CBCL, Author at NLIU CBCL - Page 93 of 101

Competition Law Concerns of Big Data

[Venkata Sai Aditya Santosh Badana] The author is a 4th year student of ICFAI Law School, Dehradun. Introduction: Several years ago, “The Economist Magazine” noted that data, particularly consumer data, had become “the new raw material of business: an economic input almost on a par with capital and labors.” The choice of buzzwords in the instant interplay between antitrust and the digital economy, however, is not merely “data”, but “big data”. Traits of “big data” that are frequently cited are large amounts of different types of data, produced at high speed from multiple sources, whose handling and analysis require new and more powerful processors and algorithms.[i] To simplify, “big data” is often defined by the three characteristics or “3 V”s – Variety, Velocity, Volume.[ii] This brings us to the question whether big data or data allied activities in general can be examined by the sector specific competition watchdog when inter alia Data protection Authorities are in place? To answer this intriguing question at its simplest, data is simply a product and a competition law analysis can be applied to it as is applied to any other product. Services founded on data can be analyzed in the same way under competition law as any other service.[iii] This article casts light on the debate of Antitrust concerns of Big data by examining some of the key issues and parameters that may need to be considered when assessing the nexus between market power, competition law and data. For this purpose it is necessary to first delineate what is by meant “big data”.The theories of anti-competitive harm usually associated with data collection and exploitation in digital markets are presented in section II, while theories to regulate Data driven combinations are dealt with in Section III. Anti-Competitive Arrangements and Big Data: Data collection may facilitate collusion when this data is employed to fix prices in tandem with the use of algorithmic technology.Factual examples of aforementioned scenario cases include United States v. Airline Tariff Publ’g Co.[iv] as well as the David Topkins case[v]. The ruling in that latter case stated that “in order to implement this agreement, David Topkins and his co-conspirators concurred to employ specific pricing algorithms for the agreed-upon posters with the object of corresponding changes to their assigned prices”. In furtherance of the conspiracy, David Topkins created a computer code that instructed Company A’s algorithm to set prices of the posters analogous to price fixing agreement, and the same algorithm was entrusted to ensure compliance. In pursuance with the agreements reached, The Northern District of California in San Francisco held that, “David Topkins and his co-conspirators sold, distributed, and accepted payment for the agreed upon posters at collusive, non-competitive prices on Amazon marketplace[vi].” Topkins also has agreed to pay a $20,000 criminal fine and cooperate with the department’s ongoing investigation. It is exigent here to outline that there that CCI as of date is yet to bring a successful prosecution or levelling of charges of employing big data for collusion. But there is glimmer of hope by drawing inferences from the recent development of CCI[vii] imposing a fine of Rs.258 crore on three leading airlines – Jet Airways, Indigo and Spice Jet after finding them guilty of tacit collusion and cartel like behavior in overcharging cargo freight in the garb of fuel surcharge. It essentially found that the three airlines had fixed a fuel surcharges at a uniform rate through algorithms on the very same day and they all increased the surcharges at the same time without any analogous rise in the fuel prices. Such conduct was found to have resulted in indirectly determining the rates of air cargo transport in contravention of section 3 of the Competition Act, 2002. Data-Driven Merger Control and Big Data: Mergers in technology sector beg the ever important question of whether an entity obtaining access to exclusive troves of big data can significantly foreclose or leverage competition? Access to data sets in a competitive markets can be of great value, for example when a data set facilitates more targeted advertising (behavioral targeting or micro targeting). While testifying before United States Congress, Mark Zuckerberg attested to the fact that, big data can potentially predict the outcome of elections.[viii] Few cases which have been subjected to merger scrutiny by the European Commission (the “Commission”) illustrate: Google/Double Click[ix]: takeover price 3.1 billion dollar; Facebook/WhatsApp: takeover price 19 billion dollar and Microsoft/LinkedIn[x]: takeover price 26 billion dollar). All the above amalgamations have been unconditionally cleared with a few contingent directions, placing reliance upon the traditional litmus test of “significant impediment to effective competition” disregarding data analytics and third party data sharing. The European Commission’s Horizontal Mergers Guidelines, 2004 and Non-Horizontal Mergers Guidelines 2008 respectively do not outline the element of big data in merger control. Competition Commission of India (CCI) did not raise concern about Facebook/WhatsApp, while concerns about competitiveness associated with net neutrality are still fresh from the Telecom Regulatory Authority’s decision against discriminatory access to data services.[xi] While the CCI is yet to examine Big Data and its effects on competition, it is pertinent to visit opinion/Exposition 83/2015 issued by the CCI, wherein dominant position of WhatsApp and Google was averred by the Informant under Section 19.[xii] The Commission noted that the informant had failed to satisfy the ingredients of section 4 of the Competition Act 2002, under which, imposition of unfair or discriminatory terms has to be shown in sale of goods or service or price in purchase or sale of goods or services.The Google/Double Click merger decision includes nevertheless a significant disclaimer at paragraph 360: “it is not excluded that (…) the merged entity would be able to combine DoubleClick’s and Google’s data collections, e.g., users’ IP addresses, cookies IDs, connection times to correctly match records from both databases. Such combination could result in individual users’ search histories being linked to the same users’ past surfing behaviour on the internet (…) the merged entity may know that the same user has searched for terms A, B and C and visited pages X, Y and

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Promoter over-reach in Corporate Governance – Murthy v. The Board

