Author name: CBCL

A Shot in the Arm or a Knee-Jerk Riposte? : Dissecting the Fugitive Economic Offenders Ordinance, 2018

Company Law /

Sandpapergate: ICC’s Failure to Save the Spirit of the Game from Orchestrated Cheating. [Harshit Anand] Mr. Harshit Anand works at Khaitan & Co, Kolkata and deals with Real Estate and Corporate matters. He may be reached at harshit.anand@khaitanco.com. Introduction In the annals of finance, the promulgation of the Fugitive Economic Offenders Bill, 2018 (“the Ordinance”) is being lauded as another bold step of the government after the Insolvency and Bankruptcy Code of 2016. The intent behind the Ordinance is to target those economic offenders who flee the jurisdiction of India and evade the rigours of the legal process, and impending criminal prosecution. This Ordinance empowers the Government to seize the property of such economic offenders- Benami and otherwise- situated in India as well as in foreign jurisdictions. The Ordinance would, under its purview, deal with cases in which the total amount involved is INR 100 crores or more. As the instances of fraudulent conduct in corporate behaviour pile up day upon day, relevance of this Ordinance cannot be overemphasized. I shall briefly discuss the important provisions and procedures listed under the Ordinance and its potential impact on our economy. Offences under the Ordinance One singular feature of the Ordinance is that it defines significant terms and phrases such as ‘fugitive economic offender’, ‘schedule offence’ and ‘special courts’, amongst others. It makes provisions for presenting an application before such special courts for a juridical declaration that an individual is a fugitive economic offender. Attachment of the offender’s property- which would include their Benami property- situated in India or in some other country is an option explicitly available under the Ordinance. For management and disposal of such confiscated property, the Ordinance provides for the appointment of an Administrator. With the Ordinance in operation, offenders who fit the definition of a ‘fugitive economic offender’ would be tried for all offences listed under the schedule of the Ordinance The Ordinance defines a ‘fugitive economic offender’ as any individual against whom an arrest warrant concerning a scheduled offence has been issued by any Indian court, who has either left India so as to evade criminal prosecution or being abroad, has refused to return to India to face criminal prosecution.[i] In other words, all individuals who have left India in order to avoid criminal prosecution and refuse to return to the Indian jurisdiction would satisfy the text of § 2(1) (f). However, leaving the country to dodge the legal process does not automatically make a person a fugitive economic offender (“FEO”); what is of essential requirement is commission of a schedule offence under the Ordinance. The Ordinance lays down that a ‘Schedule Offence’ would mean an offence specified in the schedule, if the total amount involved in the commission such offence or offences is rupees one hundred crore or more.[ii]  This Section implies that every offence laid down under this schedule would come under the ambit of economic offence and any person indulging in this schedule offence would be tried in special courts established under the Prevention of Money Laundering Act of 2002. The schedule is quite comprehensive, in the sense that it lists offences under a plethora of existing laws such as the Indian Penal Code of 1860, the Prevention of Corruption Act of 1988, the Customs Act of 1962, the Companies Act of 2013, the SARFAESI Act of 2002, the Limited Liability Partnership Act of 2008, the Prevention of Money Laundering Act of 2002 and the Insolvency and Bankruptcy Code of 2016. Authorities under the Ordinance The Ordinance defines certain authorities and accords them functions and some special powers. Three authorities who bear primary responsible for the operation of the Ordinance are: 1.Administrator: 2(a) describes an administrator as one who has been appointed under §15(1). §15 deals with management of the properties confiscated under the Ordinance, and under §15(1), the Central Government may, by notification in Official Gazette, appoint as many officers, as they may think fit not below the rank of Joint Secretary of the Government of India to perform the function of an administrator. An administrator is therefore a subordinate officer or officers of the Central Government, who perform(s) their function on the direction of Central Government. The administrator receives and manages the properties confiscated under the Ordinance. §12 of the Ordinance dictates the administrator to disposes of such property on the direction of the Central Government. Special Courts: A special court under §2(n) of the Ordinance refers to a court of session designated as a special court under §43(1) of the Prevention of Money-laundering Act of 2002. Under the Ordinance, a special court (“Court”) has the right to declare a person as an FEO under §12 of the Ordinance and issue a notice requiring appearance of such person. With the permission of the Court, a property may be attached under §5(1), if with regard to the referred property, there is a reason to believe that the property is a proceed of crime or is a property owned by an individual who is an FEO, and which is being or is likely to be dealt with in a manner which may result in the property being unavailable for confiscation. Director: A director in the Ordinance is one appointed under §49(1) of the Prevention of Money-laundering Act of 2002, which defines a director as a person deemed fit to be an authority for the purposes of the Act and appointed by the Central Government. Under the Ordinance, the director may file an application before the Court if he has reason to believe, or any other material in his possession indicates that an individual is an FEO under the Ordinance. §6 of the Ordinance states that the director shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of discovery and inspection. Powers of survey, as well as of search and seizure have been given to the Director under the Ordinance, provided he has reason to believe that

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Unauthorized Communication of UPSI:  Communicator Presumed Guilty?

