(c)[1] of the Code is mandatory; secondly, whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor. Facts of the Case Hamera International Private Limited executed an agreement with the Appellant, Macquarie Bank Limited, Singapore, by which the Appellant purchased the original supplier’s right, title and interest in a supply agreement in favour of the Respondent. The Respondent entered into an agreement for supply of goods in accordance with the terms and conditions contained in the said sales contract. Since amounts under the bills of lading were due for payment, the Appellant issued a statutory notice under sections 433[2] and 434[3] of the Companies Act, 1956. After the enactment of the Code, the Appellant issued a demand notice under section 8 of the Code[4] to the contesting Respondent, calling upon it to pay the outstanding amount. The contesting Respondent stated that nothing was owed by them to the Appellant. They further went on to question the validity of the purchase agreement dated in favour of the Appellant. The Appellant initiated the insolvency proceedings by filing a petition under section 9 of the Code.[5] The National Company Law Tribunal (“NCLT”) rejected the petition holding that section 9(3)(c) of the Code was not complied with, inasmuch as no certificate, as required by the said provision, accompanied the application filed under Section 9. Decisions of the Adjudicating Authorities The NCLT held that section 9(3)(c) of the Code is a mandatory provision, and therefore, non-compliance of the provision would lead to rejection of the application seeking to initiate insolvency proceedings. Thus, it was held that the application would have to be dismissed at the threshold. On appeal, the National Company Law Appellate Tribunal (“NCLAT”) agreed with the NCLT holding that the application would have to be dismissed for non-compliance of the mandatory provision contained in section 9(3)(c) of the Code. It further held that an advocate/lawyer cannot issue a notice under section 8 on behalf of the operational creditor. The NCLAT observed that as there was nothing on the record to suggest that the lawyer/ advocate held any position with or in relation to the Appellant, the notice issued by the advocate/ lawyer on behalf of the Appellant could not be treated as notice under section 8 of the Code. Appeal to the Supreme Court The Court observed that the first thing to be noticed on a conjoint reading of sections 8 and 9 of the Code, as explained in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, is that Section 9(1) contains the conditions precedent for triggering the Code insofar as an operational creditor is concerned. The requisite elements necessary to trigger the Code are: occurrence of a default; delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; and the fact that the operational creditor has not received payment from the corporate debtor within a period of 10 days of receipt of the demand notice or copy of invoice demanding payment, or received a reply from the corporate debtor which does not indicate the existence of a pre-existing dispute or repayment of the unpaid operational debt. It is only when these conditions are met that an application may then be filed under section 9(2) of the Code in the prescribed manner, accompanied with such fee as has been prescribed. Under section 9(3), what is clear is that, along with the application, certain other information is also to be furnished. Under section 9(3)(a), a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor is to be furnished. Under rules 5 and 6 of the Adjudicating Authority Rules 2016, read with Forms 3 and 5, it is clear that, as Annexure I thereto, the application in any case must have a copy of the invoice/demand notice attached to the application. That this is a mandatory condition precedent to the filing of an application is clear from a conjoint reading of sections 8 and 9(1) of the Code. On a reading of sub-clause (c) of section 9(3), it is equally clear that a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor is certainly not a condition precedent to triggering the insolvency process under the Code. The expression “confirming” makes it clear that this is only a piece of evidence, albeit a very important piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt. The true construction of section 9(3)(c) is that it is a procedural provision, which is directory in nature, as the Adjudicatory Authority Rules read with the Code clearly demonstrate. The Court further observed that section 8 of the Code speaks of an operational creditor “delivering” a demand notice. It is clear that had the legislature wished to restrict such demand notice being sent by the operational creditor himself, the expression used would perhaps have been “issued” and not “delivered”. Delivery, therefore, would postulate that such notice could be made by an authorized agent. In fact, in Forms 3 and 5, it is clear that this is the understanding of the draftsman of the Adjudicatory Authority Rules, because the signature of the person “authorized to act” on behalf of the operational creditor must be appended to both the demand notice as well as the application under section 9 of the Code. The position further becomes clear that both forms require such authorized agent to state his position with or in relation to the operational

Analysing Supreme Court’s Ruling in Macquarie Bank v. Shilpi Cable Read More »