[By Vartika Tiwari] This Blog is part of a series of posts as a collaboration titled “KAIZEN” between the Centre for Business and Commercial Laws (CBCL), NLIU Bhopal and Law School Policy Review (LSPR). To view this blog on LSPR, please click here. Vartika Tiwari is a 3rd-year student of NLIU, Bhopal and a member of the Centre for Business and Commercial Laws. Earlier this year, Infosys Ltd. (“Infosys” or “the Company”) completed 25 years of stock market listing.[1] Through all these years, the Company has been one of the best in terms of stock returns, revenue growth and other financial parameters.[2] Infosys and its iconic co-founder, N.R. Narayana Murthy, have long been admired and respected for delivering excellence while conducting business in a legal, transparent, and ethical manner.[3] However, even before the Company had attained the status of a bellwether for the IT industry, the Company had successfully managed to set a benchmark for corporate governance in India – from employee stock options to detailed financial disclosures.[4] In such a scenario, the past few months have been surprisingly marked with controversies and concerns over Infosys’ almost flawless corporate governance record. From the acquisition of Panaya to Ex-Chief Finance Officer (“CFO”) Rajiv Bansal’s 17.38 crore severance package, lately, it seems like Infosys is slowly losing its reputation in the market. This blog post will discuss these and other corporate governance issues that the tech-giant has faced over the past one year or so. In August 2017 the Company’s first non-promoter CEO, Vishal Sikka, resigned and the Board of Directors blamed co-founder Narayan Murthy for his exit.[5] The differences between Murthy and Sikka are said to have cropped up after a $200-million deal was struck between Infosys and Israeli cloud company Panaya.[6]As per reports, in February 2017 an anonymous whistleblower filed a complaint before SEBI, claiming that the deal was overvalued.[7] The whistleblower, in another letter, asked the market regulators in India and the United States to take action against the Infosys board for inconsistency.[8] In late 2015, the Company’s former CFO, Rajiv Bansal was sacked over differences with Sikka. The Company agreed to pay Bansal a severance package of Rs. 17.38 crore or 24-month salary but had failed to take approval of the nomination and remuneration committee and the audit committee of the Infosys board in arriving at a settlement regarding the severance money.[9] Consequently, Murthy raised concerns over this failure to disclose norms and claimed that the severance package was “hush money.”[10] However, an internal investigation committee gave a clean chit to the deal but the findings were not made public.[11]This was again contested by Murthy, who believed that the findings should be made public.[12] In April 2017, the Company has suspended payments after handing out Rs. 5 crore of the promised amount, after Murthy contested that the amount in total was “hush money” for hiding corporate governance issues under the former board of directors of the Company.[13] Later that month, Bansal invoked arbitration proceedings to contest the halting of the promised payment.[14]It was only recently that the issue finally got settled when Infosys lost the arbitral proceedings due to lack of evidence and was asked to pay Bansal the outstanding amount.[15] Amidst all this, Vishal Sikka resigned as the CEO and MD of Infosys, citing “personal attacks” on him as one of the reasons for his resignation.[16]Apart from this, newspaper reports claim that things such as Sikka’s salary, the appointment of Punita Sinha as an independent director and Sikka’s push for acquisitions have considerably strained Sikka’s relationship with co-founder Narayan Murthy.[17] It is worth noting that in a span of few months, apart from Sikka, Sangita Singh, Executive VP, Healthcare and Life Sciences and Nitesh Banga, Senior VP and Global Head of Manufacturing and Edge products, and CFO, M D Ranganath, have also stepped down from their roles.[18] In addition to this, a couple of other senior executives have stepped down too and former employees have been filing complaints of unpaid dues, thereby clearly showing that there is something seriously wrong with the way the Company has been conducting business lately. A similar situation was witnessed earlier when Tata Sons accused Cyrus Mistry, the CEO of Tata Consultancy Services (“TCS”), of lack of performance and corporate governance lapses.[19] This led to a very humiliating ouster of Mistry eventually.[20] Thus, the resignation of Sikka must not be viewed in isolation since it raises a bigger concern of over-involvement, or rather, interference of the founders of the company with the management of the company. It must be understood that independence of management is the very foundation of good corporate governance. In such a scenario, the behaviour of Indian promoters is also not in the direction to promote business practices that may be considered healthy. It is important for family-run businesses and for the promoters of a company to recognize this fact of independence of the management. Needless to say, the kind of behaviour that is exhibited by founders like Narayan Murthy and Tata Sons is only adding to the deteriorating state of corporate governance in India and discouraging potential investors internationally. Such conflicts and confrontations among reputed companies like Infosys and TCS would inevitably adversely affect the trust amongst global investors since these companies enjoy goodwill internationally. Another issue with such interference is that most companies look at IT giants like Infosys and TCS as benchmarks and are likely to follow the trend that has been set by them. Thus, ordinarily, it is advisable for the promoters to avoid unnecessary interference and to ensure that the management board is completely independent. However, the devil’s argument that both Tata and Infosys founders hold considerable shares in their companies and thus, as stakeholders, they have every right to nominate the directors and to keep a close watch on the way the company is being managed; holds equally true. Considering the clash of the interests of the company with those of the promoters, a middle path must be sought wherein not only the promoters should

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Disqualification of Directors under Section 164(2)(a) of The Companies Act, 2013: Madras High Court clears the Air