Capital Markets and Securities Law /

Sandpapergate: ICC’s Failure to Save the Spirit of the Game from Orchestrated Cheating. [Ankit Sharma] Ankit Sharma is a 4th year student of B.Com.L.L.B (Hons.) at Gujarat National Law University. Introduction Given the evidentiary problems in insider trading cases, SEBI has resorted to the use of presumptions in its enforcement of the SEBI (Prohibition of Insider Trading) Regulations[1]. Hence, if an insider trades in securities whilst in the possession of Unpublished Price Sensitive Information (‘UPSI’ hereinafter) there is a presumption of guilt against him. The law also prohibits the immediate insiders from communicating UPSI to anybody who is not an insider. The research note seeks to examine if there exists any such presumption against the immediate insider also that he communicated UPSI to a relative or a spouse etc. in instances where any relative or spouse or any other connected person commits insider trading Analysis: SEBI (Prohibition of Insider Trading) Regulations, 2015 prohibit insiders from trading[2] in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information[3]. ‘Insider’[4] is anybody who is in possession of or has access to unpublished price sensitive information or is either a connected person, which includes spouse[5]. ‘Unpublished price sensitive information’ means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities[6]. The note appended to regulation 4(1) casts a rebuttable presumption of guilt on a person who has traded in securities, whilst in possession of unpublished price sensitive information (UPSI), that such trade was motivated by the knowledge and awareness of such information in his possession, thereby making him guilty of Insider Trading. Further, regulation 3 prohibits any insider from communicating any UPSI relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Thus, in case where a person is an insider possessing UPSI and the spouse or relative of such person commits insider trading, there will be a presumption of guilt against such individual  who is trading on securities but there has to be undertaken an inquiry as to whether such presumption of guilt will exist against the immediate insider possessing UPSI also that he communicated the information to spouse or relative and thus acted in contravention of prohibition under regulation 3. Though any express provision providing for such presumption under regulation 3 is absent, the existence of such presumption of guilt seems very natural and rational as the communication of UPSI by immediate insider is the only way that the spouse or any other connected person can garner such information. But be that as it may, such a presumption may not exist because of two cogent reasons. Presumption under Regulation 4 cannot be extended to                       Regulation 3. SEBI (Prohibition of Insider Trading) Regulations, 2015 is a penal statute[7]. It is a general rule[8] of construction that the provisions of a statute enacting an offence or imposing a penalty are strictly construed[9] and not be enlarged by implication[10]. If the statute requires the accused to disprove even by preponderance of probabilities a presumed fact which an essential element of the offence as distinguished from a proviso or exception, the statute may offend a due process clause in a constitution to design fair trial[11] and the provision may be read down strictly[12]. In any case a deeming provision which reverses the onus of proof in relation to an element of the offence has to be strictly construed and cannot be extended beyond its language to cover another offence[13]. In the instant matter also, the onus of proof and presumption under Regulation 4 should be read as to cover only the cases envisaged by the aforementioned regulation i.e. where there has been trading transaction on the basis of UPSI and should not extend to the cases where the immediate insider has communicated to UPSI to any insider/non insider when such communication was not made in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. 2.Such presumption in Regulation 3 was intentionally omitted by        legislature. A statute is an edict of the Legislature[14]. The duty of judicature is to act upon the true intention of the Legislature—the mens or sententia legis”[15]. In the matrix at hand it can be reasonably presumed that the legislating authority never intended any such presumption against the communicator of UPSI under Regulation 3(1). According to the test laid down by Blackburn J. in R v. Cleworth[16], to determine what the correct presumption, arising from an omission in a statute should be, was whether what was omitted but sought to be brought within the legislative intention was “known” to the law makers, and could, therefore, be “supposed to have been omitted intentionally”[17]. To re-iterate, note appended to the regulation 4 unequivocally mentions that there will be a presumption against the trader that the transacted on the basis of UPSI if he did so while in the possession of UPSI. And hence it can be well deduced that the legislature was well aware that a presumption could be imposed in case of other offences also, or to be specific on the communicators of UPSI as envisaged in regulation 3(1). But the legislature chose to omit any such presumption in case of regulation 3(1) thereby satisfying the absence of any intention to treat the communicators of UPSI at par with the person who trades in securities while in possession of UPSI. Conclusion While it remains to be seen as to how judiciary clarifies the issue, the reasons suggesting the absence of presumption of guilt under Regulation 3 are highly persuasive and convincing. As a general rule of interpretation of penal statutes, presumptions are usually given a restricted effect and hence,

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Effects of the Amendment of the Arbitration & Conciliation Act, 1996