Financial Resolution and Deposit Insurance Bill, 2017: An Analysis

Contemporary Issues /

Financial Resolution and Deposit Insurance Bill, 2017: An Analysis. [Shajal Sarda] The author is a fourth-year student at National Law Institute University, Bhopal. The Financial Resolution and Deposit Insurance Bill, 2017 (hereinafter referred to as the “Bill“) proposed by the government attempts at providing for a comprehensive law for the resolution and restoration of financial/covered service providers who are classified under certain heads of risk to viability with respect to the timely payment of their liabilities. The Bill provides for the establishment of the Resolution Corporation whose general direction and management shall be done by a board which, in consultation with the appropriate regulator, shall lay down the objective criteria to classify covered service providers in terms of their viability into five categories viz. low, moderate, material, imminent and critical.[1] The appropriate regulator, after inspection or otherwise, shall classify the covered service provider under one of the categories mentioned above.[2] Based on the category of the covered service provider with respect to the risk to viability, the covered service provider shall be asked to submit a resolution plan to the resolution corporation and a restoration plan to the appropriate regulator under the Bill.[3] The Bill provides for various methods or combinations thereof that can be adopted for the resolution of the covered service provider under the risk category above moderate.[4] These methods can be transfer of the whole or part of the assets or liability of the service provider to another person under the terms agreed upon by the corporation, merger or amalgamation, creation of a bridge service provider as per section 50 of the Bill, acquisition of the service provider, or bail-in in accordance with section 52 of the Bill.[5] The Resolution Corporation shall replace the present Deposit Insurance and Credit Guarantee Corporation (DICGC), a Reserve Bank of India subsidiary which insures all kinds of deposits with the banks up to an amount of Rs. 1 lakh. Till now, it has been mandatory for the banks to pay an amount as premium to DICGC for the insurance of deposits.[6] The Resolution Corporation has been endowed with the same function under the Bill, though the amount of deposit insurance has not been specified, something which the Board is required to do in consultation with the appropriate regulator.[7] Purpose of the Bill The government has time and again attempted to increase the trust of consumers in the credit delivery system and create a business friendly environment. The biggest example is the Insolvency and Bankruptcy Code, 2016, which aims to provide a comprehensive and exhaustive code for the insolvency resolution of corporate entities, partnerships and sole proprietorships. The Code was enacted to provide for a speedy and efficient resolution of the claims of unpaid creditors. Other examples include the opening of Jan Dhan accounts and recapitalisation of banks. Statistical data reveals that, in public sector banks, private sector banks and foreign banks, the gross non-performing assets to total advances ratios stands at 9.39%, 2.90% and 4.26% in the financial year 2016.[8] If the banks are not being paid by their debtors, the former in turn may not be able to perform their obligations; therefore arises the problem of trust in the banking system at large. Further, only secured credit dominates the credit market in the country; therefore, the credit analysis of the business prospects of the firm has shrivelled.[9] Hence, it has become important for the government to introduce comprehensive reforms in the banking system. Accordingly, the present Bill enables resolution of banks- which are on the verge of failure with respect to payment of their obligation- by providing for a framework of resolving the risk of failure of banks to pay their obligations. Concerns over the Bail-In Provision Section 52 of the Bill provides for bail-in as a method for resolution of banks. A bail-in provision may provide for any or a combination of the following: (a) cancelling of the liability of the bank; (b) modification of the form of liability owed by a covered service provider; (c) provision that a contract or service under which a covered service provider has a liability is to be treated as if a specified right has been provided under the contract.[10] The Corporation shall specify the liability or the class of liabilities that may be subject to a bail in. The provisions of this section shall not apply to deposits to the extent they have been insured,[11] and shall not cover any liability owed to workmen including pension.[12] Further, it is to be noted that the definition of deposit in the Bill does not include deposit made by the Government of India or any state government or foreign government, though the provisions may apply to any liability created under a contract with the three above-mentioned entities. Whenever the Corporation invokes a bail-in provision, a report regarding the bail-in stating the need for the bail-in and the consequences of the bail-in must be sent to the Central Government.[13] Further, a copy of such report must be laid before both the Houses of Parliament.[14] The concerns regarding these provisions are that they have created higher risks for the depositors. Previous examples of bail-ins include the bail-in made under the resolution of the Bank of Cyprus in which the depositors had to face a 47.5% haircut in their deposits. ASSOCHAM has raised an argument that deposits such as fixed deposits and saving deposits must not be considered as similar to other liabilities owed by banks because this may reduce the trust of people in the banking system in light of the rising healthcare prices, among other things.[15] On the other hand, an argument in favour of the bail-in provision is that, in the absence of such provision, the government, in order to recapitalise a bank, may use the tax payers’ money, print more notes or borrow money, which will result in inflation and thus a reduction in the interest rates on the deposits.[16] Further, the system created through the Bill is a process-driven system which creates transparency, and bail-in is just one method which may be used for the resolution

Financial Resolution and Deposit Insurance Bill, 2017: An Analysis Read More »