Company Law / CBCL

[Devina Srivasatava] Devina is a 4th year BBA LL.B. (Hons.) student at Symbiosis Law School, Pune. Introduction In the recent case of Bhagavan Das Dhananjaya Das v. Union of India[1], decided on 3rd August, 2018, the Madras High Court has set a significant precedent for matters concerning disqualification of directors under Section 164(2) of the Companies Act, 2013 (“2013 Act”). Various petitions were clubbed by the Madras High Court in this matter and the facts in all pertained to disqualification of directors on the ground of failure of the company to file annual returns or financial statements for 3 consecutive financial years. For instance, in the petition filed by Mr. Bhagavan Das Dhananjaya Das, the director of a private company called Birdies and Eagles Sports Technology, the company had been unable to commence business activities and had not filed annual returns since 2011-12. Accordingly, the Registrar of Companies, Chennai (“ROC”), struck off the company’s name from the Register of Companies under Section 248 of the 2013 Act after giving due notice. Various other companies were also struck off as part of the nationwide crackdown of over 2 lakh shell companies and their directors disqualified from being appointed or re-appointed as directors for the next 5 years.[2] Grounds for Challenge The writ petitions challenged the disqualification on two major grounds: Firstly, the 3 year period for disqualification under Section 164(2)(a) can only commence for private companies post the enactment of the 2013 Act. Hence, the year 2013-14 cannot be included in the 3 year period of default. Secondly, the principles of natural justice were violated as no opportunity to be heard was provided to directors before their disqualification. Analysis of Issues Involved Since there was no alternative remedy for challenging the disqualification and a statutory body like the ROC had allegedly misconstrued provisions of law, infringing on the fundamental rights of the petitioners, the writ petition was held to be maintainable. In deliberating upon the first issue of scope of the period of 3 financial years under Section 164, the court considered that the 2013 Act came into force only on 1st April, 2014 and as per the definition of ‘Financial Year’ contained in Section 2(41) of the Act, the first financial year under the Act commences on 1st April, 2014. Hence, if the three year period is considered to commence from 1st April, 2013, as done by the ROC, it would be inconsistent with the 2013 Act. In addition to this, no provision for disqualification of directors for failing to file annual returns existed under the Companies Act, 1956 (“1956 Act”) for private companies. Section 274(1)(g) of the 1956 Act, which provided for such disqualification applied only to public companies. Hence, to consider the year 2013-14 for disqualification of a director would be in contravention of law as the then applicable law did not attach any liability for default in filing annual returns or financial statements in case of a private company. This is also supported by the General Circular No. 08/14 by the Ministry of Corporate Affairs[3] which clearly states that financial statements in respect of periods prior to 1 April 2014 will be governed by the 1956 Act and that the provisions of the 2013 Act shall apply only thereafter. Moreover, the provisions of the Companies Act, 2013 ought to be read prospectively and cannot relate to occasions prior to its coming into force, failing which the said provision would become unconstitutional under Article 20(3) of the Constitution of India. Thus, the court held the disqualification of directors to be invalid and bad in law. As far as the second issue was concerned, the court noted that though the ROC had called upon the companies to explain as to why they should not be struck off, no notice was given for disqualification of their directors. The Court opined that these were two distinct and independent actions and a fair opportunity to be heard should have been provided to the disqualified directors. Thus, the Court thus read down Section 164(2) of the Act to the extent that a fair opportunity to be heard must be given to directors of a company before disqualification. Resultantly, the challenged orders of disqualification were set aside. Conclusion Scholars are of the opinion that the principles laid down by the Court have somewhat narrow as well as broad application.[4] Narrow because the decision as to the 3 year period will apply only to the current batch of disqualified directors and broad because the decision on reading down of Section 164 will have sustained implications. This aptly demonstrates the impact of the judgment. However, a question that arises is that even if the ROC gives a notice of disqualification and an opportunity to be heard to a director, what will be the grounds which will be considered as sufficient justifications for non-compliance with the statutory mandate of filing annual returns or financial statements? Section 164 provides no proviso to disqualification of a director for such a default and hence, it will be worthwhile to see if a notice of disqualification will only prove to be a mere legal requirement or actually serve a useful purpose. In August this year, the Supreme Court stayed another order of the Bombay High Court granting relief to disqualified directors[5] on different grounds. If the present matter is appealed against, whether the Supreme Court will adopt a pro-director stance or support the government in its endeavours– time will only tell. In any case, the decision is a landmark one as it not only provides clarity about the calculation of period of default by directors, but also upholds the principles of natural justice. [1] 1967 SCC OnLine Mad 307. [2] https://www.livemint.com/Companies/1Y2Eru7mxnNgHoKkqXicHP/Over-2-lakh-shell-companies-to-be-struck-off-from-records-in.html. [3] General Circular No. 08/ 2014 dated 4th April, 2014, Ministry of Corporate Affairs, Government of India. Available at: http://www.mca.gov.in/Ministry/pdf/General_Circular_8_2014.pdf. [4] Umakanth Varottil, Madras High Court Grants Reprieve to Disqualified Directors, IndiaCorpLaw. Available at: https://indiacorplaw.in/2018/08/madras-high-court-grants-reprieve-disqualified-directors.html. [5] https://www.moneycontrol.com/news/business/supreme-court-stays-bombay-hc-order-granting-relief-to-disqualified-directors-2815121.html.

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Companies (Significant Beneficial Ownership) Rules, 2018: An Overview