Arbitration Law /

Effects of the Amendment of the Arbitration & Conciliation Act, 1996. [Siddhart Jain] The author is a 2nd year student at DSNLU, Visakhapatnam. Introduction With the growth of legal awareness amongst the general populous, there is a rise in the number of suits pending before courts. The inability of courts in the speedy disposal of cases has led to a rise in the trend of using arbitration as a means of disposal of most cases, where time is of utmost importance. Arbitration, has primarily become a preferred option to settle commercial disputes Globally and in India as well. Arbitration in India is governed by the Arbitration and Conciliation Act, 1996. The Act was introduced due to the need to facilitate quick enforcement of contracts, reduce the pendency of cases in courts and hasten the process of dispute resolution through arbitration. However, another prime factor for the need of this Act was globalization since there was a need to project India as an investor friendly country having a sound legal framework and ease doing business in India. One of the most significant legal changes made by the Indian legislature in recent years has been the introduction of The Arbitration and Conciliation (Amendment) Act, 2015 (Amendment Act)[1]. The Amendment Act seeks to resolve issues that have traditionally afflicted the alternative dispute resolution framework in India, for example, protracted disputes, excessive judicial intervention, dearth of qualified and impartial arbitrators, and so on [2] Need for Amendment In the recent years, the Government has been taking considerable steps time and again to make India too an international commercial arbitration hub much to the likes of Paris or New Yorks. The case of White Industries v. Republic of India[3] was the first investment arbitration claim, wherein the decision was pronounced against the country, due to judicial delay. Though the Supreme Court has delivered some landmark judgements which support a pro-arbitration approach, the objective of the Act of 1996 was far from reached due to exploitation of several loopholes in the act. The major issue with arbitration in India is twofold: – Court interference becomes inevitable as most of the arbitral awards are challenged until they reach the highest court of the land. There is no provision in The Arbitration and Conciliation Act, 1996 to expedite the arbitration process where the arbitration tribunal shall have to make an award within a fixed period of time. The above reasons made the dispute settlement process more time consuming and defeated the purpose of the legislation. The effects of this are quite evident since even Indian companies who entered into contracts with international investors preferred execution of awards and arbitration proceedings in a jurisdiction other than India.[4] The amendment to the Act of 1996 was a must in today’s time in light of Modi government’s agenda to improve ease of doing business.[5] Major Amendment “Proceedings in arbitrations are becoming a replica of court proceedings, despite the specific provisions in Chapter V of the Act which provide adequate powers to the arbitral tribunal. The Commission hopes that arbitral tribunals would use the existing provisions in the Act, in order to reduce delays.”[6] The world’s leading international arbitral institutions have been revising their respective rules over recent years in an attempt to make arbitration faster and more efficient. This is evidenced by the suite of new rules and mechanisms introduced by such institutions that are aimed at reducing the time and cost of arbitration. One notable example is the so-called ‘expedited procedure,’ which has been adopted by the ICC Court of International Arbitration (ICC), the Singapore International Arbitration Centre (SIAC), and the Hong Kong International Arbitration Centre (HKIAC).[7] The recent Act of 2015 has provided for fast track arbitration by the addition of Section 29(A) & (B) which maybe the saving grace for arbitration in India due to growing demon of delayed proceedings. The section is at par with Expedited Procedure Provision in world’s leading international arbitral institutions. The section combats delayed proceedings by providing the parties to a dispute with an option to choose fast tract procedure, ensuring that the award shall be made within a period of twelve months from the date the arbitral tribunal enters upon the reference subject to other conditions.[8] The act has further incorporated features of Expedited Procedure Provision by enabling parties to settle dispute merely on the basis of written pleadings, documents and submissions filed by the respective parties, doing away with oral hearing. It is also noteworthy that the enabling provision in Sec 26 of the amendment Act provides for fast track arbitration to be applied to the existing disputes if the parties mutually agree to apply this procedure. The Act is undoubtedly aimed at reducing inordinate delays that plague dispute resolution in India. However, the boon of speedy disposal of proceedings comes at the cost party autonomy. Party autonomy is the most prominent features of arbitration on which arbitration framework rests. In this regard, Section 29(A) raises serious concerns. The section, as it stands now, allows the parties to extend the period for passing an award by another six months if the award is not passed within 12 months. However, if the award is not passed despite this extension of six months, the mandate of the tribunal automatically terminates and it is only the court, which on an application by one of the parties and upon being satisfied of sufficient cause, can extend the period for passing the award further. The parties, even if they mutually agree, cannot extend the mandate of the arbitral tribunal beyond the 18-month period allowed by Section 29(A). This mandatory requirement to file an application before the court, an agreement between the parties notwithstanding, is antithetical to the idea of parties having the autonomy to set down time limits and procedures for the adjudication of disputes. Conclusion The process of speedy disposal is still new in India and needs to be practiced to lessen the burden on the judicial system. The fast track arbitration comes at the

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IBC Ordinance; Home Buyers to be Treated as Financial Creditors