Key Changes under the FEMA 20, 2017 Regulations

Company Law /

Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant. [Kunal Kumar] The author is a fourth-year student at National Law University, Jodhpur. Introduction The Reserve Bank of India (“RBI”) vide notification No. FEMA 20(R)/ 2017-RB dated November 7, 2017 issued the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (“FEMA 20”), which supersedes previous regulations namely the Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2000 (“FEMA 20/2000”), and the Foreign Exchange Management (Investments in Firms or Proprietary concern in India) Regulations, 2000 (“FEMA 24”). An attempt to analyse the key changes under the newly notified Regulations has been made through this article. The Department of Industrial Policy and Promotion announced the Consolidated FDI Policy 2017 (“FDI Policy”) on August 28, 2017. Of course, the changes under the FDI Policy have to be reflected under the FEMA 20, this essay will also discuss such changes when required. Key Changes Introduced Meaning of Foreign Investment The FEMA 20 provides that foreign investment means any investment made by a person resident outside India on a repatriable basis, thus making it clear that investment on non-repatriable basis is at par with domestic investment. Startups The FDI Policy 2017 allows startup[1] companies to: -issue convertible notes to residents outside India,[2] Convertible notes have been defined as instruments evidencing receipt of money as debt, which is repayable at the option of the holder, or which is convertible into equity shares;[3] and -issue equity or equity linked instruments or debt instruments to Foreign Venture Capital Investor (“FVCI”) against receipts of foreign remittance.[4] Note: An entity shall be considered as a ‘startup’ if[5] (a) it has not crossed five years from the date of its incorporation/registration; (b) its turnover for any of the financial years has not exceeded Rs. 25 crore, and (c) it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. Remittance against Pre-incorporation Expenses As per the 2016 FDI Policy, equity shares could be issued against pre-incorporation expenses, under the government route, subject to compliance with the conditions thereunder.[6] The 2017 FDI Policy has changed this requirement which is reflected under the FEMA 20. Therefore, subsidiaries in India wholly owned by non-resident entities, operating in a sector where 100% foreign investment is allowed in the automatic route and there are no FDI linked conditionalities, may issue equity shares, preference shares, convertible debentures or warrants against pre‑incorporation/ pre-operative expenses up to a limit of five percent of its authorized capital or USD 500,000 whichever is less, subject to conditions prescribed.[7] Note: However, this cannot be said to be a completely new provision under the FEMA 20 as this was introduced in the existing FEMA 20 through the eleventh amendment dated 24th October, 2017. ESOP to Directors FEMA 20 expressly allows an Indian company to issue employees’ stock option to its directors or directors of its holding company/ joint venture/ wholly owned overseas subsidiary/ subsidiaries who are resident outside India. Such company shall have to submit Form-ESOP to the Regional Office concerned of the Reserve Bank under whose jurisdiction the registered office of the company operates, within 30 days from the date of issue of employees’ stock option.[8] Reclassification of FPI Holding The total investment made by a SEBI registered foreign portfolio investor (FPI) in a listed company will be re-classified as FDI where it’s holding exceeds 10% of the paid-up capital or 10% of the paid-up value in respect of each series of instruments. Such a reclassification is required to be reported by way of Form FC-GPR.[9] Transfers by NRIs Transfer of capital instruments by a Non-Resident Indian (NRI) to a non-resident no longer requires RBI approval.[10] Earlier, as per regulation 9, FEMA 20/2000, a NRI was eligible to transfer the capital instruments only to a NRI or overseas corporate body, and if such capital instruments were to be transferred to a non resident, prior permission of RBI was mandatory as per regulation 10(B) of the FEMA 20/2000. Onus of Reporting FEMA 20/2000 laid the onus of submission of the form FC-TRS within the specified time on the transferor / transferee, resident in India.[11] The 2017 Regulations lays onus on the resident transferor/ transferee or the person resident outside India holding capital instruments on a non-repatriable basis, as the case may be.[12] In case of transfer under Regulation 10 (9), the onus of reporting shall be on the resident transferor/ transferee. Also, unlike the previous position, the new FEMA 20 allows for delayed reporting subject to the payment of fees to be decided by the RBI in consultation with the central government.[13] This is a significant change as FEMA 20/2000 did not provide anything on delayed filing, because of which the same would be deemed as contravention and required compounding by the RBI. Time Limit for Issue of Capital Instruments The FEMA 20/2000 mandated issuance within 180 days from receipt of inward remittance.[14] However, the Companies Act, 2013 provides for allotment of securities within 60 days of receipt of application money or advance for such securities.[15] FEMA 20 now provides that capital instruments shall be issued to the person resident outside India making such investment within sixty days from the date of receipt of the consideration,[16] aligning the requirement to issue capital instruments with Act, 2013. Further, proviso to para 2 (3) of Schedule 1 to FEMA 20 provides that prior approval of RBI will be required for payment of interest in case of any delay in refund of the amount. Conclusion The new Regulations have been enacted to maintain consistency with the related legislations. With the new Regulations coming, it is hoped that the governance of transfer of securities by non-residents will be eased. [1] Paragraph (“para”) 3.2.6 of the Consolidated FDI Policy 2017. [2] As per the conditions under para 3.2.6 of the FDI Policy and Regulation 8, FEMA 20. [3] Regulation 2(vi), FEMA 20. [4] Regulation 5(7) and Para 1(1)(b) of

Key Changes under the FEMA 20, 2017 Regulations Read More »

Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant

Insolvency Law /

Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant. [Vishal Hablani] The author is a second-year student at West Bengal National University of Juridical Sciences, Kolkata. He may be reached at [email protected]. On 11th December, 2017, the High Court of Delhi held that moratorium under the Insolvency and Bankruptcy Code, 2016 (“Code”) would not be applicable to proceedings beneficial to the concerned corporate debtor. However, in case the decree is passed against the corporate debtor, the enforceability of such decree would be covered by the moratorium commenced earlier under section 14(1)(a) of the Code. The write-up aims to critique the judgement passed in the matter of Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. In the said case, a financial creditor filed an application under section 7 of the Code against the respondent company. However, when the application was filed, proceeding under section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award passed in favour of the respondent was already pending. The question before the High Court, therefore, was whether the proceeding under section 34 ought to be stayed by virtue of section 14(1)(a) of the Code. The respondent submitted that before suspending the proceedings, the nature thereof must be taken into consideration. If proceedings are in favour of the corporate debtor, granting a stay would defeat its efforts to recover money. Moreover, stay of such a nature would not fall in the embargo of section 14(1)(a). The Court in the instant case had to decide whether the term “proceedings” used in the said section could be read in such a way so as to include “all legal proceedings”, or it should be read restrictively to cover only a specific type of legal proceeding viz., “debt recovery action” which may diminish debtor’s assets during the insolvency resolution period. It becomes pertinent here to discuss the relevant provision in the Code. xxx Moratorium – (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:— (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; xxx The Court placed reliance on Canara Bank v. Deccan Chronicle Holdings Limited to hold that since the word “proceedings” under the provision is not preceded by the word “all”, the provisions of moratorium would not apply to all the proceedings against the corporate debtor. The object of the Code was interpreted and the view was taken that moratorium is implemented with the objective of protecting the assets of the corporate debtor from dissipation. If the proceedings are suspended, it would extend the non-executability of the award which would add to the woes of the debtor. The Court opined that section 14 of the Code would be inapplicable to proceedings which are beneficial for the corporate debtor, as the conclusion of these proceedings would not have any impact over the assets during the insolvency resolution process. Reliance was placed on the report of the Bankruptcy Law Reforms Committee, and it was construed that the objective behind the moratorium is to protect the assets of the corporate debtor from additional stress. Interestingly, the judgment provided that if a counter claim is allowed against the corporate debtor, section 14(1)(a) would come into play and the decree then would not be executed against the corporate debtor. The judgment passed by the Delhi High Court seems to be fallacious, for the Court failed to take into consideration the situation that, if the proceedings are continued and counter claim against the corporate debtor admitted, then, by the effect of this judgement, it would then become impossible for the innocent litigant to enforce the decree against the Corporate Debtor by the subsequent effect of the moratorium. This raises various questions which the Court failed to answer: Is it possible for the litigant then to enforce the decree subsequently against the firm, or an individual whose resolution plan has been accepted, after the moratorium ceases to have the effect, provided the case was still pending while the claims against the corporate debtor were being invited before the acceptance of such resolution plan?   What recourse would be available to this litigant, in case the Adjudicating Authority passes an order for liquidation of corporate debtor, provided the case was still pending while the claims against the corporate debtor were being invited before passing of such order?  The Code provides for completion of resolution proceedings within 180 days, subject to extension for a period of 90 days. However, no statutory time limit has been prescribed for the adjudication of a suit pending before conventional courts. This gives rise to a critical question: What if the resolution proceedings are completed against the corporate debtor and the suit against him is still pending before the Court? Would the suit be automatically terminated then? In this scenario, rights of both the parties to the suit would be jeopardised, and the arbitral award would be rendered useless. There might also be a situation where the court decides the suit in favour of the corporate debtor after the acceptance of resolution plan, or passes an order for liquidation of the corporate debtor. This also gives rise to certain critical questions: Would the firm or an individual whose resolution plan has been accepted have the locus standi for the enforcement of the arbitral award in question?​ If the Adjudicating Authority approves the liquidation of corporate debtor, can the liquidator then enforce the arbitral award against the party which has lost the suit? The author hopes that the questions presented hereinabove would soon be answered by an appropriate forum so as to fill the vacuum.

Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant Read More »

Bail-In Clause in the FRDI Bill: Is the Hysteria Justified?

Banking Law /

Bail-In Clause in the FRDI Bill: Is the Hysteria Justified? [Ayushi Singh] The author is a third-year student at National Law University, Jodhpur. “I can assure you, my friends, that it is safer to keep your money in a reopened bank than it is to keep it under a mattress.” – Franklin D. Roosevelt (March 12, 1933) The Financial Resolution and Deposit Insurance Bill, 2017, approved by the Cabinet, has been in the ring of fire, drawing protests from the opposition, regulatory bodies and citizens. Mamata Banerjee has vociferously asked for the withdrawal of the Bill, currently under consideration by the Joint Parliamentary Committee, calling it “the biggest assault on the financial security of the poor and middle class of the country.” The point of contention is the bail-in clause under section 52 of the Bill. The said provision is aimed at rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings.[1] The Finance Minister, Arun Jaitley, has tried to allay the fears of the public and has hinted that review and correction of the Bill will take place post-release of the Parliamentary Report. The implications of this clause on the deposits made by citizens added with the lack of clarifications from the Government have inflamed the fears of the people as majority of their savings are deposited in banks. ASSOCHAM Secretary General DS Rawat has also asked for withdrawal of this clause due to chances of the trust in the banking system being eroded. He opined that the clause may induce citizens into making bank-runs or scare them into withdrawing their deposits and protecting them in unproductive avenues like real estate, gold, jewellery and even in the unorganised and informal financial markets run by unscrupulous persons.[2] The bail-in clause is not a new concept; in fact, it may have been introduced with a view to keep up with the trends in the World Bank’s financial resolution policies. The Financial Stability Board, which acts as a regulatory body for banking systems globally, have endorsed the bail-in clause as a tool for resolution of financial bodies.[3] In 2014, the EU introduced the bail-in clause in its Bank Recovery and Resolution Directive under which 8% of an institution’s liabilities must be wiped out before any taxpayer support can be provided. This wipe-out has to be done via bail-in of deposits according to a fixed hierarchy as given in article 34 of the Directive.[4] The objective behind introduction of the bail-in clause was to prevent the colossal failure of the bail-out resolution process used during the 2008 financial crisis. The bail-out of “too-big-to-lose” financial corporations shifted the burden of their failure on the taxpayers; this is what these bodies are trying to avoid through the bail-in clause. The drive to accommodate the bail-in clause was validated when it was used successfully during the 2011 economic crisis in Denmark. The resolution was successfully accomplished through a well-formulated bank-package such that the resolution was completed over a weekend with no negative effect on ordinary customers.[5] Failures of the Bail-In Clause However, the implementation of bail-in has not always been rosy. During the 2013 crisis in Cyprus, the insured deposits of citizens were transferred for resolution while the deposits of financial institutions and government entities were fully repaid back. Depositors lost almost 50 per cent of their savings when a bail-in was implemented.[6] Post introduction of bail-in clause in the EU Directive with the hierarchy of deposits, Portugal’s bail-in package for Banco Espirito Santo in 2016 used five of the 52 senior bonds for resolution of its liabilities. Investors who had to suffer losses had threatened lawsuits, accusing the country of discriminating against holders of the same level of bonds and violating the pari passu principle of equal treatment to protect domestic bondholders.[7] In May 2017, the Economy Minister of Italy Pier Carlo Padoan ruled out the recourse of bail-in tool, in spite of the Directive, for the rescue of its two ailing regional banks. This is to safeguard citizens’ confidence in other banks which are already suffering from bad loans caused during recession.[8] Implementation and Procedural Transparency The stark contrast in the above headings display a major difference in the nature of implementation of bail-in clause. Denmark implemented the bail-in clause within the framework of a bank-package wherein the cap of insured amount deposited in banks was increased and a safety net was set up.[9] In Cyprus, the bank holiday was declared and ATMs were shut down, cutting complete access of money to the citizens.[10] Even with the Directive, it is difficult to ensure that the hierarchy of deposits defined is upheld by countries during use of bail-in tool. The International Monetary Fund, which has endorsed the bail-in tool, has also pointed out the need to implement it in an orderly and clear manner-[11] “The legal framework needs to be designed to establish an appropriate balance between the rights of private stakeholders and the public policy interest in preserving financial stability. Debt restructuring ideally would not be subject to creditor consent, but a “no creditor worse off” test may be introduced to safeguard creditors’ and shareholders’ interests.” The RBI in its Report of the Working Group on Resolution Regime for Financial Institutions has suggested that the bail-in tool be used with due care, only as an interim measure which works along with a plan for permanent resolution like sale, merger, etc.[12] Therefore, it is reiterated that if the bail-in clause is to be used, its implementation must be clarified by a fixed set of rules and regulations which would include a system of hierarchy defining the order of volatility of deposits. Another concern is with respect to the insurance cover for the deposits that has remained at Rs. 1 lakh for over two decades. A revision and increase in insurance cover for deposits could help deter financial failure of weaker banks, as once the health of banks becomes well-defined and public, existing depositors may be induced to make bank-runs to protect their savings and pensions in safer banks. The All India Reserve