Company Law / CBCL

[Ishita Vyas and Akash Srivastava] Ishita & Akash are 5th year students at HNLU, Raipur. Introduction The ‘White Paper on Black Money’ prepared by the Ministry of Finance in May 2012 categorically stated that black money has a “debilitating effect on the institutions of governance and conduct of public policy in the country”[1]. The Govt. of India has been persistently fighting against the menace of black money and corruption. In pursuance of that it had demonetized higher value currency in December 2016. The parliament also amended the Benami Transactions (Prohibition) Act, 1988 in November 2016. Moreover the Securities and Exchange Board of India, via its circular no. CIR/IMD/FPIC/CIR/P/2018/64 dated 10th April 2018, came out with new KYC requirements for ‘foreign portfolio investments’ that ultimately seek to reveal the names of the actual beneficiaries behind a particular investment or security. This step has been taken to check prevention of money laundering and round-tripping[2] of unaccounted income. Misuse of corporate vehicles for the purpose of evading tax or laundering money for corrupt or illegal purposes, including for terrorist activities has been a concern worldwide[3]. Complex structures and chains of corporate vehicles are used to hide the real owner behind the transactions made using these structures.[4] On the same lines, the Ministry of Corporate Affairs (“MCA”) sought to amend the Companies Act in 2017. The Companies (Amendment) Act, 2017 has brought about some major changes to the law governing companies in India. It has introduced the concept of beneficial ownership along with an exhaustive compliance requirement with respect to reporting of the same. Section 89 and 90 deal with declaration of beneficial ownership and registration of significant beneficial owners in a company. In order to supplement the statutory provisions, the MCA has also notified the Companies (Significant Beneficial Ownership) Rules, 2018 on June 13, 2018. Important Definitions Firstly, beneficial interest (“BI”) refers to the right or entitlement of a person alone or together with any person, directly or indirectly, through contract, arrangement or otherwise, to exercise or cause to be exercised any or all of the rights attached to the share; or to receive or participate in any dividend or other distribution in respect of such share[5]. A significant beneficial owner (“SBO”)[6] is an individual who holds not less that 10%[7] of shares in a company or the actual exercising of significant influence or control, over the company, but whose name is not entered into the register of members of the company[8]. It has been further explained that depending on the form of business the method of identification of the Significant Beneficial Owner will vary[9]. In case of a the member being a company, the significant beneficial owner shall be the natural person, who holds not less than ten percent of the share capital of the company or who exercises significant influence or control in the company through other means. In case of the member being a partnership firm, the significant beneficial owner is the natural person who holds not less than ten percent of capital or has entitlement of not less than ten percent of profits of the partnership. Moreover, where there is no natural person identifiable then the person who holds the position of senior managing official will be the SBO.[10] In case of the member being a trust, the SBO would be the author, trustee and the beneficiaries with not less than ten percent interest in the trust and any other natural person exercising ultimate effective control over the trust through a certain chain of control or ownership. Whereas a ‘registered owner’ means a person whose name is entered in the register of members of a company as the holder of shares in that company but who does not hold beneficial interest in such shares[11]. Compliances The compliances can be categorized into three divisions on the basis of applicability. For a registered owner: A registered owner is supposed to make a declaration to the Company specifying the name and other particulars of the person who holds the beneficial interest in such shares, as specified[12]. The rules do not specify any particulars or any particular form which needs to be referred to for this declaration. For a person holding beneficial interest: Holder of beneficial interest must submit a declaration to the company specifying the nature of his interest and particulars of the corresponding registered owner in whose name the shares are held. However, a declaration form has been prescribed only for the declaration of significant beneficial ownership. Such a declaration needs to be made within 90 days[13] of the commencement of the SBO Rules and within 30 days[14] in case of any change is Significant Beneficial Ownership. Such declaration must be made in the prescribed format i.e. Form BEN- 1 For the Company: Whenever a declaration has been made under Section 89 to a company, the company is supposed to make note of those declarations in a separate register.[15] It is also supposed to file a return to the Registrar of Companies (“ROC”) regarding such declarations within 30 days of receiving these declarations. The return needs to be filed the format of Form BEN-2. The register of declarations needs to be prepared in the prescribed format i.e. Form BEN- 3. This register shall be open for inspection during business on every working day as decided by the Board of Directors of the Company. The inspection can only be open for members and for not less than two hours each day. The company can charge fees subject to a maximum of Rs 50.[16] A company shall also have to give notice to any person whom the company knows or has reason to believe to be a significant beneficial owner of the company, or to be having the knowledge of the identity of an SBO or another person likely to have such knowledge or to have been an SBO of the company at any time during the preceding three years from the date of issue of notice and who is not

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P.Radha Bai and Ors. v. P. Ashok Kumar and Anr.: An Interplay of Limitation and Arbitration