Insolvency Law /

IBC Ordinance; Home Buyers to be Treated as Financial Creditors [Riya Goyal] The President has recently given his nod to promulgate an ordinance amending the insolvency law, recognising homebuyers as financial creditors to real estate developers. This settles a long drawn controversy created by various conflicting court decisions regarding the status of homebuyers as being financial or operational creditors, which was further deepened by the IBBI issuing a claim form for “creditors other than financial or operational creditors”[1] To understand the implications of this ordinance, it is pertinent to first understand the meaning of financial and operational creditors. Section 5(8) of the Code defines ‘financial debt’ to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money and inter alia includes money borrowed against payment of interest, etc., As per earlier interpretations of the definition, the contract between the real estate developer and the homebuyer were seen as simple sale and purchase agreements  and not as a ‘financial debt’. The only exception to this view was the  assured return scheme contract, in which there was an arrangement wherein it was agreed that the seller of the apartments would pay ‘assured returns’ to the home buyers till possession of property was given.[2] However such judgments were given considering the terms of the contracts between the home buyers and the seller and were fact specific, thus no consistency existed. Further Section 5(20) of the Code defines operational debt as “debt that may arise out of the provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for time being in force and payable to centre or local authority”. In relation to this the NCLT in Col. Vinod Awasthy v. AMR Infrastructure Ltd. (Principal Bench-Delhi)[3] had ruled that, notwithstanding the presence of an assured return clause, a purchaser of a flat cannot be treated as a provider of ‘goods’ or ‘services’ to the builder and therefore, does not qualify as an ‘Operational Creditor’ and cannot initiate Insolvency Process in that capacity. This Non-inclusion of home buyers within either the definition of ‘financial’ or ‘operational’ creditors may be a cause for worry since it deprives them of, first, the right to initiate the corporate insolvency resolution process (“CIRP”), second, the right to be on the committee of creditors (“CoC”) and third, the guarantee of receiving at least the liquidation value under the resolution plan.This puts into jeopardy the future of millions of homebuyers in a situation where Delay in completion of underconstruction apartments has become a common phenomenon. the records indicate that out of 782 construction projects in India monitored by the Ministry of Statistics and Programme Implementation, Government of India, a total of 215 projects are delayed with the time over-run ranging from 1 to 261 months.[4] To resolve this issue a committee was constituted under the Corporate Affairs Ministry to  review the various financial terms of agreements between home buyers and builders and the manner of utilisation of the disbursements made by home buyers to the builders,it was evident  that the amounts so raised are used as a means of financing the real and are thus in effect a tool for raising finance, and on failure of the project, money is repaid based on time value of money. This could be covered under Section 5(8)(f)of the Code, which is in the nature of residuary entry to cover debt transactions not covered under any other entry, and the essence of the entry is that “amount should have been raised under a transaction having the commercial effect of a borrowing.” An example has been mentioned in the entry itself i.e. forward sale or purchase agreement. Though a forward contract to sell product at the end of a specified period is not a financial contract. It is essentially a contract for sale of specified goods, however if they are structured as a tool or means for raising finance, there is no doubt that the amount raised may be classified as financial debt under section 5(8)(f)[5]. Drawing an analogy, in the case of home buyers, the amounts raised under the contracts of home buyers are in effect for the purposes of raising finance, and are a means of raising finance. Thus, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8). This demonstrates eminent common sense and appears to be a correct application of the concept of ‘time value of money’. It recognizes that a purchaser of a real estate unit is under no obligation to pay a substantial amount of money as down-payment if the possession of the unit is not likely to be handed over to him in the near future. In that scenario, the builder would have to arrange finance from independent sources for the development of the project. This would not only require collateral/security but involve imposition of extremely onerous conditions, including but not limited to a relatively exorbitant rate of ‘interest’. Simply put, a bank lending money to the builder, needless to state, would qualify as a ‘Financial Creditor’ and entitled to all the rights emanating from such an arrangement under IBC, including the right to initiate insolvency process under IBC, in case of a default in repayment of debt. From that viewpoint, if the builder succeeds in inviting funds from an individual purchaser, as opposed to a Bank, on much more favorable terms, in that case – it does not stand to reason as to why that individual purchaser should not be entitled to similar protection as a Bank, when it is essentially serving the same purpose. Any other view discriminates between an individual purchaser of a real estate unit and the Bank, and to the former’s detriment. It also needs to remembered that the purchaser of a real estate unit under such an arrangement is parting with a huge amount

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Reconciling Stock Exchange Regulations with Insolvency and Bankruptcy Code, 2016: Analysis of Amendments in SAST Regulations and Delisting Requirements

Insolvency Law /

Reconciling Stock Exchange Regulations with Insolvency and Bankruptcy Code, 2016: Analysis of Amendments in SAST Regulations and Delisting Requirements. [Ishaan Chopra] Ishaan Chopra is a 3rd year B.A.LLB. (Hons.) student at NLIU, Bhopal Section 30(2)(e) of the Insolvency and Bankruptcy Code stipulates that the resolution plan should be compliant with all the existing provisions of law. Accordingly, the regulations prescribed by Security and Exchange Board Of India (SEBI) need to be adhered to while contemplating and implementing a resolution plan. Where the corporate debtor is a listed entity, certain regulations of SEBI might impose cumbersome obligations upon newly reconstituted entity. The expenses and the time spent in fulfilling such obligations often render the stressed assets investments as economically unviable. This post seeks to analyze the recent amendments in SEBI regulations to make the implementation of resolution plan investor friendly and also suggests further changes in the existing framework to prevent burden upon the restructured entity. Relaxation of Open Offer Requirements Regulation 3 of SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 2011 provides that an entity which intends to acquire any number of shares, which make the entities shareholding 25% or more in the target company, is obligated to make an open offer. Open offer refers to the statutory requirement whereby an acquirer makes an offer for at least additional 26% of the public shareholding. The purpose of SAST regulations is to ensure that substantial acquisitions of shareholdings do not jeopardize the interests of minority shareholders. Accordingly, the regulation seeks to provide a fair exit price to the minority shareholders. For a company facing ‘Corporate Insolvency Resolution Process (CIRP), the shareholders are the bottom of the waterfall prescribed by the IBC for payment preference. Accordingly, the liquidation value due to equity shareholders is less or in most cases nil. This can be portrayed through the recent Electrosteel resolution plan. Vedanta Ltd  invested Rs1,805 crore to get a 90% equity stake in Electrosteel. This results in a valuation of remaining 10% public equity at Rs. 200 crore, less than a third of the company’s existing market capitalization of Rs. 653 crore. SEBI in its discussion paper has noted that the investors acquiring stressed assets would not want to use up capital to buy back from existing shareholders. However, SAST Regulation 3 required a public announcement of open offer of at least 26% of capital when the resolution applicant intended to buy any quantum of shareholding which triggered the 25% threshold. The resolution plan will be compliant with SAST, when payment to all shareholders of target company who have tendered their shares have been made. The capital, which has out flown due to buying back existing shareholdings, could have been effectively used to revive the stressed assets of the reconstituted entity. SEBI via Circular SEBI/LAD NRO/GN/2018/20 [1] has now amended ‘Regulation 3’ of SAST. The amendment provides that any acquisition pursuant to a ‘Resolution Plan’ under section 31 of the IBC will be exempt from the open offer requirements. This gives a lot of flexibility to the resolution applicants/bidders in structuring their resolution plans to take over companies undergoing CIRP. The move is expected to make stressed investments more attractive. Delisting Requirement Prior to the latest amendment an entity which was proposed to be delisted pursuant to a resolution plan approved under IBC, the provisions of SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”) needed to be complied with. SEBI’s delisting regulations require price discovery via reverse book building and impose other conditions such as shareholder approval. Reverse book building is the process by which a company that wants to delist decides on the price that needs to be paid to public shareholders to buy back shares. In this process, the tender price by the shareholder needs to be equal or above the floor price notified by the company. The final buy back price is determined by aggregating all the prices received from the shareholder. The latest amendment via circular number SEBI/LADNRO/GN/2018/23 [2] exempts the NCLT approved resolution plans from such delisting requirements. However, the caveat is that the resolution plan should provide either any specific procedure to complete delisting of shares or provide an exit option to existing public shareholders at a price specified in the resolution plan. According to the notification, the exit price will be liquidation value minus the dues that need to be paid as per the priority laid down under the insolvency code. The liquidation value is to be determined as per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the order of priority enunciated in Section 53 of the IBC Code is to be followed. As equity shareholders are at the bottom of hierarchy in terms of priority, in most cases the liquidation value due to them will nil. But if the existing promoters or any other shareholders are given an opportunity to exit at a price, that is higher than the price derived from the liquidation value due, it will apply to public shareholders as well. The intention to delist an insolvent company, along with the justification for exit price, will need to be disclosed to the stock exchanges within one day of the resolution plan being approved. Exemption from the cumbersome delisting obligations will make stressed assets investments more viable for investors. The aforementioned amendments have dealt with certain pertinent issues that were raised in the SEBI discussion paper. However, SEBI has not clarified its position on the trading of stocks of the companies undergoing CIRP. Further, the status of reclassified shares for the purpose of restructuring has not been discussed. The following are some suggestions for further reconciliation of the stock market regulations for enhancing resolution of stressed assets. Permitting Stock Exchange Trading SEBI in a recent working paper called for public comments on continuation of trading of entities undergoing CIRP .Continuation of trading in of listed corporate debtor would facilitate transparency and better price discovery and would, therefore, be in the interest of investors. Equity