Bail-In Clause in the FRDI Bill: Is the Hysteria Justified? Read More »

Comparative Analysis of Anti-Profiteering Laws under GST– Lessons for India

Taxation Law /

Comparative Analysis of Anti-Profiteering Laws under GST– Lessons for India. [Ayushi Singh] The author is a third-year student at National Law University, Jodhpur. Anti-Profiteering[1] in relation to the new Goods and Services Tax (GST) regime ensures that the consumers reap the benefits of the tax reductions and the input tax credits (ITC) claimed by businesses in the form of reduced prices. The provision has caused a storm of paranoia amongst taxable businesses. The structure of the provision consists of undefined terms like “commensurate reduction” and ambiguities regarding which ITC claims are applicable under the provisions. Anti-Profiteering Rules, 2017 were notified by the Central Board of Excise and Customs (CBEC), which paved the way for the constitution of the National Anti-Profiteering Authority (NAA).[2] The NAA is duty bound to carry out proper investigations of complaints, identify the aggrieved parties and pass orders against the accused party. Conviction can lead to penalties under the Central Goods and Services Tax Act, 2017, cancellation of registration and orders which direct the concerned party to repay the amount to the aggrieved,or transfer the same to a Consumer Welfare Fund if the aggrieved party is not identifiable.[3] The NAA has been given the reigns to formulate a methodology which will lay down the foundations for directing how changes in the GST regime will translate into price reductions along with guidelines for implementation of this provision.[4] Inspiration for Section 171: Failures of the VAT Regime The qualms created by the roll-out of the VAT and the GST respectively is similar.  The VAT regime made tax-free goods taxable; the introduction of ITC raised questions as to how the benefits could be passed on in the form of reduced prices; and ambiguities relating to translation of tax changes to price changes are the same issues that experts are concerned about presently. The VAT did not have any mechanism in law to crack down on potential profit maximization. Recommendations to create a commission to check price changes were suggested.[5] Unfortunately, the VAT failed to deliver. In a study conducted by the Comptroller and Auditor General of India, the report stated: “Manufacturers did not reduce the MRP after introduction of VAT despite substantial reduction of tax rates. The benefit of Rs. 40 Crore which should have been passed on to the consumer was consumed by the manufacturer and the dealers across the VAT chain.”[6] Hence, this provision is an effort by the Government to rectify the mistakes of the VAT and make businesses accountable to their obligation of providing benefits to the consumer. Post GST inflation has been a trend in Canada, Australia, New Zealand and Malaysia; by controlling unreasonable price changes, this provision would help to curb the inflationary trends of the GST roll-out. On 10 November 2017, the Finance Minister, Mr. Arun Jaitley, declared a reduction in the GST rates of Restaurants from 18% to 5%. However, the failure of restaurants to pass on the benefits of their ITC in the form of reduced prices led to removal of the same.[7] If the government had formulated a methodology to enforce the Anti-Profiteering provisions, misuse of the ITC by restaurants could have been prevented with harsher punishments. Price Exploitation under Australian GST The Australian Competition and Consumer Commission (ACCC) was legally entrusted with the responsibility of formulating a methodology for defining price exploitation and creating corresponding guidelines. Price exploitation is the act of keeping unreasonably high prices.[8] The ACCC formulated the product-specific dollar margin rule, which simply means that if a tax reduction of Rs. 5 takes place in a commodity, this will translate into an immediate proportional reduction of Rs. 5 in the price of the same commodity. No corresponding changes can be added to the GST component of the price.[9] Collaborative guidelines directed retailers to display changed prices conspicuously or through any other declaration as may be.[10] Awareness camps and educational campaigns worked tangentially to make consumers more aware of possibility of price exploitation. GST price hotlines, websites and information bulletins like “Everyday Shopping Guide” helped consumers remain cautious as to exploitative price tampering. However, the objective of the ACCC was solely to deter price changes, not control of price levels and profit margins.[11] This stems from the understanding that in a market economy, the forces of competition and demand will fluctuate prices. The post GST inflation and the costs involved in adjusting to GST regime i.e. staff training, accounting software overhaul have to be adjusted into the price of the supplied commodities. A price margin of 10% was formulated to bring these price variables into the methodology.[12] As long as the prices were within this defined margin and justifiable through invoices, documents, etc, businesses were safe from penal action. Profiteering under Malaysian GST Profiteering is defined as the act of keeping profits unreasonably high.[13] The Commissioner is empowered to set fixed, maximum and minimum prices of commodities[14] and formulate a methodology to define the tenets of profiteering.[15] The 2014 Regulations laid down a strict formulaic methodology wherein net profit margins of businesses during a set period could not exceed the net profit margin as on 1 January 2015.[16] These Regulations were strongly criticized: mainly because of reliance on numbers rather than percentages in measurement of profit margins. The strict crackdown on any change in profit margin brought fear of increased governmental control in the market. In an advisory by Deloitte Malaysia, the companies were advised to “not to increase prices at any stage” in order to reduce one’s risk profile.[17] The 2017 Regulations diluted the procedural strictness and formulaic problems. The amendments decreased the scope of the Regulations to only food, beverages and household goods and changed the formula wherein the profit margin percentage of the same class or same description of goods in a financial year could not be more than the profit margin percentage on the first day of that year.[18] Despite these dilutions, experts in the country opine that the price fixing and control of profit margins are more effective tools of controlling inflation rather than profiteering.[19] Comparison Australia