Arbitration Law / CBCL

[Saara Mehta] Saara is a 4th year student at NLIU,Bhopal. Introduction A case decided on 26th September, 2018 by a Division Bench of the Supreme Court, P.Radha Bai and Ors. v. P. Ashok Kumar and Anr.[1], is an aid towards understanding how the Limitation Act, 1963 (“Limitation Act”) operates vis-à-vis the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The issue under consideration was whether Section 17 of the Limitation Act could be used to condone the delay in filing an application to set aside the award under Section 34(3) of the Arbitration Act. Under Section 17, the period of limitation begins to run from the time when fraud played against the award debtor is discovered or could have been discovered with reasonable diligence.[2] Factual Matrix and Adjudication prior to the Supreme Court An award was made in February, 2010 by a tribunal adjudicating a dispute between the Appellants no. 1-6 and Respondents no. 1 and 2, all heirs of a common descendent. The award was received within 3 days of its delivery. According to the Respondents, the Appellants entered into a Memorandum of Understanding (“MoU”) with the Respondents in bad faith. They submitted that pursuant to this, the Appellants agreed to give certain properties to Respondent no. 1, which cumulatively were more than what the award stipulated. Further, after entering into the MoU, the Appellants were required to execute Gift and Release Deeds to give effect to the MoU. This execution, allegedly, was delayed intentionally, owing to which the limitation period to apply for execution of the award under Section 34(3) (three months and an extended period of 30 days) expired. On expiry, the Appellants filed an Execution Petition for execution of the award, but the trial court held that this was not maintainable. On appeal, the High Court set aside this order; the trial court was directed to decide the petition on its merits. On realising the intentional delay of the Appellants in executing the gift deed, the Respondents applied under Section 34(3) of the Arbitration Act. They sought to condone the delay in the application on account of fraud by the Appellants. The City Civil Court, Hyderabad, dismissed the application on the ground that it was not empowered to condone delay beyond three months and 30 days, as stipulated in Section 34. Following this, four civil revision petitions were filed by the Respondents before the Andhra Pradesh High Court under Article 227 of the Constitution. The High Court remanded the matter back to the trial court solely for determination of the question of whether Section 17 of the Limitation Act would apply to condone delay in filing an application under Section 34(3) of the Arbitration Act. The Respondents, aggrieved by the High Court’s order, appealed to the Supreme Court in the present case. The Supreme Court’s Decision The Respondents submitted that since application of Section 17 of the Limitation Act had not been specifically excluded under the Arbitration Act, the benefit of Section 17 should not be denied to the Respondents. The Supreme Court, in this regard, took note of Section 29(2) of the Limitation Act, which provides: “Where any special or local law prescribes for any suit, appeal or application a period of limitation different from the period prescribed by the Schedule, the provisions of Section 3 shall apply as if such period were the period prescribed by the Schedule and for the purpose of determining any period of limitation prescribed for any suit, appeal or application by any special or local law, the provisions contained in Sections 4 to 24 (inclusive) shall apply only in so far as, and to the extent to which, they are not expressly excluded by such special or local law”.[3] The case of Vidyacharan Shukla v. Khubchand Baghel and Others[4] was relied on to interpret this section. This case provides that Section 29(2) has two limbs. The first limb is that the limitation period prescribed by the special law or local law shall prevail over the limitation period prescribed in the Schedule to the Limitation Act. In the present case, the Supreme Court noted that the Arbitration Act was a special law and thus the period in Section 34(3) would apply to filing objections to the arbitral award. The second limb, identified in Vidyacharan, is that Sections 4 to 24 of the Limitation Act will apply for determining the period of limitation “only in so far as, and to the extent to which, they are not expressly excluded by such special or local law.”[5] Thus, the Court held that Sections 4 to 24 would apply towards limitation period under the Arbitration Act only if these sections were not expressly excluded under the Act. Relying on previous pronouncements, in which Section 12 and 14 of the Limitation Act had been extended to condone delay under Section 34, the Respondents argued that since application of Section 17 had not been expressly excluded by the special law, it could be extended in the same way. Citing Vidyacharan, as well as Hukumdev Narain Yadav v. Lalit Narain Mishra,[6] the Court concluded that “express exclusion can be inferred either from the language of the special law or it can be necessary implied from the scheme and object of the special law”. The Court observed that there existed a contradiction in the language of Section 17 and Section 34(3). The Supreme Court, inter alia, observed as follows. First, Section 17 of the Limitation Act does not extend or break the limitation period. It only postpones commencement of the limitation period till the applicant has discovered the fraud. Besides, Section 34(3) of the Arbitration Act has a limitation provision built in itself. It provides that the limitation period commences from the when a party making an application had received the arbitral award, or from the disposal of a request under Section 33 of the Arbitration Act for correction and interpretation of the Award. Section

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Securities and Exchange Board of India (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018: An Overview

Capital Markets and Securities Law / CBCL

[Utkarsh Jhingan & Akhil Kumar] Utkarsh and Akhil are 4th year students of NUALS, Kochi. Introduction Securities Exchange Board of India (hereinafter “SEBI”) vide Notification Number: SEBI/LAD-NRO/GN/2018/39, dated October 3, 2018 notified the Securities and Exchange Board of India (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018, (hereinafter “Regulation”). These Regulations have been made by SEBI in exercise of the powers conferred by Section 30 read with sub-section (1) of Section 11 and Section 28A of the Securities and Exchange Board of India Act, 1992[i] (15 of 1992), Section 23JB of the Securities Contracts (Regulations) Act, 1956[ii] (42 of 1956) and Section 19-IB of the Depositories Act, 1996[iii] (22 of 1996). The Regulation aims to recover investors’ money in cases of felonious collective investment schemes. The provision of this Regulation shall apply mutatis mutandi in respect of the proceedings under the Securities Contracts (Regulation) Act, 1956 or the Depositories Act, 1996. These Regulations are a follow up to an earlier decision by the SEBI to empanel third party workers as receivers for management and sale of assets attached through regulatory orders for recovery of penalties and investors’ money from defaulters who have failed to return monies to the investors. The order in the case of Opee Stock Link[iv] was the first disgorgement order that was passed by the Supreme Court. In this case, shares of Jet Airways Limited and Infrastructure Development Finance Company Ltd. were offered to the public at large. The issue of shares in relation to both the companies had been oversubscribed. However, there were several irregularities that had been committed by certain persons related to both the companies. As a result of these irregularities, the Supreme Court ordered to compensate the retail investors. Further, the passing of these Regulations is a step taken forward by SEBI to seek disgorgement of unlawful gains from the culprits. Applicability The Regulation shall only be applicable in cases where a non-compliant entity of SEBI’s orders is untraceable. In such cases, the Recovery Officer (hereinafter “RO”) can appoint an administrator for the purpose of selling the attached properties and refunding the promoters. According to Provision 5 of the Regulation, only persons registered with Insolvency and Bankruptcy Board of India (hereinafter “IBBI”) as Insolvency Resolution Professionals (hereinafter “IRPs”) are eligible for such appointment. The administrator under Regulation 5(4) has a duty to provide an undertaking to the Board of absence of any conflict of interest with the defaulter, directors, promoters, key managerial personnel and the group entities.[v] Additionally, he should also be a person who is independent/impartial and devoid of any conflict of interest throughout the tenure. It has been provided that any dispute regarding the conflict of interest of the Administrator shall be decided by the RO. Terms of Appointment Regulation 6 provides that both the terms of appointment and remuneration shall be decided on a case to case basis after taking into consideration the amount of work, number of investors and the amount involved. Functions The administrator shall perform his functions as per the directions of the RO. He is empowered to obtain any document regarding ownership and possession of properties, claims of investors, details of amounts raised and the amount of settled debt from the defaulter or any other person. He shall also maintain a record of the properties attached in the process, the bank as well as dematerialized accounts and the value of monies and securities held by the defaulter. Furthermore, he shall also sell the attached properties as per the directions of the RO. The Regulations also empower the Administrator to carry out any act with the prior approval of the RO essential for the purpose of carrying out his duties thereto. In the process of discharging his functions, the Administrator can appoint independent charted accountants to verify the details of amount raised and the quantum of debt already settled. He shall also submit monthly report(s) as and when called by the RO for the purpose of determining the progress made by him. Sale of properties The process of sale of properties will be undertaken by the Administrator after he conducts an independent valuation of the property. The Administrator also has the option of undertaking the sale of property via e-auction for which he can engage an e-auction agency. The RO after considering the valuation report may put a reserve price on the property. Regulation 9 states that the Administrator shall also issue advertisements in an English and Hindi Newspaper having nationwide circulation for the purpose of inviting claims from the investors. The defaulting company and its officers are also supposed to furnish an undertaking that they shall be liable for payment if any complaint is received in future by the Board from any investor. Cost incurred in Administration and Repayment Process The entire cost that is incurred in relation to the sale of properties, verification, remuneration of the administrator and any other person appointed by him in connection to the repayment process shall be borne by the defaulter. If he fails to pay, then the cost incurred in the administration and repayment process shall be given priority over other liabilities. Furthermore, the cost and expenses incurred should be reasonable, should be directly related to and necessary for the act and purpose mentioned in the Regulations. Priority in Distribution of Sale Proceeds The amount recovered from the sale of properties of the defaulters shall firstly be used for the purpose of adjusting the costs incurred by the Board including the charges to be paid to the administrator and persons appointed under him. Thereafter, the remaining amount shall go to the investors and the penalty/fee due from the defaulter to SEBI in the order of priority. Return of Monies Exceeding the Liability In circumstances where excess monies exist after the completion and payment of all the defaults and the amount due, it shall be paid to the defaulter upon the completion of three years after the completion of the refund process. It is