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Match Fixing: Need for a Better Legislation

Sports Law /

Match Fixing: Need for a Better Legislation. [Saumya Agarwal] The author is a 3rd year B.A.LLB (Hons.) student of NLIU, Bhopal Introduction Match fixing has become a part and parcel to almost every existing sport in the world and has flexed its arms to tarnish the basic ethnicity of the term Sports. Oxford dictionary defines sports as: “an activity involving physical exertion and skill in which an individual or team competes against another or others for entertainment.” Entertainment, if we focus on this sole term of the definition provided we will realise that ample number of formats and championships have been introduced to provide entertainment to that audience that spends chunks of money. Indian Premier League is one of the best existing examples wherein players from across the world are auctioned upon and celebrities, business tycoons are seen spending their fortune. The Council of Europe Convention on the Manipulation of Sports Competitions which was concluded in Macolin on 18 September 2014 (Macolin Convention) is a multilateral treaty that aims to prevent, detect, and punish match fixing in sport. “Manipulation of sport competitions means an intentional arrangement, act or omission aimed at an improper alteration of the result or the course of a sport competition in order to remove all or part of the unpredictable nature of the aforementioned sport competition with a view to obtaining an undue advantage for oneself or for others.”[1] The above definition of “match-fixing” covers a wide range of situations: -The deliberate loss of a match or a phase of a match; -The deliberate underperformance by a competitor or improper withdrawal before the conclusion of a match (tanking); -The fixing of specific elements of a sporting event (spot-fixing); -The deliberate misapplication of the rules of a sport by the referee and/or other match -officials; -Interference with the play, playing surfaces or equipment. It is surprising to note that nowhere in the Indian Laws the term Match-fixing is defined. It was only until CBI Report on Match Fixing allegations which came in 2000 wherein the term was defined as[2]: (i) instances where an individual player or group of players received money individually/collectively to underperform; (ii) instances where a player placed bets in matches in which he played that would naturally undermine his performance; (iii) instances where players passed on information to a betting syndicate about team composition, probable result, pitch condition, weather, etc., (iv) instances where groundsmen were given money to prepare a pitch in a way which suited the betting syndicate; and (v) instances of current and ex-players being used by bookies to gain access to Indian and foreign players to influence their performance for a monetary consideration. The phenomenon of match fixing can be dated back to infamous incident of Black Sox scandal 1919 where eleven members of the Chicago White Sox team threw the world series. The phenomenon is carried out in two ways: tanking and spot fixing. Tanking is when the player intentionally throws away the game at his hand by deliberately losing or not competing at all and spot-fixing involves fixing small events within a match which can be gambled upon, but which are unlikely to prove decisive in determining the final result of the game. The widespread of match-fixing is immense and can be seen in almost every sport, cricket, baseball, tennis, horse-racing, snooker, sumo-wrestling to name a few. However, a high concentration can be seen in cricket. The world has witnessed many infamous cases of match-fixing and a recent sting operation documentary of Al-Jazeera discusses the match-fixing incidents covering almost all the formats of cricket. Indian Laws The laws in India under which match-fixing can be dealt with are as under: Indian Penal Code,1860 (IPC): Section 415 of IPC which deals with the offence of cheating includes deceiving’ a person’. Cheating must be committed against a specific person. The section does not include the term ‘persons’. Match-fixing is an offence against public at large which is not included here as it deals with a person in specific. The section also warrants transfer of property which is not clearly involved in match-fixing. Section 120-A of IPC deals with conspiracy which uses the term illegal acts. Since none of the laws in India illegitimates match fixing therefore it cannot be covered under this section. Moreover, for it to be a criminal offence, dishonest intention (i.e. presence of mens rea) is to be proved with wrongful loss/gain. Since the wrongful loss caused to the spectators is consequential and not something caused intentionally it cannot be covered under IPC. Prevention of Corruption Act, 1988(PCA)[3]: According to section 13 (1) (d) (ii) of PCA ‘a public servant is said to commit the offence of criminal misconduct, if he by abusing his position as a public servant, obtains for himself or for any other person any valuable thing or pecuniary advantage.’ To bring the act of match fixing one has to bring ‘cricketers’ under ‘public servants’. S. 2 (c) (viii) defines public servant as a person who holds an office by virtue of which he is authorized or required to perform any public duty. But do cricketers really do any public duty. Cricketers are mere professionals governed by independent contracts whose job is to entertain people by playing cricket. They do nothing sort of public duty. Thus cricketers do not come under Prevention of Corruption Act, 1988 also. The Public Gambling Act, 1867 (PGA): The Public Gambling Act is the only law bringing match-fixing directly in its ambit as gambling is its direct cause. However, Section 12 of the act provides with an exception that it would not apply to game of mere skill and nowhere defines the phrase. Horse racing and rummy are seen as game of mere skill. The power lies with the states to determine the status of betting and gambling as they are state subjects under the Seventh Schedule of the Constitution. Goa and Sikkim have legalised many forms of betting and gambling. Thus, there lies a grey area when it