Comparative Analysis of Anti-Profiteering Laws under GST– Lessons for India Read More »

Power of National Courts to Injunct Investment Arbitration Proceedings: The Indian Position

Arbitration Law /

Power of National Courts to Injunct Investment Arbitration Proceedings: The Indian Position. [Chandni Ghatak] The author is a fourth-year student of National Law University, Jodhpur. The article has been authored under the guidance of Mr. Kartikey Mahajan, an Associate at Kirkland & Ellis LLP. International arbitration works on a sentiment of non-restraint which domestic courts ought to exhibit in relation to such proceedings. However, parties to international treaties containing arbitration clauses often resort to domestic courts to obtain anti-arbitration injunctions, impeding the arbitration process. This post critically analyses one such judgment rendered by the Delhi High Court recently in the case of Union of India v. Vodafone Group PLC United Kingdom & Anr.[1] The Court granted an anti-arbitration injunction against arbitral proceedings initiated by Vodafone Group against Union of India in relation to the provisions contained in the India-UK Bilateral Investment Promotion & Protection Agreement [BIPPA]. These proceedings were initiated because of the retrospective application of taxation laws, causing huge losses to Vodafone. Vodafone International Holdings BV, a subsidiary of the Vodafone Group[2] had, prior to the proceeding being discussed, initiated arbitration proceedings on similar claims under the India and Kingdom of Netherlands BIPPA.[3] In the forthcoming sections, the author shall illustrate the errors in the judgment and  how such practice, if gone unopposed, could threaten India’s aim of emerging as a leading hub of international arbitration. The Rarity of Anti-Arbitration Injunctions in matters concerning Bilateral Investment Treaties International arbitration does not depend on national courts for legitimacy; this recourse is made as a matter of right based on the agreement of the parties.[4] In Maffezini v. Kingdom of Spain[5], the international character of the obligations in these treaties called for the Tribunal to retain the ultimate right to ascertain the scope and meaning of these obligations.  Investment treaties are specifically worded, establishing unambiguously the intent of the parties to be bound by such terms. To allow its frustration due to intervention by national courts would defeat the very purpose of such treaties.[6] Thus, as a matter of general practice, anti-arbitration injunctions are rarely granted. The Occasional Recourse to Anti-Arbitration Injunctions There are a common set of grounds based on which such an order may be passed, such as the existence of oppressive and vexatious arbitration proceedings,[7]  extent of likelihood of parties suffering irreparable harm if such injunction is not granted, and the like.[8] These grounds have been accepted in India as well in the case of Louis Dreyfus[9] [LD] by the Calcutta High Court, which is the only other Indian case to discuss investment treaties at length. The LD case also reinforces the principle of non-interference, which is enshrined even in Indian arbitration law under section 5 of the Arbitration and Conciliation Act, 1996. Abuse of Process – What & How? The Delhi High Court observed that the arbitration proceedings culminated into a type of abuse of process due to the presence of multiplicity of proceedings initiated by a single economic entity along with the emergence of parallel proceedings. Heavy reliance was placed on the case of Orascom v. Algeria[10]  [Orascom] to argue that entities forming part of the same vertical chain, controlled by the same management could not proceed with multiple arbitrations for the same claim.[11] However, this argument may be refuted by analysing the decision of the ICSID Tribunal inAmpal-American Israel Corporation v. Arab Republic of Egypt.[12] The Tribunal therein found that although the claims made by the parent company before one tribunal and the ones made by a 100% owned subsidiary in the parallel arbitration proceeding amount to a double pursuit of the same interest, this exercise is reasonable if the jurisdiction of both the approached forums is unclear. Once jurisdiction is confirmed, only then can the abuse of process argument be made.[13] Therefore, it can be argued that not only has such form of proceedings been accepted to a certain extent, it certainly is not a ground to grant an anti-arbitration injunction. Problems with the Delhi High Court Judgment The risk of causing ‘due process’ paranoia Due process paranoia is understood as a perceived reluctance by tribunals to act decisively in certain situations for fear of the award being challenged based on a party not having had the chance to present its case fully.[14] In SGS v. Pakistan[15], wherein after a series of adverse judgments rendered by the Pakistan Supreme Court, when arbitration proceedings ultimately continued, one of the arbitrators exited, considering his inability to ignore the past injunction passed on the said proceedings by the concerned national court.[16] Even in the instant case, the arbitration had witnessed several procedural impediments such as resignation of the Indian arbitrators in the past,[17] and pleas made by the Indian Government to change the arbitrators[18]. Therefore, it may be argued that this intervention by the domestic court could lead to the tribunal adopting such an overly cautious approach. Improper reliance on Modi Entertainment A major argument used to justify the passing of such an injunction has been the proving of India as a ‘natural’ jurisdiction.[19] The case of Modi Entertainment Networks,[20] was relied on as a landmark Indian judgment laying down the principles on natural jurisdiction. This is an incorrect position, considering that in the aforesaid judgment, the Court did not have to ascertain such principle in keeping with the presence of an arbitration clause.[21]  Despite an express arbitration clause in the India-UK BIPPA,[22] by using the aforesaid principles, the Hon’ble High Court is creating a license to disregard arbitration clauses. Taxation as a subject is not excluded under the India-UK BIPPA A ground for granting such injunction has been that taxation as envisaged under the Indian Constitution is a subject of sovereign concern, thereby disallowing its arbitrability.[23] This is erroneous since the scope of the concerned BIPPA has not laid down any express exclusion as to matters concerning taxation being out of the scope of the Treaty.[24] If India wished to exclude such matter, it would have been done by way of the provisions of the BIT itself as it has done in the past in, for instance, the India-Austria BIT. The arbitral claims in the instant case deal specifically with