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Significance of Structuring a Transaction from a Competition Law Perspective: Learnings from the Telenor Order

Competition Law / CBCL

[Rajat Sharma & Manav Gupta] Rajat and Manav are 4th year students of NLU, Jodhpur. Introduction: A “merger” or “amalgamation” or “acquisition” [referred to as “Combination” in the Competition Act] involving an enterprise can, inter alia, result in a reduction in the number of competitors, or in the ability of the existing competitors to compete effectively, and therefore raises several competition concerns. In India, the competition law aspect of such combinations is majorly governed by Sections 5 and 6 of the Competition Act, 2002[1] (the Act), read alongside the Competition Commission of India (Procedure in regard to the transaction of business related to combinations) Regulations, 2011[2] (Combination Regulations). The Act empowers the Competition Commission of India (CCI) to exercise adjudicatory authority while deciding whether a certain proposed combination could have an appreciable adverse effect on competition (AAEC) in India. In this regard, section 6(2) of the Act requires the parties involved in such a proposed combination to notify the CCI and seek mandatory approval, before effecting or “consummating” the said combination [if the proposed transaction falls within the thresholds prescribed under section 5 of the Act]. In cases where the parties fail to notify the CCI and ‘consummate’ the transaction without getting prior CCI approval, appropriate penalties are imposed by the CCI under Section 43A of the Act. Such cases constitute a violative action termed as ‘gun-jumping’. In one such recent Order (Telenor ASA, Telenor [India] Communications Private Limited & Telenor South Asia Investments Pte Limited)[3] passed by the CCI in proceedings under Section 43A, the role of structuring a transaction in order to avoid potential conflicts with competition law were highlighted. The Order also re-established jurisprudence on what constitutes ‘control’ within the meaning of the Act, especially in cases of highly complex structured transactions. Relevant provisions: The initial notice was filed by the parties under Regulation 9(4) of the Combination Regulations. Regulation 9(4) pertains to filing of one notice for a series of interconnected transactions, by means of which the ultimate intended effect of the primary transaction is achieved. Other relevant provision attracted in these proceedings was Regulation 4, read with Item 8 of Schedule I of the Combination Regulations, which exempts intra-group asset transfer and intra-group acquisition of shares. The Transaction & Initial Observations: The initial notice under Section 6(2) of the Act was filed in 2012 by Lakshdeep Investments & Finance Private Limited (Lakshdeep). The notice was filed to notify the CCI regarding acquisition of shares of Telewings Communications Services Private Limited (Telewings/Telenor India) by Lakshdeep pursuant to a Share Subscription & Shareholders’ Agreement (SSHA). The SSHA was entered into between Telenor South Asia Investment Pte Limited (Telenor South Asia), an indirect wholly owned subsidiary of Telenor ASA (Telenor Global), Lakshdeep and Telewings. There were a series of steps to be undertaken to complete the intended primary transaction and the combination envisaged Lakshdeep to initially acquire 51% shares in Telewings and ultimately hold 26% shares in Telewings. As a first step, the transaction was contingent on acquisition of spectrum for carrying telecom operations as part of the 2G spectrum auction by Telewings. Once this was done, Lakshdeep would acquire 51% shares of Telewings (Lakshdeep Share Transaction). Next, Telewings would acquire business of Unitech Wireless Private Limited (Uninor Business Transaction) and finally, once approval of the erstwhile Foreign Investment Promotion Board (FIPB) was received, Telenor shall increase its shareholding to 74%, such that Lakshdeep shall hold 26% in Telewings (Telenor Share Transaction- Tranche I). The parties contended that Step-III and Step-IV of the series of transactions are exempted and need not be filed with the CCI, however, the CCI may assess them in the alternative. The CCI, however, while approving the Lakshdeep transaction noted that since Lakshdeep would hold 51% shares in Telewings, the transfer of business from Uninor to Telewings and consequent increase in stake of Telenor in Telewings from 49% to 74% is not an intra-group transaction and therefore, not exempted. In an appeal to the erstwhile Competition Appellate Tribunal (COMPAT), it was noted that Steps III & IV are entirely separate and were diabolically mixed up. The COMPAT also observed that the CCI’s observations on the last two steps were premature in nature. Now, fast forward to 2017 when a separate notice was filed by Bharti Airtel Limited and Telenor India for a proposed transfer of 100% shares of Telenor India to Airtel. Interestingly, when CCI perused this notice, it found out that Telenor consummated the last two steps of the proposed 2012 transaction and even increased its shareholding in Telenor India from 74% to 100% without notifying the CCI of the same. The CCI was irked as it denied the exemption in its earlier notice and since Lakshdeep exercised joint control over Telenor India, the increase of shareholding from 74% to 100% by Telenor meant a change of control from joint to sole and hence, notifiable. On the basis of these, the CCI started proceedings under Section 43A of the Act. Submissions: With respect to the applicability of exemption on Steps III & IV, Telenor submitted that interpretation of the term ‘group’ in accordance with Explanation (b) to Section 5 of the Act becomes relevant while applying the intra-group acquisition exemption, as it stood pre-amendment in 2012 (Old Item-8 exemption). The term ‘group’ under Explanation (b) to Section 5 of the Act states: “two or more enterprises which are, directly or indirectly, in a position to: (a) exercise 26% or more of the voting rights in the other enterprise; or (b) appoint more than 50% of the members of the board of directors in the other enterprise; or (c) control the management or affairs of the other enterprise.” It was asserted that since ‘Uninor’ was already a part of the Telenor Group by virtue of the latter’s 67.25% shareholding in the former, thereby meeting criteria (a) & (c) of the abovementioned definition. Further, irrespective of ,Lakshdeep’s shareholding, Telenor possessed 49% shares in Telewings and had the authority to solely exercise decisive influence