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Breaking Down the Process of Securitization & Asset Reconstruction.

Insolvency Law /

Breaking Down the Process of Securitization & Asset Reconstruction. [Deepanshu Guwalani] The author is a 5th year B.A.LLB (Hons.) student of ILS Law College, Pune. Introduction To facilitate the early resolution of Non-Performing Assets (NPAs) of banks and financial institutions, the government of India enacted Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 for the extensive use of Securitisation Companies (SCs) or Asset Reconstruction Companies (ARCs). Securitization Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, education loans etc. which generate receivables and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). The sellers here are called Originators. Securitisation thus follows a two stage process. In the first stage there is sale of single asset or pooling and sale of pool of assets to a ‘bankruptcy remote’ special purpose vehicle (SPV), in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradeable debt securities. The SPV needs to be ‘bankruptcy remote’ which means that the bankruptcy of the Originator will not have any bearing on the financial obligations of the SPV. For example, in 1991, Citibank[1] sold its car loan portfolio comprising of 1,358 cars to a Special Purpose Vehicle (SPV).  Debentures carrying a coupon rate of 15.5 per cent per annum worth around INR 20 crores were issued by the SPV named as Peoples Financial Services Limited.  These debentures were backed by the car loan portfolio of Citibank.  Several institutional investors and mutual funds picked up these debentures. The SPV made monthly payments to debenture holders out of the inflows from the car loan portfolio.  The payments to these debenture holders included both interest and the principal component. At the end of 27 months the debentures extinguished and by then the SPV had paid out the entire principal and interest. These debentures were also tradeable on National Stock Exchange. Process of Securitization Step 1: The originator i.e. a bank, financial institution or an NBFC sells or assigns its assets which are in the form of receivables, housing loans, leases etc., to a SC/ARC. The sale must be a true sale as defined under RBI guidelines.[2] Step 2: The SC/ARC, which needs to be mandatorily registered with RBI and needs to have securitisation / asset reconstruction as its objective in its Memorandum of Association respectively, buys these assets by incorporating a SPV in the form of a private trust of which it is a trustee. Different SPVs are formed for different categories of assets or under different schemes by the same SC for smoothing the process of returns. The SPVs also need to be in compliance with the RBI guidelines issued in this regard.[3] Step 3: The SC/ARC (through the trust) raises funds, by issuing different classes of Security Receipts (SRs), to buy the aforementioned assets, only from Qualified Institutional Buyers (QIBs) i.e. insurance companies, Mutual Funds and Banks, etc. as they have the skill and expertise to assess risk in such a volatile market. The issue is through private placement only to protect naive retail investors and transfer or assignment of such SRs shall be in favour of other QIBs only. QIBs are issued SRs which are securities under Securities Contract (Regulation) Act. The trust shall hold and administer the financial assets for the benefit of the QIBs. Every SC/ARC needs to adhere to RBI guidelines[4] issued under the SARFAESI Act and also to revised guidelines (w.r.t. banks[5] and NBFCs[6]) issued by RBI regarding assets eligible for securitisation, Minimum Holding Period (MHP), Minimum Retention Requirement (MRR) etc.The SRs are usually in the form of Pass Through Certificates (PTCs) which can be compared to securities like bonds and debentures. The only difference being that they are issued against underlying securities. The interest that is paid to the issuer (SC/ARC) on these securities is directly passed to the investor (QIBs) in the form of a fixed income. It is different from Pay Through Securities wherein the SPV invests the receivables somewhere else for the benefit of the QIBs. Step 4: Administrative functions relating to the cash flows of the underlying assets (collection of principal and interest payments on the loans in the underlying pool of assets) are carried out by Service Providers (usually banks or originators) on behalf of the SCs/ARCs. Banks also provide credit enhancements (extra securities or guarantees to protect QIBs) and can also act as underwriters for the issue of SRs by the SCs/ARCs. Step 5: As cash flow arise on the assets, these are used by the SPV (SC/ARC) to repay funds to the QIBs. Asset Reconstruction In 1998, the 2nd Narasimham Committee Report highlighted that the huge backlog of NPAs was continuing to exert pressure on the banking sector and had severely impacted profitability. The report also recommended the creation of an asset recovery fund which would acquire and recover stressed assets and enable banks to focus on their core business. Pursuant to this and the enactment of the SARFAESI Act, many ARCs were formed in India, with ARCIL being the first. These ARCS were set up as private entities, mostly with the support of banks and as on November 2017, there were 24 operating ARCs.[7] According to s. 2(1)(b), asset reconstruction means acquisition by any SC/ARC of any rights or interests of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance. Therefore, asset reconstruction is much broader term than Securitization. Assets are classified into the following:[8] Standard Assets; NPAs; NPAs are further classified into the following: Substandard Asset; Doubtful Asset; Loss Asset; ARCs usually deal with the second type of assets and acquire them through securitisation post which the process of asset reconstruction is carried out. SARFAESI Act provides some measures