Power of National Courts to Injunct Investment Arbitration Proceedings: The Indian Position Read More »

The Companies (Amendment) Bill, 2017: Understanding the Significant Changes Proposed in the Corporate Law Regime

Company Law /

The Companies (Amendment) Bill, 2017: Understanding the Significant Changes Proposed in the Corporate Law Regime. [Muskan Agrawal] The author is a third-year student of National Law Institute University, Bhopal. On July 27, 2017, the Lok Sabha passed the Companies (Amendment) Bill, 2017 (hereinafter referred to as “the Amendment Bill”).  If passed by the Rajya Sabha, it would add a string of changes in the Companies Act, 2013 (hereinafter referred to as “the Act”), thereby introducing many crucial nuances in the Act having significant impact on the manner in which Indian companies function. The Amendment Bill aims at improving overall corporate governance standards and investor protection.[1] The major amendments pertain to relaxation of pecuniary relationship of directors,  rationalization of related party provisions, omission of provisions relating to forward dealing and insider trading, doing away with the requirement of approval of the Central Government for managerial remuneration above prescribed limits, making the offence for contravention of provisions relating to deposits as non-compoundable,  and requiring holding of at least 20% voting rights instead of share capital by investors to constitute significant influence. The following part discusses few of the changes proposed. Independent Directors An independent director in relation to a company means a director who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.[2] The Amendment Bill seeks to relax this pecuniary interest provision. In the definition of independent director, the term ‘pecuniary relationship’ is proposed to be replaced by ‘pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten percent of his total income or such amount as may be prescribed.’[3] In other words, the limit of ten percent is provided under the Amendment Bill for benchmarking the independence of a director. This expands the scope of independent directors and gives firms more flexibility to pursue their professional relationship with independent directors who are practicing other professions as well. The 2005 JJ Irani Report on Company Law also recommended that the concept of ‘materiality’ be defined and 10% or more of recipient’s consolidated gross revenue or receipts for the preceding year form a material condition affecting independence.[4] However, this was not incorporated in the Act. Significant Influence in Associate Company The Act provides that to constitute significant influence, a holding of at least 20% total share capital is mandatory.[5] The amendment ties the concept of significant influence to total voting power instead of total share capital.[6] Further, the definition includes control or participation in business decisions. Control under Section 2(e) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as “Takeover Regulations”) is defined as the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. The term is similarly defined under Section 2(27) of the Act. On March 14, 2016, SEBI sought comments from public on the bright line test for determining control by way of its discussion paper in which it enumerated certain rights which should not be considered as control.[7] For instance, veto rights not amounting to acquisition of control may be protective in nature rather than participative in nature i.e. such rights may be aimed with the purpose of allowing the investor to protect his investment or prevent dilution of his shareholding and not otherwise. In other words, the investor does not have power to exercise control over management of the business and policy making in relation thereto. On the other hand, the Amendment Bill provides that an investor will have significant influence in the company if he has control of at least 20% of total voting power, thus not completely incorporating the said bright line test. However, it must be noted that on September 8, 2017, SEBI scrapped the discussion paper and decided to continue with the current position of ascertaining acquisition of control as per the existing definition in the Takeovers Regulations which is in consonance with the Amendment Bill and the Act.[8] Related Party The Amendment Bill expands the scope of related party by including, among the other things, an investing company or venturer of the company under a related party.[9] An investing company or venturer will mean a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.[10] In the Act, the word ‘company’ is used instead of ‘body corporate’ which results in the exclusion of foreign MNCs. For instance, any transaction between the parent MNC International Business Machines (IBM) with its Indian subsidiary IBM India Private Limited is not regarded as a related party transaction and therefore completely left out under the Act. This, it is submitted, was not the intent of the legislature. The legislative intent is proposed to be met through the Amendment Bill by explicitly including investing companies within related party. The Amendment Bill also makes the definition of related party in concurrence with SEBI regulations. In the SEBI (Listing Obligations and Disclosure Requirements)  Regulations, 2015, both investing and investee companies are covered under related parties,[11] whereas in the Act, only the investee company as a related party of the investing company is included and not vice versa. While the Amendment Bill meets its objective of improving overall corporate governance standards and investor protection by providing more clarity, the burden of heavy compliance still continues. The penalty rigour in realistic terms will ensure that the compliances are appropriate and not just apparent. Nonetheless, many aspects of the bill are in line with global best practices. [1] Lok Sabha passes bill to amend companies law, THE ECONOMIC TIMES, (July 28, 2017), http://economictimes.indiatimes.com/news/economy/policy/lok-sabha-clears-bill-to-amend-companies-law/articleshow/59794867.cms. [2] Section 149(6)(c), the Act. [3] Section 149, the Amendment Bill. [4] Report on Company Law, Expert Committee on Company