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Commodity Derivative Trading : A Unified Exchange Regime

Capital Markets and Securities Law / CBCL

[Vaidehi Soni] Vaidehi is a 4th year student of NUALS , Kochi Background The Securities and Exchange Board of India (SEBI) announced to have a unified exchange regime from October 1, 2018, wherein stock exchanges would be allowed to offer to trade in commodity derivatives. Pursuant to the said approval, Bombay Stock Exchange (BSE) is set to launch commodity derivatives segments for the delivery-based futures contract in Gold (1 kg) and Silver (30 kg) and later add metals, energy products following by agricultural commodities such as processed/Un-processed farm produce whereas NSE apart from gold and silver will begin with mini gold (100 grams) contracts so as to attract small investors from October 12, 2018. Additionally, considering the fact, Multi Commodity Exchange (MCX) being the market leader, dominates in the trade volumes in non-agricultural commodities derivatives, BSE has decided to waive off the transaction charges for the first year of commodities market operations in order to encourage more participants to join commodity markets. Understanding Commodities market Commodities markets, globally and in India can be broadly categorised into two segments, namely, the market for spot transactions and the market for derivative transactions. The former market deals with the purchase (or sale) of commodities and the settlement of the transaction takes place simultaneously i.e. trade in commodity takes place either on a physical market place or on an electronic platform whereas the latter market deals with the exchange-traded commodity futures markets, which offer a highly standardized platform for trading financial instruments which derive their value from underlying physical commodities including settlement of trade at a future date. The commodity derivative market provides a platform for discovery of future prices of a commodity and also offer an opportunity to the participants in the spot market to hedge themselves against fluctuations in future prices of the underlying commodities. A sound derivative market through hedging delivers price discovery and price risk management by stakeholders including commodity traders, farmers, and market participants. Derivative trading in India takes place either on a separate segment of an existing Stock Exchange or on a separate and independent Derivative Exchange. The settlement & clearing of all trades on the Derivative Exchange/Segment would have to take place through a Clearing Corporation/House, which is unimpeded in governance and membership from the Derivative Exchange/Segment. Legal Framework for Derivative Market The derivatives market is governed by a central legislation, viz., Securities Contracts Regulation Act, 1956 (SCRA) which provides for the legal framework for organized derivatives trading and SEBI acts as the oversight regulator. In pursuance of recommendations made by the commodities derivatives advisory committee (CDAC), vide circular dated September 28, 2016, certain amendments/omissions were made to Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC) so as to enable commodity derivatives exchanges to deal in Options. As per section 2(bc) of The Securities Contracts (Regulation) Act, 1956 (SCRA) a commodity derivatives contract can either be: Physical delivery of goods (not being a ready delivery contract) as notified by Central Government or For differences, which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified by the Central Government, but cannot have securities. As per section 2(1) (fa) of SCRA, the commodity derivative exchange means a recognized stock exchange which assists, regulates or controls the business of buying, selling or dealing only in commodity derivatives. Since the Commodity derivative exchange cannot deal in any other product except for commodity derivatives, an option contract with commodity futures may not be eligible for trading on commodity derivatives exchanges. To overcome such legal hurdle, multifarious amendments are made including omission of the category of “Commodity Derivatives Exchange” under SECC regulation” with effect from October 1, 2018 so as to enable commodity derivatives exchanges to also organise trading in option contracts with commodity futures and accordingly all norms issued for commodity derivative exchanges till date shall be applicable to commodity derivative segments of recognised stock exchanges/recognised clearing corporations to the extent of its applicability. Need for Integration of Spot and Derivative Markets With increasing commercialisation and changing demands of consumers, traders and other market participants; BSE’s foray into commodities derivatives The need for integration is more felt for the overall benefit to the primary producers and value chain participants as: Firstly, A comprehensive mechanism for integration would improve cohesion between futures and physical markets. Secondly, in case, the commodity is assayed before trading, it may also lead to lead to the standardization and assurance regarding the quality of commodity to the buyers. Thirdly, on an electronic spot exchange, as the price of a commodity would be determined by a wider cross-section of people from across the country in contrast to the present scenario where price discovery for commodities takes place only through local participation, such platform will bring about efficient price determination and will ensure transparency in price discovery. Fourthly, A single market may also lead to lower operational cost, reduction in timelines, wider market penetration as technological advancement would result in amelioration of accounting of all the transactions that are taking place in the market. Additionally, the Derivative market would achieve better convergence pursuant to development of a regulated electronic spot platform and/or regulated commodity spot exchanges as is evident from the success achieved by the securities market or the commodity derives market after moving to the electronic platform. Since the derivatives market assures that the future and spot price of a commodity converges on the day the derivative contract lapse for settlement, the discovery of real-time spot prices of a commodity on a pan-India electronic spot exchange will unequivocally strengthen the convergence of future and spot prices of a commodity thereby increasing efficiency of both spot and derivatives market. Thus, the functioning of these two markets could help Indian commodity markets improve its efficiencies and enhance the effectiveness of the overall functioning of the commodity ecosystem so as to benefit all the stakeholders.[1] Challenges and Recommendations Such integration poses a