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The Insolvency and Bankruptcy (Amendment) Ordinance, 2018: A Practitioner’s Perspective

Insolvency Law /

The Insolvency and Bankruptcy (Amendment) Ordinance, 2018: A Practitioner’s Perspective. [Mr. Anshul Jain] The author, Partner at Luthra & Luthra Law Offices in the General Corporate and Regulatory Practice group identifies in this update the key changes and briefly comments wherever appropriate from a practitioner’s perspective. On 06 June 2018, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”) was promulgated by the President exercising his powers under Article 123 (1) of the Constitution of India. The need for the Ordinance was felt, as the gazette noted, to “balance the interests of various stakeholders … especially interests of home buyers and micro and small and medium enterprises, promoting resolution over liquidation of corporate debtor by lowering the voting threshold of committee of creditors and streamlining provisions relating to eligibility of resolution applicants”. Home buyers/ Allottees under a real estate project A “financial creditor” means any person to whim a financial debt is owed. Section 5 (8) of the IBC defines “financial debt”. This includes, per sub-clause (f) of section 5 (8), “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”.  The Ordinance inserts an explanation to this sub-clause providing that “any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing”. This is intended to cover home buyers/allottees under a “real estate project” [as defined by the Real Estate (Regulations and Development) Act, 2016]. This amendment does not clarify if the customers of a real estate project will be treated as secured or un-secured creditors. Even if they are provided a voice in the Committee of Creditors (“CoC”), it would hardly provide any benefit to them as they would be one of many creditors sitting in the CoC and their impact would be limited only to the extent of their claim out of the total claim of financial creditors against the company. Depending on the value of their claim, they can easily be voted out by other secured financial creditors. Even if they are heard, the secured creditors can easily assert that they have a higher claim and thus should be paid first and whatever is left after them getting repaid can then be distributed to unsecured creditors. Furthermore, this amendment does not deal with the means to fully protect their investment in the real estate project. At best, the amendment’s impact would be to provide them some amount of recovery on their claim against the company. What the customers really want is either the money or the homes/units back. This is presently not addressed. A more effective way to tackle the problem could have been to (i) put the home buyers in the waterfall structure prior to the financial creditors, or (ii) inserting a specific obligation on the incoming resolution applicant to build and deliver the units. One may also witness situations where no resolution plan is approved and the company goes for liquidation, and in which case the secured creditors can easily use Section 52 of IBC and seek a specific enforcement of their security interest. In a real estate company, the main security interest offered to lenders is the underlying land. So if the secured lenders choose to specifically enforce their security and take away the land from the liquidation waterfall, the customers will be left with nothing to realise from the CIRP. These concerns will, hopefully, soon be addressed in the impeding CIRP Regulations. CIRP period Extension: The CIRP period can be extended from initial 180 days by obtaining 66% of voting shares of the CoC (instead of earlier 75% of voting shares) Withdrawal: The Adjudicating Authority may allow the withdrawal of application filed for CIRP by approval of 90% voting share of CoC. It would be interesting to see if the CIRP regulations define the ‘applicant’ as the one who originally filed the CIRP application or anyone who of 90% votes in the CoC. It would also be interesting to see how, in a case where the CIRP application was filed by him, an operational creditor would be bound by the decision of the CoC unless his claim is been settled. Moratorium: The principle of ‘moratorium’ shall not apply to a surety in a contract of guarantee to a corporate debtor. This is a huge relief to the lenders who were earlier barred by latest NCLAT order in the matter of SBI v. V. Ramakrishnan and Vessons Energy Systems [Company Appeal (AT) (Insolvency No. 213 of 2017] to invoke guarantee giving by the promoters to secure the loans. With this amendment, the concept of moratorium shall not apply to contracts of guarantee provided to a corporate debtor. This is now in line with the recommendations of Eradi Committee as well. Compliance during CIRP: The IRP/RP shall now be responsible for complying with the requirements under any law for the time being in force on corporate debtor. This amendment now makes it amply clear that IRP/RP is required to comply with all applicable laws including but not limited to compliances under the Companies Act and the SEBI (Listing Obligations and Disclosure Requirements). A mere plea that the company is under CIRP and thus no compliances are necessary will not be tenable hereon. This is also line with the amendments brought by the SEBI a few days before the Ordinance. Representation in the CoC and related party: A new proviso has been inserted under section 21(2) which exempts the financial creditor, which is regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to insolvency commencement date. This provides relief to banks, ARCs, NBFCs, etc. who were otherwise considered as related parties due to their shareholding in the corporate debtor. Representation in the CoC—other aspects: A new sub-section 6A has also been inserted u/s 21 to