The Companies (Amendment) Bill, 2017: Understanding the Significant Changes Proposed in the Corporate Law Regime Read More »

Authorized Person to Issue Demand Notice under the Insolvency and Bankruptcy Code, 2016

Insolvency Law /

Authorized Person to Issue Demand Notice under the Insolvency and Bankruptcy Code, 2016. [Jai Bajpai] The author is a third-year student of School of Law, University of Petroleum and Energy Studies. The Insolvency and Bankruptcy Code, 2016 (“Code”) arrived at a critical stage where the banking industry was facing credit financing problems and had been looking for an efficient time-bound solution to the same. Having ushered in a new regime, the Code, enacted with the primary objective of compiling laws relating to insolvency, re-organization, liquidation and bankruptcy as regards companies and individuals, is witnessing an evolving jurisprudence in relation to its provisions. Recently, the National Company Law Appellate Tribunal (“NCLAT”) pondered upon the question of the elements that constitute a “demand notice” on behalf of an operational creditor under section 8(1) of Code, which provision deals with the initiation of the insolvency resolution process by an operational creditor. The NCLAT has paid heed to the fact that the provisions of the Code are being casually used and applied by lawyers and chartered accountants. The pertinent question before the NCLAT was whether a demand notice, drafted and sent by a lawyer, could be regarded as a demand notice under section 8(1) of the Code. This question was answered in the case ofMacquarie Bank Limited v. Uttam Galva Metallics[1], wherein it was held that if any person who issues a demand notice on behalf of the operational creditor is not authorized in this behalf by the operational creditor and does not stand in or with relation to the said creditor, the concerned notice would not be termed as a demand notice under section 8(1). Again, in Centech Engineers Private Limited & Anr v. Omicron Sensing Private Limited,[2] the NCLAT made similar observations with regard to a demand notice. In this case, it was brought to the notice of the tribunal that the demand notice was not issued by the operational creditor, but by the Advocates Associates. It was observed that a demand notice not issued in consonance with the requirements enumerated in the Macquarie Bank Limitedcase would deem the notice to be a lawyer’s or a pleader’s notice under section 80 of the Civil Procedure Code, 1908. A demand notice is necessary if an operational creditor wishes to initiate the corporate insolvency resolution process against a corporate debtor. Along with the said notice, the operational creditor is required to deliver an invoice pertaining to the defaulted amount. Moreover, under rule 5(1) of the Insolvency and Bankruptcy Rules, 2016 (“Rules”), it has been provided that the demand notice can only be sent by an operational creditor or a person authorized by him. Therefore, the language of section 8 of the Code could not interpreted in a manner that goes against rule 5(1). Accordingly, in this case, the NCLAT held that the order passed by the Adjudicating Authority appointing an insolvency resolution professional and declaring moratorium was illegal and liable to be set aside. The purpose of the demand notice under section 8 of the Code is to convey to the corporate debtor the consequences that would follow upon non-payment of the operational debt. On the other hand, a legal notice under section 80 of the Civil Procedure Code, 1908 is to notify the other party about the initiation of the legal proceedings against it. The corporate insolvency process is distinct from a normal legal process, as a case filed for claiming debt under section 9 of the Code cannot be disputed by a corporate debtor until there is existence of a prior dispute before the sending of notice under section 8. Thus, a demand notice under section 8 stands different from a legal notice as stipulated under section 80. There have been many instances where the Code has catered to the needs of the creditors but has suffered from ambiguity while doing so. The above-mentioned cases were two such instances where the tribunal interpreted the law so as to give effect to the aim of the legislation. [1] Macquarie Bank Limited v. Uttam Galva Metallics Limited, III (2017) BC 10. [2] Centech Engineers Private Limited and Ors. v. Omicron Sensing Private Limited, Company Appeal (AT) (Insolvency) No. 132 of 2017.

Authorized Person to Issue Demand Notice under the Insolvency and Bankruptcy Code, 2016 Read More »

Scroll to Top