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Analyzing the proposed mandate of SEBI for Large Corporates

Capital Markets and Securities Law / CBCL

[Kartikey Kanojiya] Kartikey is a 5th year student of Institute of Law, Nirma University Introduction Securities and Exchange Board of India (SEBI) by virtue of the consultation paper released on 20th of July proposed an idea whereby they will be making it mandatory for the Large Corporates to raise 1/4th (25%) of their finance through bond markets only. This idea was first proposed by Mr. Arun Jaitley, finance minister of India, during the budget session speech of 2018-2019. He said “SEBI will consider mandating, beginning with Large Corporates to raise 1/4th of the financial need through debt market only.”[1]Subsequently, SEBI took up this issue and finally released a consultation paper. In this article the author analyzes the feasibility of the proposed mandate of raising 25% of finance through bond market only. Applicability By virtue of this paper, the mandate will be applicable only to Large Corporates, which have been defined as: Any entity whose outstanding borrowing is more than 100 Crores; Has a credit rating of AA and above; An entity which intends to finance itself with long-term borrowings (Long term is defined here as any period above 1 year) and; Has listed its securities on any of the stock exchange. The mandate will be applicable from April 1, 2019 on all the Large Corporates who as on 31st March of any financial year fulfills all four conditions mentioned above. Thus, if any entity as on March 31 of a financial year is identified as Large Corporate then from the next financial year i.e. from April 1, the mandate will be applicable. However, Scheduled Commercial banks as mentioned in Schedule 2 of the Reserve Bank of India Act, 1934 are exempted from this mandate.[2] Compliance Mechanism Under the compliance mechanism it says that the large corporate shall inform the stock exchange about the same. It also creates two blocks of compliances. The First block constitutes first two years of implementation and the second block constitutes the third and fourth year of implementation. Under First block i.e. first and second year of implementation, there is a process of comply and explain whereby, the Large Corporates will try to fulfill the requirements but if they fail to do so they have to explain the reasons for the failure in writing to the authority. Under second block i.e. third and fourth year of implementation it is mandatory for the Large Corporates to meet the mandate and if they fail to do so a penalty of 0.2% to 0.3% of the shortfall will be levied on them. [3] Analysis Trend of Bank v. Bond financing in India. If we look at the prevailing finance market in India, then there is a shift in the borrowing practices followed by the corporates. The data from financial year 2012-13 to 2016-17 i.e. data of 5 financial years shows that the trend line of bond financing is going upwards while the same of bank financing is sloping downwards. In future the trend of Bond Financing will increase because of the enactment of Insolvency and Bankruptcy Code, 2016. If we look at the preference which is given to the bond holders, then they are placed above the government and thus making it easy for the bond holders to recover during the liquidation period even before tax recovery.[4] General benefits of Bond Financing Better Borrowing terms: When a company goes for loan financing the rate of interest is already fixed but in the Bond financing the company can fix the interest keeping in mind the market conditions prevailing during the time and the predicted future of the company. This flexibility gives company an edge to go for Bond Financing.[5] Covenants and Restrictions: When a company goes for loan financing there may be a time where the lender puts some restriction such as that borrower cannot make any material change in the company without the affirmative vote of the creditor and thus making it difficult for the company to enter into any arrangement. In bond financing the only liability the bond issuer has is to repay the principle amount at the time of maturity and to pay interest as per the agreed terms. The bond holders do not get any control in the company as compared to the loan lender.[6] Non Dilution in the shareholding of the present shareholders: As and when new shares are issued to raise finance the shareholding of the present shareholder depletes because of the infusion of the shareholders. For example, I had 25% share in the company and thus, a material stake in the governance matters of the company but due to issuance of new shares and new shareholders entering the company my shareholding is reduced to 20% thus, making my clout in the governance of the company less. This is not the case with bond financing. Preference during the liquidation: After the enactment of Insolvency and Bankruptcy Code, 2016 the preference is given to the bondholders, and they are placed above the government and thus making it easy for the bond holders to recover during the liquidation period. This is a positive step to attract the the investors.[7] Disadvantages of Bond Financing Long and Complicated process: To issue bonds in the market SEBI (Issue and Listing of debt securities regulations), 2008 (“regulations”) are to be followed which makes it a complex process. As per the regulations, merchant bankers are to be appointed which also makes it financially difficult as compared to loan financing. Early Repayment: In bond financing the main issues is of repayment. Even if a company has money after some time they cannot pay the debt and settle it. In Bond financing there is no mechanism of early repayment of the claim and final setoff is done between the company and the bond holder. On the other side, in loan financing the money can be paid back soon after taking loan and there is no bar for doing the same except for a penalty which is levied upon the borrower. Bonds

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Author name: CBCL