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Amendment to Section 185 of the Companies Act, 2013 – A Step towards Business Growth

Company Law /

Amendment to Section 185 of the Companies Act, 2013 – A Step towards Business Growth [Mr. Arjun Gopalakrishnan] The author is a Legal Manager at ICICI Bank Limited Introduction Section 185 of the Companies Act, 2013 imposes restrictions on a company in relation to advancement of loans to the directors or any other person in whom the director is interested and providing guarantees/securities in connection with the loans taken by the director or such other person. Subsequent to the Companies Amendment Act, 2017[1] and the Ministry of Corporate Affairs (“MCA”) notification dated May 7, 2018[2], Section 185 of the Companies Act, 2013 (“Original S.185”) stands amended (“Amended S.185”). The amendment is intended to relax the restrictions that were originally imposed by the section, consequentially promoting operational convenience. Analysis of the Amendment In order to address the issues in Original S. 185 and to make the section less stringent, the entire section has been substituted by Amended S. 185. The below- mentioned are the important amendments that have been made to Original S.185: Deletion of the non-obstante clause: The text of Original S.185 started with “Save as otherwise provided in this Act” which meant that if there were other provisions in the Companies Act, 2013 that allowed lending, as covered under Original S.185, then such specific provision would prevail over the prohibition under Original S.185. This resulted in a lack of clarity as to whether the specific provision of Section 186 of the Companies Act, 2013 which starts with “Without prejudice to the other provisions” would exclude the prohibition imposed by Original S.185. To bring an end to the ambiguity, the words “Save as otherwise provided in this Act” have been omitted in the Amended S.185. Partly prohibitive and partly restrictive nature of Amended S.185: The restrictions that were placed by Original S.185 have been substantially relaxed vide the amendment. In a scenario where none of the exemptions to Original S.185 are applicable, the section places a blanket prohibition on a company (the “Lending Company“)[3] from providing a loan to or providing security/guarantee in relation to a loan (such loan, guarantee, or security will hereinafter be referred to as the “Assistance”) taken by, a director of the Lending Company or any other person the director is interested in. The expression “any other person the director is interested in” has been defined as: (a) any director of the Lending Company, or of its holding company, or any partner or relative of any such director; or (b) any firm in which such director or relative is a partner; or (c) any private company of which any such director is a director or member; or (d) any body corporate at a general meeting of which 25% or more of the voting power is exercised or controlled by any such director(s); or (e) any body corporate, of which the board, managing director or manager is accustomed to act with the directions or instructions of the board, or any of the director(s) of the Lending Company. The following exemptions are available under Original S.185: (i) The provisions of Original S. 185 do not apply to private companies that fulfil all of the following conditions: (a) no other body corporate has invested in the share capital of such private company, (b) the borrowings of such private company from banks and financial institutions or any body corporate is less than twice its share capital or 50 crores, whichever is lower, and (c) such private company has no default in the repayment of such borrowings subsisting at the time. (ii) The prohibition under Original S.185 will not apply if the Lending Company is providing Assistance to or in relation to a loan advanced to its wholly owned subsidiary (“WoS”) subject to the Assistance being in relation to an activity that forms a part of the principal business activities of the WoS. (iii)The prohibition under Original S.185 will not apply if the Lending Company is providing Assistance to its subsidiary which is not its WoS, in the form of security or guarantee for a loan provided to the subsidiary, subject to the Assistance being in relation to an activity that forms part of the principal business activities of the subsidiary. (iv) The prohibition under Original S.185 will not apply if the Lending Company is providing Assistance to its managing or whole-time director in the form of a loan, as a part of the conditions of service extended by the Lending Company to all its employees, or pursuant to any scheme approved by the members of the Lending Company by a special resolution. (v) The prohibition under Original S.185 will not apply if the Lending Company is one which in the ordinary course of its business provides Assistance, provided an interest is charged in respect of such loans, at a rate not less than the bank rate declared by the Reserve Bank of India (“Ordinary Course of Business Exemption”). Pursuant to the amendment, the definition of “any person in whom any of the directors of the company is interested in” has been modified and in a case where none of the exemptions apply, the prohibition under Amended S.185 would become applicable in the below-mentioned manner: (i) A blanket prohibition under Amended S.185 will apply in relation to an Assistance provided by the Lending Company, to, or in relation to a loan taken by: (a) any director of the Lending Company, or of its holding company, or any partner or relative of any such director (b) any firm in which any such director or relative is a partner (ii) In relation to an Assistance provided to, or in relation to a loan taken by “any person in whom any of the directors of the company is interested in”, the Lending Company is now permitted to do the same subject to the passing of a special resolution in a general meeting with the explanatory statement to the notice of the general meeting clearly disclosing the full particulars of the Assistance provided and the purpose

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